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Thursday, October 2, 2008
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19 comments:
This bailout bill is becoming more of a mess by the moment... the senate found a way to turn a $700 billion mess of a bill into an $800+ billion disaster in just a few days.
I actually emailed my representative today. I am too cynical to believe it will do much good but I thought I would give it a shot.
What we need is a correction, not a bailout. When all is said and done our economy needs to rely less on debt at all levels. Higher lending standards. Higher interest rates. Lower housing prices.
Leroy said.
What we need is a correction, not a bailout. When all is said and done our economy needs to rely less on debt at all levels. Higher lending standards. Higher interest rates. Lower housing prices."
Leroy - I agree with you on this 100%, but to think that the bailout has anything to do with housing totally beside the point. This is all about the commercial credit markets now and they just arent functioning.
Today, we had a 60 million dollar loan commitment go down the tubes. Our client had a fantastic business idea, would have brought a few hundred high paying jobs to the area - now nothing. And its not that the bank doesnt want to do it - they love the idea, they just said in essence "sorry - its just too risky in this environment (at any interest rate or with unlimited collateral) - maybe next year".
This sort of thing is becoming far too common. And its not just new businesses, I now have several existing business on our "watch list". All are solvent, none cash flow well - none are related to housing or finance, yet all are at risk of going away, bringing down many many middle to upper middle class jobs with them. THIS is what this bill is intending to address.
Up til 3 weeks ago, the credit markets were doing a good job of using higher interest rates to allocate increasingly scarce credit to good uses. I saw firsthand how bad risks like residential construction and auto sales were being outpriced by high tech, medical and other "good risks". Not anymore. Now the commercial markets are so frozen, it cant discriminate good risks from bad risks anymore. It is indiscriminately killing them all, and this is what we need to fix - now.
Think of it this way. If the bill doesnt pass, what do you think will happen? If it doesnt pass, Paulson & Bernanke will continue to fritter away 700Billion on piecemal bailouts - just like it had been doing with Fannie, Freddie, AIG, Bear, Wachovia, etc. another 15B here 40BB there, none of it doing anything to restore market confidence. Instead we just continue on in this confidence vacuum - this uncertainty prugatory we have been in for the last 3 weeks.
Dont worry about a correction. Even with this bailout, I think we are in for a pretty decent one - all this bailout can do is make it a healthy correction - cut away the bad tissue in housing and finance, but leave intact other parts of the economy that dont need surgery - in essence dont kill the patient.
And as I said before, I dont think this will do much for housing. Housing is going to continue to burn down on its own accord. This bill may change the timeframe of the burn down, but it will continue to fall to its natural clearing point. Nothing the govt can do to really stop this.
I agree that its a shame the bill has mushroomed like this. It would have been cheaeper if Pelosi & the repubs just passed it on monday. Now it is even more pork laden just so those idiots who voted no, can now get some political cover and now vote yes.
As it stands, its expensive, its poorly drafted, and it may not work. Further, as I said before, I think there is an 80% chance I am reading the signs all wrong - theres an 80% chance that well be fine - 80% chance we get a healthy correction and thats it, no bailout needed.
At the same time however, I see a 20% chance that all the stuff I have seen in my office is spot on. A 20% chance that this will continue to spread we are all headed for a major catastrophe if something is not done now. In my opinion a 20% chance is unacceptably high - we must do something - now.
If I am scaring some of you with this rhetoric of mine, good. Overall I think Ive established a decent reputation on this blog as a reasonable, guy. I may argue forefully for this and that, but I would like to think I can see the other side and concede the good point or two. With this issue however, I see no alternative. As such, I have emailed my rep to vote for it and I urge others to so as well. There is a very good chance I am wrong in all of this, but in the off chance I am right, we cannot afford that risk.
I don't have time to write much of a response. So will will keep it short.. the bailout isn't going to change what you just described.
The various lenders will wake up and start lending again when they realize that they are in the business of lending and if they aren't lending... well they aren't in business.
These lenders could raise money the way banks have always raised money... by offering more attractive interest rates. A bank could offer a competitive rate on a CD and then turn around and lend that money back out to your qualified borrowers at a higher rate... that is how the business works afterall.
