Nice Going

The proposed Federal bailout bill died in the House today, and the markets plummeted in response, causing a trillion dollars or so of America’s wealth to vanish into thin air. I have no doubt whatsoever that the bill, a top-down rescue plan that rewards a great many powerful people for their catastrophic incompetence, is a foul, stinking thing, a grotesque and insulting mockery of responsible governance, and a violent and brutal buggering of the American taxpayer.

But ought it to have passed? Perhaps so. Perhaps not. At the very least it ought to have been brought to the floor of the House in a manner conducive to reasoned debate and bipartisan consensus. But it was not. Instead, in a gesture of breathtaking ineptitude, it was presented for a vote in the most polarizing and incendiary way possible by the Speaker of the House, Nancy Pelosi, who offered as prolegomenon a vicious, petty and carping screed about the Bush administration and the Republican Party. Ms. Pelosi, whose record as Speaker seems unblemished by any trace of leadership, intelligence, grace, or political acumen, has outdone herself today, and we are all quite literally the poorer for it. Imagine a responsible, persuasive, and dynamic stateswoman — a natural leader with shrewd instincts, a penetrating intellect, and the will to put the nation’s interests above petty squabbles of party and personality — and you will have imagined everything she is not.

The causes of this disaster are many, and there is more than enough blame to go around. The crisis is dire, and worsening by the hour. Would it be too much to ask our elected representatives, who hold the fate of the nation in their hands, to behave, just this once, like grownups?

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  1. JK says


    I’m informed she is the mother of five kids. That must be some kinda qualifier.

    But, unfortunately for the kids (I imagine) they’re all fed at I-Hop, or Micky D’s with all the cholesterolary fatty crap that makes good Medicare supplementals.

    Posted September 30, 2008 at 3:35 am | Permalink
  2. JK says

    Plan B?

    Or A?

    Posted September 30, 2008 at 10:39 am | Permalink
  3. chris g says

    95 dems also voted “nay” for that pathetic taxpayer giveaway! Bravo!


    Today, if Walmart or P&G wants to raise capital, the bond market will likely buy every bond they issue and only ask for a 2.5% coupon (interest that is deductible for the company). If the whiners on Wall Street want to raise capital… well, that’s a different story. They’ll have to compensate bond holders a little better.

    Ok, that sucks for the financial companies who provide us with credit cards and float payrolls but to solve it should congress give a $700 billion blank check to the ex-ceo of Goldman Sachs? Let the existing government intervention, that is less than 6 months old, do it’s job. Freddie and Fannie, in their expanded roles, are still buying these crappy mortgage assets (the new bill as written would’ve allowed the treasury to buy ANY asset, even non-real estate related), from any entity (regardless of CEO’s compensation level) domiciled in any country (hello china?). The compensation restriction only came into effect if the treasury took an equity stake. The only limit to foreign buying was to foreign central banks (which is a farse since most foreign central banks are intimately connected with the entire banking system).

    This wasn’t imperfect legislation… this was BAD legislation. The doom & gloom that coincided with it to get congress to swallow it was worse. I remember when capital was precious. I’m not saying things were better then but life didn’t suck.

    Posted September 30, 2008 at 12:35 pm | Permalink
  4. the one eyed man says

    1) It is inaccurate to say that the Paulson plan “rewards a great many powerful people for their catastrophic incompetence.” The “powerful people” who squandered their firms’ money have lost their jobs and their stock got wiped out. The management teams at AIG, Fannie Mae, Freddie Mac, Lehman, and Bear Stearns have all been ousted, and their stock traded down to nearly zero. The plan failed because of the popular but inaccurate caricature that the plan bails out fat cats at the expense of taxpayers. This is incorrect both because the fat cats got wiped out and there may not be an expense to taxpayers once the assets are ultimately sold or paid out.

    2) If it is “a violent and brutal buggering,” then let’s just say that there is a long history of pederasty in Congress. Cue the Mark Foley and Larry Craig jokes.

