Posted by: mutantpoodle | September 21, 2008

The problem with the LPFTATPMRA*

thats-all-folks

*Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets

I could be flip, and say that the problem with this proposal is that George Bush made it. However, here are two specific troubling portions:

Sec. 4. Reports to Congress. Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

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.

So Henry Paulsen (or, scarier still, Secretary Phil Gramm in a McCain administration) can do whatever the fuck he wants with a $700 BILLION blank check, no one can review what he did, and after a report in three months, only has to grace Congress with a report twice a year.

Are you kidding me?

Barney Frank suggested that maybe the act should include, say, some limitation on Wall Street executive pay and severance. Henry Paulsen told him that would be a “poison pill.” Because, after all, how will you find executives of the quality who currently manage Bear Stearns Lehman Brothers Merril Lynch AIG the most brilliant and innovative companies in the country to do the hard work that needs to be done?Here are a few other voices:

Krugman:

…historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

And Atrios, reducing it to its essence:

Step 1) Buy $700 billion of big shitpile at inflated prices

Step 2) ..

Step 3) Profit!!

As many have pointed out before me, this is not a liquidity crisis – it’s an insolvency crisis. (If you $500,000 of equity in your house and no debt, and you need $100,000 but only have $25,000 in the bank, that’s a liquidity crisis. If you only have $25,000 of equity in your house, that’s an insolvency crisis.)To give you an idea of just how massive this problem is, and why $700 billion is well short of what will likely be needed to get us through this mess, let’s look at an April 1st conversation between Kai Ryssdal of Marketplace and Marketplace correspondent Bob Moon:

MOON: I’m going to try to mention this term only once, Kai. We’re talking about something called “credit default swaps.”

RYSSDAL: And they are?

MOON: They were invented a few years back so banks and bondholders — the investors — could make sure that they got paid back when companies failed to pay their loans. So in a way, you could call this insurance.

RYSSDAL: You could call it that, but we don’t — we call it something else. How do these things work?

MOON: Well, this is where it gets tough, Kai, because a lot of people on Wall Street, even some of the leading economists in the academic world, don’t really understand exactly how these things work. A lot of them are whipped up with some computer wizardry, some advanced math — think of those fancy Greek letters turned on their sides. And there’s a lot of guesswork to this, too, about how much they’re really worth.

RYSSDAL: All right, so what’s the problem, though, if everybody agrees that they don’t know what they’re worth?

MOON: Well, the critics I’ve spoken to complain that they’re really nothing more than gaming instruments — gambling. Turns out that the big hedge funds that attract so much money from rich investors and big institutions, well, they’re playing the market on their own, and they don’t even need to have a stake in a particular company to do that.

RYSSDAL: I’m going to make the analogy here to a March Madness office pool, right? I go in, I pick a basketball team, and if they do great, that’s great, but I’m not vested.

MOON: It is. Except instead of wagering on UCLA and Auburn, these big bankers and brokers and hedge fund managers pick up the phone and they negotiate these wagers privately. Nobody really regulates this. They’ve created this incredibly enormous shadow financial system, if you will, that’s virtually hidden from investors and analysts and regulators.

RYSSDAL: How big would “incredibly enormous” be?

MOON: OK, I’m about to unload some numbers on you here, so I’ll speak slowly so you can follow this.The value of the entire U.S. Treasuries market: $4.5 trillion.The value of the entire mortgage market: $7 trillion.The size of the U.S. stock market: $22 trillion.OK, you ready?The size of the credit default swap market last year: $45 trillion.

Feeling better yet?In fairness, not all of that $45 trillion is bad debt. But still…So – back to this onerous proposal. I’ve already faxed letters to my Congressman and Senators telling them how unacceptable this version of the bill is. And I’m sure the final markup will be different. Which leads to this nugget from the Politico story which just pissed me off:

Frank will clearly add more to the dozen sections penned by Paulson’s legislative office and delivered to Capitol Hill early Saturday morning. How far he and fellow Democrats can go and not drive off Republican conservatives will be a critical question in the week ahead.

I really don’t care if Republican conservatives are driven off. If the Democrats craft a bill that has (a) accountability (b) relief for some individual mortgage holders and (c) some rules governing CEO pay, at least with respect to any institution whose “assets” are acquired by this fund, and Republicans want to vote against it, let them.Anyone who rolls over on this odious pile of crap to the Republican conservatives whose fake free market obsession got us herein the first place deserves to be shunned from any position of responsibility forever.

UPDATE: Wow! I’m not the only one pissed off. Open Left has this e-mail from a member of Congress:

Paulsen and congressional Republicans, or the few that will actually vote for this (most will be unwilling to take responsibility for the consequences of their policies), have said that there can’t be any “add ons,” or addition provisions. Fuck that. I don’t really want to trigger a world wide depression (that’s not hyperbole, that’s a distinct possibility), but I’m not voting for a blank check for $700 billion for those mother fuckers.

Aside from noting that “mother fuckers” is more traditionally one word, that’s what I want every Democrat to be thinking. There’s more at the link – go check it out.

2ND Update: Insisting on $2.5 billion in bonuses to Lehman executives who ran their company into the ground is not a good way to start what I hope is a rancorous debate on all this come Monday.

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