McCain Can’t Catch a Break

« Yankee Stadium’s Swan Song – Part 2 | Main | My thoughts on the 1st Debate »

McCain Can’t Catch a Break

By Brian | September 26, 2008 | Share on Facebook

Check out the sponsored links in this article about John McCain deciding to attend tonight’s debate in Mississippi:

Yellow teeth? poor credit? Wrinkle Cream? Yikes…when it rains, it pours, huh?

As long as I have your attention, a quick thought on the last couple of days: Everything I’ve read and heard about the current financial situation says to me that we need the federal government to step in and help. I thought George W. Bush’s speech the other night was one of the best of his presidency – accurate, non-partisan, simple enough that “Joe Main Street” could understand it without being condescending. The key line was this one:

The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.

So while responsible citizens who pay their bills on time should not be burdened with bailing out wealthy bankers who made bad decisions, it also holds that responsible citizens who pay their bills on time should not be left unable to borrow money, keep their businesses open or send their kids to college because wealthy bankers made bad decisions.

Unfortunately, President Bush has spent more than 100% of his credibility and political capital at this point, so what he says about the bailout and the economy comes under almost automatic scrutiny and skepticism. Adding fuel to the fire is Congress, who appear more interested in posturing than in getting something done. The Resolution Trust Corporation (RTC) of the mid-90s is an obvious template here (in that case, by the way, all of the tax dollars invested were paid back, plus a small profit), and yet the parties bicker amongst themselves while the world waits and banks continue to fail. In his statement today, John McCain said it best: “much of yesterday was spent fighting over who would get the credit for a deal and who would get the blame for failure.”

These folks are not doing themselves any favors. Again.

Topics: Money Talk, Political Rantings | 2 Comments »

2 Responses to “McCain Can’t Catch a Break”

Jeff Porten says at September 28th, 2008 at 5:43 pm :

You know, there’s much about this crisis that I completely fail to understand, so perhaps that’s why I find your post to be also incomprehensible.

First, you talk about Bush’s credibility as if it’s an unfortunate, and separate, news item that’s getting in the way of solving the problem. Yet Bush’s solution to the issue appears to be, “hand a vast amount of power to the executive branch, without oversight, and all will be well.” Seems to me that this is entirely predicated on faith in the executive branch and Bush’s handling of the executive power that Congress has granted him in the past. According to the Constitution, the ability to declare war and spend money are Congressional powers, so it seems to me that it’s wholly accurate to judge based on past results.

It seems to me that the problem with your analysis is that you’ve fallen in love with the bully pulpit of the presidency, The corollary problems here are that Congress does not speak with a single voice, and the Democrats have been astonishingly inept at setting up a British-style shadow cabinet to offer alternatives to Bush edicts. That says, your dismissal of Congressional action as posturing seems to me to say as much about your perception of Congress as it does the actions of Congress.

Second, you compare the bailout to the RTC, but the RTC bought out companies, not failed assets. That’s quite the clear punishment, which isn’t quite so clear in either the Bush plan or in the compromise hash that’s coming out today.

Third, I don’t get the definition of a market failure. Bush says that the market isn’t operating normally, which is hogwash — it’s normal for markets to fail, as anyone knows who has reviewed the history of tulips. It’s more accurate to say that the market is now doing things that are unacceptable in realms outside the market, so it would also be accurate to note that it only became unacceptable when banks failed, and not when millions of individuals were put at risk in the time leading up to the current crisis.

I’m especially interested in Bush’s statement that most mortgages are in good shape and will be paid off, with the expectation that $700 billion is a sound investment. As we know, the RTC turned a small profit, because it was buying companies, not assets. But it seems to me that the bailout is designed to cherry-pick the bad assets (or, perhaps, wormy-apple-pick), leaving the solid assets behind, so markets can get back on their feet. If we pay market rates for these, the companies sustain massive losses on their balance sheets — so the way to improve the health of the banks is to overpay the value, and cross our fingers that the current market valuation is so truly failed that we recoup the cost of the bad purchase.

Call me crazy, but it seems to me that the valuation of bad assets is likely to be the part of the market that has not failed. The valuation is correct, because it reflects the bad choices that were made in the years leading to this point.
Brian says at September 29th, 2008 at 1:52 pm :

The argument about Bush is the same old pig with new lipstick, so to speak. Rather than get into it with you again, I’ll simply state that I reject it out of hand for several reasons.

First, this plan came from Paulson and Bernanke, not Bush. In fact, they were criticized in some quarters for briefing Congress before briefing the President, so to pin the thing on Bush now and assign some power-grab motive is, I believe, a bit of a reach. Second, the plan was a proposal to Congress to spend the money, not an attempt to circumvent them, so your implication that this is somehow unconstitutional is as trumped up as most of the “Bush shredded the constitution” claims. Paulson/Bernanke’s clause granting 100% oversight to the Treasury department was, in my opinion, somewhere between stupid and lazy – all in an attempt to get the deal done quickly without a lot of red tape. I don’t fault Congress for overhauling that aspect of it, only for taking so long to do it. Third, anything Bush and Paulson do now effectively hands power to the next President/SecTreas, not themselves, since by the time this deal is implemented, they’re both likely on their last 10-15 weeks in office anyway. I think Paulson & Bernanke saw failures like WaMu and Wachovia coming and we’re trying to head them off (along with the reduced consumer confidence their failures engender) as quickly as possible, hence the 2.5 page proposal. Neither theory is provable, though, so we probably need to agree to disagree there.

