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Friday, September 19, 2008

The Big Bailout

posted by on September 19 at 12:18 PM

Well, ladies and gentlemen, the big socialization of risk that I’ve—and many others—have been foreseeing has occurred:

The actions began to get under way on Thursday with discussions between the Treasury, Federal Reserve and Congressional leaders on what could become the biggest bailout in United States history, a plan likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions….

In a move against traders who have sought to profit from the financial crisis by betting against bank shares, the Securities and Exchange Commission issued a temporary ban on short sales of 799 financial stocks, following similar action in Britain on Thursday.

And the Treasury, moving to restore confidence in another financial bedrock, said that it would guarantee, at least temporarily, money market funds up to an amount of $50 billion to ensure their solvency, a startling intervention into what had been considered among the safest investments.

The stock market is certainly happy about this. Should you, as a taxpayer, be happy?
For years, I’ve had to put up with conservatives bitching about the moral hazard posed by FDR’s New Deal. Today’s actions reveal these “free market” proponents as gigantic, hypocritical assholes.

Don’t be too shocked.

Want to distill down the New Deal-era financial reforms? If you want our money to bail you out, you have to play honestly and by our rules. If something is important enough to the economy that we’d consider bailing it out, it deserves regulation first, bailouts second.

For example, the Glass-Steagall Acts prevented risky investments from shacking up with the safe—keeping investment banks and commercial banks separate. The same laws created the FDIC insurance of our savings account also limited where and how aggressively insured banks could invest.

Most of Glass-Steagall’s regulatory provisions were written out of law in 1999, setting the stage for our present catastrophe. Today’s “solution” to the present crisis is all bailout, no regulation—the mirror image of FDR’s. It’s going to fail.

“Free market” conservatives—like our current SEC chairman Christopher Cox—for years have been telling us the market will collapse irresponsible companies, relieving the government of the responsibility to actual bother regulating the financial industries. Well, when the irresponsible have started collapsing, Cox and others are right there with our wallet, dumping cash on the table to “restore confidence.” I have an ugly truth for you: confidence shouldn’t be restored in this system.

Want to restore confidence? I have a suggested governmental takeover for you: The entire debt rating industry. If the goal is to calm down global investors, who were burned by “high rated” debt that was anything but good, a public execution of Moody’s and others would be the perfect way to do it.

Take the money we’re now showering on the greatest failures in two generations to pay for a new governmental debt-rating agency. Pay the employees of this agenccy usurious wages—wages beyond any bribe. Grant these employees the right to tear into the books and documentation behind all of the financial derivatives, and give honest ratings to the relative quality of the debt.

With that, I know my confidence would be restored—in more than just the financial system.

RSS icon Comments


How does this affect WaMu? Does this mean they are now safe, since it sounds like they'll be able to shift all their bad mortgages to the taxpayers, and thus won't have to be concerned with more massive losses?

Posted by wamu? | September 19, 2008 12:29 PM

Great post the silence in "conservative" circles is deafening. Also, war is bad. Also, I play guitar.

Posted by Slim | September 19, 2008 12:30 PM

What I really want to see is Wall street papered with subpoenas. Subpoenas for you, for you, for you over there, for him, for his personal assistant, for that guy behind the desk, for that guy in the mailroom, everybody. Take all of fucking Wall Street into court and start handing down sentences. Oh, and draw and quarter Alan Greenspan while we're at it.

Posted by Greg | September 19, 2008 12:30 PM

greg, don't you know you can ignore subpoenas if you're a republican?

Posted by max solomon | September 19, 2008 12:36 PM

I will not be happy until I see Phil Gram pushing a mop around the bathroom of a fast food joint somewhere.

But there's a nearly 50% chance he'll end up Sec of the Treasury.

Posted by Westside forever | September 19, 2008 12:41 PM


WaMu isn't out of the woods.

Yes, the Feds are buying up mortgage-backed securities--but at a "steep discount."

So, Wamu can now sell quarter trillion dollars (of our money) they foolishly invested in shitty mortgages--but not at full value. Given that three-quarters of Wamu's investments are in these mortgage-backed securities, this is actually moderately bad news for them.