    3) Nancy Pelosi may have been less than gracious yesterday, but everything she said was demonstrably true. The notion that the Republicans voted nay because their tender sensibilities were upset after she said mean things about George Bush is risible.

    4) Those who pushed for broader lending by the GSE’s bear some part of the blame, but the Boston Globe piece is full of holes. The original redlining legislation was enacted because inner city minorities with the same credit qualifications as suburban whites were being denied credit because the banks simply would not lend in their neighborhoods. In any event, the mortgages taken out in the Carter administration were paid off long ago, and the tangible benefit from the legislation was an increase in home ownership which helped rescue many inner city neighborhoods.

    The American Enterprise Institute – hardly a liberal organization – recognizes that the toxic mortgages came long after the redlining legislation passed:

    “How did we get here? Let’s review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of “affordable housing.” They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse … Beginning in 2004, (the GSE’s) portfolios of subprime and Alt-A loans and securities began to grow. Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates, indicating that originators were scraping the bottom of the barrel to find product for buyers like the GSEs.”,pubID.28664/pub_detail.asp

    The Democrats pushed for more aggressive lending, but they were joined numerous Republicans and a Fed which kept their hands off. The ultimate responsibility for the solvency and lending practices of the GSE’s is OFHEO, which is part of HUD. So while there is a lot of blame to go around, the Globe’s contention that it is primarily due to Barney Frank and the Democrats is incorrect.

    Posted September 30, 2008 at 12:55 pm | Permalink
  5. bob koepp says

    I don’t know how to apportion blame to elected officials who might have intervened earlier. But I’m quite sure that that regulators and corporate board members both failed miserably to discharge their respective fiduciary duties. If ‘gross negligence’ means anything, somebody needs to be held legally liable for any damage that ensues.

    Posted September 30, 2008 at 1:18 pm | Permalink
  6. Malcolm says


    The Paulson plan indeed rewards a great many powerful people for their incompetence, and at the top of the list is Paulson himself.

    And you cannot seriously believe that all who profited from the trash-mortgage operation have been “wiped out”; there were hundreds of billions made at all levels in this orgy of irresponsibility, and much of that profit has been sequestered elsewhere. If you think that every broker who made millions on this is now headed for the soup kitchen, rather than merely facing the prospect of perhaps an empty bay in the six-car-garage of one of his houses, you’re dreaming.

    Furthermore, the idea that we taxpayers ought to be grateful to be able to exchange persent-day assets for pie-in-the-sky future resales of foreclosed properties, you are not invited to manage my finances.

    I quite agree that anyone who changed his vote because that simpleton Pelosi put her foot in her big fat mouth once again is hardly worthy of admiration. But that doesn’t mean she wasn’t stupendously idiotic to choose such a sensitive moment for another of her inflammatory partisan rants.

    Obviously I am not attributing the entirety of this enormous catastrophe to anti-redlining measures. Good grief. All I said was that there was plenty of blame to go around. There was a $70 trillion global pool of money that couldn’t find a home, especially with T-Bills at 1%; with no suitable regulation in place, the opportunity to make money was irresistible at all levels.

    Posted September 30, 2008 at 1:45 pm | Permalink
  7. the one eyed man says

    1) I don’t dispute that a lot of people made a lot of money from selling mortgages which went bad. However, they are not getting rewarded by the Paulson plan – they made their money long ago. How exactly are they being rewarded by the Treasury plan?

    2) The future returns are not pie in the sky, because the assets are being bought at a deep discount to their nominal value. Let’s suppose that the Fed buys a mortgage portfolio at 20 cents on the dollar, and when the loans are paid off or sold to a third party, they ultimately accrue 25 cents on the dollar. That would be a 25% gain. While the devil is obviously in the details, there is a strong case to be made that the Fed will make a nice profit because current market values are abnormally low because everybody is selling them at the same time. It would be like telling you that your house is only worth what you could get if you sold it in the next fifteen minutes. The hope is that government intervention will stabilize the markets and allow prices to return to their true value, which is the discounted cash flow from future revenue. The Fed will make money, lose money, or break even: it’s too early to know. The Wall Street cliché is that there are no bad assets, only bad prices. If the plan is well executed, it has the potential of not only turning a profit but also unfreezing the credit markets.

