Watch the Democrats fall for the trap anyway:
Afterward, Texas Rep. Joe Barton took the unusual step of telling reporters that he had politely given Cheney a piece of his mind – the sort of dissent Republicans considered unthinkable during much of the Bush administration’s reign.
A full-throated Republican revolt could create huge problems for the administration and congressional Democrats scrambling to assemble a package to reassure jittery markets. It could also preserve the Republicans’ options after the fact – if the bailout doesn’t work or proves deeply unpopular with voters, they can say they opposed it.
Stupid is as stupid does. For christ sakes, Democrats. Gingrich. Remember him?
*** Update ***
I just listened to Erin Burnett say, with a straight face, that Paulson and 90% of the financial wizards in the country think think these junk assets are worth more than what they would command if they just went on the market right now, and that in a “fair” market, they would be worth much more. Apparently that is the real problem right now. The market is unfair.
Viva La Revolución! Long live the “fairer” people’s market!
*** Update #2 ***
Obama sliding into the trap. The real crisis of confidence is that no one has any confidence in the administration, or, for that matter, Washington. Even if this plan is desperately needed, we have been lied to so much that we can not trust them to do the right thing. Especially not when there is this much money involved.
I just get the feeling that no matter what happens, we are screwed.
r€nato
let’s hope the Democrats are smarter than this, this time around.
It’s right out there for everyone to see.
Comrade The Moar You Know
Watch them do it anyway.
Ras
There’s nothing serious enough to get the assholes that make up the modern Repuke party to put “Country” over “Party”.
Nothing. Our country is nothing but a bunch of opportunities for them to game. Assholes.
demkat620
If they were smart, and they are not that often smart, they would be on every TV taking advantage of that CNN poll(That says 47%-24% people blame the GOP for this mess) and blast Republicans for not wanting to clean up the mess they made.
I will not hold my breath, waiting for them to grow a spine or a brain.
Stuck in the Fun House
Every station I turn on, seems to have Mike Pence delivering The Mccain//RNC talking point “that’s it’s the dems fault and St. will fix it pronto, while the dem counterpart stammers out some generic mish mash about Main street and Wall street and how Pence is a good guy. They should be chewing up republicans and spitting them out. It makes me want to puke watching these useless wimps.
Daily Shocker
The problem isn’t that Democrats aren’t smart, it’s that they don’t think strategically. What I love about the Republicans, probably the only thing I love, is that it’s *all* a game to them. Every bit of it. They look for the opportunity for their party and their cause in everything.
Democrats think “how can we help the people?” Republicans think “how can helping the people help me?”
The Democrats are going to walk into this one, saying “we spent your money nobly, citizen taxpayer” and they’ll get crucified for it. They’ll get their reforms, and oversight, and regulation — maybe — and think they’ve done a man’s job, and then they’ll turn around and go “wait, what the fuck just happened?”
I’m more and more convinced this is a partisan ploy.
Seanly
NO NO NO NO NO
I deeply hope that the Democrats don’t kowtow to Jesse James Paulson.
The more I read, the more I think Wall Street is just playing everybody. Please, Democrats, don’t fall for this bullshit!
r€nato
EXACTLY.
If we do nothing and markets continue to tank, people blame the GOP.
If we bargain hard and make Wall Street scream in pain before they get anything at all, we win.
If we let them stampede us once again… people blame us for anything that goes wrong from here on out.
If anything is passed, it MUST have broad GOP support including McCain’s vote.
Otherwise, fuck ’em. Let them twist slowly, slowly in the wind.
People blamed the GOP when the government got shut down in 1994. Remember that, Democrats.
DFD
Any bailout/ripoff should be a bipartisan endeavor. Let’s see the Republican’s jump in the pool first.
Walker
That would be the same 90% of the financial wizards that said ( a ) there is no housing bubble, ( b ) subprime is contained, and ( c ) a systemic failure of the banking system can never happen.
How stupid do these people think we are?
chopper
given the press’s turnaround against mccain, i’d like to see mr. the-bailout-is-necessary successfully turn around and oppose it. methinks mccain’s preternatural ability to flip-flop and get away with it is gone.
besides which, people 2:1 think the GOP is responsible for the current mess vs. the dems. it may be a saving grace for the GOP to be a pissed-off minority party bitching after the fact about how the bailout didn’t work, but if a president obama also puts into action new plans and programs ala the new deal to pull us out of the ditch he’ll still come out ahead.
Joshau Norton
The repigs are revolting (they certainly are – bada-bing) against Bush/Cheney now. They’re claiming Bush is the “lone gunman” and isn’t really a conservative. The Dems should take note and just back off. How are they ever going to convince people to vote for them if they end up being the one’s carrying Bush’s water?
How many Keating-type deregulation scandals can McCain get away with before he’s called on it?
chopper
in other words, the dems need to make sure the public know that any bailout isn’t going to magically fix the problem. really it’s a matter of doing nothing and seeing the market tank in a matter of weeks vs doing something and seeing the market tank over many months. a shitty situation either way i guess.
JL
Please take the time to write or call your congressman. If Bush took weeks to prepare the plan, they can exert their duty to make sure the plan safeguards the American people. A clean bill would take weeks not days to accomplish.
Mark S.
Wow, I’m not sure I have ever seen such a weak Presidency in my lifetime (which, granted, doesn’t include Watergate). Bush’s scare tactics no longer even work on his own party.
I think the Dems are in good shape. They should just come up with their own proposal. If the GOP wants to filibuster it, then one of two things will happen. Either this crisis has been overblown, and we didn’t throw $700 billion away, or this is the Mother of all Meltdowns, and the GOP will be dead for playing the obstructionists.
Granted, I’d rather not be in for a decade long global depression, but if we are really in for that, giving Paulson $700 billion wouldn’t have averted it.
chopper
too late now. the dems are all-in. hmph.
as for the GOP, where were they when we were spending a trillion dollars on iraq? what, all of a sudden they think government spending is a bad idea? fuck em, fuck em right in the fucking ear. a trillion dollars to blow up a bunch of brown people halfway across the world who never did shit to us is great to them, why should they suddenly care about a 700 billion dollar wall street bailout?
burnspbesq
Is it excessively churlish to say “kill ’em all and let the Bankruptcy Court sort ’em out?”
