Here is an idea for discussion on SST.
If the bailout is approved, what is to keep the bailout money in the US?
Will the bailout result in a massive transfer of investment money out of the U.S?
What is to keep the international markets from importing junk into the US, cashing it for above market prices at the Treasury, and then exporting huge sums of money received to foreign countries?
Given the broad latitude for choice of assets purchased under the bailout, is there any real certitude that the money disbursed would help US institutions. The bill contains no provision limiting the mortgages and other bad assets to instruments secured by US realty.
Won’t most of the money go overseas and do very little here?
Isn’t it logical that once the traders start trading the securities destined for the bailout, that it is internationalized and can not be directed to help US institutions?
Just some thoughts from WP.
I enjoy your blog.
That’s one of the reasons why the British PM was in town last week – over half the bailout money is slated for the UK and Europe – they’re having their own meltdown.
Under the Maastricht agreements there is no lender of last resort in the European Central Bank.
Well, yes, it will. Paulson early on said that foreign banks with US interests were welcome at the trough.
Every bank in the world has a New York branch. Axis of Evil countries are the only notable exceptions.
Every bank on the Pacific rim has, in addition to a branch in New York, a branch in Los Angeles or San Francisco.
Every bank in Central & South America has, in addition to a branch in New York, a branch in Miami.
It was suggested that all these banks need do to take advantage of our 700 billion was to sell their domestic debt to their American branches, and then move the resulting profit back home.
We’re going to do wonders for the overseas markets. The Icelanders, the Belgians, the Germans, the English – who have all now bailed out banks – should have been patient. Uncle Sam is riding to the rescue. Do I see the shade of General Custer on that steed?
With the ‘new economic dictator powers’ given to Paulson in the ‘Bailout bill’, squat and watch as Billions and Billions and Billions AND Billions go to bankers in Britain and China to ‘cover their losses’ in the international derivatives markets just as fast as Paulson and his robbery gang can make the transfers happen. Paulson is now dictator-n-chief of the U.S. economy, who now thanks to Congress’s ignorance, can rule by whim and fiat.
The new ‘law’ that gives Paulson ‘power’ supposedly now according the the ‘Bailout law’ not even the U.S. Supreme Court can ‘question’ Paulson’s decisions nor his motives. In effect Paulson is above our three-tier form of government. The ‘Bailout bill’ is ‘un-Constitutional’ as ALL revenue bills MUST originate in the House, NOT the Senate. But who has the backbone to fight it? And by the time anybody got up enough ‘courage’ to fight it, it will have been too little too late as the $$$’s will have long since been absconded with by Paulson’s robbery gang.
Also it appears that 3 Israeli banks are slated to get large sums of the ‘stolen from the U.S. taxpayer’s’ money — Hapoalim group, Bank Leumi group, Discount Bank group. And with sooo much money going into the Israeli banks, our own FBI is now stuck and will be stonewalled in any investigation attempt on their part, as Israeli financial privacy laws prohibit disclosure. The Israeli bank’s obligation of secrecy extends not only to the details of their client’s account but also to all transactions related to the account. In other words, if U.S. authorities want to know about this, they can bend over while the Israeli bankers drive them home. Israel does not extradite its citizens. However it does allow prosecutions in its own courts for crimes committed abroad.
Of course we the U.S. could always use the ‘aide packages’ to Israel as a ‘leverage’ in order to get Israeli-oriented criminals involved transferred to U.S. courts for prosecution. But watch as the Congress squeals like a stuck pig if DOJ/U.S. law enforcement attempted such.
American financial institutions largely created this problem.
CEO’s like Hank Paulson at Goldman Sachs ( “Earnings” while at GS, 700 million dollars) knowingly made fraudulent loan transactions that netted 100’s of millions in bonuses for themselves, then packaged up that toxic waste and sold it as triple A “Investments” to third parties abroad, including Banks, Insurance corporation and Pension funds as well as “Sovereign Wealth funds” in the Middle east, and Asia.
By removing the “Toxic waste” from their own banks and foisting it off on foreigners (“Earning” yet more fat fees in the process), these people thought they had dumped the danger outside America’s borders.
The problem is… America, particularly the American Government desperately needs the rest of the world to keep loaning it money if it is to keep it’s own Economy functioning on the most basic level.
If the rest of the world stopped….America is instantly bankrupted…. and will it not be able to fund (for example) Next months military payroll.
At least not with anything recognizable anymore as the “dollar” we once knew.
America will be into Zimbabwean level inflation within months.
And the rest of the world has told Bush, in no uncertain terms…. that America has to take back it’s own toxic waste and refund at least some of what it has swindled.
Other wise, the rug gets pulled.
