Tag: bailout

“Our Hands Are Tied”

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Despite rumors to the contrary, this country is still based on the rule of law – especially when the law favors a guy who has a "bonus" in excess of $6 Million dollars coming to him. By now almost everybody has certainly heard about the $165 Million of bonuses being paid to AIG execs. In a discussion on NPR this morning Renée Montagne asked why the government could not cancel the payments considering that they own 80% of AIG through their $170 Billion in bailouts. The answer was that the government can’t just rip up an existing contract because this is a country ruled by law. That is a nice answer that is true on the surface so long as you only give it a passing glance in near total darkness. Just since the beginning of this year Congress has passed a law allowing judges to rewrite the terms of an existing, legal mortgage contract. (I use that example not because it is better or worse than nullifying the payments of bonuses stipulated in a legal employment contract but because it is so similar to what we are saying can’t be done because we are a country ruled by law.)

The question remains, what does all this mean. We do not actually want to become a country where the government can come alter a private, legal agreement anytime they decide it would be a good idea to do so. Let’s see what we can learn from some of the options that have been proposed.

Tear Up the Contracts

If we want to admit that we are not a country that follows our own laws this would be the best course of action. That’s not going to happen because it runs contrary to our sensibilities as a nation. We may break our own laws, but we won’t admit it openly like this. A "bonus" that is guaranteed is no bonus, it’s a salary – one that these executives have proven they don’t deserve. A company that would offer or even accept an employee on such compensation terms should not be receiving a government bailout – in fact it should not even be in business.

Executives Voluntarily Forgo Their "Bonuses"

This would be the morally correct course of action for those who stand to receive their bonuses. This won’t happen because those who will receive the bonuses know that having AIG on their resume for 2008 may make them virtually unemployable for a while if they ever need another job. They also know that AIG is not financially sound even with the government money it has received so they can’t be assured that their current jobs won’t evaporate. They are going to take what they can get legally for as long as they can so that they can ride whatever storms may come their way.

Give Them Another Bailout

This one won’t sound popular on the surface – and it won’t happen either – but I have to throw it in here. This was an early idea of mine. The government should offer AIG another bailout that would be structured like so – The government gives AIG another $135 Million in bailout money on the condition that all those who stand to receive bonuses sign a contract that nullifies their bonuses – thus the company receive the benefit of an extra $300 Million while the taxpayers only foot another $135 Million of the bill. If AIG refuses the offer (which they would) it would prove that they don’t need the money as much as we were told to believe they were – just like the stories on NPR this morning about all the banks who are opting out of the TARP funds because of the "excessive" restrictions that Congress has written into the TARP legislation (plus those who want to opt out, but aren’t sure they can). The fact is that many of the businesses that are taking our government funny money are doing so because it’s being offered more than because they need it. (Why put yourself at a competitive disadvantage if you can stomach the attached strings?) I hope that Congress continues to make these funds more and more restrictive.

Reduce Their Salaries to $1 for 2009

I wish (but doubt) that the nation is not foolish enough to fall for this ploy. This is the most likely course of action because it is the one that AIG has proposed. Most of the people getting these bonuses should not even be employed based on their past performance. Reducing their salaries would be a generous act even if we were to also strip their bonuses. Besides, they may take a salary of $1 for the year, but they will also take a new bonuses next year after our outrage has died down (and they’ll weather our new outrage again if need be). Most of them are receiving bonuses that exceed the annual income of the majority of American households. They can live on the $1 salary comfortably if they want to because of the bonuses that that "punishment" would allow them to take.

