Republicans are basically telling us the only way business can operate in America is if shady lenders make dubious loans to corrupt companies and then get taxpayers to bail them all out when they turn out to be idiots or liars or both. Seriously?

It's like Iraq without the presence of troops in the capital. It's been "we know what we're doing" all along, but we're in the middle of this mess thanks largely to uber-genius financial cowboys like Paulson (former CEO of Goldman Sachs - fox, meet henhouse).

The fiscal shock & awe has completely destabilized the marketplace, and the people responsible for the mess are now saying that they can fix it if they only are given the time and the capital. The $700 Billion is the Green Zone - slush funds meant to provide a haven for those lucky enough to have access.

Giving Paulson sole discretion is like appointing him the L. Paul Bremer of Wall Street. He'll provide administration and will distribute the loot to the bootlickers and corporate cronies, and when the federally-mandated deadline arrives (i.e. when the Constitution succeeds in giving him the boot after Election Day), he'll be choppered off to some safe location while the situation grows steadily worse.

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the distance between black & white is much further than i would like until now i never noticed that fascism has many disguises -d. boon, 1981

The thing that is different this time around is that the bankers got a lot smarter with the new exotic mortgage repackaging vehicles. Unlike RTC 1.0, there is no value to be recovered from what we are buying.

Here's the best description I've read, from Dave Farber's IP list:

"They take lets say 1000 mortgages and slice them up into CDOs, but not as 10 groups of 100, that is the old way, and made sense. They are sliced up by losses - so the first one is the first 10% loss, then the next 10%, etc. So 2-3 of the 10 are now worth ZERO because houses are worth much less then a couple years ago and foreclosure auctions only recover a fraction of the value. One of them is worth all of it's value unless housing collapses to 10% which is not likely. Thanks to the exotics, the banker can only win because all of the risk is sold off as AAA debt to pensions and local governments and all the gains are kept. What you're thinking is correct - this makes no sense and nobody would be dumb enough to buy these things if they understood them.

The stuff the taxpayer is getting ready to buy are those first CDOs, the ones worth zero that the banks cannot sell because they are worthless. Don't worry they are still rated AAA, so you're getting a great deal!

So this time it is different then the RTC, which bought actual real mortgages. And this is not even widely understood in the banking world. Warren Buffet says he doesn't understand these exotics, and how could he, they make no sense unless you can think like a pirate, and he's a good guy.

They got us. Lock, stock, and barrel. Nothing we can do about it. Joke is on them tho - their loot is in US dollars."

The idea of letting Paulson and the Treasury do whatever they want outside any federal law or oversight is outrageous. It would be like a fourth branch of government (or fifth counting Cheney?) with a blank check and no balances.

Regardless of party affiliation or ideology, I'm not comfortable with anyone having this kind of power in our government.

While I understand the distrust of the Bush Administration, and of the corporate and financial mismanagement that has brought us to this point, it is important to realize that there are players in this game who, by no fault of their own, find themselves at the mercy of the market's failure or success.

Today’s retirees have less money in savings, longer life expectancies and greater exposure to market risk than any retirees since World War II. Even before the last week of turmoil, 39 percent of retirees said they expected to outlive their savings, up from 29 percent in 2007, according to a survey by the Employee Benefit Research Institute, an industry-sponsored group in Washington.

“This really highlights the new world of retirement,” said Richard Johnson, a principal research associate at the Urban Institute in Washington. “It’s a much riskier world for retirees, because people don’t have defined-benefit plans. They have pots of money and they have to worry about making it last.”
(link...)

If the Democrats are smart, they'll exploit this issue, but they will also make sure that there is adequate relief for citizens burdened with debt and oversight and controls to protect the taxpayers.

Doing nothing could help the Democrats use the issue for November, but it's a serious gamble if the world markets react wildly, or the financial managers of the troubled institutions simply jump ship, and a lot of people get caught without help and blame the Democrats.

Obama says he will put all Bills up for his signature online for five days so that everyone can read them and provide input. Considering that most people who voted for the Patriot Act never read it, that's not a bad idea.

With Henry Paulson's 2 1/2 page "There will be no questioning Mah Awe-Thority!" Bill being shredded by the light of day, it is worth looking at Chris Dodd's 44 page alternative.

Krugman likes it.

(link...)

An excellent point:

Even under the Goldilocks scenario [in which the feds gets the price for junk securities just right], the financial system would remain in a precarious state. That's because the proposal doesn't deal with the underlying deterioration in asset values -- the mortgage crisis itself -- nor does it address the ever-increasing liabilities (bond insurance, Credit Default Swaps) that are linked, directly or indirectly, to declining asset values and eroding FI balance sheets. Because it doesn't take a sufficiently systemic approach -- the erosion of asset values and the disruption to the credit markets -- it also isn't set up to deal with contagion into other classes of financial assets such as asset-backed commercial paper (credit card receivables, etc). So even the best case Goldilocks scenario doesn't address the ongoing credit crunch because it doesn't recapitalize the financial system, it only keeps it from collapsing.