It will take a while for this mess to work its way through the system but a bloated and misguided bailout bill won't fix the current problem. The problem is too many people/companies are far too highly leveraged. The solution is for some to go out of business, and the rest to return to sound lending practices.
In the meantime... I hope everyone here planned for a rainy day.
crt:
is it fair to say your firm has also become a victim of the tight lending? i mean losing a 60MM biz is, well, to me at least, a huge blow.
i hope the bill could really help your firm win back some biz. i love housing corrections but i also don't want a bad recession.
crt,leroy,
A Nobel prize winning Columbia University economist and George Soros are advocating another way--the government using that $700 billion to buy equity in the banks that are hoarding cash. This is to make them well-capitalized without paying for their toxic assets. Soros says investors like him will get more confidence to invest in banks if that happens.
Critics of that method say it will be even costlier for the government(see, e.g., Pearlstein in today's WP). But that is not clear and personally I like the capitalization route.
Anyway, with the Senate passing the bailout, it will most likely be passed by the House tomorrow.
Until now, everyone was saying a recession was coming, but few economists said it was already here because they were looking at the GDP. Now most economists say recession is already here as GDI (Income) already shows a recession even though GDP is not yet showing it. Their view now is that the bailout is needed to prevent the recession from becoming a severe contraction. (See James Hamilton's econbrowser.com, for instance). In that case, the bailout won't prevent a correction, but it may avert a serious depression.
They are already planning to do capitalization. As I see the plan unfolding, the idea is to buy up the paper that is clogging up the market and get the credit markets functioning again in some fashion. But once the government buys the certificates at a discounted rates, that is going to cause a capitalization problem at the banks. The Federal Reserve will then decide which banks will get money (with warrants ensuring the repayments are made), and which are in such sad shape they should just be allowed to die or be merged into the stronger banks.
As I see it, the Fed has already created a few fortress banks to carry out this policy -- J.P. Morgan, Bank of America and Citibank. The big get bigger.
As for the broader housing issue, I think they are leaving that for the new president to lay out. It probably will be the only program the new president will have any money to deal with, except for an economic stimulus program of fixing up decaying bridges and roads. (Health care, tax cuts and whatever just vaporized). If it is McCain (doubtful IMO, but voters might decide in three weeks to go with experience) then it will be a Resolution Trust Co. approach of buying up excess properties and letting the market set new prices. If it is Obama, then a more direct and aggressive program of replacing subprime and Alt-A mortgages with new substitute mortgages at very low (5 percent) prices.
No matter who is elected, we won't see any recovery in 2009. I am very bearish now we have already entered the deflationary stage.
Krugman is saying that this bailout will likely go through and when it isn't enough, we'll then recapitalize the banks in exchange for an equity stake ala AIG. Basically we get there in two steps. The argument against just going to Step #2 is that you need to make the banks whole on what they are currently marking these MBS at AND THEN they will still be under-capitalized and need the cash infusion.
Personally, I think we need a market correction but we need to try and do it in a relatively orderly fashion. No action on the part of Congress will not result in order. Like most legislation, there are going to need to be a lot of bites at the apple and a great deal of monetary waste to even get it close to turned around.
Leroy said...
The various lenders will wake up and start lending again when they realize that they are in the business of lending and if they aren't lending... well they aren't in business."
Leroy - I really dont think you understand - the problem is liquidity and everyone is making sure they have enough to cover various commitment terms. I spoke to lenders counsel the other day. Want to know what he told me? He told me, he is essentially advising certain commercial banks - dont lend - if you do, and that counterparty goes down, you will be out of covenant. Either out of covenant with the FDIC - or you are out of covenant with your intercreditor agreements - or you risk default, or you will be sued, or possibly taken over, depending on what you do. I dont blame them either. If I was counseling the banks - I would be advising the exact same thing.
This is the nature of the quagmire we are in. Yes the banks will eventually "wake up" and start lending again, but at what cost? Who will be left to lend to? We need a stopgap measure to keep things moving. We cannot afford to wait til they wake up... Its a scorched earth policy and so unnecessary...price out the bad, dont price out all.
