[Rhodes22-list] Bush Speech and warnings and whisker pole post script

Wed Sep 24 22:17:08 EDT 2008

Andrew,

Your cost numbers are way too high (hopefully).  If you appropriate
1.3 Trillion you can bet your ass that 1.3 Trillion will be spent.
You used 'Billion' which is, uh, slightly off the mark.  But, what the
hell, my former Senator growing-up in Illinois, Senator Everet
Dirkson, used to say, "a billion here, a billion there, soon enough
you're talking about real money".

There's value in these "toxic" assets and taxpayers should get some of
their money back.  I'm including an article that explains it well.
Yeah, yeah, it's partisan, but look beyond that for the "meat".  We
can discuss who's responsible later.

Pass a damn bill before Monday you idiots or everything we say about
you is true!

Brad

---------------------

September 22, 2008
Democrats Try to Hijack the So-Called "Bailout"
Congressional Corruption
Hatched by Dafydd

Republicans see the collapse of the mortgage market as a potential
catastrophe that requires emergency measures... but an aberration
caused by government intrusion into the market, not an indictment of
capitalism and free markets.

Democrats see it as proof positive that capitalism has been proven to
be a fad that will soon pass away, like pet rocks... and a golden
opportunity to reintroduce failed liberal fascist economic policies
straight out of the platforms of Woodrow Wilson, Franklin Roosevelt,
and Jimmy Carter.

Which George W. Bush will show up... the veto-wielding Bush with a
spine that we've seen in Democratic spending legislation after the
2006 elections -- or the wimpy, appeasing Bush that we've seen in
legislation on racial preferences, Israeli-Palestinian "negotiations,"
and Republican spending prior to the 2006 elections? The choice will
spell the difference between a small-footprint intervention or a
massive repudiation of decades of progress on free-market economics.

But first, let's again talk about how we got into this mess.
Subprime mortgages, securitization, and toxic assets

This is the crux of the crisis: Back in the cretaceous period, when a
bank or S&L issued a mortgage, it held that mortgage until the
borrower paid it off. But in the contemporary era, what starts out as
a mortgage is typically bundled with other mortgages into a
"mortgage-backed securitie" (MBS) -- essentially bonds that can be
traded on the open market. Bizarrely, in the process, bad debt
automagically becomes good investment.

How are MBSs created? Let me quote from an excellent sumary in a
newsletter by John Maudlin (free registration required):

    Let's jump back 18 months. I spent several letters going over how
subprime mortgages were sold and then securitized. Let's quickly
review. Huge Investment Bank (HIB) would encourage mortgage banks all
over the country to make home loans, often providing the capital, and
then HIB would purchase these loans and package them into large
securities called Residential Mortgage Backed Securities or RMBS. They
would take loans from different mortgage banks and different regions.
They generally grouped the loans together as to their initial quality
as in prime mortgages, ALT-A and the now infamous subprime mortgages.
They also grouped together second lien loans, which were the loans
generally made to get 100% financing or cash-out financing as home
owners borrowed against the equity in their homes.

    Typically, a RMBS would be sliced into anywhere from 5 to 15
different pieces called tranches. They would go to the ratings
agencies, who would give them a series of ratings on the various
tranches, and who actually had a hand in saying what the size of each
tranche could be. The top or senior level tranche had the rights to
get paid back first in the event there was a problem with some of the
underlying loans. That tranche was typically rated AAA. Then the next
tranche would be rated AA and so on down to junk level. The lowest
level was called the equity level, and this lowest level would take
the first losses. For that risk, they also got any residual funds if
everyone paid. The lower levels paid very high yields for the risk
they took.

    Then, since it was hard to sell some of the lower levels of these
securities, HIB would take a lot of the lower level tranches and put
them into another security called a Collateralized Debt Obligation or
CDO. And yes, they sliced them up into tranches and went to the rating
agencies and got them rated. The highest tranche was typically again
AAA. Through the alchemy of finance, HIB took subprime mortgages and
turned 96% (give or take a few points depending on the CDO) of them
into AAA bonds. At the time, I compared it with taking nuclear waste
and turning it into gold. Clever trick when you can do it, and
everyone, from mortgage broker to investment bankers was paid
handsomely to dance at the party.