Jeff
Reid called McCain out tonight.
I’ll believe it when I see him vote.
Dennis - SGMM
The Financial Crisis in a Nutshell:
There’s a strong chance that a rational adult will be elected President. It’s imperative that we tie his hands by giving the pigs one last chance to empty the trough.
Joshau Norton
Obama should just knock it off with his professorial dissertations a la John Kerry. We just need him to say “You want our money? Bite me.” Instead we get explanations that start way back in the mists of time and drone on forever.
Nothing like giving more guns to the Indians, General Custer.
Comrade gopher2b
Bill Parcells once famously said in response to a question that asked if he thought his team was better than its record “you are what your records says your are”
Tuna for Treasury Sec.
The Grand Panjandrum
While all the Chicken Littles of the Most Awesomest Financial Expert World screaming like a bunch of grade schoolers the Sage of Omaha just prevailed in a sweet deal to purchase up to $5 billion worth Goldman Sachs preferred stock. The cooler heads are going to make a lot of money on this Biggest. Financial. Disaster. Evah.
And, this is why Warren Buffet is himself and the rest of the Wall Street numb nuts are tiny little punk-ass wannabes.
Martin
Gotta give them balls:
How about we declare credit swaps illegal unless you hold the underlying bond so this problem doesn’t return?
$13.9 trillion in December 2005
$28.9 trillion in December 2006
$62.2 trillion in December 2007
So, we bail these guys out and why won’t they just jump back in again? Oh, right, no cap gains, that’ll hold them back!
chopper
really, what the dems should have done is offer up a really detailed, unporked bill that grants the congress and the government all manner of sweeping control over not only the bailout but wall street as well. something that goopers would have to vote against and that bush would just have to veto. then watch the market fail and pin it all on the GOP for sticking steadfastly to the mantra that ‘deregulation works’.
but if mccain is behind the bailout, then neither he nor obama wins on the issue. its a draw, which is okay by me with regards to the election. besides, mccain still ends up losing overall given all his talk about the wonders of deregulation.
nicethugbert
Rethuglican revolt against Cheney is a bunch of theatre. They waited until now?
I think this bill is a trap for Democrats. But, there is a saving grace for them. They could drag this out for all to see the sham. Today, Schumer asked Paulson for the why about the $700B as opposed to some other quantity after Paulson had stated they needed $50B a month. Paulson did not have an answer, just some unconvincing sound.
That’s the way to turn this. Make the Treasury come to congress every month for a slice of the money. Don’t rely on the oversight board.
And, Rep. Franks is making a grave mistake! He wants to wait until next year to institute regulations. How are we supposed to give money to a bunch of rotten CDSers and clowns who write unaffordable mortgages?
John S.
r€nato Says:
I find it incredibly ironic that a blog full of bloviating smart-asses — many of whom are trolls or false personas — can help me feel sane at the end of the day.
Laura W
Lou Dobbs just announced that the FBI is investigating Fannie, Freddie, AIG and Lehman for fraud, incl the folks who ran them.
Pass the raisinetts.
Don McArthur
You’re not listening to what they’re not saying. The majority of banks and investment houses in the country are insolvent. It’s over, and we’re done.
This bill will go through, but it won’t help.
Comrade gopher2b
I read an article the other day that he was accelerating acquisitions I interpreted as the best evidence that this thing is about to come to a head soon and then get progressively better.
Buffet is evidence #1 why this “crisis” is bullshit. There are plently of major players with a ton of cash and no connection to WS shenigans that can move in an lend money once these fuckers crash and burn. BofA, Chase, Wells Fargo, Berkshire, Barclay, etc. They are being denied an opportunity to win off of their competitors’ stupidity and reckless behavior.
The Grand Panjandrum
You’re welcome!
Comrade John Cole
This is coming to a head soon, but it is most assuredly not going to get better.
It is going to get FAR worse. Someone want to whip out the graphic for the housing market over the last 100 years and show the big spikes again?
Comrade gopher2b
This is the only open question for me. What really happens if we let this whole thing collapse. The buyer get screwed because they are creditors to a bankrupt entity, right? Happens all the time. Credit markets completely collapse until other players enter the market and the government capitalize new entities. Fine. 6 months to a 1 year of hurt. BFD.
Why the hell are we bailing these mofos out? That is what this bailout is about-its not MBS. Those have underlying assets (and the best kind….land) that can be sat on until the market “rebounds”.
Jake
Not me. I’m not sure why, but I’m nowhere close to this.
It might have something to do with the fact that this appears to be the prevailing sentiment by the vast majority of pussies over at Kos. Every other post is like “OMG WTF WE ARE FUCKING SCREWED” or “NEWT GINGRICH WAS RIGHT!”
I expect better from you Cole. This defensive crouch bullshit is pretty lame.
Jeff
Bullshit. I own one small bank stock and they are still up over 20% for the year. Wells Fargo and BoA are two of the largest banks and they are doing stock buy backs. This is all scare tactics.
Comrade Stuck
In the Funhouse, we call that positive thinking.
Comrade John Cole
I am not talking about the Democratic party.
I am talking about the country.
I have spent the last two weeks reading a lot about what is going on, and we still have option ARM’s, car loans, and credit cards looming. That, and we are nowhere near the bottom in the housing market.
And I still do not understand, not even remotely, the Credit Default Swaps, but I think when the history of this is written in 30 years, that will be the big story- the unchecked, unregulated alchemy of CDS.
Comrade Dreggas
Apparently there’s word out from George Snuffalufagus that if McCain doesn’t vote yes then there’s no deal period per the Dem leadership. Nice play if it’s true. He doesn’t vote yes, or refuses to vote then the plan doesn’t happen and he can be pointed to as the reason it failed if everything falls apart.
He votes yes, he can’t campaign on his “standing up to Bush” that everyone seems worried about.
FoxinSocks
I’m reminded of a scene from Serenity:
Zoe: So… trap?
Mal: Trap.
Zoe: We goin’ in?
Mal: Ain’t but a few hours out.
Wash: Yeah, but… remember the part where it’s a trap?
