Aha, Congress isn’t being so supine after all. Christopher Dodd, who in his initial press comments seemed to be behind the Paulson bailout plan, instead appears to be supportive of the general concept of Doing Something, as opposed to the particular embodiment served up by the Administration.
Dodd is circulating a draft bill of his own that is more attentive to the moral hazard issue and the need for taxpayers to share in upside than the Treasury proposal. The big difference is that his proposal gives the US a stake in companies in which it buys bad assets. This creates a disincentive against using the program casually as a dumping ground, against inflating the value of assets sold (the higher the amount sold, the greater the equity acquired) and gives taxpayers the opportunity to profit. Of course, just about anything different would be an improvement.
From Bloomberg:
Senate Banking Committee Chairman Chris Dodd offered an alternative today to the Bush administration’s financial rescue plan aimed at giving the U.S. Treasury an equity stake when it helps companies burdened by debt….
“We cannot just turn over $700 billion in taxpayer money and not insist that that taxpayer is going to be protected in this,” Dodd told reporters yesterday…..
The legislation requires Treasury to take an equity stake equal to the purchase price of the assets being bought. If the company isn’t publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.
Dodd’s proposal also would create a five-member oversight board to supervise the Treasury secretary’s purchase and sale of distressed mortgage debt.
It would consist of the chairmen of the Federal Reserve, Federal Deposit Insurance Corp. and the Securities and Exchange Commission as well as two members from the financial industry designated by congressional leaders.
The board would be authorized to set up a so-called credit review company consisting of Treasury employees to study the soundness of the purchases. Under the plan, the government would be required to obtain an equity stake equal to the value of the debt that is purchased from the companies, including those whose shares are not publicly traded. The Treasury secretary would also be required to issue weekly public reports on the amount of assets bought and sold by the U.S.
Yves here. Note that this is a vastly shorter leash. The Treasury plan called for a report after the first quarter, then semi-annually thereafter.
Dodd is proposing to penalize executives who take “inappropriate or excessive” risks. The executive compensation and severance packages could be reduced if that is “in the public interest,” the proposal says. It would also force executives to give back profits they earned that were based on company accounting measures that are later found to be inaccurate,
And the markets are voting massively against the bailout. While the fall in the Dow is almost inconsequential (260+ points as of this writing), given the monster rallies late last week, the dollar is tanking, and more important for domestic politics, oil has gone up $25 a barrel so far today. That should give Congress and the Administration plenty of cause for pause. Voters will be mighty unhappy with again-hugely-pricey oil.
We said before that the dollar (more accurately, oil as the anti-dollar trade of choice) would constrain policy options. Will Bernanke and Paulson take heed?
From the Wall Street Journal:
Crude-oil futures surged more than $25 a barrel Monday as stocks fell, the dollar slid and Treasurys declined amid an investor flight out of U.S. assets.
Stocks traded sharply lower, while the dollar and Treasury prices took a hit as traders fretted that the vast spending necessary to prop up the financial industry will make the government itself a somewhat less attractive borrower. Oil prices soared by the daily limit of $10 as the likelihood of a bailout prompted bets that the economy would stay on firmer footing, keeping demand for fuel on an even keel.
The Dow Jones Industrial Average was recently off about 268 points, or 2.4%, at 11120.91, held down by sharp losses for all of its financial components.
Reader Michael passed us this tidbit from Tony Crescenzi at TheStreeet.com ($):
The U.S. consumes roughly 20.5 million barrels per day, which means that a $1 change in the price of a barrel of oil costs U.S. consumers roughly $8 billion per year.
Accounting for the fact that some of that money is income to U.S. producers and shareholders, the actual hit is closer to $5 per barrel. This means that today’s $10 gain represents a $50 hit to consumers — if the price were to hold for 12 months, of course.
If the $25 gain holds, make that $125 billion.
Update 3:00 PM The Journal provides a bit more detail on the Dodd draft:
Senate Banking Committee Chairman Christopher Dodd of Connecticut began circulating his 44-page draft Sunday night. The draft is likely to prove problematic for the Bush administration, which has tried to prevent lawmakers from making big changes to a much simpler proposal it unveiled over the weekend…..
Sen. Dodd’s plan would not allow the Treasury Department to purchase any assets “unless the Secretary receives contingent shares in the financial institution from which such assets are to be purchased equal in value to the purchase price of the assets to be purchased.”
