Our reader and sometimes contributor Lune worked on the Hill and was so kind as to send us his take on the choices facing the Senate and House leadership on the bailout bill, His position on it is rather clear:
While many of you may be popping champagne bottles tonight in honor of the bailout plan that never was, we need to realize that this is only one step. The bailout is by no means dead. Having dealt with the legislative process before, here is my speculation about what may happen in the coming days, and the options that Congress has before it:
1) The House schedules a re-vote on the same bill.
Keep in mind that victory today was a very narrow one. The final vote was 228-205. That means a switch by 12 congresspeople would make all the difference. All the leadership has to do is put 12 Bridges to Nowhere-type earmarks buried in the fine print of some appropriations bill, and those 12 votes can magically appear. Or promising to give/withhold campaign funds or plum committee assignments. The list of carrots and sticks available to the leadership is endless. In many ways, the vote turning out the way it did had nothing to with the bill per se, but rather represents a colossal failure of the leadership’s whipping process. You don’t walk into a critical vote like this without knowing how many votes you have beforehand. Indeed, a report in The Hill suggest that Roy Blunt, the Republican whip, miscalculated the votes in his pocket by 10, which was a huge mistake and probably cost them the vote.2) The House schedules a re-vote after some minor alterations.
The leadership is by no means out of options in the horse-trading that’s likely occurring now. Some of the congresspeople voted no not because they disagreed with the gist of the bill, but because their pet issue (e.g. foreclosure assistance, tax cuts, regulatory changes, etc. etc.) wasn’t included. Just like adding the meaningless bond insurance plan into the bill bought a few Republican votes, similar minor provisions can be added to convince a few more people.3) The Senate votes first, and the House uses that to pressure members to fall in line.
While the Senate seems to have the votes for passage, all bets are off right now until they come to grips with the House defeat. Senators are now deciding whether they want to walk the plank for Wall Street and possibly lose their jobs for a bill that won’t pass anyway.4) The process starts again, with new proposals and plans debated.
While this is perhaps the ideal situation, the likelihood of such an orderly debate will depend greatly on how the markets do in the next few days. If chaos continues to reign, the pressure will grow to pass something. This is where all those economists need to come together and come up with an alternate plan fast. While the University of Chicago writing a letter condemning the current plan was nice, it would have been better if they proposed an alternative. Remember that when a house is burning down, and someone proposes doing something, and another proposes doing nothing, chances are that something will win out, no matter how bad it is, simply because doing nothing is not an option.Economists with ties to the Hill, or with journalists that could publicize such a plan, need to come together to propose a reasonable alternative. Throw enough academic credentials behind it, and they have a fighting chance of being more trustworthy than Bernanke and Paulson. We’ll see if the academic community which has been so vociferous in its criticisms can also make constructive proposals (It doesn’t have to have all the details in place, just remember 3 goals that can be reduced to soundbites for public consumption: save the financial system, punish Wall St., and cost less than $700 bil).
5) Congress is paralyzed and adjourns before passing anything.
This may not be as far-fetched as it sounds. Right now, many congresspeople are desperate to get home and campaign. Plenty of people are locked in tight elections, and every day they spend in Washington is one less day spent rounding up votes. The number one priority of most congresspeople is getting re-elected. If that means leaving DC and leaving the economy in a tailspin, so be it. This will likely depend on how badly the markets are doing, and how far off from getting enough votes the leadership perceives themselves to be.6) The executive branch (Treasury and the Fed) finds new executive powers that allow them to substantially implement the bailout without Congressional approval.
This has happened plenty of times during this current Administration. No reason to suspect they’re going to stop now.Those are the possible scenarios that I see possibly playing out in the next few days. The bottom line is that today’s defeat of the bailout was a tactical victory, not a strategic one. There are still plenty of ways that we can end up with a bad plan, and we need to remain vigilant.
Per Lune’s final point: there is plenty the Administration could do on a stop-gap basis. One correspondent pointed out that the Administration could use the Exchange Stablization Fund (admittedly, it might need to be beefed up) to stand behind certain types of dealer trades or other “market maker of the last resort” as Willem Buiter likes to put it, activities.
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“save the financial system, punish Wall St., and cost less than $700 bil).”
doesn’t the swedish model do all 3?
Be prepared for a coup d’etat from The Bush Administration along the lines of option #6.
Recall, from a whole week ago, that what was originally presented to Congress was a document bestowing plenary powers on Henry Paulson.
An executive order would not surprise me, given that Mr. Bush is going to speak at 7:30AM today rather than after the markets open.
Congress will not pass anything other than the same bill. With Obama surging in the polls, anyone expect them to stick their necks out now? There is no political reason to do so.
