Mike Marlow wrote:
"F. George McDuffee" wrote in
message ...
On Wed, 24 Sep 2008 22:04:54 -0400, "Mike Marlow"
wrote:

Not that I'm in favor of this bailout, but where did you get the
scoop that
there would be no accountability?
-------------
Several people [actually two] have sent me off list emails asking
what they can do about this money grab. In all honesty, not
much, as this appears to be a "done deal," and Congress is again
putting on a punch-n-judy show for the amusement and diversion of
the great unwashed [that's you and me]. However if you are
interested and want to do something, write or email your senators
and representative to vote no. You can get their email/snail
mail/fax addresses at
http://www.senate.gov/general/contac...nators_cfm.cfm
http://www.house.gov/


Unfortunately, this has the familiar ring to it that is reminiscent
of the Patriot Act. My second biggest concern with this
administration is their ability to recognize a highly charged
environment and to capitalize on it to grab power and authorities
over the people. I do not see this as a Republican vs Democrat
thing, but as a hallmark of the Bush administration.

What Henry Paulson and Ben Bernanke want to do is buy up the worlds "bad"
inventory not of mortgages but of Credit Default Swaps and other derivative
products.
They have told the Congress and anyone else that will listen that these
instruments are terribly complex, difficult to value and beyond the
comprehension of all but a small group of mental giants that just happens to
include them. There is some truth to this but even a child can understand
what these things are if you call them by their right name.
They are securitized INSURANCE POLICIES and they insure the losses on
bundles of mortgage backed securities.
As such, they have absolutely NO underlying value. ZERO.

They do, however, pose tremendous downside risk if the risk they are meant
to protect against materializes. They are a purely speculative bet that
mortgages will be paid.

Guess what? The risk has materialized. Ten thousand foreclosures
per day as a matter of fact, and accelerating.

About a year ago I started calling credit default swaps "Uninsurance". Were
they
actually called insurance, and that is what they are, the issuers would have
had to back them with adequate reserves and been subject to regulation.
That's the way insurance companies work. In the case of credit default swaps
and risk management derivatives, Phil Graham introduced legistlation that
was passed and signed in 2002 specifically exempting and precluding these
products from oversight or regulation. There now exists $46 trillion dollars
of these "uninsurance" policies in an environment where they have been sold
and
traded to people who never considered that they would ever have to pay off
on them and don't have the reserves to do so in any event.

As traded securities, the worlds banks, investment banks and hedge funds
were making a market for them in the same way market makers do for equities
on Wall Street. You know, like the NYSE, for instance. There is always a
buyer of
last resort or the stock is delisted and that is the real distinction here.
Traded equities - stocks - have an underlying value. There is an actual
company with assets.

Credit default swaps and risk management derivatives are just bets that some
other security ( a mortgage backed bond ) that does have an underlying asset
( a mortgage in this case ) will be worth face value. When you budle
substandard mortgages together and those mortgages default, the insurance is
supposed to kick in but in this case it's not insurance at all, it's
"Uninsurance" and there isn't any cash around to pay off.

What the Bush administration is currently trying to sell Congress is the
idea that the US Treasury should buy up what amount to a bundle of insurance
claims needing to be paid and that somehow we can take these turds and sell
them at some later date for their value at maturity. I'm sure you can see
now why there is reluctance on the administrations part to delineate their
intentions or explain the simple truth. The financial products involved are
complex but what they represent as a practical matter is very simple and in
the end they aren't worth even the thinnest dime.

One other thing.
Since Banks are limited in what they are allowed to purchase, all of this
garbage was run by the ratings agencies and rated AAA.
The banks and our otherwise regulated institutions could not have invested
in them otherwise. Huge fees were paid to ratings agencies such as Standard
and Poors to get these things rated and even today, these agencies will tell
you point blank that they didn't understand them or know how to asses the
risks involved. They just figured they ought to be AAA rated because they we
remotely tied to home and commercial mortgages.

We now have $46 trillion dollars of this "Uninsurance" infesting the entire
banking system.
$700 billion or even $1 trillion dollars isn't going to go far as a fix for
that and it isn't even necessary do so.
What we need to do is establish a fund to step in and support the banking
entities that would be crushed if they had to actually pay claims and then
let the earnings of those institutions recoup the loss over time. IOW, they
would have to pay back the US Treasury every dime, with interest, and their
shareholders would bear the burden. That is how regulated free markets are
supposed to work.

That's my take anyway. Your 401K, stock portfolio and retirement nest egg
are already gone, you just don't realize it yet. America needs to face that
fact and right now. This
doesn't mean the world is going to end by the way.

