Funding the Bailout: A Contingent Surtax on the Rich

Robert Waldmann:

What Is to be done?, by Robert Waldmann: 
OK what ... to do now that the House Republicans (and some Democrats) have voted down the Paulson-Dodd-Frank bailout bill.

The contingent consensus of the Left Blogosphere seems to have been to go for the Swedish solution if the Paulson solution is rejected -- that is nationalize banks with inadequate capital. I think this is still politically impossible. Even if the Democrats go alone and Bush is afraid to veto, the blue dogs will be blue dogs.

I think 2 complementary and more moderate proposals might pass over Republican objections and save the financial system. They are, of course, exactly what I have already proposed here and here.

First preferred shares. Economists of all ideologies agree that what the banks need to do now is increase their equity by selling shares. ... I think a bill which allows banks to sell a lot of preferred shares to the Treasury and makes sure that the Treasury will lose money only if the bank goes bankrupt might make enough sense ... that it would be a political winner. See the old post for details.

I add one clause -- a contingent surtax on the rich. Withhold an extra 10% of income over $1,000,000 and, each year, return the part that wasn't needed to cover losses in the Buffet X 100 plan (plus the chained 3 month t-bill interest rate). This is very much in the interests of the rich as they will get their money back and the financial system will be saved. The under a million crowd will be protected.

Also squabbling over exactly what to do with the profits that the Treasury will make might convince people that there will be profits (I think there will be if the purchase is at share prices as of today September 30).

The other is Toxic Sludge Inc....

I think these ideas might be popular enough (both have guarantees that they cost most people nothing and don't add to the deficit long term) that the Democrats can afford politically to pass them over Republican objections.

I've proposed something similar in terms of paying for the bailout, but instead of taking the money up front and then refunding it if there are no losses, we wait until we know how much the bailout costs, then raise taxes progressvely through a temporary surcharge of some sort, e.g. as above. If there's a surplus rather than a loss, then there's no need for the temporary tax increase. The effect is the same, but somehow the plan above seems politically more platable.

Comments

[hari]

It's unbelievable that academic economists still follow their instincts for a bailout - while political system is refusing to budge. Why?

Whatever the variables, Oct is usually month of recknoning by historical standards. Recall Oct 1987!

My instincts - ex-Goldman dealer will seek help from SWFs to defray cost of bailout, if that's the final alternative to push for him, in exchange for what(?).

Congress is apparently and congenitically against bailout of this fraudulent mechanizations by hi street - not likely to lift a finger for its rescue...unless they're offered some substantial sweetners.

Swedish model will not fit American capitalism at this stage of self-destruction. Nor is the culture suitable for it.

So let the academics publish their bales of bailout solutions and watch it all vaporise incessantly....

[Bruce Wilder]

The modified-Paulson plan has a clawback provision, just not one that is particularly believable. And, it has equity warrants -- again just not believeable. And, limits on executive compensation -- not believeable.

But, the critical problem is that it lacks any kind of logical method for determining how the losses will be realized, and the industry will be restructured. For that, we are to rely solely on the person and point-of-view of Paulson, himself.

You don't have to tax rich people, generally, to finance this plan, if you follow a sensible policy of forcing the people, who lost money, to lose the money they lost. And, just leave it that.

Instead, we have the ridiculous prospect of authorizing Henry Paulson to decide who will have the government lose the money for them.

Government does not need to be in the business of subsidizing these losses. That's not a sensible policy. The government just needs to be there, to make sure that there's enough new capital, available in a timely way, to replace that lost to keep the system of credit and payments operating.

[esb]

Of course Paulson is not the right man to make the calls, in the same way that Bush is not the right man to be President at this moment in time.

What amuses me most here is that Paulson (when at GS) was accustomed to working through his internal perception management team to create supply (or demand) in whatever item of paper he was interested in acquiring or disposing.

Now, the perception manager through whom he is working is the buffoon George Walker Bush, who will be "on" again later this morning.

This must be pure hell for Paulson.

Whenever I contemplate the relationship of the two in this dance I experience an uncontrollable desire to laugh.

That said, and in response to Mark Thoma, of course its all about the taxpayer equity or lack thereof.