Didn't they already use option 6 with the WB->CITI deal? Looks like the FDIC guaranteed $270bn of loan assets for $12bn in Citi equity, loans with a market value of maybe 22 cents on the dollar (if memory serves about that sale Merrill did and so forth). Granted that if no more than $42bn goes bad, the FDIC comes out ahead, they did still just guarantee over $200bn in shaky loans however you look at it.
http://www.clusterstock.com/2008/9/citi-c-buying-wachovia-wb-banking-ops
Citigroup Inc. will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.
buying votes with bridges seems unlikely. The bill is wildly unpopular outside the beltway. Bridges don’t offset that. I don’t think this proposal will look better with time to the congressman, either. Just read what congressman have written in their local press. Few gave themselves any wiggle room to change sides.
It will likely fall back to the executive branch, which may be reluctant to throw the election.
All the analysis in the world can’t help us predict what is next for this black swan.
But I am happy with todays victory.
Lot’s of good ideas out there. Perhaps not well known in D.C. though.
One obvious point. Paulson has to go. He is too much a creature of Wall Street to be credible on Main Street.
How about Sheila Blair or Timothy Geithner as replacements. Both are well respected.
Very depressing indeed! I knew these devils would come back for more!
Sort of a little off topic here, but maybe some one can take a look at how Paulson wants to value some of his toxic waste:
Mystery Chaos FYI from CR:
Buffett’s Big Bet: The Real Value of the Berkshire Investment in Goldman Sachs
http://seekingalpha.com/article/…n-goldman- sachs
I don’t know about this stuff, but if the truth be known, we may know how warren and Paulson are going to look at valuation for future cash flow — for themselves, with a selected basket of loot from The Pirate Chest (see Bush Speech in a few hours) versus the assets being tossed at taxpayers:
We’ve also got to account for the value of the $500 million a year in dividends. The Net Present Value of those (discounted at a 10% rate) are worth $1.96 billion if it Berkshire holds them for five years.
Preferred Share Value
Finally, we’ve got to take the value of the preferred shares. Goldman has to buy these back at some time or they will be an annual $500 million drain on its annual cash flow and pre-tax profits.
The value of these will fluctuate with general interest rate levels and Goldman’s creditworthiness so it’s tough to put a value on these. But if we take an 8% discount rate, the present value of a $5.5 billion repayment from Goldman in five years (as part of the deal, Goldman has to pay a 10% penalty for buying back the preferred shares) is $3.62 billion.
The congress today did the right thing for the wrong reasons. If I were to have just watched the vote, and not paid any attention to what was said by any of them I might have been a little more hopeful, I am not. They descended into partisan bickering and now the real issues are even more difficult to discern.
The house should come back thursday, and immediately vote for 100 billion dollars to back FDIC coverage for up to 250k. Pay it in full for a year. This would do more that the 700 billion dollar plan, and it actually might help small businesses and individuals, the majority of the US economy. This would negate the poorly thought out decision to have the treasury back money market funds, which, by their very nature and higher returns, should be and are more “risky” than normal savings and checking accounts. Right now there is a very real economic incentive to take money out of these staid accounts, and put further pressure on banks, for every dollar deposit they lose, they have to cut back no their loans. This is not a healthy situation.
Next step, if there is time before they have to go home and raise money, is to force the holders of the MBS’s to renegotiate terms with the borrowers, this will stop the ultimate cause of the current problem, falling home prices.
Simple outline, simple terms.
Again, we fiddle. This debt will be monetized. Resistence is futile. The Fed will find a way, Congress be damned.
Your prodigious resources are better spent figuring out how to monetize effectively. And how to control the process such that it doesn’t spin out of control.
But the hairshirt approach is doomed. The bubble don’t run reverse. Can we move on now?
The above valuation for buffett goes with this, if it matters to anyone. This is apparently the methodology for valuing CDO^2 and other junk, so it would be interesting to see what kind of cash flow Paulson and warren are dreaming about versus the reality of taxpayers getting zero!
§ 502(5)(E)(E) In estimating net present values, the discount rate shall be the average interest rate on marketable Treasury securities of similar maturity to the cash flows of the direct loan or loan guarantee for which the estimate is being made.
How about Sheila Blair or Timothy Geithner as replacements. Both are well respected.
Surely you jest, sir.
The Congressmen that betray American and bailout Wall Street Gamblers.
Vote in Favour of the $700 Billion Bailout List:
Ackerman
Allen
Andrews
Arcuri
Bachus
Weldon (FL)
Wexler
Wilson (NM)
Wilson (OH)
Wilson (SC)
Wolf
Folks, if your representative IS on the above list, please call, fax or email them and give them hell. Threaten them with campaigning for their political opponents.