That’s why Foreign institutions have been included in the Bail
So the “toxic Waste” they had bought in good faith as triple A investments can be redeemed by the nation that sold them.
It has been decided that Paulson et al will keep thier ill gotten gains, can’t get it back anyway since the bulk of it all is, by now, in off-shore tax havens.
So the working American Family will have to pay for it.
Seeing as how the real source of the bailout funds in not the US Treasury but rather foreign sovereign wealth funds the question, Will the bailout result in a massive transfer of investment money out of the U.S? is misguided.
Rather, under these circumstances, the Paulson regime is better understood as an international clearinghouse for solving international problems.
We should expect that, under this arrangement, the foreign funders will have a major voice in how affairs would be executed.
Re: the concern over money bills and the House. the bill voted on was a mental healthe bill sent by the House to the Senate. dIt was loaded with ammendments including the bailout provisions and returned for House action. it’s all o.k. and kosher, if a little unusual.
The original Paulson bill which came on a Friday said in 2a:
That part was removed after the weekend and intense lobbying from foreigners.
Try to see this from a foreigners position:
– the U.S. banks originated “assets” backed by U.S. mortgages.
– U.S. rating agencies put an AAA stamp on these “assets”.
– the U.S. government regulators stood by and did nothing.
– this stuff was then sold of to foreigners for good hard money.
Now the U.S. wants to bail out its own banks but will leave the foreigners who trusted it standing in the rain?
No way. Especially as the money needed for the bailout will have to come from those foreigners. Either the U.S. now makes them whole, or it will not get the money to bail out its own banks.
I doubt that Paulson will buy stuff that was not originated in the U.S. But he will buy Mortgage Backed Securities that originated in the U.S. and were sold to foreigners.
Either that, or he will have to pay 10+% interest for the loan he needs to finance the bailout.
“That’s one of the reasons why the British PM was in town last week – over half the bailout money is slated for the UK and Europe – they’re having their own meltdown.” – NYIrish
“We’re going to do wonders for the overseas markets. The Icelanders, the Belgians, the Germans, the English – who have all now bailed out banks – should have been patient. Uncle Sam is riding to the rescue.” – Dave of Maryland
It may be true that Europeans will benefit from the Paulson bailout; it is certainly true that there is no “lender of last resort in the European Central Bank as such. But there is no need for a Europe wide bailout by the European bank – each country has its own central bank – like for example, the Bank Of England –
to prop up the domestic finance economy. But in any case, the Continntal European banking system is not in meltdown. The current severe financial crisis is largely confined to the so called “Anglo Saxon” economies – USA,UK, Ireland, perhaps Australia and others.Only a very few continental European banks and insurance houses are in any kind of trouble, and nowhere near on the scale of the problems afflicting the US and UK. Uncle Sam will not be “riding to the rescue” of France and Germany.
Banking on the continent has always been far more regulated than in Britain and America ever since the days of Thatcher and Reagan whose worship at the sacred monetarist altar of the free market permitted and encouraged the ill-disciplined and unregulated extension of credit through the economy. It is still the case that anyone asking for a mortgage in France must produce a downpayment of 20% of the property value, and is subject to the most rigorous investigations to establish creditworthiness. Similar conditions apply in Germany, Italy etc. It is worth noting that a high proportion of continental households dwell in rented urban apartments and there is not the same urge towards owner occupancy and the acquisition of a freehold property on some vast low density housing estate – sprawl – as characterises the UK, USA, Australia. Nor has there been the same development of a consumption economy in which already mortgaged properties are used as collateral for the purchase of SUVs, wide screen TVs, house extensions, even second homes,etc. The “miraculous” expansion of the Anglo Saxon economies has been fuelled by too readily acquired credit and has resulted in levels of indebtedness simply not present in continental European economies. The growth of the American and British economies has seen the expansion of the service sector – especially the finance industry – and the relative and even absolute decline of manufacturing. It is worth looking at the latest trade figures published in the Economist: Germany, $284 billion surplus; Netherlands $61.4 billion surplus ; ; UK, $184.7 billion deficit: USA, $844.6 billion deficit – compared to all of Euro area combined, $10.8 billion deficit. Figures like that suggest that it shall not be Uncle Sam riding to the rescue of anyone.
During his trip, Mr Greenspan visited the Bank of England’s monetary policy committee. He told them the US financial system had been resilient amid the bursting of the internet bubble. Share prices had halved and there had been massive bond defaults, but no big bank collapses. Mr Greenspan lauded the fact that risk had been spread, using complex derivative instruments. One of the MPC members asked: how could this be? Someone must have lost all that money; who was it? A look of quiet satisfaction came across Mr Greenspan’s face as he answered: “European insurance companies.”
If we don’t bail them out after we dumped our “instruments” on them, who will pay for our Empire of debt?