Jake
OK. Sorry – that wasn’t at all clear from your original post/update.
Yeah the Default Swaps are troubling. Do you have any sense as to who is holding the vast majority of those?
Dennis - SGMM
I always strive to keep my posts short and irrelevant.
The Grand Panjandrum
Are you sure you mean
? The big banks are not by any stretch of the imagination insolvent. They are actually pretty healthy and most of them are protected by the fact that take deposits from individuals and businesses. Investment banks are another animal entirely.
Do you mean illiquid?
t jasper parnell
At the risk of being wrong: Remain Calm All Is Well. Obama was wrong, I would argue, on the facts about FISA but right, it now appears in terms of it making no difference. He has run an intelligent campaign and has been consistently underestimated by panicky Democrats. The piece to which Comrade Cole links is not really a sign of sinking into the trap and, just for the hell of it, the Republicans are too stupid to live let alone develop a cunning plan that will double or triple cross Obama. Finally, the Senate votes alphabetically and O comes after M, last time I checked.
Jeff
What investment banks? They don’t exist anymore.
Comrade RoonieRoo
That will make me happy if they can truly pull that off. Anyone know what the hell Comrade Pelosi is up to?
Tsulagi
Looks like he’s threatening to attach some sternly worded
resolutionsconditions to Bush’s plan. Essentially his Authorization to Use Treasury Force. Great, that sternly worded stuff has always worked in the past in keeping our Commander Guy on the right path.Could just see McMaverick (did you know he was a reformer as well as a POW?) at the last moment if the bailout is likely to pass voting no saying something like “My friends, these are tough times but I believe we must reform Wall Street before giving them a blank check as my opponent has voted. I’m the candidate of the party seeking to lower government spending, not increase it. In fact, speaking to this issue the GOP platform states…
Of course all mooseshit, but when has that been an impediment?
t jasper parnell
Oh for goodness sake, on the one hand we were screwed several dozens of years ago and we are all still here. Plus and also, the future is so uncertain, both in terms of the bill, the vote and most certainly the economy.
LiberalTarian
Pretty much. We’ve been screwed since the SCOTUS selected GW Bush. Then, on the first Wednesday in November in 2004, I really knew all hope was lost.
I just don’t feel so lonely anymore.
Jake
Thanks for that. I suppose I’d count myself as a formerly panicky Independent. Not so much these days. I guess I just grew tired of the goddamn hand-wringing.
There’s a post today over at TPM about how he’s MASSIVELY ramping up campaign spending. Giddyup. GAME ON, BITCHES.
t jasper parnell
McCain on the bailout.
t jasper parnell
Obama on the bailout. Someone explain how the sage of the land of the sage out does the man from the Land o’ Lincoln.
t jasper parnell
George Will is one of the dumbest, dumber even than Andrew Sullivan, but when McCain losses him he has lost the election.
LiberalTarian
Oh goody, a troll. Let’s play Punch the Republican!!
Jake
Not sure I follow you jasper. McCain’s take would appear to be pretty close to Obama’s, with the disadvantage that he stated his afterward. I’m not sure McCain moved the ball at all with that one.
Don McArthur
No, I mean insolvent. That is what Bernanke and Paulson told them behind closed doors this past weekend. That is why Dodd and Boehner refused to tell George Stephenopoulos on Sunday morning what the fear was if action weren’t taken. “It would cause a worldwide panic.”
t jasper parnell
Who do you think Obama is listening to right now Paul Krugmann? Or which ever fringe dweller, like Chaney, who say full steam ahead?
J. Maynard Gelinas
John,
You’re operating under the mistaken assumption that Democrats care for their constituents more than Republicans. Hogwash. No, Democrats exist to support their patronage base just as Republicans do. The only difference between them is who are the patrons.
That is why they knowingly do these things. Even knowingly do things that damage their party. Because their patrons demand it. Just as Republicans have done things their patrons have demanded.
The one thing neither party – or its elected members – have done is represent their fucking constituents or meet the responsibilities defined by their oaths of office. The political parties have destroyed our republic over a sliver of yolk. It’s really that pathetic.
t jasper parnell
This is my point. Everyone is running around worrried that the startegic geniuses in the Republican Party have set a clever trap for Obama, when he is the one making all the right noises and he is the one who has the better advisors and he is the one etc.
Shouting at the Rain
I’m with ya on this one, Jake. I’ve seen Kos and Friends be wrong more than a few times. Ned Lamont ring a bell?
The GOS has been and gloomy and unreadable (excepting the occasional post from Billmon, but he’s always depressed about something) since FISA.
I feel a lot better today for some reason. Couldn’t tell you why, tho. Maybe I just know there isn’t a damn thing I can do about it. If the past 8 years has taught me anything is that my single little voice don’t mean shit.
Maybe I’m just of the opinion that if we have to go down let’s explore all the possible options. If we’re fucked no matter what we do, then let’s go down swinging.
Or maybe I’m tired of being angry all the time. That’s probably the best explaination.
t jasper parnell
Why this sound so coherent and true that I must, I simply must, get subscription to your newsletter in which I hope to find out which one is in the pocket of our coming robot overlords, which one is in the pocket of the Chinese and how both eagerly await our coming ant overlords.
Comrade Darkness
“I’m more and more convinced this is a partisan ploy.”
That would be one elaborate ploy. The republicans have an 18 year history (or more, this is just since I’ve been paying attention) of starting their negotiation positions from 3 times worse than absurd. Then they argue a little and finally concede, oh, okay, we’ll meet you half way. Maddening. The Dems fall for it every time. This feels like another one of those. But, you may be right. Bernanke and Paulson might hate this soviet nonsense to the bottoms of their hearts, but all their golfing buddies keep calling them and crying about how they have to help them out, so they put forth an idea they truly hope is too obnoxious to pass. They have their cover and their dogma is acted upon properly.
Punchy
Let’s not. Democrat here, bitches.
Comrade gopher2b
Basically they are insurance on the debt. For example, let’s use a single suburban block to illustrate how it works. There are twenty residents, one mortgage bank, a financial institution that sells CDS, and 1000 investors. The mortgage bank has issued mortgages to all twenty homeowners. Five of them financed 100% and the other remaining 15 financed 80%. The mortgage bank is concerned that some people will default so it buys CDS from the financial institution for each mortgage. That way, if one resident defaults then the banker still gets paid (by the financial institution).
