Numerian's Letter To His Senator

Numerian posted this letter in the comment thread of another post, but I think it needs a full front page post. So here it is:

Dear Senator Obama-

Chances are most if not all of the major commercial and investment banks are insolvent. Not one of them is opting out of the do-not-short list, and they don’t seem to have the confidence in their survival to opt out of the L3 asset swap program Secretary Paulson is proposing.

It is also very likely that acutely dangerous systemic risk already exists, not merely from direct lines of credit among the banks, but especially from credit default swaps, which if activated by more than one large bank default would probably bring down many others. Remember, though, that this systemic risk is highly concentrated in the top 25 or so banks in the world, and does not jeopardize the 6,000 other community banks in the U.S.

Third, it is also highly probable that as this recession worsens, and as housing values continue to sink, forcing more foreclosures, the large banks will be even closer to collapse.

Having worked for many years in the banking industry and been closely involved with risk management and derivatives, I can tell you that it looks like catastrophe is already here.

More after the jump.

Aggregated at Buzzflash and NewsHeat.

What Sec. Paulson wants you to believe is that catastrophe is approaching, but it can be averted if only Congress acts urgently to give him the extraordinary authority he is requesting. The implication is if you don’t give him $700 billion in borrowing authority within a week, markets will collapse and it will be all your fault.

We’ve seen this drill before, with the Patriot Act and with the Iraq War authorization. The scare tactics, the urgency, the implied threat of blame for any failure – this is what the Bush administration does. Some of you in the Senate were able to stand up to this pressure, and that type of strength is desperately needed now.

If insolvency is here now for the big banks, the last thing you want to do is throw $700 billion of money that is not yours at bailing out the banks who created this disaster. You’ll need every bit of that money to protect the taxpayers and their deposits in these banks when these financial companies are thrown into the bankruptcy courts. You’ll need that money to make sure consumer deposits are protected with insurance, and you’ll need it to keep the healthy parts of these banks that deal with consumers and businesses functioning until they come out of bankruptcy.

And forget about comparing Paulson’s plan to the RTC. These L3 assets aren’t homes, condos, or commercial real estate that can be easily sold at the right price. They are bits of paper giving the bond holder the right to some small portion of thousands of mortgages, a right that is shared with all the other investors, who are required to agree on what is done with foreclosed properties in the pool. This is one of the reasons no one wants to buy this stuff, and no one will for many years until it is crystal clear what the final losses will be.

Once you give Paulson the authority he seeks, he will buy these securities at 65 cents/dollar, then quietly auction them off at a nickel each. It will be “unfortunate but necessary” to revitalize the banking industry, even though you will discover the banks won’t be lending after this is all over to any but the finest credits. You will have rewarded the banks for their calamitous decisions, stuffed the taxpayers with huge losses, squandered your remaining ability to shore up the FDIC, not prevented the big banks from collapsing anyway, done nothing to help the community banks that will constitute the new banking system in this country when these problems are solved, and in the end made the situation much worse.

If you want to do something practical, require the SEC to go into these banks, open up their L3 holdings to public scrutiny, auction off a sampling of these securities, and apply those prices to the L3 portfolios of all the banks. In this way we will know which banks are insolvent. You won’t need to go through this charade of having the Treasury take ownership of these assets, because the core of the problem is not that these assets are clogging up bank balance sheets, as Paulson says (which is tantamount to saying, by the way, that no one will buy them). The core of the problem is that there is no transparency about these portfolios and their real worth. Congress doesn’t need $700 billion of our money to create that transparency, and if it shows as I suspect that many of these banks are insolvent, that’s why we have bankruptcy courts. You can certainly protect the banks from bank runs while they are in bankruptcy.