So what started as mortgages -- ranging from very secure prime
mortgages, which are doing fine, to lousy subprime mortgages for too
much money to borrowers who really didn't have either the credit
history or income to justify such loans, many of which are currently
in default 60 days or more -- were, by the magic of "securitization,"
turned into bond-like securities; and in the process, many of the bad
and even defaulted loans were transmaugrified into AAA-rated
investments.

The banks and other financial institutions that securitized mortgages
(and resecuritized already securitized MBSs) would make their nut by
skimming some percent, typically fifty basis points (0.5%), off the
loan rate; thus, if they began with a package of mortgages at 6.5%
(they tried to bundle like with like), they would securitize them into
an MBS that paid 6%, keeping the difference -- and hoping there would
be few enough defaults that the mortgages would produce more than 6%
net.

What happens when loans are defaulted is very complicated and not
really germane to this post; they created different tiers, or
"tranches," with different ratings -- AAA down to junk -- for
different prices, that distributed the losses from worst tranch up to
best. Not important here.

But defaults, of course, are where the whole pyramid scheme broke
down. While housing prices continued to rise, everybody was happy and
there were few defaults. But starting a couple of years ago, when the
housing bubble burst and the mortgage default rate shot up, a bunch of
banks found themselves holding very insecure securities, losing money
hand over teakettle. The crash began among the lenders and spread to
secondary markets (the MBSs and CDOs) and even tertiary markets
(insurance underwriters like AIG). In short order, institutions all
over the world found themselves holding pieces of paper whose value
was impossible to determine -- which are referred to as toxic assets.

Toxic assets are illiquid, meaning they cannot be bought or sold
because nobody knows how much to offer for them; they are frozen. If
you hang onto them, they might regain some value later... or they
could disappear completely. Worse, illiquid securities see their
ratings drop; and current law forbids some types of funds from holding
anything but AAAs... which means they may be forced by law to sell --
but unable to sell because of illiquidity!

Not only that, but current law also requires that such securities be
"marked to market," meaning they must be valued at the last price
offered by some institution that was desperate to sell -- because of
the law in the previous paragraph. Thus, even institutions that didn't
have to sell their toxic assets had to reprice them; this meant that a
number of financial institutions suddenly did not have sufficient
reserves for the amount of loans or leveraging they had out. That
meant they needed to get hard cash and fast... which meant they would
have to panic-sell a bunch of securities, precipitating a new round of
re-rating and re-valuating.

Eventually, nobody had a clue what anything was worth anymore; and
nearly every financial institution in the world, it seems, was
involved up to the fourth cervical vertebra in this mess.

It was that uncertainty that caused the mortgage market to collapse.
It's like trying to buy a car when all you can see is a grainy photo
in a newspaper: You can't test-drive it, inspect it, or even kick the
tires. You don't even know whether it contains an engine... how can
you possibly make any kind of offer whatsoever?

Worse yet, the seller has never seen the car either, and he knows no
more about it than you!

So what is to be done? Obviously, since the problem is the inability
to set a value for these instruments, which makes them impossible to
buy or sell (illiquid), the solution is to find a way to value them.
Enter the Paulson-Bernanke emergency rescue plan.
Treasury presses the reset button

As proposed by Secretary of the Treasury Henry Paulson and Chairman of
the Federal Reserve Ben Bernanke, the putative "$700 billion"
"bailout" is actually neither: It will neither cost that much, nor
will it bail out those financial institutions that wrote bad loans for
people they knew were not likely to be able to pay them off.

As I understand it, here is the basic plan. Note that I'm drawing this
from many sources, it's not yet written in stone -- or even in ink --
and I can't give you sources. If you want more information, you're on
your own! But here is what I've been able to glean:

   1. The Treasury is given authority to spend up to $700 billion
(outstanding at any particular moment) to buy MBSs, CDOs, and related
instruments that have become "illiquid." These "toxic assets" will be
purchased from their current owners at a huge discount... meaning the
banks and other investors who purchased these pigs in pokes will, in
fact, take a significant financial hit... they're not being "bailed
out."

So the Treasury can buy up these toxic assets; what do they do with them?

   2. I believe the plan (which has not yet been formalized in
legislation) is to create a Treasury owned and managed resolution
corporation that will take ownership of these toxic assets. Analysts
will then pore through each MBS, determining the status of all the
underlying mortgages and making a report publicly available. This will
make the opaque assets completely transparent. All the financial
fundamentals will be visible, so analysts at private companies can
examine all of the securities and decide how much they would pay for
each.