Just get the stock and be well done with all of this. And the hell with taxation. Just get the stock and do not pretend to be getting it, as Pelosi wanted to do, obviously in response to lobbying.

If the plutocrats do not like that, then the hell with them.

Take it regardless.

[hari]

Asian markets are giving sign of global trend(s) that a recession is imminent now given the failure of Congress to bailout Wall Street. What if a global recession sets-in and there is nothing politicians can do to avert it?

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

#My reaction to Pelosi's closing argument on the Plan during the Congressional debate was esentially her avoidance of even praising (or even looking at!) anyone from the opposite ailes for supporting the process of pushing the Plan. It was a tactical triumphant card which she used - maybe she had just spoken to BO (who knows) - exclaiming her horror at the $700 Billion bailout provision of Paulson/Bush. She repeated her horror more than once! Was she antagonizing oppostion or simply providing a political wedge for the roll call vote? I suggest she was like a matriach defending her side...and also suggested in few weeks Congress will be renewed and so on.

SO, if you want to argue with Pelosi's judgement - you'd need to also argue with BO disposition during the debate.
BO is definitely boyed by the trouncing of McBush tactics since its own side killed the Plan!

The public is reading the tea leafs of this encounter and will surely vote their conscience in a few weeks, me thinks.

[Robert Waldmann]

Thanks for the link. I go for grab it now and give it back later because I think soak the rich is a political winner right now (I always think it always is) and because I don't want to ask people to trust the Federal Government to actually impose a contingent tax on the rich.

The difference is really really subtle. I didn't know you had proposed it first or I would have linked (sorry).

[Dunc]

Regarding contingent vs deferred taxes: make hay while the sun shines. If you don't tax the rich now while you have them by the balls you'll never see that money.

[Progressive or Regressive]

Funding the bailout with a progressive surtax on the rich is a far better idea than funding it with the regressive inflation tax. As a matter of fact, the regressive inflation tax should be completely eliminated, and the progressive surtax on the rich used to subsidize short interest rates (when necessary).

[Lafayette]

The God-Almighty Market Solution

Article: Also squabbling over exactly what to do with the profits that the Treasury will make might convince people that there will be profits (I think there will be if the purchase is at share prices as of today September 30).

It is difficult to understand this particular bit of the larger squabble.

The bad debt being repurchased is in the form of realty-based SIVs. Why should they not go to the Treasury, if earmarked for affordable residential housing. Yes, the price must be right, but we can only know that after and not before the fact. So, we take a stab at the right price based upon the information we have.

In fact, why not, out of the ashes of Fannie and Freddie, create a GSE that does correctly what "Market Forces" were clearly inept at doing -- blinded, as they were, by greed to perpetrate fraudulence.

Some say the subprime mortgage market shows clearly the non-need for Fannie and Freddie type institutions. I say just the opposite is glaring us in the face. The Market Solution has a tendency towards systemic failure, in some highly particular instances, because greed is allowed to prevail over prudence.

The solution, say some, is more policing or supervising of markets. Well, how do you do that when a Replicant President can get a Replicant Congress to bypass state laws that protect home purchasers? Or a Red Chairman implements, almost single-handedly a low money-rent policy in the fixated idea that it promotes uniquely economic development. When, we have seen, in the wrong hands it produces the opposite.

American needs, methinks, a model low-cost realty-orientated GSE Credit Institution, run by Civil servants. Because it is government supported and run, it should, as F & F did, benefit from lower cost access to the money markets. But, unlike F & F, it should not be investing in subprime mortgages foisted by hair-brained private credit institutions -- subventing Congress by saying that such manipulations are consonant with its charter. Bollocks to that. Fool me once ... etc., etc., etc.

We need an honest credit agency that focuses on First Time Credit Worthy Buyers. Once an individual gets themself onto the realty merry-go-round its up to them to work hard to build their egg-nest net worth and ultimately retire with it. No, it's not a handout, and, yes, it's a hand up onto the carousel.

Creeping socialism? You betcha ... to thwart the unfairness of the God-Almighty Market Solution.

[BJ Feng]

The clawback method will be up to the next administration to decide. Paulson isn't dumb enough to think that he can fashion the best structure for results that won't be known for 5 years. There's great danger that whatever he promises now will be changed to fit the situation 5 years from now anyway.