    3) You may not be attributing the origin of the catastrophe to the anti-redlining laws, but the Globe article points to them as the “root of this crisis.”

    4) If the government shells out $700 billion and doesn’t get a penny back, it will spend 6% of GDP. However, it will get something back, and possibly enough to repay the outlay or exceed it. But let’s assume that they lose one third of the money and it amounts to 2% of GDP. If the credit freeze continues, the hit to GDP will be well in excess of 2%. The spread between LIBOR and treasury bills – the most commonly used proxy for the unwillingness of banks to lend – is at an all time high. The three month Treasury bill is effectively at zero, which indicates that banks would prefer to keep their money at a standstill than lend it out. This is a catastrophic situation if it continues, and its dimensions would far outweigh even the most pessimistic estimates of the cost of the bailout.

    5) As you can tell, I am a big proponent of the Paulson plan. It is messy and unpleasant, but I think it is absolutely necessary. However, to anyone who would argue against it, I would ask a simple question: what’s your plan?

    Posted September 30, 2008 at 2:31 pm | Permalink
  8. bob koepp says

    Peter – I don’t want to argue about the wisdom or not of the Paulson plan — I’m not an economist.

    Even as a non-economist, though, I wonder whether “true value” is, indeed, “the discounted cash flow from future revenue”. I appreciate that “market value” represents what people are willing to pay, but I suspect that “real value” is something else entirely. Perhaps real value and market value coincide in an ideal world where every potential buyer and seller possesses “full information” and behaves in a “perfectly rational” manner. But that ain’t the world we’re in.

    Posted September 30, 2008 at 3:00 pm | Permalink
  9. the one eyed man says

    Bob: most investments — certainly stocks and bonds — are valued at how much revenue they will generate in the future, discounted against whatever you could get from a completely safe investment like Treasuries. While this is certainly unknowable now for the toxic debt the Fed wants to buy, at some point in the future it will be known and quantified. My point is simply that whatever this number is more than likely is as great or greater than what they Fed would have to pay now.

    Malcolm: say what you will about Pelosi’s “inflammatory partisan rants,” but it was Pelosi and Frank who reached across the aisle and acted in a truly bipartisan fashion. After all, they are supporting the Republican administration’s plan, as well as taking a big hit from their supporters. (If you don’t believe me, you should go to the forum in, Pelosi’s home town newspaper.) They certainly could have opposed anything which came from the Bush administration, but they put the country’s interest ahead of partisan advantage to push for a necessary but deeply unpopular piece of legislation. Unlike some politicians who come to mind.

    Posted September 30, 2008 at 3:12 pm | Permalink
  10. chris g says

    One Eyed Man, some points you made are mistaken.

    (1) The securitization system that enabled this debacle is still in place. It is a relative new thing and, while you’re right that the property appraisers and mortgage brokers won’t be directly rewarded, the conduit for these excesses (the “innovative” system of securitization that separates risk-taking from origination) will be strengthened by a bailout like this.

    (2) On this planet, there are plenty of deep value investors who can see underlying value of assets much more clearly than you think. If you see value in these assets, like you think you do, then I promise you they saw it (or didn’t see it) a long, long time ago. In fact, their sole purpose in life is to dig into stuff nobody wants and determine if there is value. Wall Street has searched high and low for these investors and they are not showing up. Wall Street cannot sell these assets because they are crap. This is not about liquidity. These assets are fraudulent assets built by fraudulent behavior. The taxpayer has no business owning them.

    (3) Anti-redlining? It’s bigger than that. Blame lack of regulatory oversight if you have to blame.

    (4) 6% of gdp is correct but this isn’t coming from gpd. Do you actually pay taxes? Out of 300 million population only 138 million file tax returns. Of those 138 million, 43 million pay zero taxes. This bailout works out to $7500 per cash tax payer (of course, they don’t split the burden evenly like I did).

