The "NO Bailout" Act

@littlek,

From http://www.swamppolitics.com/news/politics/blog/2008/09/bailout_alternative_offered_ho.html

Quote:

No BAILOUTS Act

Bringing Accounting, Increased Liquidity, Oversight and Upholding Taxpayer Security

1) Require the Securities and Exchange Commission (SEC) to require an economic value standard to measure the capital of financial institutions.

This bill will require SEC to implement a rule to suspend the application of fair value accounting standards to financial institutions, which marks assets to the market value, no matter the conditions of the market. When no meaningful market exists, as is the current market for mortgage backed securities, this standard requires institutions to value assets at fire-sale prices. This creates a capital shortfall on paper. Using the economic value standard as bank examines have traditionally done will immediately correct the capital shortfalls experienced by many institutions.

2) Require the Securities and Exchange Commission to restricting naked short sells permanently

This bill will require SEC to implement a rule that blocks naked selling, selling a stock short without first borrowing the shares or ensuring the shares can be borrowed. Such practices many times harm the companies represented in the sales and hurt their efforts to raise capital. There is no economic value produced by naked short sales, but significant negative effects.

3) Require the Securities and Exchange Commission to restore the up-tick rule permanently.

This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies "to protect the integrity and quality of the securities market and strengthen investor confidence." This rule prevents market crashes brought on by irrational short term market behavior.

3) Require the Securities and Exchange Commission to restore the up-tick rule permanently.

This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies "to protect the integrity and quality of the securities market and strengthen investor confidence." This rule prevents market crashes brought on by irrational short term market behavior.

4) "Net Worth Certificate Program"

This bill will require FDIC to implement a net worth certificate program. The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future. For those entities that qualify, the FDIC should purchase net worth certificates in these institutions. In exchange, these institutions issue promissory notes to repay the FDIC, counting the amount "borrowed" as capital on their balance sheets. This exchange provides short term capital, with not cash outlay. Interest rates on the certificates and the FDIC notes should be identical so no subsidy is necessary.

Participating banks must be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management. Financial records and business plans should be subject to scrutiny while participating in the program.

In 1982, Congress approved a program, known as the Net Worth Certificate Program, that allowed banks and thrifts to apply for immediate capital assistance. From 1982 to 1993, banks with total assets of $40 billion participated in the program. The majority of these banks, 75%, required no further assistance beyond the certificate program.

5) Increase the FDIC Insurance limit from $100,000 to $250,000.

The bill will require the FDIC raise its limit to provide depositors confidence that their money is safe and help eliminate runs on banks which are destabilizing to the industry.

2 Replies

@littlek,

I'm no smarter than you are, but I'm worried about what they plan to do with the "mark to market" law. Here's how I see it:

They bought assets at $10. Now the market doesn't value the asset at $10. Imagine if they continue to pretend it's $10. That doesn't change that it simply isn't worth that now, and though it may become worth that in the future they shouldn't get to pretend that it already is and hide the risk. That's fudging the books even further.

That part smacks of a simple accounting gimmick to solve the problem, but that doesn't really solve the problem. If I'm going broke, drawing extra 0's on my bills isn't the way to solve the problem.

1 Reply

@littlek,

This may well be a sensible plan for preventing the next crisis in the financial system. But I don't see how it deals with the acute crisis at hand. Based on the summary on investmentnews.com, I think this plan is really a bargaining position for the Democrats' liberal wing in Congress. Eventually, they will help with the acute crisis in return for regulations that they think will prevent the next one.

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@littlek,

Ima just watch, but I don't think it does enough to do much.

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@Robert Gentel,

On this point, I definately agree.

Now, if all mortgages were made by a local bank which intended to hold them to maturity, I might reconsider. In fact, they are traded like securities, and need to be valued appropriately.

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Thanks all, I'm still trying to figure all this out. If the average citizen can't get it, and some of the house can't get it, who should be the ones to make the decisions?

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@littlek,

So, my take is that the republicans are trying to buy the assets below value and the new proposal is trying to buy at above cost. Is that right?

