Banks Bail-out - 2008 Sep - Paulson Plan
(2008 Oct blog post)
In mid-September 2008, after Secretary of the Treasury Henry Paulson made a proposal to Congress that Congress give him the right to generate about 700 hundred billion dollars to be used at his discretion to deal with the banking crisis, I saw the following quote in an article in the local newspaper (a story by Julie Hirschfeld Davis of the Associated Press):
"The proposal ... would give the government broad power to buy up virtually any kind of bad asset --- including credit card debt or car loans --- from any financial institution in the U.S. or abroad in order to stabilize markets."
I could not believe my eyes. In the wake of a crisis caused by an over-selling of poorly secured home mortgages, there was a proposal to pour money into bad CREDIT CARD DEBT and CAR LOANS --- in addition to dealing with the extremely-risky home mortgage problem.
There's a big difference between CREDIT CARD DEBT and CAR LOANS --- and HOME MORTGAGE DEBT. The first two generally involve 'discretionary' purchases, in large part --- whereas the latter is about putting a roof over one's head (provided the home buyer is not 'sold' into the idea of buying a home that is out of their affordability range --- which, unfortunately, seems to have been the case all too often).
In any case, somewhere a line has to be drawn --- and the 'free market' companies, who took too much risk, have to reap what they sowed.
OR, at the very least, the executives and boards of directors, who allowed that much risk to be taken, need to be taken out of the picture, before giving those same people billions of dollars with which they will be tempted to continue their same bad financial investment habits.
I remember, back in the 1970's, when my wife and I bought our first home, realtors provided us with advice on what we could afford on our salaries.
Even then, in those more conservative times and simpler times (before rampant packaging of extremely risky mortgages together with relatively risk-free mortgages and re-selling the packages), it seemed to us that if we bought a house at the maximum end of the suggested home-price range that we could afford, we would have been paying out somewhat beyond what our paychecks could cover each month --- taking into account our other expenses on utilities, food, clothing, health care, etc.
We chose a house costing at least 10% less than what they said we could afford, and we were pleased with our choice. We had a slight cushion for moderate emergencies.
Continuing with the outrage thread ...
Like millions of Americans across the country, in light of this unprecedented, massive bailout, I felt that I had to express my concern to pertinent Congressmen. I called one of my Virginia Congressmen (Senator Webb), but the secretary who answered the phone was obviously not going to convey the true essence of my concerns to the Congressman.
She was just taking counts --- for or against the 'bailout' --- and probably an informal, non-recorded count at that. She did not want to listen to more than a sentence or two from this caller --- and, presumably, from ANY caller on the bank bailout issue.
Then, around 23 September 2008, I watched Senate Banking Committee hearings chaired by Senator Chistopher Dodd and took notes on the 20 or so Senators that were questioning Treasury Secretary 'Hank' Paulson and Federal Reserve Chairman Ben Bernanke on Paulson's 3-page proposal for dealing with the crisis that had been precipitated by 'toxic debt instruments' held by investment banks.
I sent slight variations of the following letter to the following Senators --- via their email submission web pages at www.senate.gov. Their email submission web pages can be accessed by clicking on the Congress persons names below --- thus making it easy for you to submit your own opinions to members of the Senate Banking Committee. (These are the web addresses that existed in mid-September 2008. They may be slightly different now --- especially as Congress persons are replaced by others.)
Since Congress persons and party affiliations change in each state, yet the states may remain relatively constant in the Senate Banking Committee, I have ordered this list alphabetically by state.
Here is the text of my four-points-of-concern-email to them.
SUBJECT: Banking Issues
24 Sep 2008
Dear Senator Christopher Dodd (D-CT):
I watched Senate testimony last night in which you expressed many concerns that mirror my own --- including the concern that Paulson's proposal, in spite of his protestations that he wants oversight, seemingly knocks the teeth out of any reasonable oversight.
