The Bailout Defeat: A Political Credibility Crisis

[WayOutWest]

http://www.time.com/time/nation/article/0,8599,1845655,00.html?cnn=yes

The Bailout Defeat: A Political Credibility Crisis
By Michael Scherer/Washington Tuesday, Sep. 30, 2008

President Bush delivers his State of the Union address before a joint session of Congress, Monday Jan. 28, 2008, on Capitol Hill in Washington

Nearly every major political leader in America supported the $700 billion financial bailout bill. The President of the United States. The Vice President. The Treasury Secretary. The Chairman of the Federal Reserve. The Chairman of the Securities and Exchange Commission. The Democratic and Republican nominees for president. The Democratic and Republican leadership of the House and the Senate. All of them said the same thing. Vote yes.

But a majority of those politicians anointed by the U.S. Constitution to reflect the will of the people voted no. This is a remarkable event, the culmination of a historic sense of betrayal that Americans have long felt for their representatives in Washington D.C. The nation's credit crisis exposed Monday a much deeper and more fundamental problem ? a political credibility crisis that now threatens to harm our nation further, should the markets freeze up and more companies begin to fail, as many experts predict.

The problem has been growing for years. Roughly 28% of Americans approve of President Bush. Roughly 18% of Americans approve of Congress. Now those bad feelings have manifested themselves in the starkest of terms.

Asked to take a leap of faith regarding a dizzyingly complex problem, a critical mass of voters refused to trust their leaders, turning down the medicine that was offered. And so the politicians who are most exposed to popular whims have run for cover. With an election on the horizon, 95 House Democrats and 133 House Republicans opposed the bill. Some portion voted no for clearly ideological reasons. But many more were simply doing what politicians do ? responding to the will of the people.

An analysis by statistician Nate Silver, who runs FiveThirtyEight.com, made this clear. Of the 38 incumbent members of Congress from both parties who are considered vulnerable in the coming election, 30 voted against the bill, and only 8 supported the bill. By contrast, members of Congress from relatively safe districts were evenly divided ? 197 for to 198 against.

"What this showed more than anything else was that not even members of Congress can ignore a switchboard system of Capitol Hill that is so totally jammed," said Peter Sepp, a conservative opponent of the bill with the National Taxpayers Alliance.

If the experts are right, the nation now risks great financial hardship because there was no one to stand up and explain the situation. The Dow Jones Industrial Average dropped 778 point on the news. Treasury Secretary Hank Paulson warned Monday afternoon that car loans and student loans were likely to tighten. Other economists have warned of the possibility of widespread corporate failures and unemployment, if the short-term credit markets freeze up. Bank failures, or mergers, are likely to continue. The taxpayer costs of federal insurance on deposits could increase.

In a worst-case scenario, economic historians may find that all of Paulson's predictions come true, leaving the cost to the federal government far greater than a risky $700 billion investment in the private sector. If this comes to pass, the historians will find many people to blame. Paulson and President Bush for failing to explain the plan better. The House leadership for failing to whip enough votes. Even the presidential candidates for failing to use their bully pulpit to force the issue.

But those historians should not forget that roots of the failure predate the vote Monday, or even the mistakes of Wall Street. Years ago, the trust between the people and their politicians was broken. The credibility was lost. The reserve of goodwill went bankrupt. And when they needed it most, our nation's leaders found they had squandered their ability to exert influence over the people who chose them to lead.

[westkoast]

I don't think you can blame Bush for not explaining it better.  Blame the Bush Administration for showing the American people time and time again that they are wrong when making decisions for this country.  He could explain it perfectly and there is going to be a large portion of Americans who will not agree with a plan drawn up by anyone inside or close to the Bush Administration for that reason.  I wonder how many people were turned off to the 700 billion dollar bail out when they saw who was behind drafting this bill.

Rick says the sky is falling.  Paulson says the sky is falling.  Lurker says it is not.  Other sources have said it is not.  Now how does the average America process all this information?  Once again there is no middle ground in this country.  It is either this country crashes and burns or the shake up is going to weed out the get-rich-quick personalities who helped cause this problem in the first place.  Where is the middle ground?

[Lurker]

http://www.time.com/time/business/article/0,8599,1845209,00.html

Let Risk-Taking Financial Institutions Fail
By Ari J. Officer and Lawrence H. Officer

The Administration and Congress have felt compelled to do something about the "financial meltdown," so an inefficient and inequitable "bailout plan" has been rushed through the legislature despite harsh criticism from the right and left. That's unfortunate. Both presidential candidates were stalling by qualifying the plan. Whichever candidate had had the courage to reject outright this proposal would have had the better claim to be President.