I don't see what the objections are to the proposed dead plan other than petty finger pointing. You don't trust Paulson but why would that matter if loses will be covered by the participants? And if you believe Obama will win, then he will be president 5 years from now right? So he'll make sure the taxpayer is compensated if there are any loses. Besides, he'll soak the rich regardless of the outcome of this plan. So what's the opposition really about? A personal dislike of Paulson? That he has Wall Street roots? I think that's a plus in this situation, don't you? Or would you have some career politician at the helm instead? I'm sure Barney Frank could be trusted to do a better job than Paulson, yes, Frank's lack of knowledge can be made up for with his desire to soak the rich.

[(O)CT(O)PUS]

By all accounts, all bailouts stink to high heaven, but the point is not about retribution for those who caused the meltdown or about the excesses of laissez faire capitalism but about protecting millions of innocent people caught up and hurt by it. In other words, when a car hits a pedestrian, do you call an ambulance first or do you lynch the driver before giving first aid to the victim?

[Robert Waldmann]

Oh to clarify. I proposed the tax and contingent buy it back to cover possible losses from buying preferred shares (at current market price). I don't believe the Treasury should buy mortgage based securities.

[Lafayette]

BJF: And if you believe Obama will win, then he will be president 5 years from now right? So he'll make sure the taxpayer is compensated if there are any loses. Besides, he'll soak the rich regardless of the outcome of this plan. So what's the opposition really about?

Once again, BJ, I don't think you "get it".

Gross professional negligence has occurred resulting in a national economic calamity. But the culprits seem to think (1) they can all run for cover under a Government blanket, (2) still remain in the job because they have supposedly "done nothing wrong" and (3) still collect either an annual bonus or a Golden Parachute (both normally for merited "performance") -- the only performance being to have literally thrown us all into the deep, dark brown stuff.

Just who are you kidding besides yourself? The American population smell blood and they are looking for some highly televised perp walks, followed by jury trials and, the cherry on the cake, some well deserved jail sentences.

Ever hear of the "Keating" Five? It's sequel, "The Spitzer White Collar Crime Show"? This is the sequel's sequel ("The Great American Sub-prime Mess") in a seemingly never ending saga of miscreant Wall Street financial engineering.

[Callahan]

Let's see. Filty rich Bill O'Reilly who "owns no debt", wants a bail out. Lou Dobbs also equally rich does not want a bail out. Think I'll go with Lou on this one.

[Bruce Wilder]

bj feng: "he will be president 5 years from now right?"

Not unless he's re-elected in 2012. I don't think that's the Republican plan. The Republican Plan is to blame the economic meltdown, the decline in U.S. middle class incomes, "losing" Iraq, etc., on the Democrats and the Democratic interregnum. It's just their timing has been a little off. But, just as the Surge succeeded in pushing withdrawal from Iraq, and all its consequences, off on the Democrat, so the Paulson Plan is meant to push off as much of the economic meltdown and the painful reduction in U.S. middle class incomes, also onto the Democrats. After maneuvering the Democrats into passing a partial abortion of a bill, with only minority of a minority Republican support, the Republicans will execute the law, such as it is, with their usual mix of incompetence and corruption, so that $700 billion is mostly gone in 6 months, with only modest and fleeting effects. Just like the Surge was designed to put the burden of "losing Iraq" on the Democrats, so the Paulson Plan will only postpone the economic meltdown a few months, or, at most, a couple of years, so that it, too, can laid squarely on the Democrats.

After 4 years of earnestly trying to clean up the mess left by Bush and the Republican Congress, and being slandered and abused for raising taxes and for ending the pointless and ridiculously costly War in Iraq, the Democrats will be replaced by a new crop of Republicans, rededicated to reducing taxes, regulation, civil rights and anything else that doesn't please the ½ of 1%.

[Bruce Wilder]

I know my comment, above, will be read as just another one of my rants. And, it is a rant.

But, instead of always trying to apologize for this Republican horror show, maybe we should be examining exactly what their policy has been in this crisis, and add it up, realistically.

