I thought I'd share some thoughts from Ryan Pfenninger of MarketRiders, who was adamant that yesterday was a bad day for trying to reach consensus on the mortgage bailout. His thoughts are worth understanding. House Republicans are trying to remember what fiscal conservatism means. After eight years of writing checks to fund anything and everything the Bush Administration sought, these members of Congress remembered they must stand for re-election on November 4th.Apparently, they believe that standing behind conservative fiscal ideologies for the next 40 days will keep them in their seats in Washington.
No one can blame them for disliking the so-called Paulson Plan. Let's consider the most recent set of facts:
- Are we really going to rely on the same people who led us into this mess to get us out? It is entirely possible that had Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) reform legislation been passed two years ago, the scale of the current economic mess would be greatly reduced.
- Several financial experts are discussing how the taxpayers will make money on their $700 billion investment. But investing in bad mortgages is not like investing in distressed companies. If you invest in a distressed company, the company can right itself and provide a good return. If you invest in a second mortgage that was written on a house valued at twice what its currently worth, the odds are slim you will ever see a positive return on that investment.
- Secretary Paulson's plan would entitle him to purchase assets from any financial institution – not just AIG. When asked if this would allow him to purchase from pension plans, he said yes. How does purchasing from a pension plan help the homeowner facing foreclosure or the bank who can't afford to lend any money?
- The plan does not seem to differentiate between the types of loans that the government can purchase. There is a big difference between purchasing a first mortgage on a property and purchasing a no-documentation loan or home equity line of credit. We may have a chance of recouping money on the first mortgage; we have little to no chance on the others.
- Where are the details? Three pages aren't enough for anyone to feel comfortable spending this kind of money.
What if we don't do anything at all? What if we let the market sort this out on its own? Isn't this socialism at its worst? As much as I believe in free markets ability to self-regulate, I no longer believe nothing is an option. We cannot afford to lose credibility with foreign investors while we're $9.6 trillion in debt. It would be disastrous if foreign countries no longer purchased our debt because they didn't trust the financial markets. If we let this linger, retirement investment accounts and pensions could be seriously impaired.
How do we know that a $700 billion bailout will work? Haven't we already pumped hundreds of billions of dollars into the economy? How can we claim that this money is working when Washington Mutual (NYSE: WM) just failed tonight and was bought by JP Morgan Chase & Co. (NYSE: JPM) on the cheap ? There is no simple answer to this. The fact is nobody knows the right number. It's simply a guess.
So what should happen? Here are some things that Ryan believes are critical when a bailout plan eventually gets finalized.
- Phased approach. There is no reason to spend all the money up front. It makes sense to invest a portion, watch what happens, and evaluate how successful the strategy is.
- Once the government purchases assets, it must be ready to work out these loans to prevent further foreclosures. If we can stem the tide of foreclosures, we can stop this meltdown dead in its tracks.
- Oversight. The Treasury must be accountable for what it purchases. A plan with no or little oversight asks for corruption, preferential treatment to certain institutions, and the like.
- Taxpayers first. This bailout is to protect the taxpayer. Any proceeds from this bailout should go to pay back the money we borrowed and to lower the deficit, not into the pockets of Wall Street bankers who aided in creating this mess.
Ryan hopes that Washington is able to set aside both partisan and Presidential politics in order to put together a plan that has a chance of succeeding in a timely fashion.
Closing Bell: Can't go up every day (BAC, HE, HPW, COMS, BRCD, WMT, AMD)
Wal-Mart grows profit and cash flow in Q3, but comps still ailing
Chasing Value: Ten stocks for 2010 -- Part 2
Reader Comments (Page 1 of 1)
9-26-2008 @ 4:44PM
william lindblad said...
No, this is not a game. While the majority of the public is not up on all of the ins and outs - they are adamantly against a bail out.
They may not fully understand, but they have the correct answer.