    (5) It is not unpleasant… I have a plan: The solution is to let the previous bailout attempt work. It’s not even 2 months old! Fannie and Freddie have been given unprecedented power to buy crappy assets with tax payer guarantees. They’ve barely started. Giving away taxpayer money is not a solution. Don’t let the silly news panic you into supporting this. Those that have good businesses can still EASILY raise capital. There are still cash-rich investors on the sidelines willing to buy & lend.

    Posted September 30, 2008 at 3:14 pm | Permalink
  11. Malcolm says

    Pete, there are a lot of responsible parties who, rather than the tumbrel or the lamp-post, are getting their asses covered by this bailout — not least of whom is Paulson himself. This rankles, to put it mildly.

    As for 2), we have to borrow money to fund this thing. I think most of us would rather not force the taxpayers to borrow $700 billion to buy up this junk on the gamble that it may show enough of a profit to pay for itself later.

    Regarding 3), sure, it’s silly to suggest that anti-redlining is the only source of this problem. But it certainly prepared the soil by exerting a strong downward pressure on verification criteria.

    As for 4), we lost a trillion dollars yesterday. I agree that something must be done quickly. If you read this post again, you will see that it does not argue for or against passage of the plan.

    Posted September 30, 2008 at 3:18 pm | Permalink
  12. Malcolm says

    Welcome to the conversation, by the way, Chris G. Thanks for joining us.

    Posted September 30, 2008 at 3:19 pm | Permalink
  13. bob koepp says

    Chris G – Again, speaking as a non-economist, I think you are right on the mark when you say, “Wall Street cannot sell these assets because they are crap. This is not about liquidity. These assets are fraudulent assets built by fraudulent behavior.”

    Posted September 30, 2008 at 3:36 pm | Permalink
  14. chris g says

    Yeah, I’m a long time listener first time caller. I used to enjoy this blog because financial subjects were conspicuously absent. I watched a little c-span yesterday after the vote and there were plenty of blow hard congressmen talking about the bailout vote in context of religion and armegeddon; so I guess it does belong here.

    Posted September 30, 2008 at 3:40 pm | Permalink
  15. the one eyed man says


    1) The securitization system is in place, but nobody is securitizing any more because there are no buyers for the CDO’s or similar instruments. The market for these instruments froze up and died. In any event, one of the consequences of the bail-out will inevitably be much tighter regulation on derivative instruments, should the market for them ever resume.

    2) Not so. Merrill Lynch recently sold billions of dollars of CDO’s to a private equity firm at 21 cents on the dollar. WaMu and Wachovia debt was bought by J. P, Morgan and Citibank respectively. Large shareholders of AIG are starting to negotiate to buy the whole company, including the debt. Deep value investors ranging from Wilbur Ross to Blackstone have set up funds to buy distressed debt. There is a market for the securities, but the prices are at an abnormally low level due to all of the forced selling. We’ve had a vicious cycle where banks were forced to sell, which lowered the prices, which caused more banks to sell, and so forth. The idea is that by becoming the largest bidder for these assets, the Fed will reduce stress on the system and the vicious cycle will turn into a virtuous cycle, where rising asset prices reduce the need for banks to sell, causing prices to rise further and recapitalize the banks’ balance sheets.

    3) Absolutely agree. It was the author of the Boston Globe piece cited above who traced the roots of the problem to redlining legislation.

    4) True: the money is not coming from GDP, it is coming from bonds which are being floated to buy the distressed debt. However, this week’s Economist reports that countries routinely socialize bad debt from their banks, and the average bail-out is 15% of GDP. More importantly, because there may be no ultimate cost at all, the cost could be zero percent of GDP. In my view, whatever cost the bail-out leads to will be much smaller than the cost of an economy in nuclear winter.

    5) Fannie and Freddie can only raise capital when it is guaranteed by the Treasury. All of their bonds and preferred stock which were not guaranteed went to zero. Moreover, scaling down the GSE’s to a manageable size seems to be on everyone’s agenda. Maybe the top agendum on Treasury’s agenda. So I’m skeptical about this approach.