Paulson is basically rolling you and the rest of Congress into giving him unprecedented power to protect his friends on Wall Street. This decision you are making is probably as momentous as the Iraq War resolution. Don’t fall for this bailout disguised as the only way to prevent Armageddon. Armageddon is already here – at least for the big banks – and it needs an entirely different solution. Spend our money protecting us, by ensuring the FDIC is properly funded, by throwing these too-big-to-fail banks into bankruptcy if they truly are insolvent, by preserving the healthy parts of these banks while in bankruptcy, and bringing them back out again so they function under much better safety and soundness regulations. We’ve had airlines functioning properly and safely for years while in bankruptcy, and there is no reason we can’t do the same with banks.

Please, please, do not fall for some useless compromise or bipartisan agreement that gives the administration what it wants in the end. Kill this proposal here and now, protect us from this bailout, and deal with the real problem – the insolvency of the major banks, not the paper that is supposedly blocking their lending capabilities.


Hits all the right notes if you ask me.

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Sean Paul Kelley

Traveler of the (real) Silk Road, scholar and historian, photographer and writer - founder of The Agonist.

39 CommentsLeave a comment

  • I have to say that deep down I am not sure Obama cares about the rest of us, either. If Wall Street promises to cover Obie’s back, he too might be among those who kowtow down to them, and sell off our constitutional checks and balances to the highest corporate bidder.

    I really wish I could say that I trust him not to, but the reality is – I don’t.

    Nevertheless, I will send these on to my Senators too. The letter does say all the right things.

  • that Congress is concerned about:

    will the Numerian solution prevent a world-wide panic and depression?

    They told Congress that without action that there would be a depression within days. Congress is freaked.

    1. What would you do to avert a panic leading to depression?

    You have to give Congress something to do, or all hope is lost. They have to do something (politically, as well as economically).

    2. As a corrolary, will Bush plan avert a panic?

    Congress saw the market go up. Isn’t that proof that the Bush plan would avert panic and depression?

    If not, why not?

  • on methods that correct the mortgage crisis. Ian came up with some suggestions.

    The Bush Legislation current draft must not be passed:

    The three key provisions of it:

    (1) The Treasury Secretary is authorized to buy up to $700 billion of any mortgage-related assets (so he can just transfer that amount to any corporations in exchange for their worthless or severely crippled “assets”) [Sec. 6];

    (2) The ceiling on the national debt is raised to $11.3 trillion to accommodate this scheme [Sec. 10]; and

    (3) best of all: “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” [Sec. 8.]

    If Congress relinquishes that amount of authority, the executive branch in seeking dictatorial powers, successfully pulled off a bloodless coup.

  • highly trained economists who counter that bailouts are unnecessary. Why Paulson is wrong. Better than bailouts is a creditor restructuring plan. The article ends with the statement, “The time has come to save capitalism from the capitalists.’

    Paul Krugman says, “No deal!”

  • They point to an IMF study of 42 banking industry crises. The study supports taking a comprehensive approach rather than spending time with one bailout after another. However, an RTC solution like Paulson is proposing is “ineffective”, because politicians are able to manipulate the results to their liking. Paulson’s proposal, housing the entire rescue effort in the Treasury with hardly any oversight, access to $700 billion of taxpayer dollars, and no ability for the courts to challenge any decision, is a quintessential political solution, subject to the whims of the administration.

  • Washington is like a patient told by its doctor that the tumor it has looks like cancer, and if so every second counts in dealing with it. The patient, however, refuses to have a biopsy done to know for sure.

    The letter does address this point in that it argues the disaster is already here and upon us – we just refuse to recognize it. An enormous number of credit markets which existed a year ago have ceased to function worldwide. Hardly any ABCP is being auctioned, the variable-rate municipal bond market has shut down, all securitization of mortgages have ceased, SIVs have folded up shop and no longer process credit card or auto securities, the high yield bond market is issuing at best one new deal a week, leveraged buyouts are dead, consumer home equity lines of credit are being canceled and no new lines issued, and banks no longer lend to each other short term. If the interbank credit market has dried up, what does that tell us? It means banks think every one else has cancer and they themselves probably do too. The worldwide panic is here amongst the bank players, but it can be prevented from spreading to consumers.