Rule 23a, weakened during the period of Republican regulatory neglect that got us here, is gone "temporarily". Commercial bank insured deposits are a mine for any kind of speculative venture.

"Mark-to-market" accounting is being pushed aside. Accounting fraud and irregularity helped to get us here, but now it is to be policy.

The banks got "zero reserve" and interest at the Fed.

The Fed financed the JPMorgan's Bear Stearns acquisition. The FDIC financed Citibank's Wachovia acquisition.

Did the bankruptcy code get revised to allow bankruptcy courts to adjust first mortgages on primary domiciles? No, of course not.

[ndd]

" when a car hits a pedestrian, do you call an ambulance first or do you lynch the driver before giving first aid to the victim?"

Well, I'll tell you what you DON'T do.
You don't give first aid to the drunk driver.

Which imho is what the failed bailout bill mainly would have accomplished.

[Bruce Wilder]

And, yes, while the Republicans in Congress were blaming Nancy Pelosi for a partisan speech that hurt their tender feelings, the Republican National Committee, expecting the bill to pass, were preparing attack ads, targeting Democrats, who had made the mistake of supporting this bill, sponsored by the Republican Administration.

anne will still sputter on about Pelosi's partisanship, though. Why? Because anne is a girl. Or, because Pelosi is a girl. Or, maybe because Palin is a woman, deserving of respect, even though she's a dangerously ignorant, foolish, parochial, authoritarian, religious nut. But, hey, we must not be partisan and mean.

[donna]

I paid my surtax yesterday for not supporting this bailout idiocy -- $60K. ;^) Fortunately getting some of it back today. At least I don't need my investments for another 15 years, and hopefully someone sane will be in charge of things by then so they won't keep threatening social security anyway.

If I'm perfectly willing to let my investments go to hell to get rid of the shadow banking system and these morons who have made millions while ruining the basis of our economic system, I don't know what anyone else's problem with it is.

[ReturnFreeRisk]

I like the capital injections via preferred shares idea a lot. Very clean. However, this assumes that the Paulson plan was designed to give help to the banks. That would have happened only if they overpaid for the securities (as Bernanke hinted at the testimony and later retracted). My opinion is that this plan was to bail out the foreign lenders (the Chinese etc) who are angry at the losses they are suffering on their investments in these bonds. Any comment on this aspect will be much appreciated. This topic has been carefully avoided (TOO carefully, in my opinion) by the commentators and the blogs.

[TNLNYC]

I had a different proposal for funding the bailout:

TNL.net: Paying for the bailout

Basic idea: it's a crisis so tax cuts should be off the table. The 2 Bush tax cuts account for about $300 billion a year in lost tax receipts. Repeal them and the bailout gets paid off in 3 years...

[BJ Feng]

ReturnFreeRisk, all indications are that the Chinese and other sovereign wealth funds had minimal exposure to these exotic derivatives and subprime mortgages. They have a lot of US Treasury bonds, which have increased in value thanks to this crisis. As for direct investments in shares of banks, again a minimal amount of money was lost. What's a couple of billion when you have hundreds of billions and many more flowing in?

No, the banks could be helped just by separating out the "cancer". The bank would take large losses, but if investors know that they aren't exposed to the toxic stuff anymore and that no more losses will be coming, then that could provide enough confidence for people to invest in them again. Right now, anyone who has invested previously has lost a lot of money. So solvent banks can't raise more capital and are having trouble borrowing because people are scared they'll have to write off an untold amount more with these bad loans.

They don't want to invest until the loans are gone, but until then, the bank is a zombie, it can't raise more capital, it can only borrow from the FED, and it has no money to lend. This is what TARP could help with even paying firesale prices. There just isn't anyone out there who can afford to buy $700 billion of risky assets, even if those assets are cheap. The point is TARP could help solve the crisis without overpaying.

[BJ Feng]

Tristan, how do you retroactively repeal the tax cuts without causing a lot of turmoil? You are going to make people refile their tax claims all the way back to 2001? Come on be sensible, a better approach would be just to raise taxes on everyone going forward if you are going down that path. Of course, cutting the defense budget in a time of war is insane and a non-starter.