Reader Michael, via e-mail, pointed out that gas prices have not (yet) followed the rise of oil:
3-2-1 Crack spreads went negative (as diesel and gas didn’t move up with
oil)2bbl gasoline = $2.70 x 84 gallons
1bbl diesel = $3.03 x 42 gaollons
Add those productsThen,
Divide by 3 and that is the $ refiners make on a bbl of oil.
122.50bbl of oil and gas at 2.70; disel at 3.03 — refiners lose ~$4.50 per
bbl!!!Aka the oil is worth more than the output!
In other words, those are trading sardines, not eating sardines.
Update 6:00 PM Francois in comments tells us that Bloomberg, via Calculated Risk, has said that Paulson is willing to concede on the equity stakes issue (but only because the financial lobbyists industry says it’s OK.
39 comments
Comments are closed.
I wonder if Dodd’s proposal has an upper limit of 79.9% in stock?
Matthew Dubuque
A much better plan.
I like the equity provisions, the givebacks if inaccurate accounting was used and ESPECIALLY the weekly reporting of activities.
Yves, I believe you have played a material role in the growing courage of Congress.
Roubini seemed to change his tune after posting a link to your initial negative reaction.
But the battle is far from over. IMF hostage negotiations like this usually involve a sharp selloff to spook the legislatures into complying with the forced socialization of losses.
Matthew Dubuque
I hope everyone called up their representatives to oppose this plan. Someone once told me each representative needs about 900 calls on one issue in a short period before they would do anything. I figure they are going to spend it anyway. It is worth getting them to put in some safe guards so a single person is not setting the prices.
A 300 point decrease in the DOW is inconsequential now. How times have changed.
Nick
Heads up. That oil move was nothing more than a short squeeze in the OCT contract which rolls off today. Somebody got caught short in a big way and needed to cover.
Oil ‘only’ moved up about $6.00 in the NOV contract… now the active month.
Something just went wacky with the roll. Maybe a hedgie or two got caught with their pants down…
TheFinancialNinja
Somebody on the Democrats side is one slick ball handler. Stripped the ball right out of Paulson’s hands.
Dodd is too slow. Maybe Schumer
plschwartz
Yves,
The equity provision is a good one and is really a riff off of what Ackman was proposing in his plan re GSEs. I think the Treasury has to be careful how the equity is priced. Recall when UBS did their deal the stock was at 28ish and the warrantes came in at 21. the same issue confronts the banks. The no short rule has had the perverse impact of creating a massive air pocket below the bank stocks. Consider that banks stocks money centers trade 13-14x. Insdane valuations. these things went to high single didgits in every prioir recession. Also, the EPS for ’09 reflect an alternative reality. The banks are in desperate need of capital, but they risk going to market and hitting the air pocket.
Thus the banks should be rushing to back this plan for equity while they can. They are usually pretty good at selling equity for compnaies at the top so it is a bit shocking that they ar hesitating. Then again they think they can threaten to choke off lending and cripple the economy.
What we have here is good old fashion blackmail. Taxpayers take notice.
Also the equity should be of the super senior variety – ie first in-line. bondholders don’t get a free ride either. Air tight.
Yves – a bright spot in a dingy world.n work’s not over yet. but when it is, i’ll get the fat lady.
“Of course, just about anything different would be an improvement.” Of course it does. That was an ambit proposal to make anything else seem reasonable.
what was that trick again..i think his name was aldrich
idont know if its that bad..but putting out an outrageous plan to make a bad plan look like gold
that first napkin draft was so horrible and obvious i hope those metrics are not work.
extreme due dilligence is the order of the day
Matthew Dubuque
Clearly it is premature to view today’s market activity strictly as a yes/no vote on the bailout plan.
This is a dynamic, complex situation with scores of dependent and independent variables; such a statement borders on the facile.
It looks like we ALSO have some substantial hedge fund unwinding, as the margin calls from 5 days ago become due….
Matthew Dubuque
If they don’t get rid of the provision that allows the Treasury secretary to do whatever he wants, without oversight by congress or courts…
1) It will be unconstitutional and will be repealed by the courts
2) It is fiasco for the US
Calculated Risk reprt (via Bloomberg) that Paulson agree to the equity stake.
http://calculatedrisk.blogspot.com/2008/09/report-paulson-agrees-on-equity-stake.html
That is a start. But just a start.
re: Oil the circa $120 price might be an one day, non-replicable price die to options expirations.
