The Republican alternatives to the Paulson bailout

Justin,

I can't help but feel like the approach here is wrong. Is it not time to bring out Roubini, Greenspan, Volker, Fox, and Buffet...all of the big guns need to go to hill...like yesterday.

Further, I am perplexed by the response by House Republicans approach. They admit there is a problem, but they don't know what to do that will actually work. The guys that do know what will likely work they won't listen to. And the people they are listening to, their constituents, have no clue what a CDO or MBS is or how significant a systemic crisis it about to take place.

Will they fall upon their sword of ideological purity and risk global meltdown or do they sheath the sword and find themselves forced to leave the battlefield? Ultimately, this has to be one of the toughest choices Republicans have ever faced. They are damned if they do and damned if they don't. My gut tells me that they are just stalling for time. They are hopeing against hope to survive politically, but I think they are doomed unless there is an improbably recovery without any government intervention. Is that even possible?

Am I wrong here or is the world upside down on its head? This is an incredibly dangerous game of brinksmanship. I guess what all of these politicians fail to realize that sometimes even if you win the battle you still lose the war. Sometimes, you just can't win, so I would think it would be better to lose honorably. Additionally, the fact that so many Republicans are rebelling against Bush and Paulson indicates a horrible lack of confidence in this administration. Did that just arrive or should that same doubt permeate other decisions.

I sit in my house thinking this is the greatest political calamity of any party in my lifetime (all 34 years of it). You're got Republicans running away from Bush and in some ways running away from John McCain the further his poll numbers go down.

This is simply madness. Even if they manage to get re-elected (Democrats and Republicans) but there is serious downturn these guys won't make it through the next time. That is almost a guarantee. I don't see voters forgiving politicians for allowing a serious situation to become desperately out of control.

If the bailout does go through (and it has to) couldn't Paulson do something like what FDIC Chair Sheila Bain is doing for IndyMac? She halted foreclosures on home loans and contacted delinquent borrowers to try to restructure their mortgages. She wants to reduce future defaults, improved the value of the mortgages and cut servicing costs. This would be a lot of detailed work but it might well pay off, particularly if the government can negotiate a good price for the stuff they buy.

What Dad said.

Justin:
My Guess. The Democrats are the effective owners of the Bush bail out plan in the public's mind because they have majorities in both houses and have been out front in talking to the press about the need for passage of the bail out. The House Reps and McCain undermine any plan so it just stalls in negotiations. Then, the credit markets do seize up and the economy tanks. Rep: "This is what happens when the Democrats, the kids, are in charge. They wreck the economy. They could have passed a rescue plan and saved us, they have the majorities in both houses, and Bush's support, but they're too screwed up to be able to save us. Vote McCain and the Republicans will save you from this economy which the Democrats wrecked." If the economy does not tank, "see, we were right all along." Sick, yes. A political winner, good chance. "The Democrats can't win and the Republican can't govern" You can't have much more fun than this!

"I'm no expert in this, but my initial thought is that Cantor's plan wouldn't be a markedly better deal for taxpayers than Paulson's."

Lotsa ways to look at this, but consider best case / worst case. Under Paulson (In Principle?) taxpayers end up holding control of badly-damaged banks and brokerages.

Under Cantor, worst case is that after a year of premia, taxpayers pay out the total amount and get nothing. At which point we have an Uncivil War over the Giveaway.

They, the Republican party, are obviously not negotiating in good faith. I predict they are going to be punished come November.

Hank Paulson has one of the sharpest financial minds in America. What is it that has got him in a panic? Demeaning himself by kneeling before Pelosi? The massive remapping of Wall Street, record breaking bank failures, the near bankruptcy of AIG, trillions and trillions of dollars of liability lurking in the opaque global CDS market, over leveraged hedge funds on the brink suffering the same fate as AIG, trillions of boomer retirement assets at risk, the USD on the verge of diving, creditors like China wondering if they will have to pull the plug...The list goes on and on.

Paulson and Bernanke can't tell you what is going to happen next. It is the proverbial Black Swan getting ready to fly in. Words like depression and financial apocalypse are actually apropos. This is the so called financial contagion. That is what is frightening the bailout boys.

Whether or not you agree that a bailout is the right way to go...what is not right is to politicize this sorry national affair. This is precisely what McCain and the Republican party have done. Grandstanding at the expense of Americans.

Its their boy in the White House, its their financial pig sty and it is their bailout.
Plain and simple.

I don't care what they say. It is blatant and disgusting.

And...I don't care if Mr. McCain abstains from attending all of the debates.

WilliamBanzai7

Ballad of John McCain
(to the Melody of the Ballad of the Green Berets)

WilliamBanzai7

Wall Street bailout do or die
Fearing not as his campaign slides
He who means not what he say'in
He's their man, Big John McCain

CHORUS:
He's got wings less finance brains
He's their man, the grand old best
They will vote, for TARP today
But only if he first says yes

Trained to babble when he speaks
Trained to dabble economics
He will babble day and night
From John McCain its double speak

CHORUS

Back at home waits the GOP
Did John get his foto opp-ortunity
Has he sold the public's best
Leaving Wall Street its request

Hes got wings upon his chest
Hes their man the GOP's best
He's a man we'll detest one day
If he wins election day

The capital gains cut raises the value of all financial assets because they are worth more to new buyers who can take advantage of the reduction. It might not be enough to solve the problem, but it will help at the margin.