However, the financial institution thinks that the housing market will continue to appreciate forever. In this world, no one will ever default because if they cannot make their payments, they will just sell the property ….AND FOR A PROFIT). So, to keep the cash coming in, the financial institution sells 1000 CDSs to the 1000 investors on all 20 properties (20,000 total CDSs). In other words, you are “insuring” the same debt 20,000 times instead of 20 times.
Thus, if any given resident defaults now, the financial institution doesn’t owe just one bank money, its owes 1000 investors money. (BTW, before the FI realized the shit storm, it sold CDSD on credit card debt, commercial debt, construction loans, etc. Again, you weren’t satisfied with a 1:1 ratio so you issued it to any investor, bank, speculator that wanted one even though the didn’t hold the underlying note (debt)).
So, once a single resident defaults, 1000 investors and one bank come calling for their CDS to be paid. The problem is that you don’t have enough cash to pay out all that money. Once you default on a single CDS, all the remaining buyers on all the remaining CDS (including credit cards, commercial debt, etc) can call their CDS (per the CDS agreement). You are toast and you take down a bunch of entities with you.
Thus, the problem with these CDSs is that the amount of loss is infinite (or in real terms right now….$62 trillion) and completely unsecured. Mortgage backed securities, at the end of the day, are connected to assets with real value (land and maybe the shitty house on top of it). If those assets are worth 25-30% less than they were when the loan was issued – okay, that sucks, but its not the end of the world. Instead, we’re talking about a potential pool of losses that exceeds the net worth of the United States.
My point is this: so what. It’s not real money. Clearly, everyone who is involved will go bankrupt but not every financial entity is involved in this stuff. Big companies like Berkshire and commercial banks like BofA, Wells Fargo, Chase have good balance sheets and plenty of cash. (1) they will fill the credit void when it occurs and (2) is it so bad to return to a national economy that is not completely dependent on credit?
PC
Comrade! We have alt-a loans, munis, HELOCs, CDSs and another $500 trillion in OTC derivatives to unwind. Thankfully the people’s revolution will prevail by giving more dollars to the institutions that have given us this great blessing!
Comrade John Cole
I fear this may be closer to the truth than the idea this is just a ploy.
Jake
Strategery?
I think this pretty much started with the 2004 Presidential election. Folks just couldn’t accept that we’d lost to the monkey.
J. Maynard Gelinas
Hi Parnell. There’s no need to purchase a subscription to my newsletter. I give my insights all away for free.
Enjoy! Asshole.
El Cid
If you f***ing idiot Democrats think you’re gonna pass this sh*t in order to save the country, remember: you’ve got no proof whatsoever that this 3/4 of a trillion will actually work, and you will be helping into power the John McCain / Sarah Palin administration who will make the current economic crises seem like ‘the good times’.
I realize there’s not much more I can do than call my Congressman and write here etc, until somebody organizes a Trillion Dollar March on Washington, which I doubt — and maybe we’d all be arrested and sent to holding cells anyway.
Or whatever better idea.
But these idiots will rush into this thinking they’re saving the nation, and instead they’ll not be saving the country but they will be saving the Presidency for John McCain.
tBone
Fuck you, buddy. That’s my job.
You know, I’m pretty sure Obama and his team are smart enough to see all the angles on the bailout. Have a little faith.
The Repubs can try this bullshit “we’ve always been at war with Wall Street” pivot if they want, but I think it’ll explode in their faces. They managed to stir up enough panic that a lot of people across the political spectrum are convinced that some kind of bailout is needed.
Paulson’s plan is obviously a non-starter. McCain has been wandering around like a heavily-concussed (and angry) Mr. Magoo. Meanwhile, Obama has laid out a set of common sense proposals that have broad support from the public.
Let McCain huff and puff and oppose Obama’s plan if he wants – it might play well with his base, but no one else is going to buy it. Obama will use it to hammer the final nail into McCain’s electoral coffin.
t jasper parnell
Thanks!! J. Maynard Gelinas and nicely done with the characterization it usually takes a day or two for folks to figure that out.
J. Maynard Gelinas
El Cid:
I’ll take a John McCain presidency if it would actually solve the problem. Fuck partisanship. The problem is that McCain – and the Republican establishment economists – are proposing insane solutions which only benefit a small minority of the GOP’s ‘special friends.’ And the Democrats remain the party of feckless invertebrates, so they can’t offer up a reasonable alternative.
So you’re right: Democrats will respond by nibbling at the edges rather than promoting their own full-scale solution. Which is why they keep losing. They offer up only opposition positions, even when they’re the majority. And that’s why they’ve become a permanent minority, even when the party in power has shown themselves to be nothing more than “killers, thieves, and lawyers.”
Jake
I think I’m simply going to trust that Obama is smarter than the evil Republican geniuses and McSame. In fact, I just sent the BAD MOTHERFUCKER and his campaign another $100. Call me naive, call me a wanker, whatever you like.
If we lose, you can say I told you so. If we win, you can suck it. Mmmkay? Kay.
Montysano
That’s the problem: because of Gramm’s Commodities Futures Modernization Act, CDSs were removed from regulatory oversight. IOW, no one knows what their true value is or who exactly owns what. We know there’s about $60T worth, but no much more. According to New York Times columnist Gretchen Morgenson, on tonight’s Fresh Air, the CDS market was a shadow insurance industry where the issuers of the swaps never ever thought they would have to pay off, and hence were capitalized accordingly.
Damn right, and how do you fight such an absolute absence of integrity?
Incertus
Keep calling. I heard Sheldon Whitehouse on NPR this evening and he was talking about the overwhelming opposition to the plan Congress is getting from the public. That’s probably the reason it hasn’t passed yet.
He also popped the interviewer in the mouth when she questioned whether it was fair to link McCain to Bush on this. After he answered, she said “spoken like a true Democrat” to which he responded “it’s also true.” If he’d added “fuck you very much,” I’d probably have driven my car off the road.