Tags bailout, Constitution, laws, money, NPR

National

Senators Seeing the Future (Clearly)

Post author By David
Post date February 18, 2009
No Comments on Senators Seeing the Future (Clearly)

There are obviously a few things that I don’t understand about the Senate. Yesterday I reported that according to Senator Bennett the most important (he said it was most important, it was not simply the first thing on his list) part of the job of a senator is to try to see the future clearly. Little did I know that later in the day I would find an example of that prescience in action. Becky Edwards shares from the State Legislature:

There was discussion and explanation of the federal stimulus package and how it will affect Utah. We will receive $1,536,834,051 of stimulus funds. This is one time money only. Of that $86M is to be used at the Governor’s discretion. Much of this money is targeted, cannot be moved around, has strings attached (we’re still waiting to find out what they are), some cannot be spent for 1 or 2 years . . .

(emphasis added)

Apparently our representatives at the federal level (Not Utah’s delegation specifically) can already see the future clearly enough to know that the economy will need continued stimulus next year and the year after that. And here I thought that the stimulus bill was intended to get the economy back on its own two feet sooner rather than later. If I wanted it to take 3 years (it’s already been more than 1) we could have achieved that by sitting back and watching. Now we run the risk of nursing it along for years to come.

Tags bailout, connections, economics, senate

National

Define “Change”

I have come to the conclusion that I should not listen to national news – it just gets me agitated.

I was driving home listening to NPR and was treated to actual soundbites from the rallying speech that President Obama gave to the Democratic caucus meeting. I had head about that, but hearing these gems really showed that many people must mistake the fact that Obama is articulate by assuming that everything he says must therefore be intelligent and accurate.

The audio clips I heard had the president emphasizing that the people elected him (and the rest of Congress) to change the direction of the country and were not seeking "more of the same." What really got to me was this well phrased analogy:

"I don’t care whether you are driving an SUV or a hybrid, if you are headed toward a cliff you have to change direction."

He’s absolutely right. My reaction was that instead of changing direction when faced with an economic cliff, the president and Congress are accelerating and hoping to grow wings by the time they reach the edge. Let’s examine the "change" that he is promoting.

The president calls inaction irresponsible – it seems to me that inaction is not something that the Bush administration can ever be accused of. In other words inaction would probably be the clearest for of change. Last year the administration got a $150 Billion dollar stimulus bill and later received another $700 Billion to unfreeze the credit markets. That’s $850 Billion in spending last year of money that we don’t have and the result is that we are still in a recession with no end in sight. The change that Obama is promoting is something on the order of $800 Billion in new spending of money that we don’t have. I’m beginning to think the politicians really don’t know the difference between legal tender and monopoly money (too bad the IRS knows the difference all too well).

President Bush and his Republican Congress raised deficit spending to an art form. When Bush got a Democratic Congress there was no change in habits. Now President Obama and his Democratic Congress are trying to build an art acadamy around Bush’s art form – that’s not the change I was looking for.

I understand that the argument Obama is trying to make is that the country is sick and honestly needs surgury. That is an argument that I can accept. The problem is that we have already tried surgury by hatchet – it doesn’t work very well. Our Republican senators are trying to insist on using a scalpel for the surgery. Their profligate economic past opens them up to accusations of hypocrisy – and many of them might very well be acting in full hypocrisy. Regarless of how hypocritical they are being the fact is that surgury with a scalpel is safer and more likely to not kill the patient. This leads to another inconvenient truth. Assuming that the patient survives surgury (whether by hatchet or by scalpel) to get a liver transplant we need to recognize that the disease was not a bad liver, it was alcoholism. Just because you have had a transplant does not mean that it’s safe to go back to the bar.

Tags bailout, Bush, economics, legislation, media, money, Obama

National State

Politics Goes Local

The Senate passed the bailout bill (that they had no business voting on) and with an added 315 pages of pork they might be exposing the real reason that the House did not pass it on Monday. All that extra sugar coating is likely to make the bitter pill go down easier. This reminds me why watching Washington politics is so depressing.

On a happier note, I met with Kyle Roberts last night and really enjoyed getting to know him better. I look forward to helping him to become my representative in the Utah Legislature.

I’m sure I will have some things to rant about on the national level, but I am going to focus on state and local issues for a while (like the proposed amendments to the Utah Constitution) and quit paying attention – as much as possible – to the coming Obama administration and the continued shenanigans that will remain rampant inside the beltway.

