Motley Moose – Archive

Since 2008 – Progress Through Politics

The Bailout Bum Rush: Slow Down and Get It Right

The news about the economic crisis has been coming fast, each headline pushing the last off of the page. Most of the ordinary citizens that I’ve talked to do not understand the economic crisis and feel that the American taxpayers are simply being bamboozled out of their hard earned money – that a transfer of wealth is taking place from the middle class to the wealthiest few.

$700 Billion in Revolving Credit With No Oversight

The currently proposed bailout plan is a knee jerk reaction by a presidential administration, Federal Reserve, and Treasury Department that were caught off guard by the current crisis on Wall Street. Even the amount is arbitrary. A U.S. Treasury spokesperson told Forbes,

“It’s not based on any particular data point. We just wanted a really large number.”

Even though Treasury Secretary Paulson has been unable to determine what it will take to avert the looming crisis, he has asked for unlimited powers along with a revolving credit line of $700 billion (again, an arbitrary number), specifically stated in the bill as “outstanding at any one time.” This is an open, revolving credit line. The bill does not specify any cumulative limit:

“That means he could buy $700 billion — then sell some at a loss — and then buy more to get back to $700 billion. This is a revolving credit line, not a firm upper limit. It’s conceivable the Treasury could buy and sell trillions of dollars under this authority.”

It is also unlikely that $700 billion will be enough, which is probably the reason for the open revolving credit limit. Keep in mind that the S&L fiasco cost the first Bush administration double what they originally estimated. The most controversial part of the bill, however, is not the dollar amount. It is the unlimited, unchecked power given to the Treasury:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

The controversy surrounding unchecked power for the Secretary of the Treasury comes from three primary issues. if Paulson were the right man for the job, he is retiring in three months, and many are wary of giving unchecked power to a person yet to be named.

Foxes Guarding the Henhouse

Many feel that Henry Paulson is not the right man for the job, that he has conflicts of interest that should disqualify him from administrating the bailout. Paulson is the former CEO of Goldman Sachs (1999-2006), and he made tens of millions of dollars at the helm of company when it was a major player in the mortgage securities that the government will now be purchasing. He also has ties to Morgan Stanely, which will most likely help to liquidate mortgage securities that the government plans to buy.

The bailout plan, as currently written and proposed, requires the Treasury Secretary to determine which securities to buy, who to buy them from, which companies to hire as government agents, and which corporate consultants to hire to manage the assets – all without legislative, bureaucratic, or judicial oversight.

However, several well-known, trusted financiers have endorsed Paulson for the job of administering the bailout, including New York Mayor Michael Bloomberg and Warren Buffet. Both stated that if they had to choose a Treasury Secretary to handle the crisis, they would choose Paulson.

The Politics of Fear

The Bush administration, Secretary Paulson, and many others are now using scare tactics to push through a bailout plan quickly. Even the experts are clamoring that this is a complex issue that needs further understanding to develop a comprehensive solution. But Paulson, Bush, and many others are telling the media and the American people that this crisis demands immediate action – today, tonight, tomorrow, not several days from now.

Fear is not the answer – a quick fix is not the answer. It was impatience (trying to make a quick buck) that got us into this mess in the first place. It’s time our country exercised some caution, some forethought, some courage, and some patience to get ourselves out of a crisis. As many people are keen to point out, this mess was not created in a day, and it will not be solved in a day.

Political Stunts

Just when it seemed that members of Congress were close to negotiating a bailout plan that could be passed, McCain made a surprise announcement that he is suspending his campaign, canceling Friday’s presidential debate, and coming to Washington, DC to help negotiate a bailout plan in Congress. Within minutes, members of Congress on both sides of the aisle were making public pronouncements for or against McCain’s decision. Obama retorted that he had been working, via telephone, around the clock with Congressional leaders and had offered to come to Washington if needed – suggesting that he had been asked not to come to DC. The negotiations instantly turned political and ground to a halt – exactly what many had feared would happen if the presidential candidates came to DC.

Of course, if McCain’s primary concern were the bailout, he could have suggested that he and Obama go to Washington, DC today, tomorrow, Saturday – any time really. So why has McCain settled on an arbitrary deadline of Friday? Although the currently scheduled debate topic is foreign policy, the economy is at the forefront of everyone’s minds, and the moderator would have to ask the looming crisis. It is clearly what everyone would be listening for and judging.

In addition to having the focus during (and after) Friday’s debate change from the original topic of foreign policy to economics, an area where McCain is known to be lacking, postponing Friday’s debate would likely mean bumping the Vice Presidential Debate, which the McCain campaign has been trying desperately to constrain. The McCain campaign has been asking that the rules for the vice presidential debate are much stricter — requiring only very short answers and prohibiting the candidates from addressing each other (answers only directed to the moderator).

A Game of Chicken

McCain’s political stunt may have ramifications for the bailout negotiations themselves. It is possible that democrats may stave off any deal until after Friday to ensure that McCain does not get credit for a quick bailout negotiation. Then again, maybe the Democratic Congress will put together a deal quickly (without a thorough evaluation) in order to stave off McCain’s attempt to politicize the crisis.

It is likely, now that presidential politics have been injected into the situation, that both sides will posture themselves to gain credit for the benefits while positioning themselves to avoid credit for the negative aspects of a deal. The Senate leadership was right to ask both candidates to stay away.

Taxpayer Burden without Benefits

Taxpayers who have paid their mortgages on time, did not take risky loans, and were generally responsible mortgagees should not be required to shoulder the risk of bailing out wealthy investors without receiving any of the benefits of the bailout. Currently, responsible homeowners across the country are suffering due to the collapse of the housing market. Families are upside down on mortgages, despite having made significant down payments. Many are unable to sell their homes. The middle class is suffering because of risky decisions made by wealthy investors, and now they are being asked to pay the bill again.

