Global markets are soaring on news of a plan to bailout Wall Street again -- this time by creating a government entity that will buy up all the toxic waste on Wall Street's books. Yesterday, the Dow closed up 410 points on the news and this morning, Asian and European markets are up between 4% and 9% in response to the news, according to the New York Times. So, what is this plan and why is the market so happy about it?
At this point there's nothing much to the plan. The Times reports that stocks started to climb 617 points from their low during the day when Sen. Charles Schumer (D-NY) introduced a proposal to create a new government agency that would buy up the toxic waste on banks' books. The White House's anti-bailout crowd has already spent $1.1 trillion rescuing Wall Street so far -- this includes the $800 billion Lou Dobbs mentioned on CNN Wednesday night plus the $300 billion that the Fed injected into the market yesterday, according to the Times.
There does not appear to be much clarity on some fundamental questions: What kind of toxic waste will this agency own? Will it buy the waste from around the world or will it just stick to buying the waste from U.S. banks? How much of this stuff is out there? How much will the agency buy? How much will the agency pay? How much will this cost the American taxpayers? How will the agency raise the cash to finance these purchases? How will the agency sell this toxic waste to recoup the cost to taxpayers?
CNBC reports that the plan could cost $500 billion and that the government would buy mortgage-backed securities that Wall Street had underwritten. It would finance the purchases by selling Treasury bills. The agency making the purchases would hold the securities to maturity -- seven years hence. This administration plan would increase from $5 billion the amount of Fannie and Freddie-issued mortgage-backed securities that would be bought.
If this plan is what ends up being implemented during what promises to be another weekend session of government bailouts, I am not sure that global markets should be so overjoyed. That's because there are still trillions of toxic waste that is excluded from this plan. For example, as I posted, there are $6.1 trillion worth of Collateralized Debt Obligations (CDOs) which are not addressed in this plan. Considering that the mortgage-backed securities market was $6.9 trillion in 2007, the bailout plan leaves out a big pool of toxic waste.
But it looks like the administration is on its way to outdoing the 41st president whose Resolution Trust Company (RTC) bailed out the S&L industry -- including $3.4 billion to John McCain's pal Charles Keating who arranged a sweet real estate deal for McCain's wife. RTC bought a total of $225 billion in junky assets according to BusinessWeek. (Interestingly, RTC got $140 billion from selling those assets -- yielding an $85 billion cost for taxpayers).
The current president's bailouts could cost eight times that amount -- another victory for junior.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
9-19-2008 @ 10:58AM
Ralph Ed Bradley said...
When I was young, I remember it was always important that we had enough Gold to back up paper Money---I don't know , but I believe that is no longer the case. Its just --get the printers going, we need more Money. And Who ever signs it
done. Then we have a patch in the tire,
but the tire is worn completely out.
Personally--I don't think any President , or congressman, senator,Representatives should stay more than 6 yrs MAX.
9-19-2008 @ 11:01AM
joe theep said...
Why do we think that this is a good idea?
This means that the American Taxpayer is going to buy all the bad paper in the world.
What are we getting for this, more taxes, and richer companies.
That is really smart....
9-19-2008 @ 11:10AM
Joe Theep said...
Thanks Congress and Senate for fixing your rich buddies problems while we working people struggle to live.
You are the worst people in the world.
You have no brains and no ability to think through tough problems. If we fail it is tough love. If the rich fail then oh we need to help them with the working people’s money because they give us money to campaign with. What BS.
Impeach them all.
Do not vote for an incumbent.
9-19-2008 @ 11:13AM
Ralph Ed Bradley Jr. said...
I don't believe that there is enough Gold in the world to back up paper Money, so
the Governments just say there going to back up this one and that one--with nothing to do it with...
Lawyers always have made Laws for the lawyers...... Just complicated enough to
have to have one to {Maybe figure something out, or change to a new law>>
42 cents of every Federal tax money goes to the military. Its way behond that now
in our wars overseas. Now tell me how the US can bail out a plastic boat in a bathtub?
9-19-2008 @ 4:42PM
Robert Chapin said...
The bailout doesn't make sense. Applying $500 billion to the underlying mortgage balances would free up much more liquidity throughout the economy. Otherwise, we're just talking about a Bank Tax.