   3. The resolution corporation will then auction off each of the the
now-transparent MBSs, selling it to the highest bidder; that very
action allows the market to reset the value of the security.

That is why I characterize this rescue operation as "pressing the reset button."

Once some corporation has examined the fundamentals of the security
and offered the winning bid for it, the MBS becomes (by definition)
liquid; it is no longer a toxic asset. Its value has been reset... and
it can go up or down after that point based upon subsequent,
well-understood events (defaults, repayments, prepayments) in the
underlying mortgages and reevaluations based upon other, market-based
criteria. In other words, it becomes just like a mutual fund.

The crisis was the inability to value MBSs; the solution is to reset
their values. The beauty of the Paulson-Bernanke plan is that this
resetting is done by the free market, not by government decree.

Finally, note this point:

   4. When the Treasury-owned resolution corporation auctions off the
now-transparent MBSs, it can use that money as income. Since the asset
is now much more valuable than before (having been scrubbed into
transparency), if it becomes saleable, then it will certainly sell for
more than the discounted rate at which the corporation bought it. In
other words, the resolution corporation will make a profit on every
security it resells -- so the program will not actually cost $700
billion... it may even end up completely in the black.

That's why the Paulson-Bernanke plan is neither a bailout -- the
so-called beneficiaries in fact must pay dearly for their folly -- nor
massively expensive, since it resells most of the securities it
bought, and at a profit. It could still end up costing money,
depending on how many of the MBSs end up still toxic even after the
complete report (if too many of the underlying mortgages are in
default, for example); but the losses won't be anywhere near $700
billion, and they may be less than the profits.
Democrats: fingers in the pie, finger in your eye

But the loyal opposition is not content to use the Paulson-Bernanke
emergency mortgage-market rescue plan to rescue the mortgage market
from the current emergency; how dull that would be, especially in an
election year. Rather, they see America's crisis as their opportunity
to enact or re-enact by extortion every awful, failed, thoroughly
discredited, socialist-populist scheme they have tried, or always
wanted to try, over the past century. Senate Democrats demand:

    * Contingent stock in every, single company that sells its toxic
assets to the resolution corporation; this would give the federal
government a degree of ownership of virtually every bank, savings and
loan, or other financial institution in the entire country. It is
liberal fascism at its purest, and it would lead directly to much
greater government control of private capital.

    * They demand that bankruptcy judges be allowed to rewrite the
terms of the underlying mortgages, in order to "provide direct
assistance to homeowners caught in the foreclosure crisis"... in other
words, to allow people who took out loans much too big for houses they
could not afford to nevertheless keep those houses, even though they
cannot make the payments. All at the expense of financial institutions
that are teetering at the brink as it is.

    * Democrats demand "limits on the pay of top executives whose
firms seek help." That is, Congress would set the salaries and bonuses
of executives working at companies that are in serious trouble because
of the mortgage meltdown... and that's always worked out so well in
the past!

    *

      They also have structural demands:

      The 44-page Senate proposal, pulled together by Senator
Christopher J. Dodd, Democrat of Connecticut and the chairman of the
banking committee, would require the Treasury to run the rescue plan
through a new "Office of Financial Stability" to be headed by an
assistant treasury secretary. It would also establish an "Emergency
Oversight Board" to monitor the bailout effort, made up of the Fed
Chairman, the chairman of the Federal Deposit Insurance Corporation,
the chairman of the Securities and Exchange Commission; and two
non-government employees with "financial expertise" in the public and
private sectors, one each appointed by the majority and minority
leadership in Congress.

      In addition, the Senate proposal would require monthly reports
to Congress, rather than the biannual reports that would be required
under the Bush administration's proposal.

      This sounds like an invitation to micromanagement -- and unless
I miss my guess, the "Emergency Oversight Board" will somehow end up
stuffed with former members of the Clinton administration and/or
Barack H. Obama's campaign, like Franklin Delano Raines, James
Johnson, and Jamie Gorelick... the same people who ran Fannie Mae and
Freddie Mac into the ground and ran many of the very multinationals
that offered subprime loans, hedge-funds and other derivatives, or
that insured these toxic assets, thus creating the crisis in the first
place.

