Some financial crisis links (9.25.2008)

Vikas Vajaj of the New York Times wonders about the real worth of these toxic assets. He wonders because "…the difficulty in valuing these assets could result in the government's buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers' expense." But I thought overpaying was the whole point!

Yves Smith of Naked Capitalism takes Vajaj to task for "spreading disinformation"! Smith asks "How can Vajaj not understand what this program is about?" He wonders because the Plan intends

…to pay above, in fact considerably above, current market prices for the illiquid (frankly, often dud) assets. There is no point to this exercise otherwise. The banks are free to sell now at market price, but they aren't willing to. Hence the government is stepping in, paying over the mark.

This is a feature of the program, not a bug. The financial firms most assuredly do not want price discovery at current levels, and paying above market serves as a back door recapitalization of the banking system. But the operation is badly flawed, since it's the companies with a high proportion of assets for which the Treasury overpays most who benefit most. That given priority to those with the biggest exposures, when not all of them may be worth saving, and within that group, the level of subsidy will likely be arbitrary, since the degree of overpayment will vary from asset to asset.

Vajaj seeming accepts as true the belief that this is a liquidity crisis. But this is an insolvency crisis, one generated by the magnitude of toxic assets now in the system.

Michael Hudson fleshes out his "Plan as monumental fraud argument" in his most recent article. Why would Paulson consider perpetrating this fraud? After arguing that a wave of write-downs and -offs are necessary for the economy to move toward an equilibrium position, Hudson proceeds to state that

Such debt writes-offs are a precondition for writing down America's mortgage debts to levels that are affordable [emphasis added]. But Mr. Paulson's plan is to fight against this tide. He wants the Wall Street to keep on raking in money at the expense of the economy at large. These are the big banks who lobbied Congress to appoint de-regulators, the banks whose officers paid themselves enormous bonuses and gave themselves enormous golden parachutes. They were the leaders in the great disinformation campaign about the magic of compound interest. And now they are to get their payoff.

Briefly put, Paulson, according to Hudson, merely wishes to help America's renteir capitalists to cash in big while they can.

Ralph Nader asks "Who will show some backbone against the bailout?" before enumerating the conditions he believes a bailout would need to protect the public interest.

James Galbraith questions the need for a bailout in the Washington Post (via Naked Capitalism). The bailout would only help Wall Street, according to Galbraith, "…where deregulation, greed and fraud ran wild."

David Herszenhorn of the New York Times reports that Congressional Democrats and Republicans have agreed on the form of bailout (see also the reports in The Wall Street Journal, Business Week and The Washington Post). The agreed upon bill seemingly will reflect the Paulson-Bernanke Plan but for a short-term spending cap,

…limits on pay packages for executives whose firms seek assistance from the government and a mechanism for the government to be given an equity stake in some firms so that taxpayers have a chance to profit if the companies prosper in the months and years ahead.

It appears that the Congress will pass a bill which contains the appalling Section 8, which reads:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

The agreement has collapsed, according to an Associated Press report. The cause? "[C]onservatives were still in revolt," according to the AP. Moreover, the New York Times reports that "It has become abundantly clear, that members of Congress are hearing from their constituents, many of whom are furious about the proposed rescue."