    Paulson wants to remove the tumor and run the risk the cancer spreads to the federal government, which means you and me. He doesn’t want to irradiate it; he wants to auction it off over time. These securities instead need to be liquidated now. They are not called toxic waste for nothing, and let’s not forget some of them have squaring and cubing features that create exponential losses as foreclosures increase – they metastasize. The banks which hold these securities in their L3 portfolios need to be sent into receivership for treatment so that the healthy parts of their body can survive.

    The market did go up for two days this week, but that is hardly proof that global panic has been averted. The same thing has been said multiple times, and each time the panic returns worse than ever. The short squeezes are like administering morphine to the patient to hide the pain, with nothing done for the underlying problem.

  • Numerian, you may be right. We have chatted from time to time over the years, and you know that I don’t know.

    But we need a different message. “We’re doomed; give up” is not going to sell.

    Suspend disbelief for just a minute, and ask yourself this:

    If I were a desperate Fed/Treasury/Congress, and I wanted to trick the Saudis and the Chinese into bailing out the world financial apparatus (maybe with a promise of some near-term reforms), what would I do?

    What technical sounding thing could I do and make economist/pundits applaud and say “that’s worth a try, and a much better approach than that blank check for $700.”

    Congress has to do something. Otherwise, they touched the problem last, and take the blame. This could be very significant. If the economy does go into depression, great fear and humiliation will roam the land, and people will be looking for scapegoats. Violence and hysteria are not out of the question. Losing all our money could be the least of our worries.

    So it is not a small thing for us to figure out what smart thing for Congress to do. (Believe me, there are plenty of people there who are all ears at the moment.)

    Secondly, why won’t the $700 billion blank check work?

    I feel convinced it won’t, but I don’t have a good technical argument.

    Can you tell me exactly what buying mortgage loans will do

    and then why that won’t address the central problem?

    I know you know. You just have to articulate it.

  • something about the corrosion of anti-trust rules? If none of these banks had been allowed to become so big, now none of them would be too big to fail.

  • American voters aren’t furious about these bailouts and transfers of wealth from the rich to the middle class?

    It ticks me off that Canada’s central bank and other nations are supporting this farce by continuing to plow more money into what’s become a bottomless-pit market. Billions of dollars are gobbled up as fast as put in. Guess which financial firm Mark Carney, the Governor of the Canadian Central bank, used to work for? Did you say Goldman Sachs–same employer as the current Secretary-Treasurer of the US Federal Reserve, Henry Paulson, currently attempting the biggest heist in history!

    I would have thought masses of people would be demanding heads on plates. At Agonist, should we be starting a list of incompetent people that needed firing yesterday?

  • I think you once said you worked on the Hill – I may be wrong – but you certainly deserve an answer because you consistently point to a major problem here: the political thinking that defines Congress and Washington in general. These people cannot be experts in everything, especially high finance. They need things kept simple, and they need their reputations intact after making a decision. How much easier it is for them, then, to defer to administration experts and accede to administration requests, even if these are momentous decisions and shift power and responsibility to the executive branch.

    And here we have a crisis for the century, which has terrible downside risks for the nation, not to mention the politicians. I would say to them: “This time don’t trust your guts in solving this problem; get to the guts of the problem.”

    This is not a liquidity crisis – this is a solvency crisis. How do we know? We have thrown massive amounts of liquidity at this problem, and it keeps getting worse. More and more banks are failing, and the rush to safety is accelerating.

    Now it is time to deal with the insolvency of the banks and the systemic risk they represent. The way to do that is first, find out the facts. What is the real value, today and now, of the portfolios held by the banks? Which banks are therefore insolvent if these securities were priced consistently from bank to bank? Which other banks will be dragged down if the insolvent banks are allowed to fail? Second, how do we quarantine all these banks?

    Quarantine matters because whoever owns these securities is subject to their value continuing to drop, unless the housing market were suddenly to start heading up, which is very unlikely. Quarantine matters because left to its natural progression, this disease of the banks will eventually drag in the general public, who will rush to pull their money out when they discover the truth. It is far better to protect the public first – inoculate them if you will – by giving them assurances their deposits are safe, while working to find out which banks need to enter receivership. If need be, spend hundreds of billions bolstering the FDIC, rather than rescuing failed banks.