Regarding Congress, the deal they seem to have struck this morning (nothing final as of this writing) is a much better bill than the one they started with, so kudos there. My point regarding posturing was merely to suggest that this deal could have been worked out the day after the Paulson-Bernanke proposal. Instead, it took about a week, and involved lots of “Wall Street vs. Main Street” talk that was both unproductive and inaccurate. The cost of these delays, IMHO, were the failures of Washington Mutual, Wachovia, and probably one or two other banks still to come.

Regarding the RTC, I’m not sure who told you that the RTC bought companies and not assets, but that’s not true. Here‘s the wiki page. Basically, the way the RTC worked was that the S&L would collapse, and then the RTC would partner with another (solvent) company to purchase the debt of the failed S&L. The other company would manage the sale of this debt as market conditions improved, and the RTC would benefit in proportion to the debt they took on. There were several legal structures for how to manage the assets, but the main point was to use a private sector “expert” on these securities to properly price & sell them in the (reviving) marketplace. When the RTC tried to sell the assets itself (prior to these arrangements), buyers would discount their value due to limited information about what they were buying. The private corporations helped remove that risk, raising the prices and increasing their (and the government’s) profits.

The difference today is that we’re dealing with the secondary market (i.e., not the banks that wrote the mortgages, but the investment banks that traded securities based on them) as well, so the companies haven’t necessarily folded, but are neck deep in reserve requirements that they can’t meet because of their weakened balance sheets.

Regarding market failure, you’re off base here. Bush is right – the markets aren’t operating properly. Your tulip example is a good one. The tulip market did not fail. In fact, if you own a large quantity of tulips today, there are places you can go to sell them at an agreed upon price. What happened to tulips (and to tech stocks, and to real estate) is the bubble burst, and so people who bought at the peak and sold at the trough lost a ton of money.

If this was about banks losing a ton of money, we wouldn’t be having these conversations. Banks (and insurance companies, like AIG) lose money on their investments all the time, and their corresponding hedge investments and (government regulated) reserves help them sustain those loses. What happened here was that no one was willing to buy these mortgage-backed securities at any price, even though they clearly had some value, just based on the underlying revenue streams.

This kind of total shutdown in trading means you can’t get rid of your bad investments, account for your losses and move on. You have to hold them on your balance sheet, which triggers all sorts of regulatory requirements about cash on hand, mandated leverage ratios, etc.. Ironically, companies like Lehman Brothers went out of business not because they weren’t profitable, but because they were suddenly legally required to produce a large sum of cash that they couldn’t raise because no one would buy anything they were willing to sell. At this point (using Bush’s words now), the government is the “one institution with the patience and resources to buy these assets at their current low prices and hold them until the market returns to normal.” When these assets aren’t on corporate balance sheets anymore, they can begin trading again. And when liquidity returns to the markets, people will be willing to buy these securities at a market price. Demand and competition, especially if/when the overall economy improves, will drive the prices higher.

Re: cherry-picking assets, again, I think you’re off base. The bailout is designed to buy up the assets the companies can’t sell. So yes, it’s the “bad” assets. We will pay a negotiated fair-value for these (“market value” is a meaningless term, because there is no market right now), and yes, the corporations will show massive losses on their balance sheets (much of which, by the way, is already on the balance sheet due to the much-publicized “write-downs” over the last year or so). But balance sheets are not income statements. Once the assets are off the balance sheets, credit becomes easier to come by, and firms can start buying and selling again. The assets will grow in value not because of the price we paid for them, but because there are suddenly entities in the marketplace that are willing to buy them.

Call me crazy, but it seems to me that the valuation of bad assets is likely to be the part of the market that has not failed. The valuation is correct, because it reflects the bad choices that were made in the years leading to this point.

So, to sum up: If the market had not failed (“siezed up” is a better term, btw…), then the market valuation would be, as it always is by definition, correct. And yes, it would reflect the bad choices that were made in the years leading to this point. Now that we’re here, though, the government is the only entity willing to assign a market price, so it’s needed to get things moving again. The longer they wait to do so, the more banks will fall into violation, and be forced into liquidation (by the FDIC, for example) or into hastily arranged mergers. That leads to more job losses and devalued assets on “Main Street” (i.e., pensions go down in value, stock portfolios plummet, retirement accounts deplete, etc.).

The psychological need to punish someone for this, either economically, legally or politically, should not be the top priority. We need to stop the downward spiral first, and then determine if this was good people making bad bets, or greedy people riding the wave until it crashed. As with most things, it’s likely to be some of both…