BAIL OUT

[sometimeman]

Let Risk-Taking Financial Institutions Fail
By Ari J. Officer and Lawrence H. Officer Monday, Sep. 29, 2008
Demonstrators protest the U.S. Congress's proposed $700 billion bailout of the financial industry in New York City's Times Square, Sept. 27

Demonstrators protest the U.S. Congress's proposed $700 billion bailout of the financial industry in New York City's Times Square, Sept. 27
Keith Bedford / Reuters

* Print
* Email
* Share
o Digg
o Facebook
o Yahoo! Buzz
o Add to Mixx! Mixx
o Permalink
* Reprints
* Related
*
*

The Administration and Congress have felt compelled to do something about the "financial meltdown," so an inefficient and inequitable "bailout plan" has been rushed through the legislature despite harsh criticism from the right and left. That's unfortunate. Both presidential candidates were stalling by qualifying the plan. Whichever candidate had had the courage to reject outright this proposal would have had the better claim to be President.
Related
Stories

* The Bailout Bill That Nobody Likes

More Related

* 7 Questions About the $700 Billion Bailout
* 18 Tough Questions (and Answers) About the Bailout
* Washington Prepares the Mother of All Bailouts

Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have "gone bad."

At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. It is as if many financial institutions sold "earthquake insurance" on the same house: when the quake hits, all these claims become close to worthless — but the claims are simply bets disconnected from reality.

Follow the money. Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth — from the American people to financial institutions engaging in reckless speculation — that will be the greatest in history.

Rescuing financial institutions is not the best solution. Yes, banks are needed to provide capital to businesses. But it is not necessary to spend $1 trillion to maintain liquidity. If the government is to intervene, it should pick and choose which claims to purchase; claims that are directly tied to mortgages would be a good start.

Let financial institutions fail, merge or be bought out. The faltering institutions will see their shares devalued and will be likely to be taken over by stronger institutions — as has already started happening. This consolidation of the financial sector is both efficient and inevitable; government action can only delay the adjustment.

The government should not intervene. It should leave overleveraged financial institutions to default on their derivatives obligations and, if necessary, file for bankruptcy. Much of the crisis has arisen from miscalculating the risks involved in a large book of positions in these derivatives. It is only logical that these institutions pay for their poor management.

Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions.

Let the poorly managed, overly risk-taking financial institutions fail! Always remember that Wall Street and the real economy are not the same thing.

— Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University. Lawrence H. Officer is a professor of economics at the University of Illinois at Chicago.

[oscarwho]

Sometime , Is not this just another way our crooked no good elected officials are trying to screw the little people on the totem pole ?

[sometimeman]

I sorta feel like you are right Oscar.

Say, you any kin to that Oscar on Sesame Street?

[bubbadebubba]

I've got paper money I'll swap for metal coins. copper, nickel, silver, or gold.

paper money for gold rings, gold earrings, anything gold.

I'll send my agent to meet you anywhere and anytime.

[AskTheWiseOldMan]

OK For those interested in this sort of thing, here are two things I've discovered about the bail out, frst the tax provisions associated with the bill - the original inclusions and the amendments from last night... and secondly, a clear picture of the new government vehicle which will be used to hold the government-purchased mortgage backed securities.

First:

* Help for Homeowners Sinking Under Mortgage Debt. Usually, when homeowners have parts of their mortgages forgiven, they immediately owe income taxes on the amount of indebtedness forgiven. To keep struggling homeowners from facing higher tax bills, the housing relief bill passed by Congress this year allowed homeowners caught up in the mortgage crisis to avoid paying tax on forgiven mortgage debts through 2009. To help more homeowners stay on their financial feet in the ongoing economic crisis, the rescue plan will extend through 2012 the housing bill provision that forgives income from the cancellation of indebtedness. It does not extend the relief to home equity loans.

* Fairness for Banks Hit by the Failures of Fannie Mae and Freddie Mac. Federal law limits the allowable investments for banks, and so many community banks invested in Fannie Mae and Freddie Mac preferred stock - which became worthless when the government bailed those companies out. This proposal ensures fairness for the approximately 800 banks that held Fannie and Freddie preferred stock, by allowing financial institutions or financial institution holding companies to treat their Fannie and Freddie losses as ordinary losses. Applying to any preferred stock that was owned on September 6, 2008 or sold between January 1 and September 6, 2008, this provision will allow banks to claim the book benefit of the loss on their tax returns, therefore reducing the need to obtain additional capital from the FDIC or investors. This should also prevent some community banks from becoming insolvent.