The fact that they've been on sale for days now, with no serious takers, is also not a great sign. It seems that the dowry, provided by taxpayers, must go up a bit more.

Posted by Jonathan Golob | September 19, 2008 12:45 PM

@ 1,

I've no fondness for WaMu, but bank runs are a self-fulfilling prophecy. I've been astounded by the smugness of people who've moved their accounts to Bank of America, whose investment in risky loans and derivative schemes could be even larger, AND who just bought Merrill Lynch and all their basket-case debt.

Just try to stay calm.

Posted by Original Andrew | September 19, 2008 12:48 PM

Great post, JG! People who whine about greedy lenders and irresponsible borrowers are either ignorant of the real cause of this fiasco or they have some ideological agenda. Sloppy deregulation is the reason for this mess!

Why isn't the public being told about the credit rating agency fiasco? Why isn't the public being told about the 1999 Gramm-Leach-Bliley Act? Why isn't the public being told about the way Greenspan refused to implement the market protection powers that congress gave him in 1994?

The bailout is an absolute necessity, but there better be regulatory strings attached. I will say this. I am glad Barney Frank is carrying the big stick in congress right now.

Posted by mydquinn | September 19, 2008 12:52 PM

Great post, JG! People who whine about greedy lenders and irresponsible borrowers are either ignorant of the real cause of this fiasco or they have some ideological agenda. Sloppy deregulation is the reason for this mess!

Why isn't the public being told about the credit rating agency fiasco? Why isn't the public being told about the 1999 Gramm-Leach-Bliley Act? Why isn't the public being told about the way Greenspan refused to implement the market protection powers that congress gave him in 1994?

The bailout is an absolute necessity, but there better be regulatory strings attached. I will say this. I am glad Barney Frank is carrying the big stick in congress right now.

Posted by mydquinn | September 19, 2008 12:53 PM

But, what Original Andrew @7 said.

Nobody wants Wamu to fail, particularly before a major election. This bailout doesn't specifically help them, but it's reasonable to decide to sit tight. The FDIC is automatically bailed out by the Federal Treasury.

Posted by Jonathan Golob | September 19, 2008 12:56 PM

Also, for those of you who think tax payers have to lose money in this bailout, I encourage you to read Paul Krugman's NY Times column today. Sweden had a similar crisis in the early 1990s. The country spent 4% of its GDP to buy up the "bad" assets, but ended up selling many of them off for a profit later. The devil is in the details, but wouldn't it be great if the US tax payer profited off of Wall St. for once?

Posted by mydquinn | September 19, 2008 12:57 PM

And if I don't want your money to bail me you, then do I get to not play by your rules?

Posted by David Wright | September 19, 2008 12:59 PM

Oh. Well then, I guess I just get to play by your rules either way.

Posted by David Wright | September 19, 2008 1:00 PM

Who isn't trying to trying to stay calm....

Is there any news that is relevant to the U.S. Minerals Management Service and the Senator Maria Cantwell story

Friday September 19, 2008

Seattle Post Intelligencer...
Page A 1,

and the drilling on sea floor leased lands, and the contracts awarded to Mexico in connection to the figures reported by decimal point configuration ratios and dollar figures in the billions, verses the lost royalty revenues that tax payers have now been saddled with?

Do you think the backslide of the story will just move again into another scandal that blames the big decisions made by the corporations who can and should pay, or will it be put onto the names of the expendable in menial job positions? will the problem of blame and compensation be left with their long dad relatives and heirs?

Posted by danielbennettkieneker | September 19, 2008 1:01 PM

@11, I'd love it, but I'm just too cynical to believe that our government would allow that to happen. If the expensive loans the government acquires begin to turn a profit due to a recovery in housing prices or some other miracle, I'm sure the lobbyists will insert a provision in this program that returns any profits to the companies that originally turned over those loans to the government.

Posted by unlikely | September 19, 2008 1:02 PM

David Wright @ 12 and 13:

I know you're being smugly rhetorical, but I'm going to give you an honest answer anyways.

