Another week for the history books. As expected the news just keeps on coming well into the weekend. Yesterday was the first day of Spring, but that information was not passed along around here as it is a nippy 35 degrees and windy.
Possibly Some Good Things to Come from the AIG Debacle
The saga of the AIG bailout will one day make for a fascinating book and a terrible made-for-TV movie. Until then we have to watch the train wreck unfold in real time. Two possible positive developments have started to take root, so perhaps something good might come out of this.
- Congress Now Might Read Bills They Pass
The bonus payout outrage has put a huge red bulls eye on the political chests of many members of Congress. Trying to enact legislation that would bailout AIG after only looking over the plan for about 3 hours has resulted in some nasty consequences for almost every member of the government. It is clear that the bonus payouts WERE included in the plan passed by a huge margin, but now the entire Congress has to act like they are shocked, shocked! that this little tidbit went unnoticed by them.
Nothing scares an elected official like the idea of a little notation on TV or in the press whenever their name is mentioned that says "...scandal". The AIG bonus scandal is now a real political point. Going forward I would expect members of Congress to get a little better at teasing out the finer details of various bailout plans. They will also be much more reluctant to attach their name to bills of this kind at all. Now the FED and the Treasury have already started a process by which they can just circumvent Congress all together, but that is another topic.
- Corporations Across the Business Spectrum Will Want to Avoid Government Intervention
The banks and the insurers were all for government intervention as long as it remained a hand over of cash with no strings attached. The Treasury has been masterful as crafting plans that allow access to unlimited capital with zero control over how it is used. Now the Congress is rushing (notice a pattern??) a new bill out to tax at 90% any bonus over $10k given to an employee of various firms, the management of said firms are scared out of their minds. As they should be. The new core principle for all going forward will be to try and build a "bullet proof" bank/insurer/other that can survive without government assistance. This is very good, and sadly as it should have been all along.
Plenty of things are Funny, Until it Involves You
I have stated that I think the taxation of the bonus money is probably correct and could serve as a lesson for all to keep the heck away from the government. That said, I am worried about the extension of federal powers to target revenue for taxation in any way they see fit.
Look at it this way;
The US government was able to push through the House a bill to tax bonus money at 90%. Ok, that is going to hurt the banks/insurers. It may even make you feel good or make you laugh at the idea of an AIG executive in the creative finance department having to redo his taxes. HAHA.
How about next week when the government decides that making money on "shorts" is fair game? How about paying 90% taxes on any short position you may have made some money on? Still,laughing?
This is dangerous ground we are running across without a clue or any long term thinking process.
Room for a Different Opinion
By now it should be clear that I am of the opinion that the FED/Treasury/Congress have no idea what they are doing. As a blogger I will of course highlight and reference material that I agree with to state my case. I fully accept that I may be the one that may have no clue what I am talking about. In fact that possibility is most likely!
In an effort to expand my mind, I have been reading and rereading an article that I saw over at Econbrowser titled Quantitative Easing. I would suggest to all to read the story in full as there is plenty of information to digest.
I would say that I have no agreement with any section of the article. The author has great faith that the FED can perfectly manage money creation to arrive at an inflation rate of 3%, which he deems as just right. They also seem fully confident the FED will take away the stimulus both before the dollar tanks and before inflation really gets going. It all sounds too good to be true.
I would offer that the writer of Econbrowser has substantially more knowledge of these matters than I do. Certainly they exhibit great depth of knowledge on fiscal policy that is impressive. Again, it is good to check out all opinions, not just the ones you think are right. You cannot get much more different than Economic Disconnect and that article.
Toxic Asset Transfer to Taxpayer version 10.4
Every plan totted out thus far to take the "bad assets" off the books of the banks has crashed and burned because there was no way to protect taxpayers form massive losses. Not content to let sleeping dogs lie, Treasury has an "all new" three pronged attack to....transfer massive losses to the taxpayer.
Yves Smith over at Naked Capitalism has her usual top notch analysis, and I would point you over there for the full write up.
The NY Times has all the details:
The three-pronged approach is perhaps the most central component of President Obama’s plan to rescue the nation’s banking system from the money-losing assets weighing down bank balance sheets, crippling their ability to make new loans and deepening the recession....
The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.
RED FLAG ALERT: I am not sure I understand why the FDIC is going to be so involved in all this. The FDIC is in the business of making sure our money is available if a bank goes bust. I am not aware that they have a charter to become a management firm that specializes in brokering deals. This is a serious red flag. The FDIC just made news last week with the fact that they need more cash just to do their job of deposit insurance, and now they are going to be involved in this? Strange indeed and warrants more reporting. Hello mainstream media!
In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.
In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.
I thought the FDIC was going to be the management firm?
Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.
The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of the country’s banks.
The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.
Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.
To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.
The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.
Hold on. The entire last section makes no sense. Yves says it best: "Yves here, If this isn't Newspeak, I don't know what is. Since when is someone who puts 3% of total funds and gets 20% of the equity a "partner"?"
Again, the Naked Capitalism piece has an in depth take on the whole thing. This plan is so bad even my good pal Paul Krugman hates it!
My overall take: Frustrated by a lack of ability to remove toxic assets at every turn, Treasury has finally concocted a plan complicated enough and with enough numbers, percentages, and moving parts to make everyone confused. The net effect is still the same, transfer massive losses for years to come to the taxpayer. This plan has so many aspects that pure fatigue will allow it to go forward.
So if you count the great assets transferred to the taxpayer by this plan and couple it with the Quantitative Easing policy now declared a go, you get a big time one-two punch to the dollar. How much damage can be done over the course of two weeks? I think we are going to find out.
Have a good night.