    Paulson says his plan will save the banks and give them time to recover. Why is this wrong? It is practically wrong because Paulson is peddling the illusion that he is buying mortgages. He is not. He is buying a new invention called mortgage-backed securities which gives him no clear ownership rights to any mortgage, and which prevents him from helping homeowners facing foreclosure. This is exactly why foreclosures are accelerating in this country; banks have no practical easy ability to satisfy both homeowners and owners of these securities. The second practical problem is that, unlike the RTC which bought properties after the savings and loans went into bankruptcy, he is proposing to buy securities before the banks enter receivership. This is an impossible conflict of interest, which ultimately means he will be forced to buy these securities at a price which is above market because he will not dare to push a bank over the edge.

    Now let us look at another reason why his plan will fail. It is wrong to transfer only a portion of a bank to the federal treasury, without transferring the rest of it, even if the sum total of it is insolvent. At least that way the taxpayer will have a fighting chance of recouping something, which is how the AIG conservatorship was handled. The way Paulson is going about this, he is taking the least desirable parts of these banks, and giving them to the taxpayers on the odd hope that someday they will be worth something. As I said above, he will and must overpay, and they will inevitably be worth less when and if they are disposed, and many will expire worthless on the books of the Treasury. Given the toxic nature of these securities, he is infecting the body politic, and this is no small point.

    It is the good faith and credit of the United States that is being tainted, and dangerously so. During Bush’s tenure, the federal deficit has soared from $4 trillion to nearly $10 trillion. No government has ever experienced so dramatic a weakening of its financial health. This does not count the cumulative current account deficit with other nations, it doesn’t count the new debt taken on in recent years by corporations and municipalities, nor does it count the massive indebtedness of the consumer. The relationship of this total debt to GDP is at a ratio that has only been equaled by Paraguay and Argentina before their collapses into depression.

    Paulson is acting as if the US has an unlimited capacity to issue and sell new debt. He wants the debt ceiling raised to $11 trillion just for this one proposal alone. Whatever he believes, he is acting according to the Cheney/Reagan principle that “deficits do not matter.” This is criminal irresponsibility; the Treasury Secretary should be the voice of fiscal prudence, not profligacy.

    Where are the voices of fiscal prudence in Washington? Why is there no Ross Perot to tell us enough is enough – it is time to reduce our deficits and retire our debt, not increase them? What happened to pay as you go? Why isn’t the Paulson proposal subject to new taxes or reduced spending elsewhere to pay for it? Why is it automatically assumed we can just keep issuing Treasuries (do you know he sold $200 billion new Treasuries this past week to recapitalize the Federal Reserve – that is 40% of our annual deficit added on to our debt)?

    The Democratic leadership surely cannot have forgotten the 1990s, when deficits were held in check and debt actually reduced by budget surpluses. There is an immorality to the way these bailouts and Treasury proposals are sold as being painless and cost-free, just because the market at the moment is anxious to buy the “safety” of Treasuries. Ultimately a breaking point is reached, and Treasuries will no longer be safe, and the Aaa rating of the United States will be lost. That is a 20 – 50 year consequence of great cost to the citizens of this country, and certainly of greater cost than the depression that is now unfolding and that is wiping out a glut of debts.

    Congresspeople! Deal with the guts of the problem. Find out which banks are insolvent, force them into receivership, and protect the public’s deposits while these banks work to clean themselves up and emerge from bankruptcy in a safer and sounder mode. Transferring toxic waste of poorly designed and highly risky securities to the body politic will only infect everyone else in this country. Do not fall for the illusion that deficits do not matter. Start disciplining yourself when it comes to public debt and the good faith and credit of this nation! It took hundreds of years to build up the financial reputation of this country, and it is now being systematically shattered by bad policy decisions. Stop this process once and for all. If any additional debt must be issued in this crisis, let it be restricted to helping the people at large through deposit insurance, and not used to help the very institutions which brought about this crisis.