I appreciate the Colonel publishing my questions and I have enjoyed the comments.
Here is my two-cents worth.
The thing is that money is extremely mobile and is subject to almost immediate transfer by inconveniencing a few electrons. The bailout money will leave quickly.
A good example of this is that Ireland has adopted a plan to guarantee bank deposits. Ireland’s guarantee is better than Great Britain’s and so British money is moving to Ireland.
Marketwatch reports, “The move by Ireland has not only shored up its own financial system that, on Monday, saw share price drops of as much as 40%. It’s also prompted an exodus of money from British consumers and companies to Irish institutions that operate in the U.K., as the bill in its existing form doesn’t distinguish between deposits at home and abroad.
One company moved 500 million euros into an Irish bank, The Times (of London) reported. ”
In the next few days, capital will be flying around the globe trying to find a safe haven and as it flies it will be converted into various different currencies. To some extent, the various currency prices will serve as a report card of which country is doing the best job of keeping its economy together.
The various central banks will have to vie to match guarantees if they want to keep their banking systems alive. Right now, Ireland is a price leader in this competition. We will see soon if GB and the other European countries follow suit. Small countries like Ireland and Iceland could see their economies wrecked by a storm tide of money coming in, only to have it leave just as fast.
The whole thing is like a big punch bowl being jostled–it is sloshing over and messing the carpert all around.
The velocity of the crisis will move very fast because of how easy electronic money moves.
I personally believe that the bailout was never intended to “rescue banks and financial institutions.” I think it was a fraud foisted on the taxpayers to give the Treasury the ability to try to stabilize the world economy as a buyer of last resort for the trash. Clearly, the language of the bill allows purchases of trash from international “financial” institutions. SEC. 101 (a)(1) of the Bailout bill states, “AUTHORITY- The Secretary is authorized to establish the Troubled Asset Relief Program (or `TARP’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.”
If that is really the case, then it is simply not enough money. The treasury will always be fighting a losing battle. It is much like ANWR oil drilling where there is a lot of oil, but the amount is insignificant to lower prices given the huge size of the world oil market. Those who support drilling ANWR to reduce prices, just do not understand the fallacy of their arguments.
Soon, whatever money is spent on the bailout will spread to some level or equalibrium around the world. It is like pouring a teacup of water into an Olympic-sized pool that leaves an imperceptible waterlevel change.
Also, if it is really the case that the money was to save the world and not American institutions, the American people should be really mad at the people who lied to them. While some may believe that the lie was justified by circumstances, I do not agree. The whole bill was the essence of dishonesty and it will ultimately weaken the nation’s trust in its government. Unfortunately, all of the present Presidential candidates participated in the lie and that bodes ill for the future.
In the end, this crisis will not be solved by printing money or shoring up bad loans or buying derivatives. As in Argentina, those attempts will fail. As in Argentina, the banking and financing system is simply broken beyond repair and will have to be re-booted from scratch. Monetary solutions will not work using the present money.
The concept of banking is a great invention. But, like a computer, sometimes you have to clear out the memory. Once restarted, the computer may work just fine. Historically, this nation has destroyed and restarted its banking system several times. We will again.
It is time to start thinking about how to buffer the consequences of this massive mess without too many people dying and starving. The real problem is going to be one of securing sustenance and social services to individual people and keeping them in their homes.
But wait…There’s more!!!!!!
You have only seen part One of the remedy. Part Two is going to be worse, and it’s cleverly going to be left by the Republicans for Obama to implement.
Yes, you do have to bail out foreign banks, in part because your rating agencies branded the toxic junk as AAA investment grade paper with the complicity of the American Government.
However the worst is yet to come, and its going to be left to Obama to deal with. That is the question of the American Government agreeing to put a “floor” under the U.S. Dollar exchange rate with major currencies in return for further extensions of credit by foreign lenders. This is essential from their point of view to ensure that America can’t steal them blind by hyperinflating the currency and making U.S. dollar denominated debt virtually worthless.
Now nobody has told you about this yet because the consequences are just plain awful. To stabilise the dollar requires that inflation – too much money chasing too few assets, be checked. The only financial levers available to do this are massive increases in taxation and massive cuts to Government spending – and at the same time, in order to reduce demand for goods and services, or the selling of large chunks of valuable American physical assets (like most of the U.S. Navy perhaps, Col. Lang?) to foreigners.
Unless this process is done very very delicately and with great skill and compassion, the pain this process could cause the General Population would be intense, physically and emotionally.
Note that only the US, Sweden, Switzerland, and The Netherlands allow mortgage interest payments for non-income producing property to be tax deductible. However, in the case of the latter three countries, homeowners must pay additional income tax on an imputed income related to their homeownership. In other countries, like Canada, the homeowner has a great incentive to pay off a mortgage as the payments are coming out of after-tax income.