And if these banks had gains elsewhere, they obviously wouldn't be in this mess.

Doesn't the same basic question asked of the Paulson-Dodd Plan apply to these proposoals: At what value?

Discussion over Paulson-Dodd has highlighted the limited impact of buying at current 'fire sale' values against the taxpayer losses associated with values approaching 'term value'.

Take the insurance proposal - is the government to insure at current values (protecting against further losses, but doing nothing to aid in bank recapitalization) or at something more toward term value (immediately placing said insurance fund in the red)? A similar set of options can be laid out for the capital gains tax suggestion. (also the cap gains suggestion really makes that joke about tax cuts being the Republican solution to everything sound true: "Got a head cold? Rub a little Tax Cut on it and you'll be good as new")

The only thing vaguely better about the insurance plan is its detached quality - possibly not a bad starter model for a long term fix. But since when is insurance taken out after the crisis is underway a good idea (can I buy property insurance after the fire?). And there is the administrative complexity of such a set up. I can only read these House Republican suggestions as a recognition on their part that there is a problem, but the problem rises to nothing near the crisis threshold. This is the Hopeful Nero position, right?

Justin,

Have you seen what James Galbraith is proposing?

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092403033.html

What Dad said. I believe that's the "cram down" proposal, one of the things the Democrats want, but the Bush administration has been pushing hard against.

Never mind whether it's a good idea or not, I don't even understand how the "insurance" idea is supposed to work given that most of these mortgages have been securitized and then sliced and diced into various tranches. I doubt Cantor knows either.

Calling for a moratorium on dividends is sensible though. Props to Cantor on that part of the proposal.

Pointing out that jj7 is being silly might be considered be rude, so I won't.

I'll just ask: Why would anyone currently holding the assets give a flying **** about reducing the tax on capital GAINS?

If there were gains on the things, no one would be panicking over selling them.

So the "marginal" gain projected is the delta of the tax rates multiplied by the projected value of the assets in the next few years from the purchase value.

In most of those cases, the current holders would be experiencing less of a LOSS (and therefore not subject to capital gains tax), while the new owners would be receiving a tax break that would not have helped the financial position of the asset holders one whit.

So there would be the p*ss*ng away of major tax revenues for no reason, with no gain accruing to the collapsing institutions, the taxpayers who will have to clean up the mess, or the government.

I'm not an expert either, but I can do basic maths.

The Republican Study Committee proposal reads like previous tax cut initiatives that have led to record deficits.

The suspension of Mark to Market would allow institutions to leverage assets worth a fraction of current market value further leading to long term financial instability. Ignoring that assets no longer have face value borders on the absurd.

The proposal is a band aid combined with a tax give away.

In the regulatory reform proposals there is a lack an understanding in the root cause, lending money to borrowers not equipped to pay the loans back. I think this can safely be deduced by subprime practices of giving loans to people with poor credit history and in many cases allowing them to state instead of verify income. This ineptitude is unprecedented on the part of Wall Street, who established these guidelines, and the lenders, who have no liability for putting people in loans without exercising some diligence in analyzing the ability to pay back.

The proposal does not recognize the millions of homeowners who have good credit and lost a substantial part of net worth in decreased housing values caused by the collapse of subprime lending. It also does not recognize that some of these borrowers will now lose credit ratings because of an inability to sell a home at reduced current market prices and subsequently forced into foreclosure.

The Cantor plan is akin to buying auto insurance after totaling your car. What insurance company in their right mind would issue that policy?

He says that the plan is better because the corporations are now forced to pay the premiums with their own money, but where will the money for the payouts come from? The taxpayer of course.

I recently got quoted $30 a month for $250,000 of term life insurance. Using that metaphor, it's like the company (taxpayers) paying my beneficiaries 250,000 immediately and then paying their $30 a month premium. By my calculation, it would take around 700 years to pay enough premium to pay back the payout.

Not a good idea.

The Cantor plan sounds like an extension of PMI.
There seems to be some confusion, with commentors saying that the "Securities" have not found a price in the marketplace. The securities, however, cannot be priced because nobody is sure how many of the mortgages they are based on will default. With this extra PMI, that answer would be "zero".

What Is PMI?

PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home's value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.

Benefits of PMI

PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.

What's more frightening than this financial crisis is the speed at which elected officials and the general public seem to be running toward socialist solutions to the problem. In my opinion, this whole crisis is nothing more than a fraud being perpetrated on the American people, not by Wall Street, but by our elected officials. The hysteria that started a couple of weeks ago as Paulson-Bush-Bernake announced we needed a $1T bailout is now self fulfilling as banks hold commerce hostage while waiting for their check from the government.

This predicament plays well for the Democrats who are almost seem gleeful to usher our country further down the slippery slope of government control of the economy. This year it's the banking and housing sectors, next year the health care sector. The free market principal that we have lost in America is that sometimes you win and sometimes you lose, which these days has been replaced by the idea that we can always borrow more and delay negative outcomes indefinitely.

I fear we are at a crossroads and about to move beyond a boundary from which we will never be able to return.

[...] insurance plan was a bad idea, seemingly ginned up on the fly by Eric Cantor so it would at least seem like House [...]