MM - actually it doesnt hurt us. It just changes our work from productive things like growth and entrepeneurship to unproductive things like loss mitigation or bankruptcy. We are actually looking for more bankruptcy associates if you know someone...
TedK - thats a reasonable proposition to me. All I am concerned about is get the credit markets moving again - let the burndown be of a more healthy type. The mere passage of ANY bill, even a crappy one, will buy the credit markets some time. Now, if it turns out equity is the way to go, then great, amend the mandate to the treasury, amend the bill and make it do what you want it to do.
Either way dont kill it - not at this point. 3 weeks ago, had the masters of the universe just said, nothings coming credit market, figure it out yourself, we would be that much farther ahead in fixing this without a bailout. We are way past that point now. The market is relying on a package, any package, and has all its hopes relying on it. Ever since this was proposed, the credit markets have stopped trying to fix themselves because it assumed something was coming and wanted to to see a template on how they can fix themselves. This really is a crisis of confidence and the credit market is looking to the hill for leadership. If you take that away now, after a promise of help has been implicitly baked in, you risk a crisis far greater than what we otherwise would have had.
Check out this transcript of Charlie Rose interview with Warren Buffett
http://www.cnbc.com/id/26982338
It's an hour long interview but Buffett supports the bailout. The short synopsis is he believes the U.S. will make money, and if it doesn't approve the bailout millions more will be unemployed.
If you have 3Million more unemployed, which Buffett says could happen without the bailout you have millions more without health insurance. Higher poverty rates and the need for massive government intervention. Foreclosure rates will rise as well.
You will still get a correction and recession even with a bailout. But the difference is the damage will be contained some.
I hope those who don't support bailout support some form of affordable universal health care coverage. I hope they support large public works projects, that will cost billions as well. I hope they support expanded food stamps and unemployment assistance. I hope they support massive injections of student aide to reduce the cost of retraining. We may need these things no matter what, but if we get 9% unemployment which is what Buffett says could happen, then you will absolutely need them.
Here are few takeaways:
"I have said, Charlie, that the 700 billion, if they buy mortgage-related securities or mortgages themselves at current market prices, they’re going to make money over time because the United States government has staying power and it has a low cost of borrowing. And if I could take one percent of that 700 billion pot and take the gain or loss from it and be their partner, and they would buy the stuff at market, I'd make a lot of money. It’s -- I mean you have hedge funds and people like that buying these assets to yield 15 or 20 percent, I mean, that’s the buyer for these people that are trying to unload them. The U.S. Treasury has got borrowing costs like nobody else has. They can borrow basically unlimited amounts. They can stay there for years and years. These assets will be worth more money over time. So when Merrill Lynch sells a bunch of mortgage-related assets at 22 cents on the dollar like they did a month or so ago, the buyer goes -- is going to make money, and he’s going to make a lot more money if it happens to be an institution like the U.S. government which has very, very cheap borrowing costs."
"You’re going to see more people unemployed. But the difference Charlie if we bottom this thing out at seven percent unemployed versus nine percent, that’s three million people, that’s three million people that if we do it wrong you know lose their jobs unnecessarily in my view I mean you know I’ve never been unemployed. I’ve never been very fully employed either but just think of what it’s like, you know, to go home with a mortgage payment you know and kids and everything else. My dad had that happen to him in the early ‘30s. It you know you don’t want to create three million people more unnecessarily. "
I am so tired of the Oracle of Omaha garbage. After that GE deal, he's the pig of Omaha who extracted a usurous 10 percent premium for his help of one of the country's most solid companies.
I agree with CRT regarding the bailout. It's the least worst move. [My area of practice is tax, so I don't see it from the same perspective with lending transactions, but what I do see is downright scary.] The TED spread is enormous; intrabank lending it tightening up, which will be making its way through the entire economy. The "flyover state" farmers who oppose this bill better hope they get the financing they need to rent equipment and pay workers to harvest their crops.
crt,
we sort of went around on this on an earlier thread so I won't belabor the issues.
The unintended consequences of this bill are and will be huge . . . things we can't fathom right now b/c it is such a poorly written bill.