The List is not completed it is part if it
Boyd (FL)
Brady (PA)
Brady (TX)
Brown (SC)
Brown, Corrine
Calvert
Camp (MI)
Campbell (CA)
Cannon
Cantor
Capps
Capuano
Cardoza
Carnahan
Castle
Clarke
Clyburn
Cohen
Cole (OK)
Cooper
Costa
Smith (TX)
Smith (WA)
Snyder
Souder
Space
Speier
Spratt
Tancredo
Tanner
Tauscher
Towns
Tsongas
Upton
Van Hollen
Velázquez
Walden (OR)
Walsh (NY)
Wasserman Schultz
Waters
Watt
Waxman
Weiner
Weldon (FL)
Wexler
Wilson (NM)
Wilson (OH)
Wilson (SC)
Wolf
Oh, the ‘dealership’ in Congress _will_ have another go at this; their campaign funders will insist that all public efforts be made. In a normal case, yes, those Bridgeloans to Nowhere might buy in twelve Judases; in this case, if that was going to work I suspect it would have already. Something to consider also is the fact that erosion of the Aye votes in the House for the Paulson Proposal is not out of the question. Many who voted for it didn’t want to; they may do their own canvass, and claim a mulligan on the first vote if this comes up again.
The idea of having the Senate advance on the unreduced machine gun nests of the public on this strikes me as the most likely choice. I think also, however, that the ‘dealership’ in Congress will be as mistaken and surprised in the outcome there; these vote-running mooks aren’t listening. Prior to the House’s rejection, I wouldn’t have put much hope in a filibuster, but now that the corpse is rotting on the carpet that becomes a much more live option.
I think bgs assessment is a good one as well, and if you combine it with lune’s surmises, Congress might well fund the FDIC, pass a funding of some kind—much smaller—for Treasury actions ‘unspecified,’ and then get out of town.
I would love to see the economic profession do a Fly-In on Washington, and show up en masse in person on Wednesday with a Better Idea on paper. This wouldn’t be that hard to do, but egos and peripheral issues may short circuit the attempt. But we have had more sense out of the professionals for once than the legislative amateurs. The problem with proposing an alternative plan is that the Securities Ring in the Administration and the ‘dealership’ of Congress have already settled on the plan which _they_ want, and I feel certain that they will oppose in a body ANY alternative—and if it comes to that they will show their true colors thereby. Not “Inaction is not an option” but “Our actions are the only option.” That has been this process, and to me the process is even worse than the proposal. We see the true extent of the rot, deep in the bone and brain of Congress as well, in _how_ this proposal was authored, pushed, ‘fake-changed,’ mis-sold to the membership, bungled on a vote, and will see more in attempts to revive it. I would prefer outright shenanigans and criminal activity by the totally discredited Dubya II Admin in its last weeks to try to bail out the wealth holding peers of the realm; that will give grounds for the kind of criminal sanctions subsequently we really need to see, here.
This isn’t over until its over, but the point I would emphasize is that it isn’t legal until Congress says it is, so that must be chock-blocked at all costs.
Your all crazy, in the end the banks are going to have to be recapitalized. The damage has been done, we were all were quite happy as assets inflated, the damage can’t be undone by refusing to tidy up the mess.
The only thing left is to find out how much pain there has to be before people get over it. Hoover managed to get unemployment up to 25%. I doubt stupidity will allow it to go that far. But we will see.
Anon of 2:51 AM,
We have said repeatedly on this blog that the banking system needs to be recapitalized, and have criticized measures this Administration has taken, like elimiinating dividends on Fannie and Freddie preferred stock, that was destructive to that end.
But with the huge debt overhang our economy now carries, the banking system has also grown much larger than is viable under any scenario. It needs to shrink, via loans being written off, banks that cannot be saved either being liquidated or sold to bigger banks.
The Paulson plan would have done nothing to help the problem in a meaningful way. It was a band-aid that might help confidence for two to six weeks until people came to understand that the fundamental problems were all still there.
We cannot afford to commit this much money to such a flawed program, but we may go ahead and do so anyway.
Here’s a GREAT plan, just put up today over at clusterstock.com. Please go over and take a look, it is a real joy.
http://www.clusterstock.com/2008/9/hank-paulson-and-ben-bernanke-please-read-this-now
It’s silly and abtruse IMO. No one on Main Street will see a dime’s worth of difference between Super Bonds and Super SIV. Just drop it. No money for Wall Street. Fund FDIC to $1 million per depositor and guarantee IRAs, 401ks, etc.
For Obama to win, all he has to do is blame Team Bush, promise free food for widows and orphans. For McCain to win? Name names, promise to jail the Masters of the Universe and save Mom and Pop.