Do not be fooled. The $700 billion (ultimately $1 trillion or more) bailout is not predominantly for mortgages and homeowners. Instead, the bailout is for mortgage-backed securities. In fact, some versions of these instruments are imaginary derivatives. These claims overlap on the same types of mortgages. Many financial institutions wrote claims over the same mortgages, and these are the majority of claims that have "gone bad."

At this point, such claims have no bearing on the mortgage or housing crisis; they have bearing only on the holders of these securities themselves. These are ridiculously risky claims with little value for society. It is as if many financial institutions sold "earthquake insurance" on the same house: when the quake hits, all these claims become close to worthless ? but the claims are simply bets disconnected from reality.

Follow the money. Average Joes and Janes are not the holders of the other side of complicated, over-the-counter derivatives contracts. Rather, hedge funds are the main holders. The bailout will involve a transfer of wealth ? from the American people to financial institutions engaging in reckless speculation ? that will be the greatest in history.

Rescuing financial institutions is not the best solution. Yes, banks are needed to provide capital to businesses. But it is not necessary to spend $1 trillion to maintain liquidity. If the government is to intervene, it should pick and choose which claims to purchase; claims that are directly tied to mortgages would be a good start.

Let financial institutions fail, merge or be bought out. The faltering institutions will see their shares devalued and will be likely to be taken over by stronger institutions ? as has already started happening. This consolidation of the financial sector is both efficient and inevitable; government action can only delay the adjustment.

The government should not intervene. It should leave overleveraged financial institutions to default on their derivatives obligations and, if necessary, file for bankruptcy. Much of the crisis has arisen from miscalculating the risks involved in a large book of positions in these derivatives. It is only logical that these institutions pay for their poor management.

Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions.

Let the poorly managed, overly risk-taking financial institutions fail! Always remember that Wall Street and the real economy are not the same thing.

? Ari J. Officer has completed his master of science degree in financial mathematics at Stanford University. Lawrence H. Officer is a professor of economics at the University of Illinois at Chicago.

[Ted]

"Rather than bailing out Wall Street, we propose that the government should buy up the actual mortgages in question and do nothing else. The government should not touch any derivatives; that is, claims that do not directly tie into the actual mortgages. If money becomes too tight, then the Fed can certainly increase its loans to financial institutions."

I like the sound of this.

[Skandery]

I like the sound of this.

Me Too!!!!!

See.  Ted is a right-wing, multiple-wife having, conservative, nutcase and I'm a liberal, hippy, douchebag and we agree on this. 

Why don't we have our national leaders (much less our candidates for President for goodness sake) speak this kind of sense.  Which to digress a little, never before have I done such a 180 into thinking our Presidential candidates were at least well-meaning, good idea men to now I think they're both abjectly WORTHLESS as leaders.  All within the span of one week.

[jemagee]

Why don't we have our national leaders (much less our candidates for President for goodness sake) speak this kind of sense.

Because to speak this kind of sense you have to have that kind of sense to start with, and in this day and age, most, if not all, politicians lack any kind of sense

[Lurker]

Another take on "the sky is falling"...posted yesterday after the failed bailout.  Bolding is mine...

As expected, markets have gone ape over the failed vote.

Stocks and commodities took quite a hit; bonds, both government and otherwise, rallied strongly.

Right now everybody is looking around to see whether the Fat Lady is warming up her pipes. At that point, we?re all doomed.

But doomed from what?

So far we?ve had 13 FDIC banks go bust. That?s not a good thing, but it isn?t the end of days.

And, sure, the brokerage landscape has changed dramatically since Lehman Brothers bust, while its brethren opted for mergers or the relative safety of a commercial bank charter.

Meanwhile, consolidation continues among the nation?s largest banks and thrifts. Washington Mutual is on its way into the hands JP Morgan Chase. Wachovia is headed to the big city with Citibank. And there will be plenty of others that will meet similar fates.

And getting these deals done didn?t require this massive bailout legislation. Instead, the existing powers of the US Treasury and the Fed have been used to either swallow some of the bad assets and/or provide some credit insurance of their own devising.

On the other side, the institutions making these bargain acquisitions had little difficulty raising addition capital, despite all the hang-wringing occurring on Capitol Hill or in the financial media.

Yes, there will be more workouts. Yes, we should expect several more FDIC seizures and sales of bad banks beyond the official 13 this year and beyond the workouts like the Wachovia deal.

