First, a scary thought: if the GOP was still in control of Congress, this bailout would have been passed, as originally proposed, last Friday.
Doing my evening Yahoo Finance news dump, and I immediately saw these three articles:
Berkshire buying at least $5 billion stake in Goldman Sachs
Bernanke: US should pay higher prices for troubled housing assets; cites long-term advantages
Dire warnings fail to sway senators on big bailout: Senators push back on bailout plan despite dire warnings from Bernanke, Paulson
The information in these articles alone tells me everything I need to know -- it's a scam with an amazingly simple solution. Of course the White House has been planning this for months... this whole 8 year cycle of S&L bailout v2.0 has been leading up to it.
Much elaboration below the fold.
Okay, so let me explain why those three articles are all you need to know. (All emphasis mine)
Berkshire buying at least $5 billion stake in Goldman Sachs
OMAHA, Neb. (AP) -- Warren Buffett's Berkshire Hathaway Inc. is investing at least $5 billion in Goldman Sachs, a huge vote of confidence for one of the survivors of the credit crisis that felled two of its investment banking peers.
In addition to buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman's common stock. Goldman also said late Tuesday it would raise another $2.5 billion in its own public stock offering.
The news sent shares of Goldman Sachs and stock index futures soaring in electronic trading, after the Dow Jones Industrial Average posted a triple-digit decline for the second day in a row.
....
Now members of Congress have to deal [with] what may look to many taxpayers like Wall Street is already cashing in.
Of course they're already cashing in. This is what happens during panics. Read up on the history of the panics that led to the Fed being created. Celebrity investors (back then it would be JP Morgan himself, or industrial titans like Carnegie and Rockefeller) did exactly what Buffet is doing now, buying major stakes in the companies they think will survive the crisis.
Buffet's warrants (the predecessor to options) allow him to win both ways. If the bailout goes through and stocks recover, he can double his stake at today's prices. But if the bailout fails to save stocks, he can toss those warrants in the trash can and buy up lots more of Goldman Sachs on the cheap.
And note the separate stock offering: what you are witnessing is a massive pump and dump operation, on a scale never before seen in history. Confidence in the banks must be bolstered so that more suckers will buy new stock and improve the balance sheet positions of the banks. One wonders, if the government is going to buy up all of Goldman's bad debt, why would they bother with a capital raise when so many other firms (like Lehman) bided their time expecting to get saved in a bailout?
Frankly I think Goldman is doing this because of the Democrats' demand that the government wipe out shareholders before helping a company, like what happened with AIG. This would be their last chance to get extra money via that route, plus it increases their chances of survival no matter how things turn out.
Bernanke: US should pay higher prices for troubled housing assets; cites long-term advantages
WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke told Congress Tuesday the government should pay more than "fire-sale" prices for the toxic assets it would acquire under a proposed $700 billion bailout plan. That could mean both higher initial costs for taxpayers and reduced returns when the assets are later resold.
Har. This is like my relatives who are minor real estate barons, who tried to get me to go in with them on yet another property in 2006. At that point they saw nothing wrong with taking out an interest-only ARM and using the mortgage tax deduction to offset the money we would all be pouring into this thing. I did the math and told them that for the deal to make any money, the market price of the property would have to rise 3% every year we held the house, and the market in San Diego (where it was) was already down about 4% from its peak.
It's always nice to have an excuse to use your own vacation property as a business tax deduction while doing "maintenance" on it, but in the meantime we'd be renting it from the bank, and not cheaply either. (They reconsidered and dropped the idea.)
Bernanke's comment was the first indication of how he and Treasury Secretary Henry Paulson are thinking about formulating the rescue plan's medicine in a way that doesn't kill the patients. Requiring banks and other financial institutions to sell troubled loans and other assets anywhere close to recent sales prices of only a few cents on the dollar could wipe out the net worth of many and lead to a new wave of bank failures.
The Fed chairman said he favors buying the assets based on their "hold-to-maturity" value, which would require an estimate to be made of what each security will eventually be worth as payments come in over the years.
"If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits," Bernanke told the Senate Banking Committee. "First, banks will have a basis for valuing those assets and will not have to use fire-sale prices. Their capital will not be unreasonably marked down."
Translation: "We will estimate how soon housing will recover, and fix the market price based on that. If housing recovers sooner, then taxpayers make a profit. If not... then at least we tried."
This of course assumes that you believe the fiction that we're not really in a recession. But with 2007 Q4 GDP already revised downward to be negative, and Q1 GDP probably to follow suit when they announce Q3 numbers after the election is over, only an idiot would believe that this bailout is going to fix housing.
Repeat after me: Funky loans are a thing of the past. That means you need 20% down and provable income to get a new loan. Housing prices are going to slide until they reach the historically stable 3-4x income range in their immediate area.
The housing market CANNOT recover until American home "owners" get a big raise or the price falls a lot more.
But the crucial point is this: Banks are going under because they must raise capital to cover paper losses on mortgages that the market thinks are worth less than Bernanke and Paulson do. This is because the market knows a recession is coming and that future defaults are going to get much worse, not better.
Dire warnings fail to sway senators on big bailout
WASHINGTON (AP) -- Refusing to be pushed, Republicans and Democrats alike rebuffed dire warnings Tuesday from the government's top economic officials of recession, layoffs and foreclosed homes if Congress doesn't quickly approve the administration's emergency $700 billion financial bailout plan.
....
Paulson, seated next to Bernanke at the Senate hearing, objected strongly when Chuck Schumer, D-N.Y., asked if $150 billion might be enough to get the program started, with a promise of more to come.
That would be a "grave mistake," and would fail to give the markets the confidence they needed to rebound, Paulson responded.
Rep. Barney Frank, D-Mass., the Financial Services Committee chairman who is leading talks with Paulson on the plan, also called phasing in the bailout "highly unlikely."
Exactly which market is Paulson talking about here? There is the credit market which is hurting because banks are hoarding cash in order to cover their anticipated write-downs on bad mortgages; this is the one that matters because our economy depends on it for day-to-day operations. And then there's the stock market which is the con game that banks use to raise capital from suckers. There's a reason the Koreans didn't buy Lehman Bros. Too many other sovereign wealth funds have been burnt by investing in big financials since the crisis started.
Paulson was asked repeatedly why taxpayers should accept the burdens of a bailout.
"You worry about taxpayers being on the hook?" he replied at one point. "Guess what -- they're already on the hook." Paulson suggested that the fallout from the credit crisis would hit almost everyone in the pocketbook unless forceful action was taken. Moreover, the flawed and outdated regulatory system, which didn't catch abuses, needs to be overhauled, he said.
You mean the regulatory system that you guys failed to actually use, and if anything deliberately hamstrung in the name of Bush's "Ownership Society"? (And who owns who? Pretty soon it will be private equity funds owning all the houses AND the banks and whatever else they can snap up when the bottom finally falls out.)
You mean the regulatory system that sets the accounting rules that values the bad paper that the banks are now desperate to unload?
Given the outrageous interventions we have already seen, emergency changes to accounting rules are not out of the question either. If "hold to maturity" is good enough for Treasury and the taxpayer, then why isn't it good enough for the accounting rules?
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Update 1. Filled in a missing word in a quoted section and clarified my opinion of Goldman's capital raise to be neutral and not rude.