El Cid
David Cay Johnston, author of a number of books on the U.S. financial and tax system, and a guy that all sorts of people and politicians ought to listen to, said this in a letter to Poynter:
harlana pepper
No fuckin’ shit. Roosevelt was a devil and what we really
need to do is exploit and profit from this situation, for which we are monumentally responsible, to the last drop of sweat and blood of the American worker.
jnfr
Just for contrast:
It’s all fun and games… until it isn’t.
Comrade gopher2b
I wonder how much it would cost for the U.S. government to take a 30% equity stake in every at risk mortgage in the country? Any idea?
Comrade Stuck
Three cheers for the False Personas! They are the only real Americans among us.
Calouste
@Comrade gopher2b:
Nice post. That sounds like a Ponzi scheme if there ever was one. Now the big question is, who holds these CDS’s? If it’s just investment banks and some hedge funds, that might all just cancel each other out and we can let this hot air corner of the economy collapse on itself and let the real world continue. Of course there will be a credit crunch, but that will be because money that didn’t exist in the first place is taken out of existence. And the housing market will flatline for the foreseeable future. But considering that will cause real estate agents to become productive members of society, that might not be too bad.
There are still large amounts of real money around (Microsoft announced a $40 billion stock buy back program this week for example), which will prevent a complete credit disaster.
Incertus
This news makes me even more suspicious that there’s an actual crisis. Things may be tough for Goldman Sach’s, but Warren Buffett has never struck me as the kind of guy to chase a truly bad situation.
Jake
Interesting article on the meeting between Republicans and Cheney.
It is really a damn shame that we don’t have better people in the WH. They have close to zero cachet. That both prevents people from getting a sense of how big the crisis is, and also of having any confidence in their ability to fix the problem.
trollhattan
Sooo, Rick Davis on Freddie Mac’s payroll since ’05? This could get muy interesante:
http://www.nytimes.com/2008/09/24/us/politics/w24davis.html?hp
Good times.
El Cid
President Herbert Hoover, State of the Union, 1931.
Tax Analyst
Yes, this is the stance I’m taking here, too. Obama & his team HAVE demonstrated that they are a capable campaign organization, at least as far as I’m concerned. So I’ve more or less retired my auto-matic hand-wringer for the time being and have opened up my checkbook quite a bit more than I ever anticipated doing. Another check goes out AFTER I pay off my AMEX bill that comes in a couple days…got a lot of $$ on it since I used it quite liberally on my just completed vacation.
I can only obsess so much on this election without completely losing what little is left of my sanity. I really do think Obama is going to open up a bit of an electoral lead by election day, although it will probably be more due to McCain’s Bullshit Express wearing out it’s welcome throughout the country than anything else. Which is too bad, because I happen to think Obama is a terrific candidate. But I’ll take what I can get as long as it keeps McCain & Palin out of the White House.
Incertus
The facts have a liberal bias.
PC
It’s a fucking rabbit hole no one wants to go down. Seriously, when Buffet said derivatives were financial WMDs, he wasn’t kidding. CDSs only make up a part of the problem. Again, as of Dec. 2007 the OTC derivatives market was $596 trillion.
Sharpen your pitchforks and light your torches. There will be a wall and Wall Street gets lined up first.
r€nato
indeed. Most of the public doesn’t understand this. I just began understanding CDS a month or so ago.
As someone else stated upthread, there are several crazy things about CDS. They don’t have to be disclosed, they got transformed from a method of transferring risk to just betting, and they created enormous potential liabilities which those wise guys on Wall Street never thought they’d have to pay on.
There’s no way this shit should not be regulated. The fact that we are being hit up for $700 billion as a down payment to fix this mess, is proof of that.
Jake
So this “Mentalist” show seems pretty fucking awful.
phobos
It seems to me that the garden variety wingnuts–the blogging, AM broadcasting types–just want this mess swept under the rug as quickly as possible because it’s bad for McCain and they want to get back to the Palin defending/Obama smearing conga line. They’ve barely mentioned anything else over the last few days.
The higher functioning wingnuts seem to realize the deeper ramifications and are being a bit more cautious.
If the Democratic leadership for once plays their cards right, they could possibly make grudging allies of the latter while making the former seem somewhat less relevant.
Litlebritdifrnt
Perhaps it is just me, but I have been thinking of late (I know, a rarity) but would it actually be such a bad thing if there was a “depression” of sorts, I mean really? It has become obvious recently that America is a nation of debtors. The government operates just like the people do, they go out and use credit to buy shit they don’t need, probably don’t want, and ultimately have no place to put. A clue, if you need to rent a storage unit to store stuff unless you are a serviceman deployed overseas you have too much damn stuff. And yet despite having to rent a storage unit they go out and buy more and more stuff, on more and more credit cards. The average family has $30,000 in credit card debt right now. They are not buying groceries, and essentials, they are going out cause “JC Penny is having a sale” and buy crap they don’t need. Perhaps it is time for the country to take a long hard look at what one needs to live a happy life, family, home, food, utilities. Perhaps it is time for people to get back to darning socks instead of throwing them out, perhaps it is time for people to start having things repaired instead of them throwing them in the landfill and buying a new one. There could actually be a good side to this entire mess if we would only look for it. Hmmmmmmm methinks that sounds like I should post it on my blog.
Comrade gopher2b
That IS the question. If you have investment banks, and hedge funds, and other like instutions that owe $500 zillion dollars on these things (as opposed to $50 trillion), does it really matter at that point. Its worthless. The buyers are really only out what they paid in “premiums” and the sellers are out what their assets were worth in a real market. You say its a $60 trillion lost but it isn’t in real terms. What I cannot figure out is why these guys kept buying the CDS when they had to know if the system collapsed (which they were betting on) they would never get paid.
But, if every lending institution in the world is insolvent because of these things then its a big deal. Period. I just don’t think that is the case.
Besides, all you need to do is ensure that there are few defaults which the government could do by simpling buying pre-foreclosed homes (how many do you get for $700 billion).
Jake
El Cid, answers to David Cay Johnston have now been provided by Felix Salmon and Ryan Avent.