To pay for this, Congress will have to authorize about $50 to $150 billion in additional funding for the FDIC--a move that no one will likely oppose.

At the core, the banking and financial system still very much works.

Beyond the workouts of bad banks and brokers, the Federal Reserve announced that it will inject a further $630 billion into the global financial system.

This is what the Fed does. It can accept just about anything as collateral, including so-called toxic assets. And it?s working with several other major central banks to work to keep the cash flowing throughout member banks and their counterparties.

But what?s currently working has fallen by the wayside because it?s easier whine and moan over the failed bailout bill.

The bailout bill would not have been the panacea or the silver bullet, but instead could have resulted in a world of additional near-term and long-term challenges for the markets and the economy.

Stocks are down. And traders will keep trying to make a buck by making more trades and trying to whip up more volatility; that?s their game and, of course, their stock in trade.

The stocks and partnerships that we hold are in solid business shape. They?re not immune to a selloff or a complete elimination of credit, but they will realistically keep churning out revenues and paying us.

But bonds are working and will keep working.

Some of our bond funds and mini-bonds will be subject to the vagaries of the stock market--that?s unavoidable. But the bottom line for bonds is that they will keep the cash coming to you.

Do not get swept up in all of the mania over an impending depression. Do not sell everything in a panic.

Instead, stick with the bonds, quality companies and partnerships that we will keep vetting over the coming days, weeks and months.

[Skandery]

All this talk about the indignation of the constituency who just don't understand.  Malarkey.  Published in the New York Times on September 20th and the concepts are not esoteric.

============================================================================

The Wall Street Bailout Plan, Explained

By DAVID STOUT

Published: September 20, 2008

WASHINGTON ? News reports about the upheaval in the world of finance have been full of esoteric terms like ?mortgage-backed securities? and ?credit-default swaps,? but the crisis has resonated for people who know little about Wall Street and who did not think they would ever have to know. Here are several questions and answers of concern to Main Street Americans:

Q. The bailout program being negotiated by the Bush administration and Congressional leaders calls for the government to spend up to $700 billion to buy distressed mortgages. How did the politicians come up with that number, and could it go higher?

A. The recovery package cannot go higher than $700 billion without additional legislation. As for that figure, it lies between the optimistic estimate of $500 billion and the pessimistic guess of $1 trillion about the cost of fixing the financial mess. But the $700 billion is in addition to an $85 billion agreement on a bailout of the insurance giant American International Group, plus $29 billion in support that the government pledged in the marriage of Bear Stearns and JPMorgan Chase. On top of all that, the Congressional Budget Office says the federal bailout of the mortgage finance companies Fannie Mae and Freddie Mac could cost $25 billion.

Q. Who, really, is going to come up with the $700 billion?

A. American taxpayers will come up with the money, although if you are bullish on America in the long run, there is reason to hope that the tab will be less than $700 billion. After the Treasury buys up those troubled mortgages, it will try to resell them to investors. The Treasury?s involvement in the crisis and the speed with which Congress is responding could generate long-range optimism and raise the value of those mortgages, although it is impossible to say by how much.

So it would not be correct to think of the federal government as simply writing a check for $700 billion. It is just committing itself to spend that much, if necessary. But the bottom line is, yes, this bailout could cost American taxpayers a lot of money.

Q. So is it fair to say that Americans who are neither rich nor reckless are being asked to rescue people who are? What is in this package for responsible homeowners of modest means who might be forced out of their homes, perhaps for reasons beyond their control?

A. Yes, you could argue that people who cannot tell soybean futures from puts, calls and options are being asked to clean up the costly mess left by Wall Street. To make the bailout palatable to the public, it is being described as far better than inaction, which administration officials and members of Congress say could imperil the retirement savings and other investments of Americans who are anything but rich.

But it is a good bet that the negotiations between the administration and Capitol Hill will include ideas about ways to help middle-class homeowners avoid foreclosure and perhaps some limits on pay for executives. And it should be noted that neither party is solely responsible for whatever neglect led the country to the brink of disaster.

Q. How is it that the administration and Congress, which have not tried to find huge amounts of money to, say, improve the nation?s health insurance system or repair bridges and tunnels, can now be ready to come up with $700 billion to rescue the financial system? And is it realistic to think that the parties can reach agreement and get legislation passed in a hurry?

A. The first question will surely come up again, involving as it does not just issues of spending policy but also more profound questions about national aspirations. As for rescuing the financial system, elected officials in both parties became convinced that, while a couple of venerable investment banks could fade into oblivion or be absorbed by mergers, the entire financial system could not be allowed to collapse.

