No Bailout

The first bailout has epic failed in the House. From the article:

The overriding question for congressional leaders was what to do next. Congress has been trying to adjourn so that its members can go out and campaign. And with only five weeks left until Election Day, there was no clear indication of whether the leadership would keep them in Washington. Leaders were huddling after the vote to figure out their next steps.

You already have the advantage of incumbency. How about you stop looking ahead of the current crisis and stay in session until you get this thing worked out, Congresspeople?

4 thoughts on “No Bailout”

  1. Nate Silver at fivethirtyeight.com made a couple of interesting points. He likens this to a prisoner’s dilemna, where all the legislators want the bailout proposal to pass, but nobody wants to vote for it. He points out that the probability of any individual legislator voting for the bill had a strong inverse correlation to how tight a race they’re in.

    Fundamentally, it sucks that we’re in this situation, but economists more or less agree that we’re out of options. It’s like if your neighbor lights his own house on fire playing with fireworks indoors – you kind of want to let it burn to punish him for being an idiot, but you’re better off putting it out so it doesn’t spread throughout the neighborhood. A locked-up market for credit will hurt everyone.

    Maybe they just need the Dow to crash some more and another bank or two to go under so that they’ll have the support they need to make it happen.

  2. Here’s the thing I don’t get: it’s all about having $$$ in the banking system available for borrowers, right?

    The current bailout seems to proportionally reward banks to the degree that they screwed around with these bad mortgage packages–if you don’t own any of them, the gov can’t buy them from you for $$++ what you could get for them on the open market and you get no relief.

    Can’t we do the inverse somehow, and infuse money into the banking system by rewarding the banks who *didn’t* bet their operations on these lousy instruments?

  3. While I’m not entirely familiar with the plan that’s on the table today, that’s basically what’s happened so far. Bear Sterns was “bailed out” by a government backed buyout from JPM. The Fed wanted the transaction to occur at $2 per share, effectively wiping out the shareholders. JPM decided to pay a higher price because the BS shareholders were threatening to let it go bankrupt rather than accept the deal, but JPM still got BS for a much lower price than their asset value. The Merrill Lynch, WAMU, and Wachovia shareholders were essentially wiped out when they were absorbed by BofA, JPM and Citi respectively. The government facilitated those transactions, in part, by allowing the big banks to use FDIC insured deposits to fund their acquisitions (as I understand it). AIG’s shareholders saw their equity diluted 80% in that liquidity infusion. So far, the government has been pretty intent on punishing the shareholders of any institution that has needed rescuing, which is appropriate. The issue of CEOs getting big payouts after crashing their banks is irritating, but fairly small in the big picture and is the fault of the shareholders anyway.

    So the “safer companies” — BofA, JPM, and Citi — are benefiting from various forms of government backing, while the owners of the riskier companies are getting wiped out.

    The question on the bailout now is how will they value the mortgage assets the government will be buying. Too low, and it won’t help the economy. Too high, and the shareholders are “rescued”.

  4. That still doesn’t make sense. If you’re a good credit risk, and existing banks won’t extend you a loan because they’re worried about their balance sheets, why don’t I just start my own bank and get the sweet, sweet interest from your business without any of the dicked up subprime packages all the “professionals” bought?

    Now here’s a guy who makes some sense.

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