Tags bailout, civic participation, House 20, Utah

National

Government Gray Area

When the House voted down the bailout on Monday I was very surprised by the result, but I was not particularly surprised to hear that of the Representatives facing close re-elections, only two voted in favor of the bailout. This looks like a blatant reminder that the primary concern of elected officials tends to be keeping their jobs rather than showing leadership. I say that while acknowledging that I feel strongly that rejecting the bailout was the right choice. The urgency with which the bailout was pushed makes me immediately wary. Government should never work that fast on anything of importance – except in cases of our nation being attacked. In other words, the members of the house did the right thing, but it appears that they did it, in most cases, for the wrong reason.

Today the Senate is set to vote on the bailout bill – despite the fact that they have no Constitutional authority to appropriate money except in concurrence with the House. Unlike the House, where every member is facing re-election, 2/3 of our Senators are insulated from an immediate election. Because of this I expect that the bailout bill will pass in the Senate as Senators feel more free to lead with re-election not being an immediate issue for most of them. I have not been able to read a draft of the Senate version of the bailout, but assuming that they have not written a new bill from scratch I fully expect that they will do the wrong thing for the right reasons.

I’m really not sure which is worse, but our options in Congress (when we have options) seem to be that our elected officials do the right thing for the wrong reasons, or the wrong thing for the right reasons.

UPDATE 11:00am: There is no way that any Senator will have read the full text of this bill – it is 451 pages long. I have no idea why it is so long because as of the parts I have read nothing of significance has changed. In fact, the page numbers for the entire first section of the bill (which contains the bulk of the substance) appear to be unchanged. None of the issues I raised with the House bill have been addressed in any way.

Tags bailout, change congress, government, money

culture

Something for Nothing

As I have been thinking and reading about the credit crisis my mind has been chewing on the idea that there are two very different kinds of investing. One is the kind of investing where you put in an initial outlay of resources and follow that with efforts to improve the investment (whether that is a company, an idea, or a building) so that the final product is greater than the sum invested and thus turns a profit. Some examples are finding a company in need of cash with a good idea, a business plan, and the support of other qualified investors and giving them cash to help realize their plans and turn a profit. Another example is buying a distressed property and fixing it up. Perhaps you are purchasing a house for $150,000 in an area where most houses are going for $225,000. You put in an extra $70,000 in materials and time to get the house in prime shape and then sell it for $240,000 – realizing $20,000 profit for your efforts.

The second kind of investing is the shortcut based on the mentality of seeking something for nothing – it’s called speculating. Although it may look similar to traditional investing it is really just a serious form of gambling. An example of this would be buying into a company that is cutting corners to turn a profit and operating with a loose regard for the rules of their business. They put on a good show with richly rewarded executives and a lot of talk, but there is no substance to their ideas if you do a little digging. Another example would be "flipping" a house. You go in and buy a house with an interest-only mortgage where the owner is in a hurry to sell and then you turn around and sell the house at a $100,000 profit within weeks without putting in any work. It also applies to those who purchase a large, showy home (compared to what their income should support) with an adjustable rate mortgage on the assumption that the value of the home will rise in time to refinance the home later using the "equity" gained by sitting in the home for a year – worse is when they intend not only to refinance, but to refinance and get cash out to support a lifestyle that they cannot support on their regular income.

A financial crisis, at least for individual cases, may result from either approach to investing – but it is much more likely (and I believe it is generally more damaging) when the crisis results from speculating. I am convinced that every time we experience a bubble in the economy – whether it’s a tech bubble, a housing bubble, or any thing else – the bubble is a result of speculation, even though there is legitimate investing taking place as well. In our current credit crunch we will not be able completely sort out those who were burned by speculating and those who were legitimately investing (the same is true anytime a bubble bursts) so we must either rescue some or all of those who were speculating, or else we will have to accept in advance that many people who did nothing wrong will be paying the price for the fallout from the rampant speculation that caused the crisis.