And, yes, the parties are likely to reach an accord. Many members of Congress are eager to leave Washington to go home and campaign for the November elections, and no one wants to face the voters without having done something to protect modest savings portfolios as well as giant investors.

Stephen Labaton and David M. Herszenhorn contributed reporting.

More Articles in Business ? A version of this article appeared in print on September 21, 2008, on page A32 of the New York edition.
============================================================================

Did you sense that aura of inevitability of that last answer.  Seems like the voters said, "YOU better do nothing, rather than do something I don't WANT if you want my vote in 4 weeks."

[jemagee]

Well there's what I perceive as a bigger problem with the electorate.

They want it fixed, but they don't want it to cost them anything...they want it fixed, but it better not affect their immediate lives one iota, either income tax, income, or anything else.

It's similar to what I've found concerning 'security' in this nation.  After 9/11 everyone wanted tighter security at airports etc...but no one wanted to be inconvenienced even one extra second FOR that extra security.  Fly El Al one day, if you have crossed eyes they'll strip search you without a second thought. 

Americans in general want the government to do everything and fix everything but without inconveniencing them in any manner whatsoever.

[Lurker]

Did you sense that aura of inevitability of that last answer.  Seems like the voters said, "YOU better do nothing, rather than do something I don't WANT if you want my vote in 4 weeks."

A lot of "no" votes were from those in the tighest re-election races...

The 228-205 rejection of the $700 billion rescue package for the financial markets reflected the every-man-for-himself posture of lawmakers with no plan to prop up the economy five short weeks from the election. Of the 19 most vulnerable House lawmakers tracked by The Associated Press, 13 of them voted against the bill despite pleas from their party leaders to pass it.

Many of them said they could not vote for a bill that would allow some executives of the failed companies to be paid many times what their cash-strapped constituents could ever hope to earn.

Among the "no" voters was Rep. Nick Lampson of Texas, widely considered the most vulnerable incumbent Democrat from a heavily Republican Houston-area district. He reflected on his constituents hit hard earlier this month by Hurricane Ike, saying in a telephone interview that calls to his office ran at least 15-1 against the package.

"Think of all the people who have lost houses. If they lost a $100,000 house, the most the government can give is $28,100," Lampson said.

Contrast that, he suggested, with the $500,000 limit on compensation packages for executives of the failed companies that would participate in the bailout. "I thought it was a $700 billion boondoggle that I thought had a huge, dramatic impact on our citizenry."

Of the 11 most-endangered Republican incumbents, eight voted no: Young of Alaska, Marilyn Musgrave of Colorado, Tim Walberg of Michigan, Joe Knollenberg of Michigan, Sam Graves of Missouri, Robin Hayes of North Carolina, Steve Chabot of Ohio and Dave Reichert of Washington.

The three vulnerable Republicans who voted "yes" were Reps. Christopher Shays of Connecticut, Mark Kirk of Illinois and Jon Porter of Nevada.

Of the eight most-endangered Democrats, five voted against the bill: Reps. Nancy Boyda of Kansas, Don Cazayoux of Louisiana, Carol Shea-Porter of New Hampshire, Chris Carney of Pennsylvania and Lampson.

The three vulnerable Democrats voting "yes" were Tim Mahoney of Florida, Paul E. Kanjorski of Pennsylvania and Jerry McNerney of California.

Some of those who voted for the bailout said they did so in possible conflict with the districts they represent.

[jemagee]

My favorite part of this  whole thing is the republicans say they had '12 ayes' that turned to nays when pelosi got all partisan on their sensitive back sides.

Yet when inquired, there's not a single republican who will admit to being one of those 12 and 12 is the magic number that would have made it a passing vote...makes the lie so much more obvious, shouldn't have stated a specific number, and if stating a specific number try one that isn't the EXACT number of votes needed to sway the vote to passage.

Again, sense folks.

[Lurker]

Does anyone else see the irony of the US Congress taking a vacation in the middle of this crisis when they condemned the Iraqi Congress for the same thing back in August?

[westkoast]

Does anyone else see the irony of the US Congress taking a vacation in the middle of this crisis when they condemned the Iraqi Congress for the same thing back in August?

No way!  They worked hard for like 5 days straight.  They totally need a vacation!

[SPURSX3]

Does anyone else see the irony of the US Congress taking a vacation in the middle of this crisis when they condemned the Iraqi Congress for the same thing back in August?

lol, Atleast Iraq should have a financial surplus soon.  should we move? lol.

[jemagee]

Was it a religious holiday in Iraq in AUgust?