    End of lecture.

  • It’s all very complicated, and last week was frightening! The markets went up last week, so what they’re doing must be working.

    Americans, by and large, and especially before JFK, have trusted that their government was working for them, and everyone was working in good faith.

    Much evidence to the contrary has been available, but we’d prefer to believe that most problems are side-effects, or are being caused by just a few bad actors.

    Just watch a speech from the President on the tele – he cares about keeping America great! He’s one of us! He’s doing his best for everyone!

    “Frankly, we’ve lost a lot in recent years.” – General Colin Powell

  • I think we can be sure that most of them are not going to be dragged down by the collapse of Citibank or JPM Chase. But many will still have a problem with commercial real estate – office buildings, strip malls, etc., built during the boom. This business was largely financed by the community banks, since they were unable to participate in the securitization orgy for NINJA mortgages.

    This is another reason I don’t want to see money wasted on banks that are already insolvent. It would be better spent on deposit insurance, so that even if 1,000 community banks go down, the consumer is not damaged.

  • into the FDIC? I’m not sure I completely understand. Many people have savings accounts and CDs with these top 25 banks, right? I assume you are saying that this money would be more useful if it were employed to make sure the FDIC has enough funds to cover these people.

  • To the senators who are likely to (a) listen and (b) speak loudy. Two that come to mind are, in order, Chris Dodd and Russ Feingold. Dodd was front-and-center explaining how dire Paulson’s message was earlier in the week. But he’s no fool. That just tells us exactly how like the Iraq War resolution this tactic is. And he may just hear you if you say this to him now.

  • It is funded entirely from fees paid by the banks. It has already stated that with any significant bank failure it will have to turn to the Treasury to activate a line of credit. I suspect, though, that ultimately it will not be able to pay back that line of credit, and will effectively need to be recapitalized by the government. That’s where I think the $700 billion ought to go.

    By the way, last week Paulson unilaterally extended a government guarantee over 100% of all money market assets held by the public. This is vastly larger than the $100,000 per account or CD that is protected at a bank through the FDIC. The American Bankers Association instantly protested this, because now it is better for the public to shift their money to money market funds and out of banks.

    I should give some history here. The money market fund was invented by Merrill Lynch to act like a checking account but not be subject to bank rules. It grew tremendously popular and the investment banks set up their own insurance fund to act like FDIC insurance. Obviously that fund has proven wholly inadequate or we would not have seen the run on the money market funds that occurred last week. The banks have always hated this product, and now they are faced with two indignities: the investments banks have won their long coveted access to the Fed discount window, and their money market accounts are now superior in safety to bank accounts. This irony is not missed by the bankers. Of course, the other irony is that there are only two investment banks left. If they go down, maybe the money market fund concept will be retired and we will all go back to checking accounts.

  • … in addition to discussion, discussion, discussion, start a campaign. Get your community involved, initiate a petition, fire of letters to your senator and others. Lead … and others may follow.

    “While not a Playboy reader, she invites a male acquaintance in for a quiet discussion of Chagall, Nietzsche, jazz, sex.” – not a Hugh Hefner quote

  • Naked Capital, By Yves Smith, September 21


    Yet as we discussed, the plan makes no sense unless the Orwellian “fair market prices” means “above market prices.” The point is not to free up illiquid assets. Illiquid assets (private equity, even the now derided CDOs were never intended to be traded, but pose no problem if they do not need to be marked at a large loss and/or the institution is not at risk of a run). Confirmation of our view came from a reader by e-mail:

    I worked at [Wall Street firm you’ve heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It’s supposed to be members only, but there’s no way to enforce that if it’s a conference call, and you may have already heard from other staff who were listening in.

    Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won’t sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that’s because he didn’t want to admit that the government would just keep offering more and more.

    “Frankly, we’ve lost a lot in recent years.” – General Colin Powell

  • The question now is whether we are going to give the financiers a huge bailout just before it starts, written in terms that cannot be canceled.