Here is something from a guy, James K. Galbraith, who is as smart as his
dad - John Kenneth Galbraith.
We need to follow his advice, not transfer a trillion dollars in good money
from the American tax payer to a bunch of down on their luck gamblers.


A Bailout We Don't Need

By James K. Galbraith
Thursday, September 25, 2008; A19

http://www.washingtonpost.com/wp-dyn...d=opinionsbox1

Now that all five big investment banks -- Bear Stearns, Merrill Lynch,
Lehman Brothers, Goldman Sachs and Morgan Stanley -- have disappeared or
morphed into regular banks, a question arises.

Is this bailout still necessary?

The point of the bailout is to buy assets that are illiquid but not
worthless. But regular banks hold assets like that all the time. They're
called "loans."

With banks, runs occur only when depositors panic, because they fear the
loan book is bad. Deposit insurance takes care of that. So why not eliminate
the pointless $100,000 cap on federal deposit insurance and go take
inventory? If a bank is solvent, money market funds would flow in,
eliminating the need to insure those separately. If it isn't, the FDIC has
the bridge bank facility to take care of that.

Next, put half a trillion dollars into the Federal Deposit Insurance Corp.
fund -- a cosmetic gesture -- and as much money into that agency and the FBI
as is needed for examiners, auditors and investigators. Keep $200 billion or
more in reserve, so the Treasury can recapitalize banks by buying preferred
shares if necessary -- as Warren Buffett did this week with Goldman Sachs.
Review the situation in three months, when Congress comes back. Hedge funds
should be left on their own. You can't save everyone, and those investors
aren't poor.

With this solution, the systemic financial threat should go away. Does that
mean the economy would quickly recover? No. Sadly, it does not. Two vast
economic problems will confront the next president immediately. First, the
underlying housing crisis: There are too many houses out there, too many
vacant or unsold, too many homeowners underwater. Credit will not start to
flow, as some suggest, simply because the crisis is contained. There have to
be borrowers, and there has to be collateral. There won't be enough.

In Texas, recovery from the 1980s oil bust took seven years and the pull of
strong national economic growth. The present slump is national, and it can't
be cured that way. But it could be resolved in three years, rather than 10,
by a new Home Owners Loan Corp., which would rewrite mortgages, manage
rental conversions and decide when vacant, degraded properties should be
demolished. Set it up like a draft board in each community, under federal
guidelines, and get to work.

The second great crisis is in state and local government. Just Tuesday, New
York Mayor Michael Bloomberg announced $1.5 billion in public spending cuts.
The scenario is playing out everywhe Schools, fire departments, police
stations, parks, libraries and water projects are getting the ax, while
essential maintenance gets deferred and important capital projects don't get
built. This is pernicious when unemployment is rising and when we have all
the real resources we need to preserve services and expand public
investment. It's also unnecessary.

What to do? Reenact Richard Nixon's great idea: federal revenue sharing.
States and localities should get the funds to plug their revenue gaps and
maintain real public spending, per capita, for the next three to five years.
Also, enact the National Infrastructure Bank, making bond revenue available
in a revolving fund for capital improvements. There is work to do. There are
people to do it. Bring them together. What could be easier or more sensible?

Here's another problem: the wealth loss to near-retirees and the elderly
from a declining stock market as things shake out. How about taking care of
this, with rough justice, through a supplement to Social Security? If you
need a revenue source, impose a turnover tax on stocks.

Next, let's think about what the next upswing should try to achieve and how
it should be powered. If the 1960s were about raising baby boomers and the
'90s about technology, what should the '10s and '20s be about? It's obvious:
energy and climate change. That's where the present great unmet needs are.

So, let's use the next few years to plan, mapping out a program of energy
conservation, reconstruction and renewable power. Let's get the public
sector and the universities working on it. And let's prepare the private
sector so that when the credit crunch finally ends, we'll have the firms,
the labs, the standards and the talent in place, ready to go.

Some will ask if we can afford it. To see the answer, don't look at budget
projections. Just look at interest rates. Last week, in the panic, the
federal government could fund itself, short term, for free. It could have
raised money for 30 years and paid less than 4 percent. That's far less than
it cost back in 2000.

No country in this situation is broke, or insolvent, or even in much
trouble. For once, Wall Street's own markets speak the truth. The
financially challenged customer isn't Uncle Sam. He's up on Wall Street,
where deregulation, greed and fraud ran wild.




--

John R. Carroll
www.machiningsolution.com