As I wrote, b/c this bill has no principles except intervention in the markets there is no way that we can know what the ultimate consequences will be. And when this bail fails with all its unintended consequences, the American people will pay.
While I don't doubt what you are saying about these particular credit markets, I have serious doubts about the reasons behind it.
I wonder to a large extent if there isn't some serious manipulation to freeze the markets to force the passage of this bs pork bill.
Look honesty, in the government . . .especially when it comes to talking to the people . . . is a dying breed.
So we the people are supposed to accept the fact that we have been lied to and now they are telling the truth? I think the boy who cried wolf is applicable.
Just as one example of unintended consequences this bill authorizes
0% reserves! 0%, meaning the banks don't have to keep anything on hand. I could easily see that in an emergency banks are authorized to say they don't dispense cash. Think impossible, Argentina did it (yeah we aren't argentina, but we're working on it).
I seriously question the need to "do something" . . . but for the love of pete, if you're going to do something, do it at least halfway right, get economists, debates, committees, etc.
Not this bs 3 weeks ago "our economy is sound" to "we won't make it to Mon. if this bill doesn't pass".
If that is truly the case, then handing the keys over to the absolute MORONS that can't make a correct forecast more than 3 weeks in advance is truly stupid.
And as far as main street needing this b/c they don't know it but it will be good for them . . . talk about hubris (a favorite DC word)
You've got to get out of DC. Main street can take care of itself.
Terminator X - im curious are you guys in any way directly dealing with this? Its very strange - 1/2 the firms I work with are on high alert, the other 1/2 dont seem to have a care in the world - its really bizarre!
GTE - I agree with you in that there will be unintended consequences - there always are. But think of it this way. Lets say you (the govt) see someone you care about (the public) in danger. You "think" you can do something to help - can you really blame them for doing what they think is best? Conversely, can you ever imagine a public that would stand for a government whose attitude was "dont get me involved, I just screw stuff up"? It sounds good in theory but a bit questionable in practice.
As far as manipulation being the reason behind the bill - I really dont think so. The freezing is coming from within. Its from counsel like me saying - dont lend you will be sued. Mind you too, this conclusion of it being frozen is likely coming from within. My experience (to the limited extent I deal with this stuff) is that it is the market who tell the govt monkeys - this is the problem, this is what it may screw up, this is what may fix it. I suppose there could be some manipulation going on, but no one told me thats what we are doing!
I will say this too, regarding the powers that be that didnt see it 3 weeks ago. Well, our office has been watching this steady tightening for a while, but we sure as hell didnt see it coming either.
Incidentally, I think you assume to much about what the govt "knows". Some of the guys I graduated with now work for the govt. Every so often, we talk and they ask me about the law on this or that. Think about that for a second. They are "the Government" they are supposed to know this stuff, yet they sometimes call regular schmucks up like me and then act in part based on what I say.
Terminator X has likely dealt with this too to some degree, and its a rather scary thing. Growing up, you thought there was a "they" out there and that the "they" knew everything - they "know" whats going on. In reality, most of the people that constitute THE GOVERNMENT really dont know much more than the rest of us do.
Leroy,
Interesting comments. As I type this I am watching CNBC Fast Money comment on the Bailut Bill. This week has been the worst week on the stock market in seven years.
The bailout bill won't help the jobless situation or the bad mortgages on the books. Yet there is a growing sentiment that even $700 billion won't be enough to address the financial mess we are in.
This credit crisis could be a great thing for smart smaller banks. But instead the Fed wants to favor huge monopolistic banks who made the mistakes in the first place.
I say capitalize the smaller, smarter banks that are in good shape. Let them become the new big players in the market.
crt,
"THE GOVERNMENT really dont know much more than the rest of us do."
Exactly my point!
If they don't know more than the rest of us . . . how can they possibly propose a solution that will work!
It will muck up things even worse.
"Conversely, can you ever imagine a public that would stand for a government whose attitude was "dont get me involved, I just screw stuff up"?"
Actually, there was a time in this country were a vast majority of the people said and believed just this. Which conversely goes back the principles aspect. Unless you know what your underlying principles are and accept the unintended consequences of those actions, you can't act b/c it is doomed to fail.