* Stronger Taxation of Compensation and Severance Pay for Financial Executives. The financial rescue plan contains non-tax measures aimed at limiting executive compensation and "golden parachute" severance packages overall for companies and executives participating in the buyout - a key element in gaining approval of the package among negotiators. When the Treasury directly buys assets from a company, not through an auction or bidding process, the financial institution will be required to meet certain standards for executive compensation, including a total prohibition on "golden parachute" severance payments to senior executive officers. When more than $300 million of a company's assets are purchased by the Treasury through an auction, "golden parachute" payments will be banned for top executives hired while the Treasury rescue is in effect. Additionally, tax provisions will kick in to strengthen the tax treatment of remaining executive compensation and severance packages. The deductibility of executive compensation for companies will be cut in half from the level in current law, and companies will also lose deductions currently available for excessively large severance packages. Executives receiving severance packages will continue to face a 20 percent excise tax on payments once they reach an excessive threshold, and that tax will now be due if the executive leaves for reasons other than a standard retirement for which they are eligible - not just if the company changes hands, as in current law.

New Tax Amendments:

* Extends Alternative Minimum Tax relief for some 24 million middle class taxpayers through 2008. Includes some additional AMT relief for people who exercised company incentive stock options.

* Extends provision allowing homeowners who do not itemize their taxes to take a deduction up to $1,000 for state and local property taxes.

* Extends through 2009 a provision allowing some taxpayers to take a deduction for state and local sales taxes.

* Extends a tax break for certain higher education expenses for taxpayers who do not itemize their deductions.
* Includes a provision that would require insurance plans that offer mental health benefits to offer those benefits at the same level as medical-surgical benefits.

* Provides tax exempt private activity bonds for Texas, Louisiana and Midwestern states hit by natural disasters. Also provides other tax benefits to those areas to help develop low income housing and help businesses.

* Extends the research and development tax credit through 2009.

* Provides $18 billion in tax breaks for clean energy by continuing production tax credits for wind and refined coal and allowing facilities that generate electricity from waves and tides to qualify. Also extends tax breaks for solar energy.

* Provides new tax credits for carbon capture and sequestration demonstration projects for advanced coal electricity generation.

* Creates a new category of tax credit bonds to finance state and local government initiatives to cut greenhouse gas emissions.

* Creates new tax credit of up to $7,500 for plug-in electric drive vehicles.
* Extends tax credit for biodiesel production through 2009.

* Extends tax credits for homeowners who update with energy efficient products. Energy efficient biomass fuel stoves for the first time would qualify for a $300 credit.

[AskTheWiseOldMan]

And secondly, a clearer picture of the new government vehicle to hold Mortgage-Backed Securities:

[sometimeman]

BUBBA WROTE:
"
I've got paper money I'll swap for metal coins. copper, nickel, silver, or gold.

paper money for gold rings, gold earrings, anything gold."


Now you are getting it Bubba!!

The most fortunate people are those with gardening skills good soil, water and a roof off the beaten path in an out of the way place

[sometimeman]

Three Questions The Government Doesn't Want You To Ask About the Financial Crisis And 3 Shocking Answers!

Bob Prechter, President of Elliott Wave International (EWI), is no stranger to challenging the status quo. His New York Times bestseller, Conquer the Crash , was published in 2002 before anyone was even talking about the current financial crisis.

In his recent 10-page market letter, Prechter shifts his focus to the government's role in the latest financial turmoil.

Elliott Wave International is offering the full 10-page report free if you'd like to read all 28 answers. Visit EWI to download the full report, free.

Here are 3 questions excerpted from the free report:

1. Didn't Congress create the Federal Housing Authority, Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks for the purpose of helping the public buy homes?

You're kidding, right? What happened is that clever businessmen schemed with members of Congress to create privileged lending institutions so they could get rich off the public's labor. In return, members of Congress got big campaign contributions from the privileged corporations and, as a bonus, even more votes. The public's welfare had nothing to do with it.

Who celebrated when Congress passed the latest housing bill? Answer: "The California Mortgage Bankers Association applauded Congress for permanently increasing the size of loans Fannie Mae and Freddie Mac can buy...." (USA, 7/28) The legislation exists to "protect the nation's two largest mortgage companies...." (NYT, 7/24) Who took out full-page ads to encourage Congress to "enact housing stimulus legislation now"? Answer: the National Association of Home Builders. Who celebrated when the administration "unveiled a new set of best [sic] practices designed to encourage banks to issue a debt instrument known as a covered bond"? Answer: "[Treasury Secretary] Paulson was joined at the news conference by officials from the Federal Reserve [and] the Federal Deposit Insurance Corporation.... Officials from banking giants Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. issued a joint statement saying, 'We look forward to being leading issuers'" (AP, 7/29) of covered bonds. And voters still believe that Congress is there to help the needy.

2. Who cares if a bank goes under? Won't the FDIC protect depositors?

The FDIC is not funded well enough to bail out even a handful of the biggest banks in America. It has enough money to pay depositors of about three big banks. After that, it's broke. But here is the real irony: The FDIC, as history will ultimately demonstrate, causes banks to fail. The FDIC creates destruction three ways. First, its very existence encourages banks to take lending risks that they would never otherwise contemplate, while it simultaneously removes depositors' incentives to keep their bankers prudent. This double influence produces an unsound banking system. We have reached that point today.