Take away from their responses what you will, but it seems clear to me there is a need to do something, and also that we’d better be certain we do the right thing.
t jasper parnell
Or how about this buying up the instruments that got a bunch fools into economic trouble will not avert a depression or recession but engaging in government spending that increases employment opportunities will. Therefore, we oppose the Wall Street Bailout but support sensible state intervention into the employment market. Should the congress deem pumping billions upon billions of dollars into the economy necessary at this moment it ought to flow directly to the greatest number instead of the most wealthy.
Just a thought.
Montysano
Here’s a question: is this $60T of CDSs for the US market, or for the global market, or is there even a distinction anymore?
The total value of US real estate is probably $20T or so; globally, it’s about $100T. So: how did the value of this “insurance” come to be valued at such a high percentage of All Things of Real Value?
Tsulagi
Regarding the political aspects for the candidates, in a more perfect Union Country First McCain and Obama would put political considerations aside for something this big. Leaders of their respective parties, they could work out some agreement on this bailout plan and how to proceed. This thing is easily going to go over a trillion impacting the country and the next president for years to come.
Put aside their differences and ambitions to do what’s best for the country without using it as a political hammer on the other guy. A comrade can dream can’t he?
PC
Global and no. The $60 trillion is the notional value, not the real value. The aforementioned OTC derivatives of $596 trillion has a real value of around $15 trillion. Neither is a trivial sum, but it tells you how much shit is sloshing around out there.
AIG sank because of their CDSs, not their normal, regulated insurance business. Bear Stearns was “saved” because they were the first major counter-party of CDSs and no one had any idea how a major failure would impact the rest of the financials. By the time Lehman went down, counter-parties had assessed their risk and knew they could weather the failure (even though it required a special Sunday trading session that got very little press so companies could cover their swaps).
This shitpile is much bigger than $700 billion.
ed
The forty plus year hold of conservatism on the country has finally being exposed for the fraud that it has always been. Government is not the solution to the problem, it is the problem, shrink government down in size until we can drown it in a bathtub, deregulate major industry so the market can work better for the country, privatize Social Security, pour money into the super rich from the government trough while you have a chance especially war profiteering, make people manage their own retirement funds so companies are not stuck with bad pension fund management decisions any more, on and on with systematically destroying the middle class for the benefit of the rich and super rich.
Tell the religious right you are on their side and you will do something for them sometime if they just vote conservative. Wave the flag to distract the rubes while robbing them blind. Nominatin’ an uninformed, uncurious g droppin’ governor that says with a straight face that Alaska is near Russia so that is foreign policy experience while forgettin’ to say Moscow is 4,350 miles from Anchorage, Alaska. Seeing a godforsaken pissant Siberian island from a godforsaken pissant Aleutian island makes one an international affairs expert, indeed.
How can anyone with an ounce of thought advocate continuing the conservative trainwreck? Can you imagine the economic trainwreck privatizing Social Security would have brought about? Wall Street titans had to make up no value investment vehicles (deriviatives, anyone?) just to have something to contain the money flowing in. What on earth would they have created with endless billions of Social Security money? Whatever it would have been, it would have made a Ponzi scheme look like a rock solid investment. A pox on their house and forget about a trillion dollar goodbye gift to the rich from the conservatives who know their time is over.
Jake
No Yankees in the playoffs this year. I’ll take that as a good sign.
rob!
hmm, i dunno, John…excuse me, Comrade Johnski–
we liberals/dems keep hand-wringing that the electorate is so stupid, they don’t learn the facts, they don’t want to hear details, etc…
except in this case, where we seem to be worrying that the Great Unwashed all of a sudden will somehow determine that Obama is “sliding into this trap” etc., and McCain is not. that requires a level of Paying Attention that most of us assume the above voters don’t possess.
i think the average uniformed voter is thinking one thing about this–this is Bush’s/the Republican’s fault. McCain made that dumbass “fundamentals = good” statement, and i think that’s an anchor around his neck. i bet to the average voter, Obama looks more blameless in this than McCain.
Comrade gopher2b
I think the uninformed voter isn’t thinking about any of these things because he’s well, by your definition, uninformed.
I’m pretty sure he/she is worried about the Great Depression II everyone keeps harping about and is otherwise scared shitless. He/she wants to know who’s going to get us out of this mess, not who’s fault it was in the first place.
Marshall
Senator’s can defer their votes in a roll call, but if my time on this Earth has taught me anything it is that on this particular vote Obama will cast his vote after McCain’s.
The CDSs will be repudiated. The companies who issued them will say “never mind” faster than Rosanne Rosannadanna. Anyone who actually needs that insurance will probably be in a world of hurt, bail out or no.
Jake
O/T, but Lawrence Lessig absolutely eviscerates Sarah Palin’s claims to experience. Devastating, and worth the 12min if you’ve got them.
Brick Oven Bill
But wait, we’re a consumer economy.
There was ~$10 trillion in mortgage debt when this all began, and prices are down ~30% on average. A non-reported fact is that in most of the geographic US, prices have been rising. Prices are still falling in areas with heavy immigration but have stabilized elsewhere.
So the loss is $3 trillion plus future drops (probably not too much more as prices are now well below replacement costs) plus administrative costs associated with and damage costs to the foreclosed homes. Throw in other bad debt and fraudulent financial games for spice. So the price tag when the smoke clears is probably $4 trillion, not $700 billion. Paulson knows this. He originated the CDOs.
We cannot write $4 trillion in checks without either (1) destroying the national credit rating; (2) causing big time inflation; or (3) all of the above. So as the end result will probably be a ship on the rocks in any case, it is best to run aground with a relatively stable currency. No to the bailout.
Those who have allowed themselves to become dependent on the government had better take some swimming lessons. Part of me thinks that this is healthy. The other part is stockpiling all kinds of things.
Church Lady
With a BBA in Finance, a law degree and six years in investment banking working with mortgage backed securities (in the 80’s), I will be the first person to acknowledge I have absolutely no understanding of CDSs or derivatives. I hope everyone else here will also admit that they don’t know shit about these instruments. The only thing that I can figure out is that everyone on Wall Street knew that many of the MBSs securitizing the CDSs and derivatives were collateralizing really, really crappy mortgage loans.