1 Reply

@littlek,

They wouldn't know what the value of those bundled mortgages are worth, so they'll buy with the hope that they didn't pay too much for those assets. Factually, there is no market for those packaged mortgages at the current time, because more foreclosures will impact them in the future.

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Good evening. This new plan from, I guess, the Dems, is equally worthless from their brethern on the Repub side. Item (1) is increasing FDIC coverage from 100m to 250m, Anyone with that kind of money has already moved their money into several different accounts. Sounds good but means little,
They propose (2) an increase in the "securities transfer tax." It is said that it would be "a very small bite" that would generate $150B a year. Good luck on getting that passed.
(3) As for the "mark to market" thing. All I can say is this, as it is late and I am sleepy. Your brother-in-law Ernie owes you $100. He hasn't paid you a nickel for months. You will be lucky to get $20 out of him. You are going to lose $80. You need to "mark to market" the value of that loan. You can not pretend that Ernie will get a job and eventually pay you $100. You have to realize the $80 loss.

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Ok....... so. Does anyone have a good plan? Or one better than the compromise voted down by the senate?

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@realjohnboy,

pretty damn accurate RJB.

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@littlek,

in order to have a good plan to fix an organism one needs first know 1) how the organism works when healthy and 2) what has gone wrong. The problem with the American economy is that it is so complex that not even the experts understand completely how it works. To see that I am correct think back a few months and ask who then was claiming that the American mortgage derivatives could take down all of the investment banks, some of the biggest commercial banks, and threaten the global economy??? Nobody understood how tied together all of this stuff is, and how a problem with one section of the financial system impacts others and the economy as a whole.

1 Reply

@hawkeye10,

hawkeye, Banks and finance companies were a big part of our economy, and that's the reason we're in this current mess. The manipulation of money was so complex, nobody understood at what level it would impact our total economy. When pe0ple began to lose faith in their banks, they started pulling out their cash and investments in banks. We saw this in the stock market when it was reported many banks lost over 50% of their value; that was a big warning, but most were not paying attention. With the loss of value on their books, they essentially didn't have much asset compared to their liabilities and equity - and even less cash.

Cash is the lifeblood of any economy. All the big players went to Vegas and lost, and everybody is now paying for their gamble.

As politicians are won't to do, each is now blaming the other party. Even after McCain just said one week ago that our "economy was sound." Bush used those same words during the past year. Great leaders always know what they are talking about.

1 Reply

@littlek,

littlek wrote:

Ok....... so. Does anyone have a good plan? Or one better than the compromise voted down by the senate?

No, Littek. The answer is no.

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@cicerone imposter,

you make it too complicated: when nobody knows what assets are worth (derivatives) no one knows which companies are sound (will stick around and pay their debts) and which ones will not. This problem spread over the whole economy because with the advent of the credit default swap during the mid 90's almost everyone holds a stake in the banks success, almost certainly to include your pension. We could have let the derivatives go into default and let the fools that bought then go bankrupt, had it not been for the new default swaps which effectively took the risk off the balance sheets of the owners of the derivatives and spread it all around to almost everybody.

Thus, it it is not only that no one can tell which financial companies are sound, we don't know about the health of any company or any fund. Capitalism demands that risk be able to be determined, if risk can not be determined everything stops. That is where we are at. Capitalism has fundamentally broken down. When Paulson went to Congress and told them the risk that lurks around the corner you can bet your last dollar that he told them that the pending failure of financial markets and just the tip of the iceberg, what is at stake is the ability of capitalism to function going forward. As things stand now it can not, we are in the grinding down to a halt stage.

1 Reply

@hawkeye10,

hawkeye, It is complicated, but some investment houses saw the problem with those instruments, and stayed away from them. Vanguard is one of them. When this cash crisis started a couple of months ago, Vanguard wrote to us and informed us they stayed away from those instruments, because they saw the difficulties in valuing them. My wife's funds with Vanguard just lost 5.7% YTD, because her funds are more conservative than mine. I lost over 10% YTD. I'm not complaining, because during some years, my funds increased 25%. I've always planned our investments for the long-term. If we add to our net equity the value of our home, we're still hundreds of thousands ahead today. We paid $50.000 for our home in the early 70's; it's now easily worth about $1.2 million, and we have no mortgage.