    This is the Paulson deal for his Wall Street buddies just before the end of this administration and he goes back their or retire on his hundreds of millions while millions in the Third World starve to death.

  • Two words: Opacity and complexity.

    First, complexity. Most people, even serving in Congress, aren’t fluent in economics or mathematics. They have no idea what’s happening and can’t understand it when it is explained clearly to them. They just don’t have the tools necessary.

    Secondly, opacity. A lot of the problem is buried behind company firewalls and in arcane accounting. This is why the bailouts aren’t working. No one knows yet where anyone else stands. This is why banks aren’t even lending to each other. Until all this toxic waste is cleared out, these institutions will be either on the verge of bankruptcy or zombified.

    That’s why a depression is inevitable to correct this mess. It will take years of pain to unwind.

  • I have some CDs with ING Direct, almost at maturity. I haven’t heard anything about them, they are never mentioned whenever trouble is discussed… It’s impossible to know for sure if they are OK or not, right? I’m wondering if I should just transfer all funds to my local employee credit union (associated with a large University).

  • visit this site Is your bank in trouble?

    I believe ING is too diversified to pose any problems. But better wait for Numerian’s opinion.

    ING Groep N.V. is a Dutch hybrid of banking, insuring, and asset-managing services. One of the world’s largest insurance and financial services companies, its operations are focused on its home market of Benelux, as well as Asia/Pacific, Europe, and North America. Key products include life and non-life insurance, pensions, and retirement services. Its banking operations include wholesale and retail banking and mortgage lending. The company’s ING Direct business offers online retail banking for individuals in nine countries in North America, Europe, and the Pacific. ING provides asset management for individuals and institutional investors through both its insurance and banking businesses.

    “While not a Playboy reader, she invites a male acquaintance in for a quiet discussion of Chagall, Nietzsche, jazz, sex.” – not a Hugh Hefner quote

  • “These capitalists generally act harmoniously and in concert to fleece the people, and now that they have got into a quarrel with themselves, we are called upon to appropriate the people’s money to settle the quarrel.”

    –Speech to Illinois legislature, Jan. 1837.

  • Giving personal financial advice over the internet is always difficult. I don’t know, and shouldn’t really be told anyway, your basic financial circumstances. It matters how many accounts you have at an FDIC insured institution, whether they are all in separate family names, whether any of them are joint, and how many of them exceed $100,000. Moreover, are these checking, money market, or savings accounts, or are they CDs issued by the bank? Are they with the brokerage arm of the bank, which does not receive FDIC insurance.

    Given all these complications, I suggest you check out Adrena’s reference and see if any of the names match up exactly with the name of your bank. ING Direct, for example, doesn’t tell you much, whereas ING N.A. tells you it is a national association and part of the Federal Reserve, so it will carry FDIC insurance. One simple way is to ask the bank – rest assured they are getting this question every day (I really surprised my bank a few years ago when I asked these questions – they thought I was from outer space. Now, however…). Check the material they send you – the statement should identify whether there is FDIC insurance, or if it is a brokerage account, SIPC insurance, which is not directly connected to the federal government, by the way.

    Credit unions are much trickier propositions, not normally tied in to the banking system with FDIC insurance. They probably have some private insurance, but if it isn’t FDIC you are in a somewhat less safe category. But I say that advisedly – less safe if the credit union fails, but the risk of that failure may be not as great as with the typical bank. There is probably a safety rating service for credit unions that you can find on the internet.

    Complicated waters, aren’t these?

  • they absolutely use the poor underfunded FDIC insurance as a selling point.

    Good grief it’s practically before any of the financial details of the type of account!

    (especially IRA accounts (FDIC up to 250,000, says MetL ife Bank NA:-))< sub>
    “The mythical John McCain is an affable, straight-talking, moderately conservative war hero who is an expert on foreign policy” – Bob Herbert

  • a couple of your points.

    First, the “contagion” thing. How does keeping alive an insolvent bank or broker cause more trouble?