Once again, the bailout WILL NOT COST $700 billion! This is the total amount the Treasury is authorized to buy, but unless the underlying property becomes worthless, there is no way we will lose $700 billion or even close to that amount.

Once again, the proposal requires financial companies to reimburse taxpayers should taxpayers lose any money. If you are going to make a serious proposal, you should be aware of what is on the table already.

[BJ Feng]

Bruce, perhaps Democrats have been out of power for so long they don't understand how to behave as the majority in power. When you have the majority, you cannot avoid responsibility. Of course the minority party is going to blame you for everything.

Look at what happened with the initial vote to authorize the Iraq War. Kerry, Clinton, Edwards, etc., all voted to give Bush the authority to go to war. They had access to the same intelligence reports given to the president. When the war soured, they invented a half-baked story of how they were "deceived" into going along, even though they had the same type of intelligence reports Bush had.

Did the Republicans cower under these charges or did they take responsibility and continue to provide funding for the war again and again and again? Did the Republicans need cover from Democrats? Did they say, hey, we can't continue on without some bipartisan support? Hell no, they understood they were going to be blamed regardless and as the majority party, it was up to them to OWN the power given to them. Take some responsibility, take some ownership. You cannot avoid responsibility as the majority party. It's so sad to see the Democrats cowering like this, begging for some way to avoid ownership. Is this what we want in our leadership? Is this the way the majority party should behave?

[Bruce Wilder]

ndd: " when a car hits a pedestrian, do you call an ambulance first or do you lynch the driver before giving first aid to the victim?"

"Well, I'll tell you what you DON'T do.
You don't give first aid to the drunk driver."

No, of course not. You buy the drunk driver another drink, to soothe his upset feelings, and buy the wreck from him at an inflated price, so that he can buy a new car.

The loser pedestrian he hit is the one, who should be scolded, for not owning a car, and for holding up important traffic with his annoying, slow-motion street crossing. He should have been more careful. If you start coddling injured pedestrians with health insurance and emergency care, you just introduce a terrible moral hazard problem. Pedestrians won't have the incentive they need to have to avoid these accidents.

Drivers, drunk or otherwise, however, are vital to our modern system of rapid transportation. If we don't get these wrecked cars back on the road immediately, everyone will suffer, even the pedestrians, who depend on the car drivers to go to work and deliver things, and generally keep the automotive economy going.

[Patricia Shannon]

Bruce Wilder says...

Not unless he's re-elected in 2012. I don't think that's the Republican plan. The Republican Plan is to blame the economic meltdown, the decline in U.S. middle class incomes, "losing" Iraq, etc., on the Democrats and the Democratic interregnum. It's just their timing has been a little off. But, just as the Surge succeeded in pushing withdrawal from Iraq, and all its consequences, off on the Democrat, so the Paulson Plan is meant to push off as much of the economic meltdown and the painful reduction in U.S. middle class incomes, also onto the Democrats. After maneuvering the Democrats into passing a partial abortion of a bill, with only minority of a minority Republican support, the Republicans will execute the law, such as it is, with their usual mix of incompetence and corruption, so that $700 billion is mostly gone in 6 months, with only modest and fleeting effects. Just like the Surge was designed to put the burden of "losing Iraq" on the Democrats, so the Paulson Plan will only postpone the economic meltdown a few months, or, at most, a couple of years, so that it, too, can laid squarely on the Democrats.

After 4 years of earnestly trying to clean up the mess left by Bush and the Republican Congress, and being slandered and abused for raising taxes and for ending the pointless and ridiculously costly War in Iraq, the Democrats will be replaced by a new crop of Republicans, rededicated to reducing taxes, regulation, civil rights and anything else that doesn't please the ½ of 1%.

Spot on.

[Patricia Shannon]

Bruce Wilder
Great drunk driver analogy!

[Cynthia]

If given a choice between being fascinated by car wrecks and being frightened of them, I'd choose fascination over fright any day!

So when the next great car wreck rolls around again, I'll choose to stay on the sidelines with Krugman acting as a professional, not as a citizen...

[ccsail]

BJ Feng says...