Tags bailout, economics, money

National

Amateur vs Professional

The financial amateurs in Congress have given us the 110 page text of their bailout plan which they will probably vote on today. It’s pretty much like the 102 page draft I wrote about on Saturday. They added the option to insure troubled assets in addition to the option to buy such assets. They also settled on the Graduated Authority to Purchase version rather than a straight-up $700B gift. I’m not sure if this is new, but there is also an option to remove the mark-to-market rules in the latest version.

The financial professionals such as Ross Perot have outlined a much better plan at perotcharts.com. Their plan in the immediate term calls for:

Modification or removal of mark-to-market
A 120 moratorium on foreclosures and dividend payments by banks
Higher national standards for capital bases at banks with the Treasury able to buy equity in those banks who cannot raise equity to meet the standard
Raising the FDIC guarantee from $100,000 to $250,000
Using any profits from equity that the government does buy to strengthen Social Security
An independent oversight board for the plan
Criminal investigations into the causes of the crisis

Later they would fix the Glass-Stegall Act, amend bankruptcy regulations, and give HUD/Fannie Mae/Freddie Mac the authority to work with individual homeowners facing foreclosure.

It’s too bad our amateur decision makers are so busy listening to the vested-interests rather than the independent professionals.

Tags bailout, economics, fiscal restraint, money

National

A First Glance at the Bailout Bill

Post author By David
Post date September 27, 2008
4 Comments on A First Glance at the Bailout Bill

I don’t claim to have read the full 102 page text of the bailout draft proposal yet, but I wanted to share my first reactions after jumping around to some of the sections that caught my interest.

Section 110 – Executive compensation (p. 29)

I like the idea of controls on executive compensation for participating companies, but the regulations here are vague and toothless. For example, the bill prohibits "inappropriate or excessive severance compensation." (110 3b) Considering how much the executives of large companies make, it should specify that there be zero compensation for severance.

Section 114 – Graduated Authorization to Purchase (P. 38)

This section was a pleasant surprise. It appears that it is not settled, but I like the idea of having a tiered approach to how much the Treasury is authorized to spend. The levels here are $250B initially, $350B upon notice from the treasury, and $700B if Congress does not oppose within 15 days the proposal of the treasury for that level of authority. Personally I think there should be an intermediate level of $500B where the treasury must write a proposal and the Congress has 8 days to decline before it takes effect.

Does anyone want to make bets on how long it takes the Treasury to bump its authority from $250B to $350B?

Section 119 – Termination of Authority (p. 55)

This might be my favorite section. I was pleasantly surprised that the authority was only granted until December 31, 2009 – with the option to petition for an extension by describing how extended authority will benefit the taxpayers. Even with a petition the authority is specified to end only two years from the day the bill is originally signed. Of course I won’t hold my breath that it will die in two years or less. I will believe it when it happens.

Section 123 – Minimizing Foreclosures (p. 65)

What I saw of this section suggested an approach that would not cost taxpayers anything – that’s the right aproach. The efforts to minimize foreclosures are directed at restructuring loans by extending their terms where appropriate.

One More Wish

I would like to see a provision, on the outside chance that this program actually generates a profit, that any profit realized by the treasury through this program will be used 100% to pay down the national debt – this should not be used as a windfall by Congress to fund some pet projects.

Tags bailout, money, reactions

National

Economics 101 (Bush Edition)

Post author By David
Post date September 25, 2008
6 Comments on Economics 101 (Bush Edition)

Wasn’t it so nice for our president to give the country a lesson in economics. He worked hard to reinforce the image of Washington knows best. Unfortunately his lesson left out a few details that are less than flattering for Washington. Let’s review the text of his speech. I’ll skip all the real fluff and focus on those parts of the speech that need correction.

This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time.