    Posted September 30, 2008 at 5:20 pm | Permalink
  16. the one eyed man says


    1) I’m not sure who the unidentified “responsible parties” are who “are getting their asses covered by this bailout” – sorry if this reads like a Zagat’s review – but Paulson is not among them. He was a very wealthy man when he went to Washington and gave up the megabucks he made as head of Goldman Sachs to get on the public payroll. My guess is that when he took the job, he had to put everything in a blind trust or turn it into Treasuries to avoid conflict of interest. So I’m not sure how he benefits personally from any of this.

    2) I understand that we have to borrow money to pay for it, and that’s regrettable (and, in Paulson’s word, embarrassing). However, we’re in a bad situation, and the only question worth asking is how to get out of it. Better to borrow money with the hope of having it repaid later than to lose a greater amount of money from diminished tax receipts because of an ailing economy.

    3) I’m not an expert on fiscal legislation from the Carter era, but my (limited) understanding is that the legislation had nothing to do with verification criteria. The problem was that borrowers with perfectly good credit couldn’t get mortgages in inner city neighborhoods because the banks simply wouldn’t lend there – the origin of the phrase is that they drew a red line on a map around these neighborhoods and wouldn’t write mortgages within the red box.

    4) Forgive me for thinking that when you called the bill “a foul, stinking thing” which constitutes “a violent and brutal buggering of the American taxpayer” that you were opposed to it.

    Posted September 30, 2008 at 5:37 pm | Permalink
  17. Malcolm says


    1) I wasn’t referring to Paulson personally benefiting financially — just that Treasury, whiich he runs, was being rewarded for its stewardship by being given a big blank check, immense power, and scant oversight.

    2) So it doesn’t matter what the deal actually is? We could be paying vig to Paulie Walnuts at 50% a week and that’s fine?

    3) Oh no, there was a lot more to it than that; my understanding was that there was a great deal of downward pressure on qualifications.

    4) I don’t think there is anyone out there who doesn’t think this is a horrible, stinking mess of a bill, and an insulting cornholing of the taxpayers. I wasn’t saying yea or nay because like you, I realize that it might be worth doing anyway.

    Posted September 30, 2008 at 6:49 pm | Permalink
  18. the one eyed man says


    1) Fair enough – in reading your inference was that in “getting (his ass) covered by this bailout” I thought you meant financial gain. I’m not sure if the Treasury is getting rewarded for its stewardship, as the Fed and OFHEO are also stewards. Someone has to do it, and the Treasury is probably better equipped than any other government entity.

    2) Of course it matters what the deal is and how it is executed. Any public enterprise can go awry if, for example, it is run by hacks and cronies. However, Paulson ran the most successful company on Wall Street, so I trust him to set up an operation which operates responsibly and in the public interest.

    3) Well, maybe so. I’m disinclined to spend a lot of time researching Carter administration legislation.

    4) I’m not sure if it is truly a cornholing (is that the technical term?) but your remark reminds me of the time when Frank Zappa performed at Smith College. He informed his audience that being at Smith was “only five per cent better than being at a convent” and the way to rectify the situation was to “get reamed.” Words to live by in these troubled times.

    Posted September 30, 2008 at 7:14 pm | Permalink
  19. chris g says

    (1) Nah… the act of securitizing debt is flawed. The very idea of having one group of people originate debt and another group fund the origination is not a good structure. Academics will argue that it is a modern miracle. I’m saying it is flawed because the incentive is wrong. By nature it leads to laziness. How many debt related boom and bust cycles do we have to go through to prove this? The structure, the idea, the ratings agencies, etc… are all on the wrong side of the risk-taker (i.e. the investor).

    (2) I’ve heard that, too. If value investors are paying 21 cents on the dollar then it’s likely worth 32 cents at most. Value vulchers traditionally want a 50% margin of safety. Wall street is trying to model this stuff as being worth 60 cents.


    (4) don’t know what to say… just because everybody else does it doesn’t mean it’s not inflationary or won’t cause higher taxes. In the end, when the gov’t spends more than it takes in we are responsible (despite our freakishly low cash tax rates). Inflation is an insidious tax… now European vacations are off the table for some Americans thanks to our accommodating monetary policy and debt load.