"Once again, the bailout WILL NOT COST $700 billion! This is the total amount the Treasury is authorized to buy, but unless the underlying property becomes worthless, there is no way we will lose $700 billion or even close to that amount. "

You can count on for every household loan modification there will be 2 defaults. Who? The neighbors directly on each side who pay their mortgage on time. But in addition to paying their underwater mortgage on time the government is asking them to pay for their imprudent neighbor. Won't fly. Now all mortgages will become worthless. Loan modifications = all mortgages underwater will walk away. You can't just give special attention to the most imprudent without devastating consequences. Here is the reason why we can't price the crappy stuff. No one will admit the real problem. We are all questioning whether the prudent will stay prudent just because someone somewhere said it was moral. My money is on massive walk aways..

[paine]

"I go for grab it now and give it back later "

indeed indeed total agreement

and to think
the mind of robby wonderman
is hardly my cup of green tea

[paine]

claw forward not back gang
claw forward ever forward

soak the silk hat dancers now
we got em on the run

god bless the cap gain geese
and the rabid repub race
for popular cover

the crowd roars ..at last

maybe this time
we can strike at the rich
not the wet backs

[paine]

"the Paulson Plan will only postpone the economic meltdown a few months, or, at most, a couple of years"

from whence cometh
these high octane end time visions of your's bruce ???

the lot bubble ain't hardly enough

and looting is the great american past time

what so raises your hackles this time ??
i have my reasons
what are yours ??

[paine]

Spot onSpot onSpot Spot onoSpSpot onot onnSpot Spot onon

[paine]

hey you wizards
just what range does the necessary equity refill fall into

300 bills ???? a trillion ????

the over pay by uncle was to be the gain to private equity under the paulson plan eh ???

so what was the estimate

all this talk bout an equity refill
i want to be spoon fed
dah numbizz

[paine]

"a lit-tle allegerry gah-oooz a long way ..."hiccup

[Lafayette]

Think

Cal: Lou Dobbs also equally rich does not want a bail out. Think I'll go with Lou on this one.

Amazingly well-honed logic, that. So, go ask Lou Dobbs to bail out Wall Street, big mouth that he is.

Shut off the TV. Think for yourself.

[ken melvin]

Willie Brown, the consummate politician, believes that everything is political. Politics, indeed, had a lot to do with how we got into such a sad state and'll be at the forefront of effort to preclude the recurrence, but the situation demands an economical/financial solution.

[ken melvin]

Strange bird morality. In the General's Labyrinth, Marquez has Bolivar letting the general who attempted to assassinate him go free while he has a general he doesn't like executed for the attempt citing 'lack of evidence'. The bulk of the proceeds from the housing bubble went to those homeowners who sold their house for many times what said house were worth. "Twas unearned, no? Where the moral indignation? Who dares say a portion of such ill gotten gains should be returned?

[Lafayette]

Desperate Housewives

Article: Withhold an extra 10% of income over $1,000,000 and, each year, return the part that wasn't needed to cover losses in the Buffet X 100 plan (plus the chained 3 month t-bill interest rate).

Nice proposition, but it doesn't go nearly far enough.

We've created a caste of plutocrats. They permeate government, industry and control the levers of power.

If we want to tame their individual greed, nothing less than Confiscatory Taxation will work. Confiscate all income above 5 megabucks a year. That will change what? Not much, really.

Watch them all settle down and earn decent livings, with houses in leafy suburbs, driving Mercs and BMWs to work, with Desperate Housewives and their kids all going to Ivy League schools ... etc., etc., etc.

Nothing will ostensibly change -- except that the hallucinatory fortunes will be a dark past best forgot. And, the country just might show less from plutocracy and more social justice. Not a bad trade-off, I'd say.

[Patricia Shannon]

Why return any of the tax? It will be needed to repair the damage in other areas done by these legal mafias.

[Lafayette]

The precedence is there

PS: Why return any of the tax? It will be needed to repair the damage in other areas done by these legal mafias.

Let's put marginal tax rates up to where they were once - at 92% from the early 1950s to the early 1960s at all income over 400,000 per year.(Don't believe me? Go here, see for yourself.)

That will go a lonnnggggg way to fixing the Greed Problem that has infested America and is causing the rot in our social fabric. And, let's make sure that inheritance tax applies to all the net worth of an inheritance by closing the loopholes. Enough of this Replicant nonsense that there should be no inheritance tax.