I have commented on the responses of the members of your committee --- in the text, below, which I am sending to my representatives in Virginia --- Webb, Warner, and others.
You may want to look into the Associated Press story that says you would give broad government power to buy up CREDIT CARD DEBT and AUTO LOANS. I did not get that sense from your opening statements. It seems this proposal should have been attributed to Paulson and/or the Bush administration.
Thank you for your concerns. I hope you (and your staff) have time to look at the four 'POINTS' that I make below. I hope these 'features' are incorporated in the proposed legislation.
In reference to the 700 billion dollar financial system bailout:
I called Senator Webb's office yesterday to express my concern --- about bailing out CREDIT CARD DEBT and CAR LOANS (and student loans)!!? -- after seeing the following quote in a newspaper story (by Julie Hirschfeld Davis of the Associated Press) which said:
"The proposal by Sen. Chris Dodd, D-Conn., the Banking Committe chairman, would give the government broad power to buy up virtually any kind of bad asset --- including credit card debt or car loans --- from any financial institution in the U.S. or abroad in order to stabilize markets."
(An aside: I think Ms. Davis attributed to Dodd what should have been attributed to Paulson --- judging from Senate Banking Committee testimony I saw on C-SPAN last night. Was this an intentional or accidental 'slip' on the part of Ms. Davis of the Associated Press?? I.e. is the administration trying to make this look like it is a Dodd proposal, rather than a Bush administration proposal?)
I AM EXTREMELY CONCERNED ABOUT Treasury Secretary Paulson going far afield from dealing with the mortgage mess and spending huge portions of the 700 billion on CAR LOANS and CREDIT CARD DEBT (and even STUDENT LOANS, as mentioned by Senator Bunning in voicing some of his concerns during testimony before the Senate Banking Committee last night).
Paulson is talking about 'bailing out' loans for DISCRETIONARY ITEMS --- such as
(1) large gas-guzzling SUV's that people cannot afford to feed anymore --- and are willing to default on the loans they took out to purchase them --- to get rid of the gas guzzlers.
(2) credit card debt such as debt piled up by shop-a-holic women and men who could not control themselves --- especially in the face of credit card companies (like mine, Capitol One) that send out, on a monthly basis:
(a) blank checks encouraging credit card holders to use the blank checks (obviously to run up debt on which ridiculously high interest rates can be imposed)
(b) ads encouraging credit card holders to add other family members (and whoever) to their credit cards, with authority to use the card --- another obvious ploy to get additional debt added to my/our credit cards.
MY POINT #1:
I have real concerns about Paulson's 'laissez faire' [let executives do what they want] approach to this bailout.
It was heartening to hear, from several of the Banking Committee Senators, their concerns about financial company executives (CEO's, VP's, and directors) getting ridiculously high compensation (including severance packages) after the mis-management on their watch.
Senator Sherrod of Ohio asked Paulson and Bernanke "Does Wall Street owe the American people an apology?"
I thought it was of great concern that NEITHER OF THEM COULD BRING THEMSELVES TO SAY YES.
Paulson named off many parties who deserved blame (aggressive mortgage lenders, passive or complicit mortgage borrowers, etc) --- but he could not bring himself to say these people owed the American people an apology.
I think that is the least we can expect for a 700 billion dollar bailout --- and yet the 'laissez faire' philosophy of Paulson and Bernanke will not allow them to admit these gross-abusers-of-public-trust owe anyone an apology.
If you left a group of children alone in a candy store and told them not to touch the candy, you can bet that at least one or two would eventually help themselves. It is natural.
Yet somehow 'conservatives' expect members of the financial services companies to be surrounded by billions and trillions of dollars and not be tempted to help themselves.
'Laissez faire' capitalists do not seem to know about basic human nature.
In the testimony, Paulson repeatedly said he is concerned about the taxpayer. But then he, in the next breath, INSISTS that nothing should be done to require reasonable restrictions on executive compensation (even severance pay).
