Kleptocracy. Just say no (or prepare to walk away – I’m doing both).
Sec. 2. Purchases of Mortgage-Related Assets.
(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
Sec. 8. Review.
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 most obvious question: is how will paying market price for near worthless assets prevent the collapse of zombie institutions like Bear Stearns, Lehman Brothers and AIG? These institutions needed money. They won’t get it from selling mortgage backed securities, that are chock full of bad mortgages, at the market price. We already know this, because they already had the option to do so.
Unless the Fed is planning to buy assets at above market value—that is, to directly subsidize those same bankers and firms with taxpayer dollars, with concomitantly to make those risky assets “less” risky in the market and still providing no route or incentive to return to the “good” equilibrium—the “bailout” as discussed with have no positive effect on the health of the firm(s).
So what Henry Paulson is proposing has to be a direct subsidy to have any effect.
I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.
As I posted earlier today, it seems all too likely that a “fair price” for mortgage-related assets will still leave much of the financial sector in trouble. And there’s nothing at all in the draft that says what happens next; although I do notice that there’s nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?
There are private investors willing to buy these troubled assets right now, but the banks do not want to sell at those prices. Why? Some banks believe the assets are worth more than the current bids (it all depends on future house prices, and different banks and investors have different projections). And many banks are unwilling to accept the current bids because the banks would then be insolvent. See Professor Krugman’s: Doubts about the rescue and Uneasy feelings. Also, even solvent banks would probably have to recapitalize (dilute shareholders) or reduce lending if they sold at current bid prices.
So how does the Treasury plan help? It isn’t clear yet. The first goal should be transparency of the troubled assets. What do the banks own, and what are the assets really worth? Transparency is surprisingly difficult: each RMBS and CDOs – even within the same asset class and origination year – can have significantly different values depending on the orginator and other factors. If the Treasury conducts a reverse dutch auction on a broad asset class, they will probably end up with certain New Century and Bear Stearns deals that are basically worthless.
To facilitate price discovery, it would probably be better to bid for individual mortgages from RMBS pools, but analyzing each mortgage would be a monumental task. We definitely do not want the Treasury to buy RMBS and CDOs at anywhere near the value on the bank’s books. Buying at those prices would help keep the banks lending, but it would also severely impact the taxpayers, it would be a transfer of wealth from the many to the few, and it would also encourage future excessive risk taking.
So determining price will be difficult. And what happens if a price can be determined? How does this help keep the banks lending?
What we have here is a soul test of several tendencies in American politics – progressivism, libertarianism, limited-government conservatism, principled defenders of managerial liberalism generally. This is as naked a case as we could imagine seeing of the state working to enrich the already wealthy at the expense of the many. The only theoretical defense of it would be a belief that the well-being of America’s wealthy as a class is necessary to the well-being of the country as a whole, and that this transcends any merit its members possess. That is, the business of America isn’t business, but businessmen. This is not an argument anyone is going to want to make in so many words.
If libertarians fail to oppose this bailout, they stand revealed as the hypocritical apologists for corporate power their detractors have always accused them of being. If Democratic leaders fail to oppose this bailout, they will prove to be the phonies and weaklings of stereotype. If managerialists go along with it, then every argument against the State as guardian of the general welfare will bear out. Right now a corrupt and spent corporate class is on the brink of getting a corrupt and spent governing class to perpetuate its privilege by almost dumbfoundingly transparent means. Anyone with a soul needs to oppose them.