Yesterday's hearing on the Paulson proposal was as revealing as it was historic. My take: not trustworthy. Paulson and Bernenke revealed themselves as not trustworthy. Senators on the whole came across pretty weak, too.
Dodd's plan is notable for what it doesn't include. To me, yesterday Dodd also appeared to be posturing, and not forthright.
Here's what's in Dodd's "Troubled Asset Plan":
Dodd's alternative plan includes the following:
- Equity stakes in return for bailout to recapitalize institutions and retain upside for taxpayers;
- An oversight board composed of the chairs of FDIC and SEC and two non-government persons with financial background;
- Monthly reports to congress including a detailed financial statement;
- Weekly reports to the public on total values of assets held, purchased, and sold;
- Mortgage management rights to the new authority;
- $700 billion balance sheet limit "at any one time";
- Federal property management to avoid home foreclosures;
- Authorization to establish an insurance or guarantee program for money market funds up to levels as with the FDIC;
- Good to December 2009 -- and extendible;
- Authority to raise federal debt to 11.3 trillion;
- Annual audits;
- Direction to establish some (unclear) executive compensation limits;
- Direction to study the impact of the off-the-books derivative market and leveraging on the current situation;
- Direction to study results of this MOAB, and whether it worked or not;
- Creation of an Inspector General to generate reports and analysis of work done and oversee systems, procedures, and controls.
Let's compare that with Kos's list from yesterday evening. My comments interspersed are italics.:
1. Transparency. Release the presentation Paulson gave to congressional leaders that supposedly has them all spooked. Give us the data and information, and let outside economists pore over the numbers and reach independent conclusions. The Bushies lie and have zero credibility. We can't trust anything they say.
Not there. In addition, when others of us are asking for transparency, we're asking for access to balance sheet values, posted on the web; not merely summary reports.
2. Timing. Why the sudden rush, when the administration has been working on this plan for months? Seems more than a little suspicious.
Dodd appears to be playing into the rush by starting so with a document as weak as it is.
3. Solution. We don't know what the problem is, so we really don't know if this solution addresses that problem. What we do know is that it's targeted not just at failing institutions, but any old financial firm on Wall Street that wants a piece of our money. Even those that "are very successful banks and investment houses that have done very well". Heck, did I say "on Wall Street"? I almost forgot. Any foreign bank can apply!
This is the elephant. Dodd continues the pretense that this is not about the collapse of a $62 trillion dollar credit default swap market.
4. Details. Why $700 billion? Why not start off with, say, $75 billion. Is the emergency so dire that Treasury will spend all $700 billion next week? Doubtful. So put in what would amount to a bridge loan until people have had a chance to full understand the magnitude and severity of the problem. If it's truly as bad as people say it is, further moneys can be appropriated.
Yes. Dodd's proposal plays into this dodge.
5. Motives. Given that the administration wants to give money to solvent financial institutions, is this just another component of the long-running conservative effort to bankrupt the government to destroy government's ability to improve people's lives?
Yes. There are any number of people observing that this recipe is worse than doing nothing. Among them Karl Denninger is colorful, but there are many more.
6. Incentives: The administration is really concerned that solvent banks may not take the bailout, so it has to be as condition-free as possible. Why is the administration desperate to force taxpayer funds into these private Wall Street institutions? If they don't want our money, everyone wins, best of all, the taxpayers.
Yes. Dodd's conditions are weak.
7. Politics. The American people hate this thing, and those approval numbers are only getting worse. Given all the points listed above, whoever votes for this thing, even an "improved" version, will face a world of hurt this November, and if not this year, in primaries and general elections through 2010.
Yes. So McCain straps himself to this time bomb with a yes vote. That's important, but not sufficient. He's losing anyway. Right?
My main points:
- Dodd's proposal avoids the main issue that most public persons just allude to as an irrelevant background issue: Credit Default Swaps. A market failure on the scale of $62 trillion dollars. That's huge, folks. That's the time bomb Dodd is proposing to push down the road for Obama.
- Transparency. Transparency can mean many things. The big lie will continue as long as they can hide their transactions in inaccessible documents and summary reports.
- Leverage. As much as there are any number of protagonists to blame including Bush, the non-oversight Republican ideology, and people like Paulson who were protagonists in creating this morass (collecting more than $500 million tax free for himself upon retiring to take his current position), the system also is to blame. 30:1 leverage is too preposterous.
The derivative market amounts to a huge Ponzi scaffold. That was clear years ago. The system increasingly demanded of these Wall Street people and businesses to achieve increasingly impossible double digit returns. Competition and free market ideology seemed to demand it, it payed (short term) big time, and culture condoned it. But clearly it was not sustainable.