He regards such actions as 'punitive'. He thinks that will endanger the success of the bailout.
BUT ... how does he expect the taxpayer to be protected if the same greed-addicted CEO's-VP's-directors remain in place.
MY POINT #2:
I think any institution that takes significant advantage (where 'significant' is, say, more than $100 million in purchased securities, original value) of the taxpayers' 750-billion-plus commitment --- (a commitment which is more like 1.6 trillion and counting) --- SHOULD BE REQUIRED TO (if the top 3 layers of management and all directors are not removed) REMOVE all stock options/grants/etc. (i.e. executive-COMPENSATION add-on's) for 3 years and put SALARY CAPS of, say, $5 million (or less) on execs for 3 years ($50,000 on directors).
If they don't like it, THEY CAN LEAVE and try to find a job at another $1 billion-plus-revenue-per-year financial institution --- if they can find one that is healthy enough to be hiring mis-managers.
I found it amazing that Paulson could repeatedly say he welcomed and wanted OVERSIGHT --- and yet one of the requirements of his proposal is that he and his department have carte-blanche to decide what to do with this money --- with no way for the Congress to intervene and stop him if it looks like things are going awry --- such as, starting to purchase bad credit-card-debt and auto-loans.
I am glad that Dodd, in his opening statements, expressed concern about this --- and that several other Senators also expressed concern.
Frankly, I have no faith in Paulson. Although he says this is all about the taxpayer, his 'laissez faire' philosophy is obviously leading him to protect high-level-financial executives who obviously encouraged, directed, and mis-managed this mess.
MY POINT #3:
a) keep himself from buying credit card debt and car loans and student loans (and whatever other 'shiny' things attract his gaze)
b) handle 'slapping the wrists' of the authors of this mess,
then he should step aside and let someone else handle it --- Volker or whoever is up to the task.
One more point:
On the subject of 'regulation', many Republican Senators (like Bunning) would obviously consider any kind of regulation 'socialism' --- ignoring the fact that regulation is a means to curb the temptations that trillions of dollars bring.
I too have concerns about regulation:
a) that it cannot keep up with the greedy machinations of the greed-iopaths in the financial system,
b) that regulations will actually be set up (say, via lobbyists who seem to write most of the laws anyway) to motivate the wrong behaviors.
MY POINT #4:
Set up a system involving trial-by-jury-of-citizens --- an after-the-fact 'punitive' system, since we cannot head off all the varieties of mayhem before-the-fact --- in which financial 'persons', who have been DEEMED TO HAVE CROSSED THE BOUNDS OF COMMON HUMAN DECENCY, ARE BROUGHT TO TRIAL BEFORE A JURY OF CITIZENS --- and judged-and-sentenced on the basis of common decency principles that are commonly recognized and that are in the spirit of the Constitution.
A 'Bill of Financial Responsibilities' could be codified, similar to the 'Bill of Right's --- to help put the 'decency judgment' on more solid legal footing.
Typical jury selection rules apply. Defendants can have their attornies, (whom they will no doubt pay with their ill-gotten gains) and prosecutors and their investigators will be paid for, initially, by the tax-payers.
If the dollar size of the offense is huge, the Justice Department (not just local authorities) is responsible for making sure that every reasonable effort is made to properly execute the gathering of evidence.
The Justice Deparment is to answer to the congress as well as the chief executive on these matters.
Personally, after hearing SEC Chairman Cox's opening statements on CDS's (credit default swaps) and the short-selling of them and the total absence of regulation of trillions of dollars of these 'things' --- and Senator Dole's comments on how the CDS pool has grown in size from $100 billion to about $60 trillion in a matter of years (about 100%-per-year growth rate in the last few years) --- I think that CDS's are the next thing that Paulson will want to bail out.
When that happens, I think we have no choice. We need to let the AIG's of this country fail. Many people will be out of work.