I hear the November contract to be offered for trading tomorrow is priced around $108.
the one thing my father taught me:
1. never buy on margin.
it was true in the ’70s and its true now.
as for oil. don’t fill your tank for a week. take public transportation. this is what CA did years ago. seemed to work then. it would work now.
It is true that the huge move in oil today was a short squeeze. However, even at $108 you are still talking about a 10% rise in just the last 2 or 3 trading days.
what about friends of angello, and dodd hocus pocus? dodd needs to focus on accounting fraud endorsed by lobby groups and the corruption embedded in the system he belongs to.
Foreign companies seemed awfully happy to lobby for inclusion in Paulson’s no strings attached version, but how about Dodd’s version? Are they ready to let Uncle Sam take a stake in them? And how will foreign governments react to the possibility of the US nationalizing chunks of their financial sectors?
I think the point was to free up the credit markets and instigate trust between the money changers.
No CEO is going to fall on his own sword to save the world so if a plan offers no protection from prosecution plus tightens oversight and even bonuses, no entity will be a willing signatory.
Let’em eat cake or send in the military, while Rome burns waiting for fresh funds.
As of the open today we’ve taken our long/short funds to cash, leaving a token amount in the model portfolio (and limit down in the long mandates) to keep our performance record live. My internal note over the weekend:
We haven’t had any exposure (to speak of) to the credit crisis; and have done quite well in the meantime trading our normal company-specific and industry-specific themes, however implementing our market-neutral strategies relies on the efficient functioning of equity markets – specifically the ability to freely short stocks borrowed from reliable counterparties.
With the US authorities’ latest move there is a substantial danger of alienating the very creditors the US relies upon to fund the real economy — because they are now attacking the independence and structure of markets, and legislating the price of risk. Will this be enough? Where will they stop? We no longer know.
We have no special expertise in the court politics that will be critical in anticipating the US government’s next moves as they continue to work to avoid writing down housing assets and matching expenditure with income. Our training is in industry fundamentals, financial analysis and market dynamics; not kremlinology.
We currently see no compelling opportunities in this type of market that would duly compensate us for the additional political, counter-party and currency risk.
I recommend that we unwind our positions to the extent allowed by our various mandates until:
* an open market regulatory environment has been restored and has stabilised
* a set of well-capitalised financial counter-parties has emerged
* the pressure is off of governments to “do something” about credit contraction
We’ll just sit this one out, thanks.
Who cares about the CEO comp. Let the market dicate that. Regulate them to a crawl and profitability will take care of that issue. On the other hand dilutiving the shareholders has 0 to do with the bank’s ability to lend. Dilute them into oblivian. Just think how much cheaper that NYC real estate is going to be. Maybe even a hampton cottage thrown in as incentive.
Chris Dodd on July 14 2008:
“What’s important is to calm people’s fears,” Dodd said. “These are very well capitalized at more than adequate levels. They weren’t bottom feeders when it came to these subprime mortgages like other banks were. There’s a lot more reason to have confidence in what’s going on here than to have fear take over.”
Why has he not resigned yet?
The dollar down $.03. In a day. While surely some of that is a byproduct of other massive swings in positions, still that’s as close to a global vote of no-confidence as one is going to see.
Regarding Paulson’s proposal as a scare ’em then save ’em positional approach, I would by that concept more if the no-accountability design wasn’t signature for the Bushies and the function of the intervention wasn’t effectively overt price support which has been Paulson’s schtick for closing in on fifteen months. —But this can be rolled the other way if the Demos have their lumberjack cleats on. Since the Admin has declared this a ‘must act’ situation, the Demos can give them the Act which _they_ want; it will be very hard for the Admin to stall or stave it off. The key is not to be seen dragging feet, so boys and girls its time for a few all-nighters.
Seems to me that what a man was shown to be a liar no one listened to him anymore and he was shunned. Now, when told by a proven liar that there absolutely must be a solution and I have the answer, nobody questions why there must be a solution; rather, all the pundits are conned into devising better solutions.
cftc should be embarrassed. Expiration or not, $25 one-way swings are not orderly…i could’ve sworn all these new market participants were supposed to increase liquidity and reduce volatility?
thank you, financialninja.
the spreads obvs went insane, but nov08 contracts never topped 110; when i left for the day they were in 108 range.
still waiting on good info, but it looks like either one entity got caught really, really short on the last day of trading (they should probs be fired), some one blew up completely, or som eone was getting squeezed. either way, not representative of crude mkts.
the reporting on this was really irresponsible. or really stupid. possibly both.
