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NO TAXPAYER-FUNDED BAILOUT—DON’T TREAT THE FINANCIAL INSTITUTIONS ANY BETTER THAN ENRON…UPDATED

When Enron was revealed to be a shell—its assets not worth what they had claimed, no one suggested that the American taxpayer buy up the bad stuff and “save” Enron.
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We’re being told that if we, the taxpayers, don’t ride to the rescue with our saddlebags full of money, our economy is going to crash, and we’re all going to suffer terribly. It’s probably true that hard times are coming, but I’m betting that the real suffering our political class is afraid of is the suffering that will be done by the ripoff artists at some of these big banks and those politicians who were ‘WAY too cozy with them, and took their money for years and years. Don’t listen to these guys, and swallow their socialistic scheme for “making things right”. Remember, Enron was no slouch in terms of its effect on our economy:

...when Enron tanked in late 2001, it was the seventh largest public company in the U.S. Enron traded derivatives and other financial instruments with counterparties that were among Wall Street’s biggest commercial and investment banks, which were heavily exposed to its losses. To make matters worse, these investments were concentrated in the energy sector, which is at least as important to the nation’s economy as the housing section that is at the center of the current crisis.

In short, at the time of its bankruptcy, Enron was one of the nation’s largest publicly-owned companies, a vitally-important market-maker in the natural gas trading industry and a leader in hedging corporate risk through structured finance transactions.

Enron’s bankruptcy proceeded to cause enormous tremors through various industries—particularly the energy industry—because valuable resources for hedging risk of loss had evaporated seemingly overnight. The natural gas trading industry nearly fell apart completely, costing companies and their customers untold billions of dollars that they otherwise could have saved through hedging risk of loss. Similarly, the market for many structured finance transactions dried up, also costing companies another valuable avenue for hedging risk.
However, the nation’s financial system did not break down. Companies adjusted to the changed circumstances and endured their additional costs as best they could. Markets also adjusted. Slowly but surely, both the natural gas trading industry and the market for structured finance transactions rebounded so that both are again providing companies with valuable alternatives for hedging risk and saving money.

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We weathered that storm, and I’m betting we’d weather this one, too…..what WOULD happen if we let these companies be disciplined by the market, rather than bail them out, is that we’d learn A LOT about the corrupt connections between business and the Congress, about the payoffs that allowed all of this to occur. And that is the LAST thing the politicians (and their beneficiaries in the business world) want to happen.
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A giant bailout means that all of us who didn’t buy more house than we could afford, who paid our mortgages on time, and who acted responsibly even while others were playing fast and loose with the easy credit fostered by our political class…..we’re not only having to take a loss on the sale of our previously overpriced house, but we are going to be on the hook for cleaning it all up using our tax money, while those who caused it all are going to be able to hide their involvement. NO BAILOUT WITH TAXPAYER MONEY!
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In reality, each of these Wall Street firms should be required to endure the same thing that Enron and its creditors did—a chapter 11 reorganization where equity gets wiped out and creditors either take a haircut on payment of their debts or convert their debt to equity in a reorganized firm that emerges from bankruptcy with a cleaned-up balance sheet.
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That process ensures that investors and creditors who undertook the risk of investing or dealing with the bankrupt firms share the losses of their risk-taking. Moreover, it allows the firms that really are worth saving (as opposed to simply liquidating) to emerge from bankruptcy with an improved financial condition that should provide the firm with an enhanced opportunity to create wealth again. (emphasis added)

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The answer is to allow the financial institutions to value their paper according to the likelihood of its continuing to be paid off by the mortgagee, rather than following the “mark to market” rule—valuing perfectly good mortgages at nearly nothing because no one will buy them in the current panic. This rule is CRAZY, and following it is a good part of the precarious position of many perfectly sound banks.
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Once we value their assets reasonably, we will quickly find out which companies were responsible and can recover, and which were gambling on making a killing and having the taxpayer take the hit if the gamble didn’t pay off.
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READ ALL ABOUT IT HERE
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UPDATE: ANOTHER SUGGESTION that avoids using taxpayer money to overpay for the questionable assets of the financial institutions.
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The better idea is an open auction. This would let private buyers join Treasury in bidding for bank securities. Taxpayers wouldn’t have to buy all bad securities first, and, as the market develops, those that Treasury does buy would rise in price. Treasury could even make money on the resale….Another misconception is that the credit problem will vanish if only Treasury suspends “mark-to-market” accounting—as if those bad assets wouldn’t still exist. The banks themselves would know they still have this bad paper and aren’t likely to engage in much new lending. Investors also don’t trust the bank marks now; imagine what they’ll think if the U.S. declares that cooking the books is official policy. Mark-to-market has surely contributed to this mess and needs to be revisited. But to toss it aside wholesale now would risk turning banks into the zombies of Japan’s lost decade….There is a better—and more transparent—way to put public capital into the banks while protecting taxpayers: through the Federal Deposit Insurance Corp. The FDIC has long had the power to handle failed banks. But in 1991, Congress passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) that limited the FDIC’s ability to provide assistance to struggling but still solvent banks.

The exception is when there is a risk to the entire financial system. In that case, the President, Treasury Secretary and two-thirds of the Fed board can authorize such open-bank aid. The current moment would seem to qualify. Yet the White House has so far refused to trigger this exception and let the FDIC work with the likes of Wachovia, Morgan Stanley, and others before they crash and burn.

Whether or not the Paulson plan passes, President Bush should sign the FDICIA waiver. This would allow Treasury and the FDIC to inject new capital into banks early enough to prevent failures; in return, the feds could impose some discipline in the form of management dismissals and preferred stock or warrants that would protect taxpayers when the banks recover. This also beats the Congressional idea of attaching taxpayer warrants to the Paulson plan, which will be much harder to administer to hundreds of banks as opposed to one at a time through the FDIC.

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The more transparency, and the more accountability on the part of the institutions getting money from taxpayers, and the more we learn about the corrupt politicians who helped bring this on, the better…....

Posted by .(JavaScript must be enabled to view this email address) on 09/24 at 03:36 PM

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