Barack Obama has a petition that asks for:

(1) No Golden Parachutes — Taxpayer dollars should not be used to reward the irresponsible Wall Street executives who helmed this disaster. (2) Main Street, Not Just Wall Street – Any bailout plan must include a payback strategy for taxpayers who are footing the bill and aid to innocent homeowners who are facing foreclosure. (3) Bipartisan Oversight — The staggering amount of taxpayer money involved demands a bipartisan board to ensure accountability and oversight.

Finding an Acceptable Solution

Taxpayers cannot be asked to shoulder all of the risk and receive none of the rewards. Just like any investor, we must negotiate acceptable terms. These are terms that I have been hearing from laymen, ordinary middle-class citizens who are tired of struggling day-by-day, watching government bail out only the investor class:

• Preferred stock in any company accepting government funds through the bailout act

• Rights to appoint board members to any company accepting government funds through the bailout act

• Assistance not just for the investor class – mortgage refinancing assistance for mortgage holders who are on the brink of foreclosure of their primary home

• Strict limits on executive pay and severance packages for any company accepting government funds through the bailout act

• Assets should be purchased below their hold-to-maturity values, somewhere closer to their market values — or treat the bailout like an investment and demand preferred stock and future dividends

• Executives of companies who must be bailed out should be banned from working in the financial industry

• Restore post-Depression regulations that will prevent a repeat of these types of economic crises (e.g., Glass-Steagall)

All of these bullet points cannot be included in a single bailout plan, but Congress must examine all of these options and determine which combination of requirements will minimize risk, maximize return, and still solve the current crisis. At the very least, the government should demand an equity position, should not pay premium values for worthless assets, and must curb executive pay for companies operating on taxpayer dollars.

Ferreting out the best plan cannot be done overnight. As McCain’s arbitrary Friday deadline looms, the pressure is mounting on Congress to pass a bill – any bill, but it is imperative that Congress get this one right. In this case, doing it right is much more important than doing it fast.


  1. …by the speed of this. Yes, there is a need to guarantee liquidity and debt obligations in a tumbling market, but HOW that is done, WHO benefits and who is penalised, cannot be decided in a week.

    We’re basically talking about one of the biggest mergers in history: the acquisition by the US treasury of a large portion of the mortgage debt of the country.

    Due diligence in ANY acquisition requires share support, and then weeks working out the heads of agreement.

    Good job DawnT for summarizing the facts so well, and pointing out to moral hazards and politic hijacks.  

  2. spacemanspiff

    Most of the ordinary citizens that I’ve talked to do not understand the economic crisis and feel that the American taxpayers are simply being bamboozled out of their hard earned money – that a transfer of wealth is taking place from the middle class to the wealthiest few.

    If your intent was to carefully lay out and summarize what’s going on to those who don’t really understand beyond the basic arguments. You achieved your purpose perfectly. This is exactly the type of  post I was looking for. I’ve bookmarked and I will be referring to it constantly. Not that I’ll comment much or engage in any of these “ouch, my brain hurts” threads. This is something that I’m just learning about now and I don’t want to drag the conversation down with offtopic dick jokes and epic fail pics.

    I’ll let the adults continue this converstion and I’ll sit back and learn as much as I can.

    I am a sponge. Though I am not asexual.

  3. …on this potential new ‘Septic Tank‘ from the BBC’s Economics Correspondent, Robert Peston

    All of these uncertainties can be boiled down to one dilemma: if the bailout is used to punish the banks it probably won’t save the global financial system; but if the banks aren’t punished, then US taxpayers may well feel that their pockets have been picked, and that the Whitehouse has allowed the perps to run off with the spoils.

  4. as long as possible.

    This, from MudFlats:

    “Delay” is apparently the theme of the day for our Republican VP nominee. Today we hear that Palin has requested, and received a four day extension for the disclosure of her personal finances. The new release date for these forms? October 3rd, the day AFTER her scheduled debate with Joe Biden.

    Trevor Potter, general counsel for the McCain-Palin campaign, told the FEC that the campaign initially thought it had until Oct. 4 to file the report but then learned the FEC set an earlier due date.

    Oops. They forgot to check the date. Those silly McCain people… I bet they felt really stupid.

    But now that they’ve got their dates straight, they’ve got to tread very carefully with this one. Ask indicted Alaska Senator Ted Stevens, who is facing seven felony counts for filing false financial disclosure forms. Ask Anchorage Mayor Mark Begich who just got in a little hot water himself because his federal and state forms didn’t match.

    [The forms will] show whether she and her husband, Todd, hold any mortgages for real estate investments, and roughly how much any property held for investment purposes is worth. The financial reports that Sarah Palin filed as Alaska governor list property the couple held at that point, but not how much it was worth; how much, if any, profit they made on real estate sales; or how much, if any, mortgage debt they held.

    • swaminathan

      Getting equity in return is simply about avoiding transfer of wealth.  If the only grocery store is in the village is going bankrupt due to bad decisions, and people pool in money bail it out to avoid hassles for themselves, no one expects that the money should be a gift instead of a loan.

      Limiting executive compensation is about eliminating leakage of funds, not about punishment.

      Rules that require them to renegotiate terms instead of foreclosing are not about punishment, they are about favouring long-term win-win instead of short-term win-lose.

      Increased regulation is not about punishment, it is about eliminating the dynamics that created the problem.

      Frames such as punishment confuse the issue – the real issue is about fairness and effectiveness of the solution.

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