But all is not bad. At least the CEO's-VP's-directors who created this mess will be out on the streets. And, hopefully, via the Internet, we can look up their addresses --- to send them a Christmas card (or some other kind of greeting).
Cheers, [my name]
No wonder this financial mess has occurred. Look what mortgage lenders and credit card companies have been doing.
What's next? The 58-plus trillion in CDS's (credit default securities) --- totally unregulated --- that Cox and Senator Dole brought up in the Banking Committee hearings last night.
Who can afford to handle that bailout? China?
In late September 2008, the mail and phone calls to Congress persons was running 99% against the bailout, according the Congress persons' accounts in the Senate Banking Committee hearings.
They were swamped with thousands, if not millions, of responses to the situation.
So it is not surprising that I did not get any meaningful response to these emails --- other than about six 'form' email responses from Congress persons' offices.
The responses were clearly written to respond in a generic way to the immense amount of feedback they were getting.
The 'form' emails from Congress people did not directly address my points. Not one word about bad credit card debt, for example.
I continue to be concerned about the bailing out of CREDIT CARD DEBT and AUTO LOANS.
In fact, instead of BUYING mortgage-backed 'toxic' securities from the banks, the Treasury and 'Fed' embarked on an INFUSION of capital in the banks --- which amounted to a way for the banks to use the capital in any way they saw fit --- to handle bad mortages, bad credit card debt, bad auto loans, bad student loans, executive over-compensation, etc.
FURTHERMORE, in late October, the Treasury and Fed announced the intention to offer relief to INSURANCE COMPANIES who had gotten in trouble with their aggressive marketing of retirement annuities.
I am familiar with the nature of these 'investments' because my wife had arranged for an insurance company representative to discuss retirement investment options with us --- and he aggressively 'pushed' retirement annuities.
I was quickly 'turned off' by the annuity type of investment after reading the 'small print' in some disclosure documents the representative gave us.
Essentially, the retiree signs over their retirement funds to the insurance company --- losing control of the money.
And the 'small print' included a 'plethora' of rules that the retiree had to agree to --- most of which were obviously devised to make it almost impossible for the retiree to get back control of their money.
AND, many of the rules were so convoluted, in relation to time periods and penalty per-centages and other details, that many of the rules seemed to contradict or over-ride each other.
The insurance companies seem to 'pile on' the rules, to make sure that the retiree has no real hope of regaining control of their money.
Furthermore, I later learned that the annuity salesmen generally receive outlandish commissions for signing up retirees to annuities.
It is no wonder that insurance companies are already in trouble with respect to annuities --- and we have not even really gotten into the retirement of the 'baby boom generation'.
The financial trouble that they are in is probably caused by the fact that they have already spent most of the retirees' money --- on commissions, lavish sales conferences, and over-compensation of the CEOs and their co-conspirator boards of directors.
In my opinion, anyone who thinks that the $700 billion Paulson-Bernanke bailout is going to fix the economy and the crashing, volatile stock market any time soon is sorely mistaken.
The annuities bailout and the unregulated trillions of dollars in the CDS (Credit Default Swaps = insurance on debt instruments) are going to make their presence felt in November and December of 2008, and well beyond, I predict.
And the mortgage mess is going to drag on for years and years, since the banks are being given money with no clear plan for clearing the 'toxic' mortgages out of the system --- such as requiring a downward adjustment of the principal of each loan according to the inflated appraisal of the property value. (You read it here.)
2013 UPDATE :
Sure enough, here it is 5 years later and banks are still foreclosing on mortgages and letting houses sit neglected, driving property values down in their neighborhoods --- because the banks are still unwilling to adjust principal of loans downward to reflect the real property values as they should have been valued when the loans were initiated.
The banks stubbornly prefer to put people out on the street and generate run-down, empty houses in neighborhoods --- rather than do the right thing --- the thing that would have cleaned up this mess several years ago --- and kept many people in those homes, paying for them.
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Page was posted 2008 Nov.