While writing my fax to the Senate last night, I connected a few dots and realized something... we have been maneuvered into a double checkmate here:
- We "can't" simply let housing prices crash, because then all the credit default swaps instantly explode. The only way to clear CDS exposure is to force firms to come clean, but none of them will because they would instantly lose business to their stronger competitors. So in a perverse sense Paulson "needs" extraordinary powers to make these firms talk.
- Foreign investors are pissed at us for selling them piles of "AAA" crap. Even more so because some months ago, Congress passed a bill that just so happened to have a provision preventing foreigners holding fraudulent mortgage bonds from obtaining damages in court. My sense of the foreign reaction to the bailout proposal is "it is the USA's duty and obligation to fix this problem". If we don't give them some kind of recourse, we can probably expect a lot of dumped dollar holdings and a dollar crash, and probably World War 3 soon after.
(Sorry, I know it needs links, but I'm on deadline. Will re-post later.)
My fax to the Senate appears below the fold.
Dear Senator,
Reuters reported tonight that the SEC has "clarified" Mark-to-Market rules again (link). This has the same practical effect as Section 132 of the Bailout bill on Speaker Pelosi’s website as of Sunday night. In my earlier faxes and/or phone calls I have pointed out that this by itself grants a reprieve to holders of questionable mortgage assets, and addresses the immediate crisis so that we have time to implement a sober solution to the real crisis (the identification and disposal of bad assets) with as little taxpayer exposure as possible.
However, I also see in the news that the Senate is voting Wednesday night on a modified Paulson bailout package designed specifically to win over enough House Republicans to pass both houses. Obviously the Congressional leadership is trying to pass this turkey before the banks decide that doing business is more important than stamping their feet like an angry child trying to get mommy to buy them some candy. Do I need more proof that my tax dollars are being stolen and that Congress is complicit in the theft?
It was clear that the Fannie and Freddie bailout was done specifically to placate foreign creditors (in particular the Japanese). This is already going to blow a huge hole in our budget but no one dares admit that yet. And if I recall correctly, earlier legislation removed the ability of foreign investors to obtain court relief in the case of bad mortgages – previously if a mortgage was found to be fraudulent, then it got shoved back onto the seller or originator here in the USA.
My family owns a fair amount of real estate. I can see that the last wave of mortgages at the top of the boom was mostly fraudulent or "flipper" properties because they have no intention of paying off the mortgage and can bid prices much higher than honest homeowners. I don’t want to hear people blaming this on irresponsible homeowners – if Greenspan hadn’t blown the bubble to get Bush re-elected, none of them would have been given the opportunity to get in trouble because the banks would have cared about getting their money back. Those who are losing their homes now, are just collateral damage of our immigration and globalization policies brutally suppressing the median wage and destroying their ability to make higher mortgage payments.
I think what’s really going on here is that foreign investors are enraged at us and are pressing their governments to dump dollar holdings and destroy us economically, unless we buy back these bad mortgages. Because from the financial news I read it seems like the rest of the world is saying that it is our obligation and duty somehow to fix the crisis for them. Suddenly all the suspicious fast-tracking of this bill starts to make sense.
Clearly not all of Congress is taking this lying down. Today I listened to Representative Brad Sherman on how the Paulson proposal will purposely bail out foreign investors.
This is from CNBC in an exchange with Larry Kudlow.
Rep. Brad Sherman, D California:
Larry I am glad you have a few seconds to talk to someone who voted against this bill. I am not changing my mind. I want to thank my colleagues who stood up to the purveyors of panic and voted against a very bad bill and voted with 400 eminent economists including three Nobel laureates who wrote to us and said don't panic, don't act hastily, hold hearings, work carefully. The fact is Larry if you read this bill, even you would have voted against it.
It provides hundreds of billions of dollars of bailouts to foreign investors. It provides no real control of Paulson's power. There is a critique board but not really a board that can step in and change what he does. It's a $700 billion program run by a part-time temporary employee and there is no limit on million dollar a month salaries.
Larry Kudlow:
Let me just ask you one question. I think you are referring to foreign banks headquartered in the United States. I do not see how foreign investors get bailed out.
Rep. Brad Sherman:
Larry you have to read the bill. It's very clear. The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn't owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can't buy it. It was rejected.
The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday.
Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can't be sold to the Treasury.
Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it and the bill has been carefully written to make sure that can happen.
Senator, please scrap the Paulson proposal in its entirety and try something that might work, that is constitutional, and does not put taxpayer money at risk. While Congress and the Administration have been bargaining over politically desirable concessions, the economics community has put forth numerous proposals which are generally far superior than the Paulson proposal because they stay focused on the true nature of the crisis.
We must force the Bush Administration to consider a solution that does not involve infinite amounts of taxpayer money. Anyone who thinks this will stop at $700 Billion once it gets started is in denial. The Fed pumped over $600 billion in liquidity into the system on Monday alone! The US Gov’t does not have the resources to fix this problem purely by throwing money at it. The markets involved are too large.
More bluntly, passage of this legislation is a tacit admission that America does not control its own future any more. I would think that both the political left and right would agree that is not acceptable. In fact I have been heartened by the unified opposition to this bailout that I have seen on the ground all around me. It is nice to finally have all of America united in a good fight once again.
It’s just too bad that the one thing that finally unites us is disgust at being brazenly shaken down by the same people who have been fleecing us blind for decades.
Please oppose the Paulson bailout plan in any form, and by any means, including a Filibuster. I cannot and will not vote for any legislator who supports this bill. This includes my voting advice to everyone I know, my campaign donations and other support.
Thank you for your time.
Todd Whitesel
October 1, 2008.