What we don't need, this sub-prime mess should have taught us, is a nation of plutocrats - from generation to generation.

We do need sometimes tax breaks to kick-start a sputtering economy, but if we had a fairer tax system, we'd not have the accumulation of riches at the upper end and the poor (as well as middle-class) taking the burden for it.

If greed fosters the rot at the high end, poverty does the same at the low end. It brings about unfair exploitation of Health Care resources, it cause delinquency and crime, it causes people to live in the streets and promotes drug abuse. It also is at the root of the obesity pandemic -- as studies are beginning to show the clear links between obesity and income.

Who are we kidding? Ourselves. Taxation is both part of the problem AND the solution.

[Lafayette]

Gee Whiz!

Rube: Bernanke said the current market price is the "fire sale" price, so why is that price unfair or incompetently derived?

The market price is not always the “fair” price, because fair depends upon how it is defined. Tell Bernanke, that subtlety has obviously escaped his well-honed intelligence.

As regards the history of market prices in the US, here’s a data point. If you can find better information, do not hesitate to post it here.

Here’s also an idea of the total exposure, from a study of the IMF. Lo and behold, what is the estimate of total subprime loans that are uninsured … $650B. Note that the study was done in August, 2007!

Note also that the subprime market was fairly manageable up to 2006, even at failure rates of more than six times prime rates. (See here.)

Therefore, some could argue that the Treasury should repurchase only those SIVs that are post 2001, when it really started upwards towards the bubble’s collapse. That reduces the bill to around $500B.

But, at what price? To be fair to the American taxpayer, they should not be at present fair market value for non-performing toxic junk that was sold at lower than present market prices from 2001 to 2004. The current price average, that Bernanke thinks is “fair” is that of 2004.

I don't think that one price is fair and without looking at the SIVs and of what properties they are made, I doubt we can arrive at any real understanding of the original transaction price and how much to discount it to arrive at a Treasury purchase price.

En passant

So, as regards Paulson's total estimate figure, where did he pull that rabbit out of hat? You guessed it, at the IMF -- from the second graphic linked above (attributed to Citigroup).

Isn’t this the sort of information that the Treasury should have had at its fingertips?

Gee Whiz!, most importantly: Doesn't the trend in subprime growth become dangerously clear well before the bust in 2007 (from the second graphic above)? Where were our watchdogs in Washington? Bathing in the Potomac?

[Real Person from the Real World]

NYT TODAY:

http://www.nytimes.com/2008/10/02/opinion/02kristof.html?th&emc=th
The Institute for Policy Studies in Washington estimates that
U.S. taxpayers every year provide more than $20 billion in tax subsidies for executive pay.

Among the strongest critics of inflated executive pay have been Warren Buffett and the late management guru, Peter Drucker, who argued that C.E.O. salaries should peak at no more than 20 or 25 times those of the average worker. (Last year, C.E.O.’s got an average of 344 times the wages of the typical worker.)

The truth is that with the complicity of boards of directors, C.E.O.’s hijack shareholder wealth in ways that are unconscionable. As The Wall Street Journal reported in June, if Eugene Isenberg, the 78-year-old C.E.O. of Nabors Industries, were to drop dead one of these days, his estate would be entitled to a “severance payment” of at least $263 million — more than the firm’s first-quarter net earnings.

[Real Person from the Real World]

above: see Nickolas Kristoff - Save the Fat Cats.

[Lafayette]

RP: The truth is that with the complicity of boards of directors, C.E.O.’s hijack shareholder wealth in ways that are unconscionable.

The national legislation that provides a framework around corporate ownership of a public company is amongst the most lax in the developed world.

The Board has lattitude to do just about anything it wants. Voting by proxy is a joke. Corporate chieftains love to talk about the Vested Interests of the company. As if the capital invested was theirs personally. For all practical purposes, they behave as if it were.

There must be installed representation on the Board of the other two Vested Interests. A rep for the shareholders, independently elected by them and NOT nominated by the Board. And a several representatives of the both blue and white collar workers.

In my lifetime? I should live that long ...