My question is why mortgages sold to Fannie and Freddie were anything less than prime. Back when I was securing mortgages from S&Ls into Fannie and Freddie securities, the underwriting standards were very, very strict. We threw out two or three loans for every one that was used to collateralize the security. Loans required strict proof of income, a minimum 5% downpayment (with PMI required), but a 20% downpayment was the norm. Mortgage payments (P&I plus taxes and insurance) could not exceed 25% of gross monthly income and all debt, including the mortgage, couldn’t be over 33% of gross monthly income. Property appraisals were gone over with a fine tooth comb and we always looked very hard at the comps used to determine the value of the property. In other words, these were mortgages that carried a very low risk of default.
The bottom line is that in the past five or ten years, crap loans were made because someone is Washington thought it would be a great idea if every Tom, Dick and Harry, no matter unqualified, deserved to own a home and changes were made to lower proof of income, ignore credit history, and allow a purchase with no downpayment, while letting the seller pick up the closing costs, all on a house that someone just COULD NOT AFFORD, and let them have it with an interest only loan to boot! Mortgage lending became the equivalent of a used car we-tote-the-note lot, but repoing a car is a whole lot easier than forclosing on a mortgage.
There is plenty of blame to throw around, and it’s easy to blame the lenders or the wizards on Wall Street. However, if our Congressional delegations had not pressured Fannie and Freddie to lower their guidelines in order to make sure even the most undeserving could be part of our “ownership society”, there would be a minimum of loans being defaulted on and the MBSs securing the CDSs wouldn’t be the junk that they have become.
What I find scary is that Barney Frank wants to go ahead and approve this thing, as long as the crap mortgages in foreclosure that started this mess in the first place can be refinanced, and he can limit CEO pay at the same time. Yes, limiting CEO pay will really, really make those delinquet homeowners pay on time now! All I can say about it is WTF!
Marshall
Comrade John !
According to the Great Grey Satan, retirees are the group rendered the most afraid by the contradictions of Capitalism exposed by the collapse of the credit system erected by the running dogs on Wall Street ! Look for them to convert to Obamaists in short order !
(When I was in the Soviet Union, the only English Language newspaper easily available was the Daily Worker, which believe it or not still wrote in this style.)
Komrade Montysano
Holy farking jeebus. More booze, please.
I’m not doubting you, PC, but that means the $15T is leveraged 40x, at least to my simple mind. And now that I think of it, Michael Greenberger, on Fresh Air last week, talked about leverages that were in that range.
Komrade Kain
I am not surprised. You can whip anybody into a mob over there. It sucks. Once you get them revv’d up you can point them anywhere. Fav tool of politician. The Mob Gambit. :(
komrade cain
Litlebritdifrnt
Church Lady – the problem I have is not that people were convinced that they could own a home, it is that they were convinced they could own a “McMansion” with little regard how they were going to pay for it. When I drive around rural NC I look at older houses that are probably no more than 900 square feet, my house is 3 BR 2 bath and 1214 HSF. Apparently that is no longer good enough for people. You have to have a home which is 3000 HSF and up, each child has to have their own bedroom (who here hasn’t shared a bedroom with a sibling?) Each person has to have their own bathroom, everyone has to have walk in closets, the kitchen has to be the size of the 1950s house. THIS is the problem, expectations have been raised so high that people are simply not happy with a comfortable house, they EXPECT a “McMansion” and anything less is below them. THAT is the problem. What results is people earning 50K a year buying a 350K home. It is not going to work. Period.
CaseyL
The more I hear about the shitpile, the more I think calling it a shitpile dignifies it: apparently that mountain of debt is composed of nothing but air.
Air!
Mortgages on properties which were overpriced to start with were bundled together with more mortgages on more overpriced properties, to be used as investment instruments. In order to work as investments, investors assumed these already-inflated bundles would appreciate even more – and, rather than sock them away in a vault somewhere, these by-now triply inflated bundles of assets were used as collateral to move loans around major banking institutions which also took out insurance on them just in case the reification of thin air into profit didn’t pan out, and paid for the insurance with more credit leveraged against the same goddamn worthless bundles.
It is exactly like what happened in 1929: speculators had been buying stocks for ten cents on the dollar, and leveraging that illusory wealth too buy stuff, and then couldn’t cover the cost when they had to. Same goddamned thing.
Did I say the shitpile was made of air? Maybe a better metaphor would be a hologram: something that looks solid, moves like something solid, but is really just a trick of light.
In other words, there is no there there.
All the real property buried beneath the debt leveraged from it is like the scrim the hologram is projected onto.
We cannot bail out the shitpile, because there’s nothing in the shitpile worth the bailout amount.
So I wonder what would happen if we just said no. No to $700 billion, fer sures. Maybe set an arbitrary amount – say, $100 billion – and say “That’s all you’re getting. Divide the $100 billion by the number of assets, and let that number be what each instrument is worth. If that means some mortgages for $750,000 are now mortgages for $25,000 – well, yay for whoever the homeowner is, and too goddamn bad for you!”
I’m really, really tempted to advocate that.
Comrade Trotsky
I believe, comrades, that you are fucked no matter what you do. See you at Thunderdome. I’ll save you a seat.
Comrade gopher2b
Honestly, that’s the kind of attitude that results in $700 billion bailouts getting rammed down our throats. You have to figure out what this shit is to know that Paulson’s stock answer “this is really, really complex and complicated stuff that only a few people understand and can fix” is complete bullshit.
It’s not complicated. Honestly, finance is not that complicated. It’s just a little bit of math sprinkled with made up words.
El Cid
What if we hired some guys to play lab scientists who had just invented some magic material worth $1 quadrillion dollars, and we could use it to buy up all the bad yet inexplicable, untraceable debt on Wall Street.
Would the weird market people buy it?
Jane_in_Colorado
I’m a banker. That is, I work in a medium-sized community bank. We’re fine. We didn’t play the subprime game, and we hold no “collateralized mortgage securities” as they call them. We have plenty of capital, and would actually be happy to lend more of it if we could only find decent credits. We don’t need a bailout. I would say more community banks than not are in a similar position. Some of the big banks are doing just fine too. They don’t need bailouts either. I would include Bank of American and Wells Fargo here. (Wells makes, and retains, classic, solid mortgage loans. You don’t get rich doing that, but you don’t get poor either.)
