Bailout Bill

Catherine Rampell at the NYTimes liveblogging the House Debate on the Bailout Bill.

Bailout Mysteries (probably) Solved

As I previously blogged, two looming questions in the Bailout are: (1) how to value the assets the Treasury will purchase and (2) who are the beneficial counterparties to the nominal bailout beneficiaries. 

The Treasury has put forth its answer on the former (greater than market prices) and the answer to latter is apparently Goldman Sachs.  

In a story by Julie Creswell and Ben White in today's NYTimes, it was reported that:

Goldman was A.I.G.'s largest trading partner, according to several people close to A.I.G. who requested anonymity because of confidentiality agreements.

So, under my theory, it is Goldman as opposed to A.I.G. who is being bailed out because without the infusion of Treasury money, A.I.G. would not be able to settle the contracts it had with Goldman, who would then be unable to settle contracts it had with (insert name), and so on....

In other words, systemic risk (this is one of the positions of the Treasury).

Just a reminder that every derivative contract has a winner and a loser, and that a lot of the money the government plans on investing in the losers will be transferred directly to the winners, including, apparently, Goldman Sachs.  

Naomi Klein on the Bailout

Naomi Klein (The Shock Doctrine) posted a column at CommonDreams.org that captures a lot of the spirit surrounding the bailout, at least from those who think that Main Street should not bail out Wall Street.

A choice quote reflective of a lot of public sentiment:

This spectacle necessarily raises the question: if the state can intervene to save corporations that took reckless risks in the housing markets, why can't it intervene to prevent millions of Americans from imminent foreclosure? By the same token, if $85bn can be made instantly available to buy the insurance giant AIG, why is single-payer health care - which would protect Americans from the predatory practices of health-care insurance companies - seemingly such an unattainable dream? And if ever more corporations need taxpayer funds to stay afloat, why can't taxpayers make demands in return - like caps on executive pay, and a guarantee against more job losses?

Bailout Evaluations

Rebecca Christie and Jody Shenn reporting on new developments in the mortgage backed securities bailout at Bloomberg.

Essentially, Bernanke and Paulson plan on paying greater than "market" rates (currently at "firesale" prices because there is no private market) for the securities.

From the article:

The government can help restore liquidity to the banking system by buying depreciated assets at "a price close to the hold-to-maturity price,'' rather than the price they would fetch in the market today, Bernanke said. He also warned the economy will contract "if the credit markets are not functioning.''

Seidman [Note-William Seidman worked extensively on the S&L bailout], who also served as Federal Deposit Insurance Corp. chairman, said a 1990s attempt by Japan to halt that nation's banking crisis failed because the government offered prices that would have drained companies' capital.

The Upshot: Valuation will be for above market rates.

Sirota on "Bailout Bill"

David Sirota (channeling Naomi Klein and Tom Frank) raises five questions about the propriety of the Bailout Bill over at InTheseTimes.

He primarily raises the issue of lack of oversight/writing an effectively blank check which is hot on some of my listserves. With action imminent, we will see where everything falls when the dust settles.

For my two cents, the major questions beyond oversight are: (1) how will the paper be valued and (2) who are the counter parties who are the actual beneficiaries?

On this last point, take the example of AIG. Apparently it has large losing positions in a large number of credit default swaps. The government is taking an 80% stake in AIG, thus "bailing it out." But who holds the winning end of these swaps???? To me, it seems that these are the people who are being "bailed out" (along with anyone who has retirement money in AIG) as the alternative would be for AIG to go into bankruptcy and let the counter parties try get their money from the bankruptcy trustee. Instead, AIG gets the money it needs to settle the swaps.

The upshot: Who are the beneficial counter parties???