I think McCain would have to do more than name names. Although naming Phil Gramm and his (sneaky) destructive act when he completely deregulated the swaps market in December 2000 for his Enron donors (and his wife’s connections there) might be a start. But then he’d have to admit to how great an influence (negative that is) his derugulatory zealotry has been on this whole process.
The government has already taken action without CONgress approval. Yesterday, the FED injected $630B into capital markets. Yes, $630B!
How’s that for taxation without representation!
@Randy – Yes that is incredible! The FED seems to have awarded itself the power to do anything it wants and Congress doesn’t give a sh@t. If they don’t have any real money, they will just order some more from Treasury.
Also, came across this on Mish’s blog:
Federal District Court Obstructs Lawsuits Challenging Authority for Bailouts
Judiciary Scuttles Motions Demanding U.S. Produce Evidence of Constitutional Authority
full article
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Funny how our rulers always eventually get what they want, directly or indirectly, by hook or crook.
Their tendency is going to be, to think bigger and bigger. Not just preposterously large currency swaps with foreign central banks, but … wait for it … a global central bank, that can emit funny money in 31 Baskin-Robbins flavors.
Mmmmm, fried funny-money ice cream balls! They’s finger-lickin’ good!
— Juan Falcone
First: Thank you Lune for this invaluable overall perspective. I mean that. And, I also am going to criticize one thing you write; namely, that some in Congress voted against “because their pet issue (e.g. foreclosure assistance, tax cuts, regulatory changes, etc. etc.) wasn’t included.”
I understand the use of the phrase ‘pet issue’ with regard to the Republican proposal to cut capital gains taxes. To date at least, I’ve not seen a single explanation for how such tax cuts can assist in this crisis.
On the other hand, foreclosure assistance as well as regulatory changes are decidedly NOT ‘pet’ issues. One may or may not agree with them. But, each stands as an essential proposition that could have significant effects in moving forward.
Yes, “Congress” and “Pet issues” are pieces of language that, over the past two decades of Congressional insipidity have become correlates. But, I don’t think we’ll find Congress or the rest of us moving beyond that sad description if we ourselves trivialize significant positions through casual repetition. Instead, we’ll only find ourselves and Congress and the media discussion continue to be stuck in ideological horse puckey.
Yves I just want to say I agree with you completely. Your Christian Science Monitor article is right on! Keep up the good work. And let’s pray that our legislators do some research — and some hard thinking — before taking another vote.
My condition for passage of any bailout will be that Paulson and Bernanke are fired immediately, Bush resigns and then Congress shall sit down for months and re-write legislation that is clearly written in language that a 5th grader understands — because 5th graders are the ones that will grow up and wonder why they live in a country that is second rate — and they will question why this congress was filled with so much corruption, which is reflected in the lowest approval rating of any congress in American history. The future history lessons for 5th graders will focus on the lack of patriotism associated with these retarded and corrupt group of rich fat cats — that have failed America! What is wrong with the taxpayers, don’t they see how this will burden them????????????
That was rant mode, need clarity??
Congress must hold hearings.
The administration plan has gone down —for now— but hearings are needed to get a new plan —a good plan— worked out in committee. When you call you senators and representatives again, demand hearings on the financial crisis.
We need some economists to testify.
President Bush to the Wall Street crooks and their lobbyists who will make a killing off the financial bailout: “I love you.” President Bush to the Americans who will have to pay of this outrage: “go screw yourself.”
“Remember that when a house is burning down, and someone proposes doing something, and another proposes doing nothing, chances are that something will win out, no matter how bad it is, simply because doing nothing is not an option.”
Sure … except if that something is throwing gasoline on the fire.
Brian
Did you know many of the fat cats who circulate from board to board and from job to job throughout the financial industry are also members of the Bilderberg Group and or the Trilateral Commission, founded respectively in 1954, and in 1973, in New York City? When someone takes your money and steals your car, it makes an impression. When they belong to such a secret political clique, it leaves an indelible impression. Many elected officials even belong to these cabals, hence the secrecy. When Bill Clinton eased banking restrictions, he dished out $8-billion dollars for community reinvestment loans. When the financing schemes fell through, as is their wont whenever 30-million Mexican nationals buy inflated properties and default, it left banks in the lurch. Hillary Clinton counted on the loan giveaways to buy votes. Interestingly enough, had Hillary secured the nomination; she, instead of Barack Obama would preside over the bailout. So, where’s that $8-bilion plus dollars? Where’s Hillary? Why the caveat in Section 8 of the bailout: “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 Global Initiative people (code speak for car thieves) took my money; they stole my car. If you or I did half the things these people have done, we’d be serving consecutive life sentences. Wise up, get angry, and let the bubble burst. Besides, Ben Stein says we’re going to be just fine. You have my word on it too. Gentlemen, I want my money back: http://theseedsof9-11.com