Free Markets (as per John Smith) have:

1. Low barriers to entry for buyers and sellers.

2. Many buyers and sellers.

3. Accurate information about value and price paid that is known equally to all buyers and sellers.

Certainly, even in an uninsured market--where public dollars will not be used in a case of failure--you can see a role for government to encourage and protect #2 and #3, and perhaps even #1.

Would we even be in this mess if the government was rating debt, rather than captive private companies like "we fucked up our computer programming" Moody's? Can you credibly claim that the crisis would be as severe if the debt and derivatives were accurately and fairly priced and rated for risk?

Posted by Jonathan Golob | September 19, 2008 1:08 PM

So what I'm hearing is: the short-seller ban effectively removed the floor from the next market drop, the purchase and management of toxic loan derivatives is something that could only be pulled off employing dedicated experts we don't have backed by Congressional funding at a level we can't get over a number of years our politics won't allow, the money-market guarantees are going to hack away at banks' ability to hold deposits, and the regulatory capital drain for all of this will leave us hugely vulnerable as housing prices continue to unalterably decline during the term of the next President.

Favorite line I've read today is, "the feds didn't intervene because the market stopped working; they intervened because the market actually started working." So stay close to your loved ones, is what I'm taking away from all this, per your post a few days ago. Okeydoke. Will do.

Posted by tomasyalba | September 19, 2008 1:15 PM

Another great point, JG @16. We heard a lot of whining about the need for free markets over the last decade. But what that really meant was "free to corner markets" and "free to withhold accurate information from the market."

Posted by mydquinn | September 19, 2008 1:20 PM

@11, lets compare to japan who did the same thing and had 17 years of recession.

further, blaming "free market" folks for being hypocrites is hilariously off the mark. The people on wall street are free market, regulated market or anything so long as it makes them more money. They will take any market condition that allows them to make money, which if you havent noticed over the past 2 days, has been huge.

i hate to burst everyones bubble but wall street learned a lesson they can take to heart; "The worse we do, the less we have to worry about consequence."

Posted by Bellevue Ave | September 19, 2008 1:26 PM

The harmonies of geo-politics supersede “American Conservative Values ™”. The American free-market is only as strong as the marketplace’s structure. Someone has to pay for the upkeep of the metaphorical roof, walls, restrooms and booths. .. the American Taxpayer.

Sure talk mean talk conservative Joe and Josephine, but this week out of any other week, has shown that the real conservative power brokers (and not just the breezy pundits) are merely straw leaders. With the people’s money, citizen's money, tax payer’s money, (money conservative have tried to entirely cut out of budgets, btw) come strings… and string pullers. GWBUSH has created some very powerful strings which do need governing. The question will be, in Dec… Jan… Feb… will these new government assets be run democratically, or as neo-cons’ fiefdoms for self-richments?

America has socialized AIG, MAE, MAC, ei-ei-o. WAMU is allowed to be sold in the marketplace… very few American consumers have banking concerns with WAMU anyways… well, not on the same scale, directly or indirectly, as they do with AIG, know it or not. The real assets of the country remain safely controlled by the USA, and not in the hands of a USA Corporate Universe with a demonstrated lack of scruples with shipping American assets overseas… in the name of Free-Market Dynamics... in the name of hitting earnings goals and thusly, being able to purchase a new, but Same Mc Mansion with a pool and home theatre room..

Posted by Phenics | September 19, 2008 1:28 PM

as for the debt rating agencies, as long as the government takeover puts it squarely in the hands of non appointed by current administration officials then I'm for it. Do you really want an agency that changes with each President?

Posted by Bellevue Ave | September 19, 2008 1:29 PM

This whole week has been like a Three Mile Island incident in our financial markets. They managed to get the control rods in, and now the sweating begins to see if the meltdown was averted.

The NY Times' account of last night's panicked meeting on the Hill is pant-pooping horror movie type stuff:

“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”

When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”

“What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”

Posted by Just Sayin' | September 19, 2008 1:35 PM

Bellevue Ave:

We can agree on this, at least: All of those cheerleading the 1999 Gramm-Leach-Bliley Act--dismantling Glass-Steagall--are anything but free market enthusiasts, regardless of what they want to call themselves.