Second, the FDIC imposes costly rules on banks. In July, it "implemented a new rule...requiring the 159 [largest] banks to keep records that will give quick access to customer information." As the American Bankers Association puts it, the new rule "will impose a lot of burden on a lot of banks for no reason." (AJC, 7/19) Third, the FDIC gets its money in the form of "premiums" from -- guess whom? -- healthy banks! So as weak banks go under, the FDIC can wring more money from still-solvent banks. If it begins calling in money during a systemic credit implosion, marginal banks will go under, requiring more money for the FDIC, which will have to take more money from banks, breaking more marginal banks, etc. The FDIC could continue this behavior until all banks are bust, but it will more likely give up and renege. Remember, every government program ultimately brings about the opposite of the stated goal, and the FDIC is no exception.

3. Who are the "homeowners"?

Everywhere you turn, news articles are discussing how Congress, the President and the Fed are taking action to "help homeowners." People's understanding of this statement is 100 percent wrong. The homeowners in question are not the residents of the houses. The homeowners are banks. Unlike some states, Georgia made its law very specific on this point. Our local paper recently explained that, by recognizing the reality of ownership, "Georgia employs primarily a nonjudicial foreclosure" and therefore "has one of the fastest procedures in the country." Specifically, "T

he property owner gives the mortgage holder a 'security deed' or a 'deed to secure debt'. Technically, until the debt is paid, in full, the mortgage holder owns the property and allows the borrower to possess it." (GT, 8/6) In states where the mortgage holder is deemed the property owner, the title is merely a legal technicality. The day he stops making mortgage payments, he no longer owns the property; the bank does. After foreclosure, many of those whom politicians and the media call homeowners will simply go from paying interest to a bank to paying rent to a landlord. For those with little or no equity, it's not that big a deal. The real devastation is happening in banks' portfolios, and banks, not home-dwellers, are the ones whom the government is trying to rescue, at others' expense.

One might be tempted to charge therefore that Congress makes its laws for the purpose of helping banks. This idea, too, is incorrect. Helping banks is merely a side effect. The reason that Congress creates privileges for bankers is to benefit politicians. They make laws in response to campaign contributions from lending institutions, real-estate organizations and builders' associations. They also garner votes from mortgage holders and, miraculously, from voters who think that their "representatives" are being "compassionate."

The previous 3 questions and answers from Bob Prechter were excerpted from his recent 10-page market letter, The Elliott Wave Theorist.

Elliott Wave International is offering the full 10-page report free if you'd like to read all 28 answers. Visit EWI to download the full report, free.

By Bob Prechter
Elliott Wave International

[bubbadebubba]

House of Reps passes the $700 billion bailout and the stock market falls another 158 points. So much for the bailout doing anything good.
The only thing that will come out of this is the banks will get their azzs covered and the mainstreet guys will continue to lose their jobs and homes and not get credit unless they want to pay interest in the double digits.

The country's going to hell in a hand basket and our chosen leaders are clearing the pathway with printing more and more of the colored paper.

Heck, we are worst than any South American Country for causing the value of our currency to be nearless worthless.

No longer will we hear the saying : "Can you spare a dime?" The saying now will be "Can you spare a hundred?"

and even with the hundred, you might be able to buy bread and milk.

It's coming folks, sometimer has made me a believer.

[sometimeman]

Bubba Said, "It's coming folks, sometimer has made me a believer"

I wish you could imagine what it is like to be unable to communicate, unable to have someone understand what you are saying.

This financial crises is planned. It is a step on the way to forming a "North American Union" with a common currency, the "Amero".
America and Canada's standard of living will be lowered to close to that of Mexico.

America stood in the way to a one world government. The plan was to weaken and remove America by destroying its manufacturing base (NAFTA) free trade and destroying its economy (the housing bubble) and bail out

[sometimeman]

The only thing that can save us is a military coup.
Some military officers understand they are sworn to protect and defend the constitution. These are removed from service and retired.

Others believe they are sworn to protect and defend the president. These are kept and promoted.

[bubbadebubba]

The bail out is NOT WORKING. The stock market is crumbling and the only ones that are gonna have any money are the sleazy banks who just got $700 billion by our stupid elected officials.

All elected officials think, just throw more money on the fire and it'll go out.

It's even happening here in Union County by the commisar.

[bubbadebubba]

Sometimeman--I have a Conspiracy for you to mull over. I thought this one up myself.

I was watching the nightly news tonight and one report said in the last week the stock market had a paper loss of $1.8 trillion dollars. People's stock investments, 401k's, and many retirement plans all losing in paper value.

In that same report there has been over $8.2 billion in government bailout money for companies like AIG previous to the emergency $700 billion bailout for the banks. The $700 billion bailout has climbed to over $800 billion in this new bailout for the banks, the automobile industry, and others.

So on one hand there is a paper loss of $1.8 trillon of the American people and on the other hand a colored paper creation of $1.6 trillion for the companies that caused the $1.8 trillion loss.

Costing the American taxpayers $3.4 trillion to cover the stupidity and corruption of banks, the stock market companies, the mortgage companies and everyone else who can get their hands on some of the money, but NOT taxpayers.

Whether it's white paper like your stock reports or colored paper like your dollar, the government just shifts it around so the same people get it all.