So based upon what you are writing your underlying principles are that the economy should be managed by the government. The government should prevent "bad" (whatever bad is) things from happening, and keep the economy out of a recession.
In essence a managed economy!
If that is your underlying principle . . . then anything the gov. does to "manage" the economy (even though they don't know more than us) is okay. And I do mean anything . . . nationalization of banks, industries, etc. . . .all in the name of a stable economy.
If that is your underlying principle, then state so . . . we can agree to disagree on that, but you can't claim you believe or want free markets and then say you want the gov. to do something to help us out of this mess.
And we can go down the road of all managed economies which have or will fail horrendously.
Incidentally, I believe this is why we find ourselves in this mess . . . we haven't been honest with ourselves. Congress, the public, etc haven't been honest with themselves. We claim we want "free markets" but are unwilling to accept the responsibilities that come with a free market. So we therefore clamor and clamor when our actions don't give us the results we want (b/c we have no principles) and want someone to force our stupid actions to give us the right result. So we want someone to "manage" us b/c we can't do it for ourselves . . . but mind you only in the bad times, we want to reap the benefits during the good times, but we don't want to reap the consequences during the bad.
Lack of principles and responsibility.
If this is what you believe in, a managed economy (which based on the underlying principles of this bill is apparent) then the American ideals, the American experiment, everything this country was founded upon is dead.
I don't say this to get you riled up or insult you . . . just be honest with your own underlying principles.
If you believe those things . . . then fine . . . defend them. But don't give me this "we have to do something" crap.
crt,
"Its from counsel like me saying - dont lend you will be sued."
I'm curious what you meant by this . . . how will you be sued if you lend?
"My experience (to the limited extent I deal with this stuff) is that it is the market who tell the govt monkeys - this is the problem, this is what it may screw up, this is what may fix it."
what may fix it??? 700B may? For 700b it better fix it.
So wait a second . . . there is collusion between private industry and the government? So you are saying the market (i.e. data) or people inside the market (i.e. managers of these credit problems)? It sounds like people making deals are telling the gov. what the prob. is and how to fix it. Hmmm,isn't that a bit like Lockheed Martin telling the gov. the need to invade Iraq?
If that's the case, talk about corporatism and conflicts of interest.
Hey government, I run a multi-billion dollar bank . . . you know the markets are frozen . . . tell you what why don't you give me 700b and that will free up the market . . . oh by the way we will profit from it too!
CROOKS, THIEVES, and LIARS!
If that's the case . . . LET THEM BURN!
GTE fair criticism - I do actually think I am probably a bit for a managed economy. I accept the efficiency of a truly free market, I accept that if you can withstand the volatility over the long term, you will get higher growth with a free market. That said, we have a fed that raises and lowers discount rates, overnight lending, etc. It is the way it is. They are going to spend 700B one way or the other (all at once or in little chunks), might as well be in a way they most think will work.
Regarding how you will be sued if you lend, this is what out of covenant means - this is what being in default means. In laymens terms, you have a bunch of agreements out there - bank to bank, bank to vendor, bank to borrower, bank to FDIC. Certain ones say something like, will always have a ratio X amount of assets versus Y amount of performing loans. If that ratio gets out of whack due to them making more loans they will be sued because they intentionally violated one or more of these agreements. Thats the problem.
Regarding the "collusion" between govt & private industry, you are assuming too much. What I am saying is that the govt often "learns" things by hearing from the private sector. Think about Katrina, 911 whatever, the govt often learns about something because they saw it on television! Are they supposed to ignore what they learn from the private sector since it may give the appearance of collusion? Should we expand the governments information gathering capabilities, (perhaps state owned media) so that they can get this information first hand?
Further, there is always an element of self interest when anyone asks the govt for anything. A guy who informs the government he is being robbed has a self interst in not losing his stuff. If the govt didnt learn of this on its own, is this collusion? Extreme examples here but thats all I am saying.
At some point you have to assume that those you put into power to do the work of the people have the judgment and ability to realize when someone is trying to BS them, versus someone saying, "hey this really is important and you need to do something now". If you dont like those people, vote them out, and put new ones in. But to assume that something is tainted because it involves an element of self interest is going way to far in my book.
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