And I'd want an independent governmental debt rating agencies--like the SEC. Maybe two of them, both doing the same task independently.

Remember McCain's gaffe; the SEC chair cannot be fired by the president for this very reason you bring up.

I want the people reviewing debt to be as isolated from the market and politics as the guy who assembles tide charts for NOAA, and be paid like college football coaches are paid: more than any other employee in the government.

While I'm fantasizing, I'd also like lunch with Olivia Munn.

Posted by Jonathan Golob | September 19, 2008 1:38 PM

Dude, that is percisely what I'd like to see. You bring up a good point about being the most highly paid too because lets face it; people respond to incentives and money is a huge incentive to those who love the mechanics of finance.

And before I go on about this, all you anti wall street types need to take a page from George Soros; make money on the system to change the system.

Posted by Bellevue Ave | September 19, 2008 1:43 PM

@22, thanks for excerpting that. Amusing that longtime Senators on the Banking & Housing, Finance and Joint Economic committees say they didn't see any of this coming. I believe them when they claim this, for otherwise it would be hard to imagine them being so easily led by the nose the last couple of days.

Posted by tomasyalba | September 19, 2008 1:48 PM


What Japan did was totally different than what Sweden did. Japan slashed interest rates to nothing and subsidized "zombie" banks. Sweden bought up assets and then sold then off when the market settled. What Paulson is doing is far more like the Sweden example. In fact, it might be even better...

For example, the AIG "bailout" was not a bailout. The govt seized 79% of AIG's equity in exchange for a bridge loan that must be paid back. Why do you think Hank Greenberg is crying a river? The American taxpayer stands to make a killing off of that deal at AIG shareholder expense. Maybe AIG's net liabilities are more than $85 billion and maybe the US govt will reneg on the taxpayer later, but calling what happened at AIG "socialism" or a "bailout" is just plain wrong.

Posted by mydquinn | September 19, 2008 1:51 PM

Putting all the bad debt under one roof is creating a zombie bank. The AIG thing isn't part of it but the speculative plans going forward is.

Posted by Bellevue Ave | September 19, 2008 1:56 PM

"Today’s actions reveal these “free market” proponents as gigantic, hypocritical assholes."

Get the fuck out of here. This rampant fraud is not a free-market problem and the bailout is most certainly not a free-market solution.

Posted by Bryan | September 19, 2008 2:15 PM


It all depends on on the price paid and how bad the debt really is. Plus, that is still completely different than what Japan did. Japan's problems went way beyond what we are facing.

Posted by mydquinn | September 19, 2008 2:18 PM

yeah, we didn't allow stock as collateral for housing purchases.

Posted by Bellevue Ave | September 19, 2008 2:20 PM

******** BUY COMMODITIES ********

The dollar is a roost.

Posted by gk | September 19, 2008 2:27 PM

guys, love it or hate it, keep in mind that this bailout is going to take a significant amount of time and effort to implement. This isn't a carbon-copy of the RTC, in neither scale nor mechanics. In the meantime, liquidity will continue to be a problem for the financials (I'm lookin at you, Wamu). imho, we're still fucked.

obligatory: my 2 cents, grain of salt, ymmv, etc etc

Posted by happy renter | September 19, 2008 2:28 PM

Jonathan, you are right that my comments were mostly rhetorical hectoring from the peanut gallery, so it is very gentlemanly of you to nonetheless respond respectfully. Thanks.

I do see a role for government in encouraging #1, #2, and #3. But that's not the kind regulation we are going to get; and that I'm willing to bet on. Already our first specific new regulation, the short sale ban, is a specific stipulation on allowed transactions, arguably for the benefit of a preferred constituancy. One of the biggest government interventions in this whole story, the creation of the GSEs (Fannie and Freddie) was a quite deliberate attempt to do the opposite of #3, effectively hiding from those funding mortgages the default risk that those mortgages bore, in order to push down mortgage interest rates.

I do see problems with the current debt rating system, but I don't think a government debt rating system would help much. Other problems aside, the government system would have little incentive to move quickly to rate new instruments, so the market would likely turn to unofficial, private ratings of new instruments anyway.