With a bail out we will stabilize (or try to) the financial sector and pass the bill to the taxpayer. Those that claim that sale of assets will actually benefit the taxpayer should go back to the days of the RTC. The cost of that fiasco has never been fully revealed, but it was over 100 billion back in 1990. That equates to about 3 times as much in today's dollar value. How much did it recover for the taxpayer?
Go find it - good luck. It did recover money for the banks that caused it, although re-formed into investment groups. The government bought at discount, sold at discount and the buyers (investors?) put a few bucks into the properties and sold them at a profit. We, the taxpayers, got zip. We got the bill. We got the layoffs. (the government did extend unemployments benefits).
Nothing has changed, except this time the event is 10 times larger. A bail out will be just more of the same.
However, this time it will be worse as the cost of the bail out will de-value the dollar and oil will again rise, compounding the problem. So, if there is no bail out - there will be layoffs. If there is a bail out there still we be layoffs.
The only real difference is in the latter case the taxpayer gets screwed even more.
Let those that baked this pie eat it also.
9-26-2008 @ 5:37PM
Lori Dabney said...
Let them fall, tired of taxes and bail outs, when does it stop! no one bails out the tax payer and the middle class is rapidly becoming no more, with everyone having rights except the anglo saxon male and female. the ones who pay the bills!
9-26-2008 @ 5:56PM
Em said...
Anglo Saxon !!!!! are you serious. well open your eyes sweetheart, that race left America a long ago. This is no true pure Anglo Saxon race in this country. Oh the new term that you might be trying to label yourself would be Racist.... so why don't you just wear, that label you wonderful taxpayer.
9-26-2008 @ 11:33PM
radar said...
we should not bail them out, they got greedy, let them reap want they sow, the richer get richer and the poorer get poorer, as far as i,m concered, they can kiss it'' just like we all trie to make ends meet, then they hold it against us by the credit reports, if u have money u got it made if not good luck , to hell with the envestment bankers, they are leaglized crooks,
9-27-2008 @ 2:02AM
Arnold said...
It's obvious the bailout is going to be forced on us, and since the situation is so dire it's probably necessary, but it needs to be postponed until some changes are made. The most obvious snakes in the grass that need to be fired immediately are those at Fannie Mae/Freddie Mac who did away with income requirements, job stability, and credit ratings and just started issuing or guaranteeing mortgages for anyone who wanted to buy a dwelling. People with credit so bad they couldn't even get a gas card or JC Penny card were suddenly able to buy a $300 thousand house or condo so it was just a matter of time until those loans started turning sour. So I want to see some good business practices in place and some skunks chased off before any bailout happens. The Wall Street crowd? They need big-time layoffs and salary cuts before any bailout. Then we can advance them some bailout money and let them deal with the foreclusures. The govt' should not go into the real estate business. Pelosi would want to give all those houses away to her beloved po' folks.
9-27-2008 @ 2:44AM
blue eyes said...
If economy is the human body, then money is the blood, bank is the heart, tax payer is the hair and brain is the fed. Heart always got the first fresh blood.
9-27-2008 @ 3:16AM
David said...
yes let them eat that delicious pie they cooked. im tired of it. i really believe its alot of hype and nonsense. The didnt pass the bill friday and omg look nothing happened at all, no armageddon.I SAY NO TO SOCIALISM! NO TO NATIONALIZATION and im angry about the very thought of it! they did this to themselves why should i and John Q taxpayer pick up the tab?
9-27-2008 @ 5:06AM
CC said...
Let's get the list of all Former CEO's for the past 5-10 years ago, just remove these Former CEO's severance pay and/or any extra money to pay off this $700 Billion...Include CEOs and their wives as well as these executives involved. Just let these former CEOs to keep up to only one million dollars each, but go ahead take the rest of their $$$ (We taxpayers should pay NOTHING !!)
Remember all of these Enron executives and their wives money, etc...
9-27-2008 @ 8:24AM
Kathrin said...
I had to pass this on because it makes so much more sense than giving money to these losers....