My wife has no money worries for the rest of her life which was my biggest concern.

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@littlek,

It is hard to find the market value to the real estate especially as the factors leading to the inflated values were made for political reasons:

1) Bush had a huge debt and deficit and the normal procedure would be to issue bonds to fund the Iraq War and the Free Trade which was leading to job losses. To get people to buy bonds would require the Federal Reserve Bank to offer higher interest than commercial banks would thus leading to a small credit crunch as it would suck up much money and would lead to a recession. W didn't want a recession.

2) He stimulated the housing industry, which employes a lot of people, with low interest rates and promoted home ownership. But with the deregulation and greed it created a bubble in the housing market and inflated housing prices. The best way to estimate the market value would to go back to the prices of houses before the government stimulation started to get a good handle on the prices. Prices at around 2000 would an accurate market value of the houses. However, the bubble created an excess of housing products so there is now an over supply of homes so prices will have to drop to sell off those homes.

3) Free Trade is an attempt to counter unions so many high-paying jobs disappeared to cheaper overseas labor markets leading to fewer American high-salaried workers which compounds the problem of affordability of high price homes.

1 Reply

@talk72000,

It is hard to find the market value to the real estate especially as the factors leading to the inflated values were made for political reasons:

1) Bush had a huge debt and deficit and the normal procedure would be to issue bonds to fund the Iraq War and the Free Trade which was leading to job losses. To get people to buy bonds would require the Federal Reserve Bank to offer higher interest than commercial banks would thus leading to a small credit crunch as it would suck up much money and would lead to a recession. W didn't want a recession.

This is true, but we can't blame all of this to Bush. Consumers began to spend on credit long before Bush took over the white house. Easy credit in a "I want it today" society was growing at a pace even when our economy was healthy and growing. This was the same time consumer savings dropped to its lowest levels. We know that over 70% of our economy is based on consumer spending; and we did that in spades. We can blame both parties for allowing the candy store to sell more on credit.

2) He stimulated the housing industry, which employes a lot of people, with low interest rates and promoted home ownership. But with the deregulation and greed it created a bubble in the housing market and inflated housing prices. The best way to estimate the market value would to go back to the prices of houses before the government stimulation started to get a good handle on the prices. Prices at around 2000 would an accurate market value of the houses. However, the bubble created an excess of housing products so there is now an over supply of homes so prices will have to drop to sell off those homes.

I would go one-step beyond just looking at values during 2000. I would look at appreciation trends compared to economic growth, and include some level of "normal" appreciation during a time of GDP growth. The bubble was created because of several reasons; a) government pushing Mae and Mac to provide mortgage loans to questionable borrowers, b) speculators who were buying homes as investments, because many of them were becoming millionaires overnight - owning more homes as investments and rentals - using their increasing values on homes already owned to buy more (I remember those tv ads where many were bragging how many homes they owned and how much they were worth on paper, and living the good life with mansions and expensive cars), and c) then the supply exceeded the demand (even the best developers over-built homes and condos, and many are now turning them into rentals, because buyers disappeared from the landscape).

3) Free Trade is an attempt to counter unions so many high-paying jobs disappeared to cheaper overseas labor markets leading to fewer American high-salaried workers which compounds the problem of affordability of high price homes.

No, free trade is not an attempt to counter unions. Many developed countries benefited from free trade and grew their economy. Free trade allows for the principle of comparative advantage where developed economies continue to create technology while the developing countries work to provide the products and services that requires manual labor and those that cannot be taken over by robots. Labor intensive manufacturing should go to cheaper labor countries. That doesn't mean all factories need to be removed from developed economies. The problem with the way factories have been shifting to other countries can be blamed on the captains of industry who continued to increase their salaries and benefits at the expense of the American workers. They increased their salaries and benefits 30-fold while the average worker's pay and benefits did not keep up with inflation. Most CEOs and boards have still not figured it out that their personal greed actually ends up destroying the golden egg.

1 Reply

@cicerone imposter,

What a lot of nonsense. If you want to find out the truth about the bailout go to the Obama website. The Harvard trained lawyer knows far more about Economics than anyone on these threads.

1 Reply

The "NO Bailout" Act

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