From Mish:
“Before one can work out a solution, the first step is to identify the problem. The problem is not a lack of liquidity, it is not a lack of trust, it is not lack of consumer confidence, it is not subprime lending, and in fact the problem is not housing at all.
“The problem is consumers and corporations are deep in debt with no way to service that debt.
“Attempts to bail out banks and brokers at taxpayer expense will do nothing but add to consumer debt, weaken the US dollar, and literally waste $700+ billion dollars that can and should go to more productive uses.”
I am not sure people aren’t working to stop the bailout, rather than modify it. How can it work when the root problem is stagnating wages? The cost must be paid either with higher taxes or inflation?
What am I missing????
mkt confidence will not be found by allowing the crooks to repackage the chaos they engineered — into a new form of capitalization/monetization that allows lobby groups to maintain conduits between accounting loopholes and government corruption.
This entire Ownership Society Charade is all about using synthetic derivatives to hide Iraq War debts and years of non-accountability. Allowing these same crooks inside and outside of government to provide solutions is nothing but more of the same scam!
Richard;
To be sure, the ‘demos have their _cleats on.’ The dollar’s been on a wild ride – .03? It’ll take a strong backbone to ride this one out.
To quote an old saying:
“If you meet the Buddha on the road, kill him.”
“If you meet the Buddha on the road, kill him,” means, according to Zen metaphysics, that all phenomena are emptiness; void of inherent reality; non-conceptual labels.
Is that what you mean? All is non-conceptual voidness anyway so have courage?
The only thing the government is not lying about is that a melt down is at hand. It’s either do or die just to delay the event.
My quick take is that the Dodd plan does indeed:
1) give bankruptcy judges discretion to change mortgage terms
2) require equity contributions in return for purchases of troubled assets
But, it also:
1) gives the Secretary of Treasury nearly total discretion
2) accepts all kinds of securities, not merely mortgage related
3) accepts toxic assets from foreign firms as well as domestic
And also appears somewhat misleadingly to do other things
1) provides review of actions, but only to make recommendations – to the Secretary
2) provides for GAO audits – but lets the Secretary certify them as not relevant
3) makes vague mention of help to homeowners, but no real requirements
4) restricts the time to December 2009, but allows the Secretary to extend it to 2 years
5) applies restrictions to executive compensation, but only in the very loosest of terms
6) requires openess of books, but only loosely and only to shareholders (implying not the public)
7) involves GAO – but mainly for studies
A more complete breakdown may be found at http://www.topiccentral.com/Wiki.jsp?page=Bailout
Regards,
Terry Steichen
Editor/Publisher, TopicCentral.com
If some plan passes why don’t we check all paper to see what we are getting. People are in place at local govs to help-registry of deeds etc.
Zenster points out the following quote from the Army Times that appeared this weekend in the midst of chaos over Paulson’s bill.
“It makes me feel good as an American to know that my country has dedicated a force to come in and help the people at home.” 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them.
http://www.armytimes.com/news/2008/09/army_homeland_090708w/
It is surprising that Paulson’s personal stake in this has not been addressed. His integrity should at least be questioned if only to confirm it. It certainly bears on just how hard a bargain he will be prepared to drive. The other question is this. Is the purpose of this effort to save the financial system or save the institutions that have heretofore constituted that system? Affirming the former points to outright and immediate seizure and nationalization of the major financial institutions. Why isn’t this on the table?
maybe because nationalising an entity not-quite-on-the-brink-of-death would seriously piss off the markets , not to mention the investors. Besides, any rumours re the fact that they might need rescuing on that scale already sends the sharks circling . (think barclays in the matter of lehman distressed assets)
but anon (sept22 1019) has a point, is the rescue targetted at institutions or the system itself, there are common interests but obvious areas of conlfict too.
so who really believes controllability is at hand and collateral values in general will not, at the least, continue a downward trend, generating further margin calls on the public until more than a decade of financial engineering is unwound, devalorized, destroyed?
No! No deal, Howie! No to both plans! This is a question of values as well as practicality. Both of their versions are both immoral and catastrophic.
The fear-mongering by these incompetents in D.C. has reached dangerous proportions. If Bernanke really thought it was so critical to Do Something now or else, THEN WHY DID HE LEAVE RATES UNCHANGED LAST WEEK? Forget firing Cox; we should be looking at firing Bernanke.
And while we are naming villains, I do not want Paulson’s plan or Dodd’s plan.
I want the Steve Forbes plan.