I'm against the $85,000,000,000.00 bailout of AIG.
>
> Instead, I'm in favor of giving $85,000,000,000 to America in a We Deserve
It Dividend.
>
> To make the math simple, let's assume there are 200,000,000 bonafide U.S.
Citizens 18+.
>
> Our population is about 301,000,000 +/- counting every man, woman and
child. So 200,000,000 might be a fair stab at adults 18 and up..
>
>
>
> So divide 200 million adults 18+ into $85 billon that equals $425,000.00.
>
>
>
> My plan is to give $425,000 to every person 18+ as a We Deserve It
Dividend.
>
>
>
> Of course, it would NOT be tax free.
>
> So let's assume a tax rate of 30%.
>
>
>
> Every individual 18+ has to pay $127,500.00 in taxes.
>
> That sends $25,500,000,000 right back to Uncle Sam.
>
>
>
> But it means that every adult 18+ has $297,500.00 in their pocket.
>
> A husband and wife has $595,000.00.
>
>
>
> What would you do with $297,500.00 to $595,000.00 in your family?
>
> Pay off your mortgage housing crisis solved.
>
> Repay college loans what a great boost to new grads
>
> Put away money for college it'll be there
>
> Save in a bank create money to loan to entrepreneurs.
>
> Buy a new car create jobs
>
> Invest in the market capital drives growth
>
> Pay for your parent's medical insurance health care improves
>
> Enable Deadbeat Dads to come clean or else
>
>
>
> Remember this is for every adult U S Citizen 18+ including the folks who
lost their jobs at Lehman Brothers and every other company that is cutting
back. And of course, for those serving in our Armed Forces.
>
>
>
> If we're going to re-distribute wealth let's really do it...instead of
trickling out a puny $1000.00 ( "vote buy" ) economic incentive that is being
proposed by one of our candidates for President.
>
>
>
> If we're going to do an $85 billion bailout, let's bail out every adult U S
Citizen 18+!
>
>
>
> As for AIG - liquidate it.
>
> Sell off its parts.
>
> Let American General go back to being American General.
>
> Sell off the real estate.
>
> Let the private sector bargain hunters cut it up and clean it up.
>
>
>
> Here's my rationale. We deserve it and AIG doesn't.
>
>
>
> Sure it's a crazy idea that can "never work."
>
>
>
> But can you imagine the Coast-To-Coast Block Party!
>
>
>
> How do you spell Economic Boom?
>
>
>
> I trust my fellow adult Americans to know how to use the $85 Billion We
Deserve It Dividend more than I do the geniuses at AIG or in Washington DC.
>
>
>
> And remember, The Birk plan only really costs $59.5 Billion because $25.5
Billion is returned
>
> instantly in taxes to Uncle Sam.
>
>
>
> Ahhh...I feel so much better getting that off my chest.
>
>
> Birk
> T. J. Birkenmeier, A Creative Guy & Citizen of the Republic
>
> Imagine what 700 billion dollars would do for the economy...if it went to those who "deserve" a bailout!
9-27-2008 @ 12:35PM
FRANK KOVACH said...
MANY PEOPLE HAVE HAD TO TAP THEIR RETIREMENT OR 401K ACCOUNTS TO PREVENT FORECLOSEURE BECUASE THEY WERE UNABLE TO FIND A BANK TO ADVANCE FUNDS. REMOVAL OF FUNDS FROM RETIREMENT ACCOUNTS ARE TAXED UP TO 40% WHEN THIS MONEY IS REMOVED.
ANY BAIL OUT PROVISION SHOULD PERMIT THESE PEOPLE THAT HAD TO USE EMERGENCY FUNDS FROM THERE RETIREMENT ACCOUNTS TO PROTECT PROPERTY FROM FORECLOSURE TAX RELIEF AND AT A MINIMUM 2 OR 3 YEARS TO REPAY THESE FUNDS TO AVOID FEDERAL TAXATION.