It’s nice to cite the "large influx of money" but the real problem was "{artificially} low interest rates" that were being managed by the Federal Reserve Board. These are what allowed for people to get credit too easily to buy cars and houses that they often had no business buying – certainly not at the inflated prices that tend to follow easy credit. And lets not kid ourselves, loans for college tuition are an inconsequential fraction of this problem but citing them makes it harder to argue against all that easy credit in the first place.

Easy credit, combined with the faulty brainless assumption that home values would continue to rise, led to excesses and bad decisions. (corrections in italics)

The following statement is almost entirely true and when we insert the one final bit of truth it is very damning to the idea of government intervention.

Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.

Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk. (emphasis added)

The one bit of untruth there was the implication that people were wrong to believe that Fannie and Freddie were guaranteed by the government. When push came to shove, the government stepped in and guaranteed both entities. Even if it had not, it was the perception of such a guarantee that allowed those companies to "put our financial system at risk."

The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America’s financial system are at risk of shutting down.

If the market is allowed to correct itself those sectors would shut down and restart, like a computer reboot. Though the process would be painful in the short term, the problems would be corrected much faster than if we insist on picking our way down the face of the cliff.

Perhaps we should take note of the fact that our government has been actively assisting the market for 7 years allowing the housing market to artificially expand our economy during a time when we should have allowed for a market correction following the Tech bubble and the shock of 9/11. Now the problem is worse than it was which gives us more excuse to pursue the same course with more drastic measures.

Without $700 Billion worth of intervention, Bush predicts:

Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And, ultimately, our country could experience a long and painful recession.

In a free market individuals and businesses would be learning to deal with the difficulties of tighter credit by living within their means, but "We must not let that happen." Because our market has been manipulated with artificially low interest rates and other such "minor" interventions the true value of a new car or a college education has become distorted. I note that Bush did not list buying a house as something that would be more difficult, I’m sure that’s because reckless home buying on easy credit is a visible part of the problem.

Lest we forget our recent history, while we have not had a serious recession (which would generally last less than 12 months) our last 84 months (at least) have been filled with news of job losses and anemic economic growth. We credited the rise of home prices with what little growth we saw and blamed the war, outsourcing, and illegal immigrants in turn for the lack of real growth.

Now we are seeing the one positive thing we saw as the primary cause of our current predicament – and yet we fail to realize that the reason for our unnatural 84 month see-saw is government intervention in the markets. Ultimately we have experienced a long and painful open wound which is now infected which was caused by our attempts to avoid the surgery of a natural market correction.

The president paints a rosy picture of how the proposed intervention would function, but the fact is that the proposal so far lacks any structure to guarantee anything like the picture we are being sold.

I liked the reference to the FDIC:

And through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000.

The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit, and this will not change.

In order to avoid some panic, let’s remind ourselves that the above statement is true, those accounts which are based on actual cash value are safe so far, and safely insured by the government already. With that safety net, we should take our chances with Wall Street and let the government bail out the savings of those who lose money if their local banks ever fail.

Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised.

It has unleashed the talents and the productivity and entrepreneurial spirit of our citizens. It has once made this country the best place in the world to invest and do business. And it gives gave our economy the flexibility and resilience to absorb shocks, adjust, and bounce back. (corrections in italics)

Since then we have decided that we want to unleash the entrepreneurial spirit without having to absorb shocks and adjust. Good luck with that plan.

Tags bailout, Bush, economics, fiscal restraint, money

culture

Curbing Innovation

When talking about a $700 Billion intervention it only makes sense that taxpayers and members of Congress would want that money to go where it’s needed rather than to propping up salaries of $50 Million/year to executives of failing companies.

But Wall Street, its lobbyists and trade groups are waging a feverish lobbying campaign to try to fight compensation curbs. Pay restrictions, they say, would sap incentives to hard work and innovation, and hurt the financial sector and the American economy. (emphasis mine)

It seems to me that incentives to work hard and be innovative got us into this mess – I think we would want to sap those incentives for the time being.

Tags bailout, government, money, New York Times