Saturday, September 20, 2008

American Taxpayer on the Hook for $1 Trillion of Banks Non-, Mis- and Malfeasance. Plus: Music to Hunt Bankers By

It appears there will be a decade long wealth transfer from savers to bankers. To reliquify the big banks balance sheets, the powers that be will let the banks borrow cheap from the Fed or at artificially low shorter term rates, then turn around and lend at higher rates to the Treasury. There is probably a carbon trading angle here too*. You just watch.

It wasn't hard to add up how much the taxpayer would be stuck with, even I could do it:
September 7
...The big losers are the American taxpayers who may be on the hook for a Trillion dollars and who may see their government lose its AAA credit rating, with the increased borrowing costs that implies....
From Naked Capitalism:
New Bailout Proposal Costs Estimated at $500 Billion to $1 Trillion
Repeat after me: bye bye the US's AAA rating and the dollar. Although the Paulson's plan is only sketchy, on the surface, it is utterly ridiculous. The authorities propose to save the economy by buying mortgage paper at market prices....
...And the prospect of turning on the spigot has others clamoring for bailouts. There are calls for underwater homeowners to get handouts too.

Pray that this measure does not pass, or better yet, call your Congressman and Senator and raise hell. The importance of these initiatives and the dollars attached says they should not be rushed through in a panic, particularly when the underlying premise is so dubious.

From the New York Times:
The Bush administration, moving to prevent an economic cataclysm, urged Congress on Friday to grant it far-reaching emergency powers to buy hundreds of billions of dollars in distressed mortgages despite many unknowns about how the plan would work.

Henry M. Paulson Jr., the Treasury secretary, made it clear that the upfront cost of the rescue proposal could easily be $500 billion, and outside experts predicted that it could reach $1 trillion....MUCH MORE
From Bloomberg:
Backlash Over Bailouts Grows in Congress, Wall Street
As the U.S. government takes stronger measures to stabilize financial markets, some former Federal Reserve officials, lawmakers and Wall Street executives are saying too much has already been done.

``Every time they intervene, they do more harm than good,'' said Peter Schiff, president of Euro Pacific Capital in Darien, Connecticut, a brokerage that manages $1 billion.

Critics of the rescues agree that government actions, such as those that prevented the failures of Fannie Mae, Freddie Mac and American International Group Inc., can't postpone the inevitable worsening of housing and financial markets. They say the bailouts by the Fed and Treasury also encourage future reckless risk-taking by investors.

``If we don't stop now, there will be no end,'' said Gerald O'Driscoll, a former vice president of the Dallas Fed and now a scholar at the Cato Institute in Washington. He joins Vince Reinhart, former director of the Fed's monetary affairs division, and Marvin Goodfriend, a former official at the Richmond Fed in questioning the market interventions...MORE

I've been a close observer of financial behavior for many, many years and while essentially an optimist, sometimes I just want to bitch slap the folks who brought us to this point. A June 17 comment at MarketBeat:

...Just be sure you’ve got the helicopter gassed up because when the townsfolk come, it won’t be with pitchforks and torches.
And pinstripes make lousy protective coloration. As they used to say in the Brit. nature shows:
“Sadly now, there can be but one outcome…”

Same theme in an open letter to Senator Chris Dodd, Chairman of the Senate Committee on Banking, Housing and Urban Affairs, March 24:

...I understand you need the GSE's to reliquify the system fast, before the public realizes that the emperors actually have no clothes, and start hunting bankers for sport, but when do we say enough is enough?...

Here's the rondo from Mozart's Horn Concerto No. 2.
Music to hunt bankers by.

*Still on the "Hunting Bankers" theme but with a carbon twist from a comment at Environmental Capital:

For the banks, a Trillion-dollar carbon market that they can help set the rules for is a Godsend.There is nothing else that can replace the income lost from the exposure of the CMO, CDO, ABCP, structured finance shell game. Even the Fed’s creation of a Fed Funds/Treasury carry trade would take so long to reliquify the balance sheets that the public would have time reflect on what has been going on, and would start hunting bankers and traders for sport.
Comment by Climateer - March 26, 2008 at 11:37 am
Pardon me, I catharted. Better now. Still trying to fit into Hunting Pink though.