    This seems to be a key point of yours. Is it because other banks and brokers will continue to do business with the diseased bank, and so be subject to ripple effects when it ultimately goes down? But aren’t those ripple effects just as great if the diseased ones are closed now? Or am I completely in left field here.

    Please explain what you mean.

    Second, the Treasury is pushing hard on the idea that a depression will hit the whole world if $700 billion is not approved, no strings, by noon Monday. Seriously, that exact thing was said to Repub Congressmen.

    What is supposed to be the mechanism — EXACTLY. This is not clear to anyone. Not on the Hill.

    Without understanding the exact mechanism, there is no coherent way to suggest a stopgap.

    I know your point about saving the system with tough love, but no one will listen to that part unless there is a Step One that tries to prevent the world depression. Come hell or high water, an effort will be made in that direction.

    What would be most sensible?

    At the moment, pols are floundering around with piddly ass-covering stuff like limiting executive compensation. Worthy, but hardly the main point.

    We need a plan that targets the depression, as well as the system problems. And we need a story about the situation that will convince the public that this is the way to go.

    Most likely, we will flush $700 billion this week — for no particular purpose except not to accept responsibility for the worldwide depression that Bush is trying to put at Dem door.

    Worse mistakes could follow. We need to try to steer public debate toward forcing Congress to hold hearings and grapple with the problems in a serious way. I suspect that the next 6 months will be key.

    The pols do not understand, and will want to hide.

    We have to organize some sort of sound machine to shame them into more responsible action. But that is not possible without some understanding ourselves.

    Please keep trying to articulate the situation. I will keep trying to understand what you are saying.

  • Paulson is off the wall. If the crisis were as bad as he makes it out to be in the immediate future, the markets would already have tanked. He is bluffing to prod Congress to act. More disaster capitalism at work.

  • Keeping alive an insolvent bank merely prolongs the process, probably for years. This was the problem with the Japanese deflation of the 1990s. The government refused to ever reveal the true extent of their losses and their lack of capital. Eventually the market and everyone knew the banks were insolvent, and after 5 or so years forced mergers began to take place. It should be noted that the Japanese bankruptcy court system is not very highly developed and probably couldn’t have handled complex bankruptcies very well anyway. There is no such problem in the U.S., and another important fact is that the FDIC takes over insolvent banks as a sort of debtor-in-possession. Wouldn’t it be better to face up to the facts now as to who is and who is not able to survive, and beef up the FDIC to deal with the situation. There is no reason there should be consumer runs on these banks.

    And by the way, in the midst of last week’s “collapse of civilization”, there were no runs on the banks. The depositors weren’t concerned. The run was on money market funds which did not have any access to FDIC insurance. The FDIC insurance is the real bulwark here to prevent public panic, and that is why I keep coming back to one point for Congress: focus on the FDIC and if need be spend your billions there. This protects the average citizen.

    Here’s another interesting point. Throughout this crisis, the SEC has never gone in to the investment banks and investigated their L3 portfolios. Isn’t that very odd. Wouldn’t the government be interested? Why is this bailout being rushed without a proper audit of what we are buying? No bank merger would ever proceed in this fashion.

    Something else stood out this week. Paulson opened the door to buying student loan and auto loan securities. This seemed to slip by all commentators, but it is both curious and important. Have you heard of any problem with people not paying on their student loans or auto loans? Yes, delinquencies are up, but not to levels banks can’t handle. Maybe this means nothing; maybe Paulson just wants access to everything in a bad bank to help clean it up. Or maybe he sees bigger problems down the road, like I do.

    Once again, it seems to suggest these big banks are walking wounded already.

    As to the sound machine that needs to be organized, I don’t think all the clear and short explanations in the world matter to this Congress. The only thing that they will notice is the sound and fury coming from an angry electorate. By now I have read at least 10 good articles on the internet explaining what is wrong with this bailout. If Congress and the staff are not paying attention, it is a willful form of ignorance that we cannot correct by honing and refining our arguments.

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