It’s investment banks, mortgage brokers, mortgage securities firms, and other mutant financial institutions that are in trouble. In my opinion, they deserve to be, because they’ve behaved like idiots. I could probably have gotten my cat a mortgage at one point (Only 2% for the first 3 years!) That doesn’t (necessarily) mean we can just let them fail. I have the impression that China invested heavily in mortgage securities, and some of them are looking pretty bad right now.
What disappoints me about all this is how little analysis is being done. What institutions are basically sound but need help through a liquidity crisis? Versus the ones that hold the worst kind of imaginary mortgage paper and need to be liquidated? No one seems to know, but there are a lot of smart people on Wall Street. The securitization of agglomerated mortgages deliberately made those instruments very hard to value, but hard isn’t the same thing as impossible.
Why aren’t we doing that analysis before we agree to a $700 million bailout? Figuring out what’s sound and what isn’t; what’s worth saving and what is doomed to fail? This is accounting, not rocket science. I have no interest in saving the bacon (or private aircraft, fancy schools, and Central Park West apartments) of greedheads–excuse me, creative investment bankers–who deliberately slurred the terms of questionable mortgage securities to get rich. (“It’s all mortgages, safest investment in the world!”)
There are some perfectly sound mortgages mixed up in all this mess–along with many that were churned out by mortgage brokers getting paid on commission for every loan, whether worthless or not. Some, perhaps many, BUT NOT ALL of those will end in foreclosure.
So that would be my condition for a bailout. Let us go through your balance sheet loan by loan; let us untangle your bundled mortgage securities so we can determine the worth or lack thereof. Only then do we offer a bailout, and only on assets with a chance of producing income. We may have to throw a lot of money after bad debt at some point, but we don’t even know what debt is bad and what is recoverable at this point. The hopeless debts need to be written off, and those loses should be charged off directly against excessive executive compensation.
I think this could be done if we could find the political will to do it. Even Lehman probably had some current loans that could have been saved by transferring them to a responsible financial institution.
I’m seeing no will to separate the baby from the bathwater. We’re treating it all like bathwater, and I have no mind to reimburse bathwater at baby prices.
Maybe I’m just a dreamer, but it seems to me that if we got a really smart team on it–I say draft Warren Buffet–to value problem assets, we could make much smarter decisions about where those bailout dollars are likeliest to have a positive economic effect.
Otherwise it strikes me as a $700 billion comfort blanket intended to cover the poor business decisions of a handful of irresponsible (non bank, for the most part) financial institutions. That will let bad managers walk away with millions, and even keep their private planes. Why should taxpayers do this, at a cost that will stupendously increase our national debt, and never return anything to the treasury?
Can’t we wait long enough for such an analysis to be done? If not, what guarantees do we have that taxpayer interests will be represented?
D. Mason
And the people who bought a house they could afford and pay their note on time get shafted. Great fucking idea.
D. Mason
And the people who bought a house they could afford and pay their note on time get shafted. Great fucking idea. I’m all for throwing the people who are in trouble a lifeline, more so than the wall street bankers. I am not for giving them damn near free houses because they acted irresponsible at the “right” time.
Church Lady
Litlebritdifrnt – No, the problem is not that all these borrowers felt entitled to a McMansion. The problems is that they couldn’t afford that McMansion, but someone gave them a f***ing loan for it anyway. Look at it this way – if the bank tells you “no deal”, then you can’t buy that sucker, hence no mortgage to default on.
Church Lady
Jane- You back up my arguement completely. You are only lending to those that are CREDITWORTHY. You have loan guidelines, and those that do not meet them do not get a loan. I believe that is considered a principle of classic banking. I just don’t know when the principles got thrown away.
TenguPhule
Then it’s just about revenge.
PC
I started paying attention to this fiasco when Buffet said something. When Buffet speaks, I listen. The $596 trillion is from the Bank of International Settlements. Not sure how accurate they are, but hey, what’s a few trillion between friends?
Jane_in_Colorado:
The wife and I will be looking to a responsible lender like you work for in a year or so. We both have a good credit score, we have steady income, and we can do a 20-30% down payment. Hopefully banks like yours will still be around at that point. As it is, responsible folks like us are going to get shafted by a higher interest rate to pay for the transgressions of the asshats on Wall Street.
Pitchforks and torches.
liberal
Brick Oven Bill wrote,
That’s absolutely useless information. It’s like those maps that show that a vast majority of the land area in the US votes Republican.
The best single number is to weight change in price by the value. If some huge patch of land that sells for $10/acre has gone up to $20/acre, it shouldn’t count for much in the average.
Marshall
I think that this was a conscious decision to goose the economy after the dot-com collapse in the early Bush years. I think that they thought that they could probably make things look good until the next Democratic President, who could get blamed for it all. So close, and yet so far, from that perspective.
Marshall
A lot of them will be. The old house prices of even 1 year ago were based lots of people buying with unrealistic credit. Those days are gone. People who bought at those prices have houses that are not worth what they paid for them, regardless of their ability to pay. This will not be changed by any bailout(s).
Look, near to where I live, in certain suburbs of DC, foreclosure rates are at the 40% level. (Some of these are McMansions, like in Leesburg, which is hard hit, others are more middle-class homes, as in Manassas, also hard hit, with 1% of the homes in the entire county currently in foreclosure.) It seems to be mostly the newer subdivisions that have this situation, but it may well spread. The price drops are phenomenal in those areas – in some cases back to numbers last seen in the 1980’s. Yes, I would say those people are shafted. And, that pain, that loss of real value, is just going to spread.
CaseyL
How?
No, really: letting people who bit off more than they could chew have a drastically reduced mortgage doesn’t, somehow, make the people who’ve been responsible lose their homes. (BTW: I happen to be one of those responsible people. I bought at a good price, put down my 20%, and have a 30-year fixed.)
Look: the way things are going, responsible people are going to get shafted anyway. The only issue is whether we prefer to get shafted to save a bunch of CEOs and their cronies, or if we prefer to get shafted to save some people whose worse sins were believing what the bankers told them.
I would rather help the homeowners.