    (5) Fannie and Freddie were given capital by the gov’t when they were taken over ($200 billion authorized). They don’t need the capital. The thing they got that made them golden was that they can now buy even crappier mortgages and securitize them. Buy something that’s worth 50 cents, have the government stamp it, then sell it for $1. Rinse and repeat. It’s a printing press. All fannie & freddie bonds are currently good & trading at full price with the full backing of the u.s. government (

    The pfd stock and the common stock are “nearly” wiped out… but these are different from the bonds. These are equity investments in Fannie and Freddie as businesses (a stand alone business, pre-gov’t intervention). The common and pfds will be completely wiped out if the government’s $200 billion that has already been authorized is actually tapped. The bonds will still be fine no matter what and they can keep doing what they do. When the $200 billion is gone the government will likely give them more but their performance will be visible.

    We’re a nation of debtors. Everybody fears the bond market. One of my favorite quotes is from James Carville: “I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody.”

    Posted September 30, 2008 at 10:29 pm | Permalink
  20. 1) I disagree. I don’t think there is anything inherently wrong with securitization. The fact that they were mispriced and opaque does not mean that the instruments themselves were flawed. I think that with transparency, regulation, and a means to price them they can add liquidity to the market. If done correctly, they can be a substitute for the GSE’s because they perform the same function while spreading the risk among many players.

    2) If the value range of an asset is 21 to 32 cents on the dollar and the Fed buys it for 26 cents – or 74% below par – then it has made a good move, especially if the asset ultimately pays out at 73% below par.

    3) There will undoubtedly be unintended consequences from the bail-out plan, but the question is whether it is better than the alternatives. I think it is.

    4) I don’t want to be put in the position of defending Fannie or Freddie. I think that their function could probably be done better by the private sector (see #1 above).

    5) People fear the bond market because it is unsentimental and imposes its own vigilante justice on the economy. It imposes a discipline which can be harsh but is vital and necessary.

    Posted September 30, 2008 at 10:57 pm | Permalink
  21. Malcolm says

    I’ll agree with Peter on that first point: the problem here isn’t the securitization per se, it’s that fact that what was being securitized was fundamentally unsound, yet managed to be promoted to trustworthy ratings. In part this was due to the fact that mortgages in the past had a predicatable, and low rate of default; those valuations, however, were based on historically far higher levels of verification of the borrower’s ability to pay than had been going on recently. We had got to the point of borrowers having to provide no evidence whatosever of the slightest creditworthiness.

    Posted September 30, 2008 at 11:20 pm | Permalink
  22. chris g says

    Separation of church and state has made us into to the Godless heathens we have all become… errrrrr wait right analogy, wrong blog. Sorry. The reason securitization is fundamentally flawed is because the risk taker is separated from the risk maker. Because of this it always always always leads to the same outcome. It starts out nice. Loan officers are strict. They make good clean money for bond holders with nice conservative loans. Other bondholder wannabes come into the market. They want a piece of the action. Originators oblige. Financiers innovate. Regulators adjust. Loopholes are found. It’s a competitive world. Before you know it they are paying loan officers to go door-to-door to originate mortgages. The loan officers just care about meeting their quarterly quota and getting their quarterly bonus. They can get bigger bonuses if the appraisers cooperate so appraisers are chosen carefully. If an appraiser undervalues a property he is not likely to be called back. There are many appraisers out there. The originator then pays Moodys to rate the mortgage pools. Moodys is not paid by the investor. If Moodys doesn’t play nice then they’ll go to S&P. S&P and Moodys compete to rate as many bonds as possible. The originator then pays MBIA to provide insurance. If MBIA won’t do it for the right price then they’ll pay their competitor, Ambac. All these competitive forces are working against the bondholder. That is why it is broken. It’s a beautiful thing when it’s working but like a highway overpass, it’s a death trap when there is that occasional freezing rain.

    Posted October 1, 2008 at 1:20 am | Permalink