There is an alternative to scenarios such as the one envisioned by WP and it is total global war, pulling out all the stops and letting the (radioactive) chips fall where they may. I don’t recommend it but it could be done.
Are European banks and investors adults or children? Didn’t they as “sophisticated” investors not do any of their own due diligence before they purchased securities? Are they willing to return all gains during the go-go years to American taxpayers to purchase their poor investment decisions?
These were all investment decisions by sophisticated private parties who benefited while asset values inflated and now want US taxpayers to hold the bag while assets deflate. Everyone had plentiful time to get off the gravy train. The whistle began blowing a while back and it sure was loud. Every institutional investor heard it unless they were tone deaf. Many rode the train waiting for one more station before getting off. Now unfortunately the train is off the rails.
Lets face it this is all a shell game. What we have is the unraveling of a literally gigantic Ponzi financial scheme – perpetrated by global “Wall St” finance in collusion with central banks, financial regulators and political elites. The scale is massive relative to world productive capacity because of the positions of the perpetrators. It’s not possible to restart this Ponzi. All these “stability actions” to try to keep this Ponzi scheme afloat will naturally fail. At some point it will have to be dealt with. Weakening the already fragile US taxpayer balance sheet to delay the squaring of the books is only increasing the costs and the pain of adjustment.
Zanzibar’s reference to Ponzi is probably accurate. This “rescue” is really Ponzi grabbing his chips while the lights come up before the whole thing collapses. Ponzi is on the plane to the Islands with all he can grab.
If the nation is to survive without terrible disruptions, we have got to look to the bottom to start rebuilding things. All of the money put in at the top will only be going with Ponzi on his vacation.
There have been many recoveries from Ponzis and bubbles. Nothing really starts getting done until the “investments” are understood to be the worthless paper they are and abandoned and forgotten. All “investments” at the top will be simply squandered. I agree that all “stability actions” will fail.
What value left in the government needs to be preserved to be used to put people back to work, fixing the bridges, and rebuilding the bottom of the economy.
@zanzibar – Are European banks and investors adults or children? Didn’t they as “sophisticated” investors not do any of their own due diligence before they purchased securities?
Many of them trusted the official ratings – that may have been stupid.
But that isn’t the problem Paulson has. He needs to sell $700+ billion.
If the AAA rating of Mortgage Backed Securities was wrong, maybe the AAA rating the U.S.A. has is wrong too?
If a pension fund in Europe got screwed by buying MBS, will the same pension fund bow trust T-bills?
If Paulson leaves the foreign investors with the losses now, they will not finance the U.S. any longer or, at least, to much harder conditions (interest rates) to make up for potential losses.
Your are right about the ratings. That has been part of the scam. Look at the conflict of interest. Ratings agencies got paid by the issuers of the securities. No different than Wall St research being funded by their investment banking operations. Institutional investors who purchased securities on the basis of ratings with no due diligence should not be entrusted with other people’s money.
If foreign investors are smart they will not buy any US government backed securities at the current rates. The risk reward is not good. All the private pools of capital that I know who got the credit bubble right will not touch long dated Treasury paper. They are using the unwind in the USD carry trade to exit all their long maturity USD positions.
Institutional foreign investors know that the US government balance sheet will explode and the Fed balance sheet has already taken off. They are taking US debt market positions right now with their eyes open. The problem they have is the Euro block is under even greater stress. DB is levered 50x with a balance sheet nearly the size of German GDP! A free floating renminbi will expose the creaky foundations of the Chinese financial structure. No easy choices. Substantial due diligence and common sense investing will become necessary. IMO, all the “black box” quant investing will be discredited by the end of this cycle.
The real game will be run secretly and without any direct public inspection or information. The game–the division of liability between the taxpayers (US), the financial institutions, and the foreign lenders. Guess who will take the biggest hit. Note how little reporting is required under the new law to either Congress or the US public. Next to Viet Nam and that decade long struggle, this promises to be the second major blow to the belief system of the average American that his/her government is acting on their behalf. Long term cynicism and destruction of American polity has now made the US a really “Dangerous Nation” as recently described by Robert Kagan in his book of the same name. Forces in the US national scene are now being unleashed that should make responsible leadership shudder. At least a dozen e-mails have been sent to me from working class friends describing almost total losses or losses in excess of 30% in their 401(K)s which were their hope to deal with retirement as even a remote possibility. Some several more are afraid to open their envelopes. And as suggested before not all the cards are held by the US.
I have to lay a majority blame of the current fiscal crisis directly on Bush and his administration. During Bush’s tenure, his administration is fully responsible for the deliberate removal of vital controls over the American banking industry that has caused the boom-and-bust we are now paying for.