    *

      While former Clintonista (and now Charlie "Tax Ducker" Rangel's
lawyer) wants the Democrats to go even further:
      Barack Obama has tried to run as a unifying centrist. Now it may
be time for him to clear the fog and talk, walk and sound like a true
FDR liberal -- reminding the American people that at times like this,
the government is a friend, not an enemy, contrary to conservative
theology. Indeed, now may be the time for him and the Democratic
Congress -- urged on as recently as Thursday by Treasury Secretary
Henry Paulson -- to take the next 30 days to enact something
reminiscent of FDR's first 100 days. It should be more than just a
$700 billion bailout. It should also include billions to help
homeowners avoid foreclosure, to assist the auto industry, to upgrade
the nation's infrastructure, and to spur development of alternative
energy sources.

One can always trust Democrats to find a way, in any crisis, to throw
gasoline at the bull.

President Bush (and the upcoming President John S. McCain) must remain
stalwart and demand an up or down vote on a clean version of the
Paulson-Bernanke rescue plan... no add-in spending, no wage and price
controls or upgrading the nation's infrastructure, and specifically,
no damned earmarks.

Anything less than this standard of rectitude and disinterested
statesmanship would be an economic betrayal of America... and must
lead to electoral ruin for any party which puts immediate
self-gratification ahead of national economic survival.

On Wed, Sep 24, 2008 at 8:58 PM, Andrew Collins
<sailingvesselcarmen at gmail.com> wrote:
> rad
>
> As Tootle pointedly pointed out the current administration warned about all
> this repeatedly over the last 5 years ... but now we are all on the verge of
> becoming pinko Commie socialists when Hank P rams the ultimately $1.3
> Billion baleout down ... or, um, up ... well you know. I can't wait to buy
> the papers tomorrow.
>
> Andrew
> Fallow Traveller on s/v Carmen
>
> PS With all this talk of whisker poles that clean the cabin carpeting, I
> think I's going to get me one and try it out in the gales of October. Yeah I
> know it's supposed to be gales of November but I have to haul her by
> Halloween.
>
> On Wed, Sep 24, 2008 at 9:45 PM, Brad Haslett <flybrad at gmail.com> wrote:
>
>> I truly hope SOMETHING gets passed so the loan on the house I'm
>> selling closes on schedule next week (Tip O'neil said it best - all
>> politics is local).  Here's one summary of the Presidents speech.
>> Brad
>>
>> ---------------
>>
>> Bush: Congress Must Act to Save Stupid People
>>
>> Posted By Scott Ott On September 24, 2008 @ 10:41 am In Business, U.S. News
>> |
>>
>> (2008-09-24) — The foundation of the U.S. economy could crumble,
>> President George Bush said today, if Congress fails to approve a U.S.
>> Treasury plan to take over foundering financial firms, a proposal
>> which the president called "a much-needed 21st-century civil rights
>> act for stupid people."
>>
>> "To sustain this shining city on a hill," Mr. Bush said, "we need to
>> rescue the ignorant, irresponsible folks — from Wall Street to Capitol
>> Hill to Main Street — who got us to where we are today. We must
>> guarantee that no American suffers the soft bigotry of being forced to
>> live with the consequences of his bad decisions."
>>
>> The president, in remarks to the news media clearly aimed at reluctant
>> Republicans in Congress, said, "Our financial system rests on a
>> foundation of huge banks, brokerage houses and quasi-governmental
>> agencies that followed Washington's lead by gambling on long-shot,
>> poorly-collateralized investments. Now this glorious way of life is
>> threatened, and we must act to preserve it."
>>
>> "We need to guarantee that the structures, systems, people and
>> products that got us to this point won't be tossed on the ash heap of
>> history," said Mr. Bush. "If these giant companies fail, then America
>> will be left with nothing but thousands of small to mid-sized
>> financial firms that made prudent investment decisions during the past
>> 15 years."
>>
>> The president added that, "Americans value the liberty they have to
>> buy homes they can't afford, to invest in securities backed by nothing
>> but hope, and to draw six- and seven-figure salaries based on the
>> courage to risk taxpayer dollars on deals that even the dealmakers
>> don't understand."
>>
>> "It is a moral imperative that we guard the civil rights of these
>> idiots," he said. "If we fail, then we face the specter of free market
>> capitalism run amok, and millions of Americans will feel the painful
>> lash of personal responsibility across their backs."
>>
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