Just got an email with a read through of the bill. One passage just jumped out at me:
Prohibits Unjust Enrichment: This section prohibits unjust enrichment for financial institutions participating in the program, including preventing the resale of a troubled asset to the Secretary at a higher price than what the seller paid. A new provision in this section would exempt troubled assets "acquired in a merger or acquisition or a purchase of assets from a financial institution in conservatorship or receivership, or that has initiated bankruptcy proceedings under Title 11, United States Code."
That just frosts me because it just increased the cost of the baillout by billions and just gave all those investment bankers eight figure bonuses again next year - go very long Goldman and Morgan stock if this passes.
Why the screaming below the fold:
The accounting at an investment bank is on a structure called "mark to market", Many people have railed at it, I think it is the only appropriate system for a trading shop. What mark to market means is that the accounting doesn't care what you paid for it, it only cares what it is worth today. The reason behind this is that a trader looks at an asset on the books and says, "What can I sell this for now and do I think that value will go up." They don't care how much the loss is, the loss has already happened - what do I want to do now.
The problem is that there may be no market for some of these assets. The sellers are unwilling to sell here but the buyers want a lower value to create a greater potential for return. In the interim, the sellers can't afford to hold because of collateral calls but if they sell, the losses will consume them.
The Treasury is now going to step in and pay no "higher price than what the seller paid". Let's say I own something that I paid $2 billion dollars for at $10 per unit that I can't sell for $2 per unit now. I have a $1.8 billion loss already on the books. The Treadury steps in and pays $2 billion - no more than I paid for it. I just showed a $1.8 billion profit on my book (about 40% of that goes to the bonus pool).
This bill needs to have the following impact:
This section prohibits unjust enrichment for financial institutions participating in the program, including preventing the resale of a troubled asset to the Secretary at a higher price than what the seller currently shows as the assets value on its trading books as calculated in accordance with FASB accounting guidelines.In the instance that the Secretary pays a higher price than would be calculated under the methods stated above, the Sedretary must receive warrants with a five year expiration struck at the current market value for the selling institution's stock at a par value to be determined in accordance with the selling institution's own option pricing systems. The selling institution and its executives shall be jointly and severally liable for any and all criminal penalties in the instance and valuation is determined to be misstated for the selling institution's benefit.
That would at least means that the sellers have a duty to provide a market price or give up a lot of stock if they want a sweetheary deal - this is what I would be asking for across the table. This, in essence, is what Buffet asked for and got from Goldman.
Why shouldn't the Secretary of the Treasury stop lying to the taxpayers and, instead, do something for them and the country?
UPDATE Please go read Zero reserve Banking posted after this diary. The pieces of this bill just keep getting worse and worse.
Update 2This is my comment below - I realized most people misunderstand what the Treasury will be buying.
Most of these assets are swaps - not mortgages. A swap says "I make a bet with you that x will be worth $1 on y date". If it is worth 90 cents - I pay you ten cents; if it is worth $1.10, you pay me ten cents.
If the bank got into these things at $1, they didn't pay anything (knowing the banks, they bought $1 face value at $0.98 to make a mark to market profit day 1). But if the swap is worth 25 cents now, they owe 75 cents. What is killing these banks is the person who sold the swap is saying "I want 70 cents of collateral to make sure I get the money you owe me if you go out of business". They don't have the 70 cents to put up.
If I buy a swap worth 25 cents for $1, I just inherited a 75 cent loss. It has to get back to $1 before I don't owe anything to the guy who sold it to the bank. This is not like a house that I buy for $100,000 and then sell for $75,000. This is buying a guy's bet on the Cowboys minus five at 2 to 5 three minutes into the fourth quarter for the $2 he paid the bookie. Only a big rally gets me anything back, otherwise I'm out 3 more bucks..