The Treasury proposal is a gigantic exercise in temporizing. It's still treating the problem as a liquidity crisis, and as Dean Baker points out, Paulson's track record at temporizing hasn't been stellar -- he's consistently underestimated the scope and intensity of the crisis at each stage. And fundamentally, the proposal doesn't address the heart of the problem -- the continuing downward spiral in the value of US mortgage assets and the permanent damage that has been wrought on global financial institutions.

For $700 billion we should make headway on the core problems. It's evident that we can't rely on voluntary participation by mortgage holders in cleaning up the housing market mess, but the experience of the FDIC with IndyMac suggests that progress can be made when "voluntarism" is removed. Any workable proposal must, at its heart, provide a system that will force underwater mortgages into workouts where feasible rather than continue to flood local housing markets with vacant foreclosures. "Equilibrium" in the housing markets can be found at several levels -- we shouldn't have to wait until we have a total bloodbath in housing to begin gaining traction at a bottom of the mortgage market. Addressing the housing crisis isn't a "Christmas tree" add-on as a sop to Democratic politicians. It should be a core part of any proposal.

The Independent Community Bankers Association weighs in on the proposals and offers solutions to protect small banks and their customers in the form of a sample letter to legislators:

As Congress responds to the Treasury’s massive new financial rescue package, I urge you in the strongest terms to provide equity for community banks and for our customers. Without important changes by Congress and the Administration, the program will help only Wall Street, not Main Street.

Community bankers did not create this financial crisis, but our banks and communities are clearly feeling the impact, and – as the fundamental drivers of local economies – we could be in a strong position to help resolve this crisis. To make this possible, Congress should include the following:

Provide Full Access for Community Banks to the Treasury Asset Relief Program

Congress should direct that the new asset purchase program not discriminate based on the size of the institution or the size or number of assets eligible for purchase. Smaller institutions should have access to this program on a basis equal to that of the nation’s largest most troubled lenders, particularly for troubled commercial real estate mortgages which have had a disproportionate impact on community banks. Unless Congress includes language like this, smaller institutions will be left holding illiquid assets, which will hamper their ability to make new loans to their communities.

The Treasury Should Purchase GSE Preferred Shares

The Treasury’s conservatorship of the housing Government Sponsored Enterprises (GSEs) imposed severe losses on community banks that owned preferred stock in the GSEs. The agreement immediately eliminated dividends on common and preferred stock and placed the preferred stock in a junior position. Devaluing of this preferred stock has damaged a number of community banks’ income and capital positions. This is having a devastating effect on the ability of some banks to meet regulatory capital standards. It will undermine the ability of many other community banks to serve their communities as the loss of capital will constrain their ability to lend and support economic activity and growth.

The financial rescue package should require that the newly created entity purchase these shares from community banks under terms that minimize losses. That entity will be well positioned to realize any long-term gain. In the meantime, community banks will be able to continue to serve their communities with new credit.

Losses on GSE Preferred Shares Should be Considered Ordinary Losses

The new legislation should also provide that any residual losses community banks must take on GSE preferred stock be treated as ordinary losses, instead of capital losses, for income tax purposes.

Providing for Treasury purchase of these shares and fixing the tax treatment on losses would address the fact that community banks purchased preferred shares in GSEs to help these entities maintain their financial health. GSE preferred stock was designed to be attractive to banks. Dividends received favorable tax treatment and regulators permitted banks to purchase the stock because of its senior position.

Money Market Mutual Funds Insurance Program Must Not Be Superior to FDIC Insurance

By limiting coverage to amounts in money market mutual funds to amounts invested as of September 19, Treasury has already made an important improvement to its plan. Treasury should do more to assure that the insurance for these newly insured funds is not superior to FDIC insurance coverage.

*Treasury’s MMMF insurance program must be temporary so that Congress can fully address the issues.
* The MMMFs must fully pay for their coverage.
* Coverage limits should be comparable to the FDIC’s.

Federally insured banks have paid tens of billions to the FDIC for limited coverage. If the new MMMF program is more favorable than FDIC insurance, billions of deposits will flow out of our communities and community banks will be unable to fund local credit needs, undermining national economic growth.

Provide Regulatory and Accounting Relief

Congress should also provide the FDIC more time and flexibility in recapitalizing the Deposit Insurance Fund. As matters now stand, the FDIC must propose a recapitalization plan within a matter of a few days. Imposing drastically higher premiums on banks like mine would reduce credit to local communities.

Banks whose capital has been affected by recent events should receive adequate time to return to capital compliance. In addition, mark to market accounting rules should be suspended during the market turmoil, so that asset values do not spiral down and cause additional institutions to become troubled.

The steps I recommend – equal access to the new asset purchase program; purchase of GSE preferred stock from community banks; ordinary loss tax treatment for any residual losses; equity and relief on the deposit insurance front; and regulatory and accounting relief – will help community banks like mine continue to provide credit during these difficult times.

More examples of the unintended consequences of hasty decisions, some already made, and their ripple effects throughout the economy...