If there was any solid content to my original carping, it is this: the justification for the reforms you propose is that they make the system work better, not that you are cutting some sort of a regulation-for-insurance deal with anybody. So just be honest and admit that you are just using the power of the state for good, not inking some voluntary social contract.

Posted by David Wright | September 19, 2008 2:31 PM

also, the markets of the past few days are completely wacky. banning short sales is ridiculous and you can see the amount of short covering as evidence.

Posted by Bellevue Ave | September 19, 2008 2:32 PM

Those right wing morons scream like crazy about socialized medicine but run for the U.S. treasury every time their, THEIR deregulation collapses a big financial institution. America, wake the fuck up. These Republican rats are picking your bones clean all the while they claim to be "conservative" and have "values". But maybe you deserve this shit. You keep voting for it.

Posted by Vince | September 19, 2008 2:53 PM

They do deserve it, Vince, the problem is that these fuckwads are dragging us along for the ride.

Posted by Max Bell | September 19, 2008 2:55 PM

Max, et al. Where is the cognitive dissonance in you when you realize that Democrats would have done the exact same thing and is part of the party platform. The Republicans might be hypocrites but that makes them only slightly worse in this.

Posted by Bellevue Ave | September 19, 2008 3:03 PM


I agree. I don't really understand why short sales are being banned unless they are somehow worsening the liquidity problem.

Re: the rating system. Private ratings supplementing govt ratings is a whole lot better than what we have now. I am not sure what the right answer is, but the conflicts of interest have to be ended. Direct payment from the investment banks to the credit rating agencies is the central problem. Maybe private credit rating agencies can get the job done if a govt entity is set up to collect and disperse fees rather than the govt taking over the whole function.

Posted by mydquinn | September 19, 2008 3:10 PM

@38, someone somewhere else is trying to argue that the share prices falling cause liquidity problems because of the rating agencies penalizing them and them looking like a risk.

Posted by Bellevue Ave | September 19, 2008 3:33 PM

which just creates more incentive to short the stock...

but preventing the shorting of shares also causes other problems and is only temporary.

Posted by Bellevue Ave | September 19, 2008 3:35 PM

Excellent post.

The repeal of the Glass-Steagall Acts was criminally negligent.

McCain was one of only 9 Senators who did not vote in support of repealing the Glass-Steagall Acts.

Biden did vote in support of repealing the Glass-Steagall Acts.

Bill Clinton signed it into law.

Posted by You_Gotta_Be_Kidding_Me | September 19, 2008 3:51 PM

A number of the rating agencies are certainly a big part of the problem. It appears they happily rated the quality of debt without really understanding the composition of the debt. To make matters worse, they were being paid to rate the debt by the companies issuing the debt. That is an inherent conflict of interest.

I have pondered how many former employees of rating companies went on to work for the various investment banks these past years.
I really have no idea, however I do suspect there was a fair number.

Posted by Cranky Old Man | September 19, 2008 4:12 PM


Why don't you use the name of the bill? Hmmm... maybe because it is called the Gramm-Leach-Bliley Act?

Moreover, you better get your facts straight...

McCain voted FOR the bill. Biden voted against it before it went to conference.

The only reason McCain didn't vote for it when the bill came out of conference was because he absent was on the campaign trail in 1999.

Posted by mydquinn | September 19, 2008 4:17 PM


So Biden voted against it before he voted for it?

How is that more principled than McCain voting for it before he did not Vote for it?

Either way. McCain is still one of only 9 senators that did not vote for the bill in its final form. Biden could have been the 10th, but was not.

And how is an absent vote different from Obama's favorite vote "present"?

Posted by You_Gotta_Be_Kidding_Me | September 19, 2008 5:59 PM

McCain supported the Gramm-Leach-Bliley Act, period. It was a Republican bill all the way. It originally passed after a partisan vote. Don't try to act like there is any other explanation.

Posted by mydquinn | September 19, 2008 6:38 PM

I have a bette bailout plan. Anyone at these firms making more than $200,000 gets their pay cut in half and CEOs and top management get zero until they get this mess cleaned up. They got paid enough while they were creating this crisis.

Posted by carol | September 21, 2008 6:49 PM

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