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How Banks Hedge Counterparty Risk
Resolution Trust Corp vs. Troubled Asset Relief Program
Even if the Bailout Express cannot be stopped, the CARE PACKAGE should be on the basis of loans, not gifts. These loans could be available to all banks at 8% interest. The loans should have priority over all existing bonds.
Paulson says we must act quickly. It is much quicker to make loans on a standardized basis than to negotiate with thousands of institutions for assets that cannot be accurately valued. Valuations might be politically valued, rather than objectively.
Banks can reliquify the rest of the economy.
Under this approach much less money should be required. The
government should get back almost all of its investment plus interest.
Confidence will be restored.
The Paulson approach would be slower. Even if it restores confidence, this would be temporary.
As the dollar loses value and doubts about the creditworthiness of the U. S. increase, our ability to finance escalating deficits will be impaired.
If you calculate the dollar's most recent loss in value multiplied by the number of dollars outstanding, this alone may amount amount to a cost of more than $700 billion, and will escalate under the Paulson plan.
There is no guarantee that we will be able to finance government debt for much longer.
A more radical and even faster approach would would be to temporarily reduce bank capital requirements slightly with appropriate conditions.
The Paulson plan is 1000 times as radical, more than 1000 times as costly, and slower.
Paulson says that not all of the $700 billion will be lost. If we get back 20% of The $700 billion and spend 10% for administration, we will lose $630 billion in addition to the more staggering indirect costs.
Oppose the Treasury's Bailout Plan
We already have mechanisms in place to deal with failed banks and Savings and Loans. There was no calamity when Indy Bank failed.
Taking over only failed institutions will be much less expensive than buying assets for more than they are worth, then reselling them for less than they are worth.
The Paulson plan purports to be necessary to bail out failing banks, but also makes a gift to banks and other financial institutions in good financial conditions.
It's like putting 300 million americans in the hospital because some people need to be hospitalized.
If this plan leads to a 5% depreciation of the dollar, it might lead to @ 5% increase in the cost of imports.
The government is living well beyond its means. It is covering this deficit by borrowing and printing money. The value of the Dollar has declined about 60% in the last eight years.
We should not continue on this course, accelerated by the Paulson bailout, until our credit is cut off.
Making a gift of $700 billion to those institutions who gambled excessively with other peoples money does not assure that they will suddenly become responsible.
If we make these gifts,the financial institutions,they will be back for more.
Paulson is a big time gambler with other people's money. Under his leadership, he led creation of the CDO market and leveraged Goldman excessively.
Why should we ask one of the people most responsible for creating the problem to solve it.
Why should we give anybody a blank check to spend $700 billion of taxpayers money.
The Bill authorizes Paulson to purchase mortgage related assets from any financial institution. What is a financial Institution. Does it include stockbrokers, insurance companes, credit unions, bond guarantors, etc?
The monolines might be able to use $700 billion.
Do you go to the head of the line if Paulson likes you. What is the total value of mortgage related securities that would be elgible for purchase.
Why is there little discussion of the facts that Paulson has a conflict of interest, Goldman might receive Billions, there are better, simpler, cheaper solutions, the bailout is likely to cause more problems than it solves.
The bailout rewards fraud and incompetence and will invite more fraud and incompetence.
The bailout constitutes going for broke and will make it more difficult to
borrow more money when we need it.
We should keep our powder dry.
While we're at it, Paulson wants the government to guarantee $2 trillion of money market funds and set aside $50 billion for the purpose.
This implies that no more will be needed.
However the guarantee will encourage money market funds to lower their credit quality, in order to increase yield, thereby increasing the ultimate government cost.
In fact, money market fund managers will be required to do so to compete.
Part of the problem is caused by corporations issuing commercial paper, thus financing long term assets with short term liabilities, and becoming dependent on this market.
The Paulson plan will also encourage people to transfer money from banks to money market funds.
This will cause more banks to fail.
All insured institutions should be prohibited from paying dividends until they show that they meet all capital requirements with all assets marked to marked, and marked to zero if there is no liquid market.
The Paulson "cure" is much worse than the disease.
Congress is being stampeeded into giving Paulson a blank check without time to understand the problem, understand the Paulson "solution", or consider alternatives.
Congress is distracted by considering modifications of lesser importance, such as executive pay, adding money for homeowners, etc.
Less attention is being given to the spending of $700 billion.
Congress is not discussing the question of cost effectiveness.
How much will interest on U. S. debt increase. What will this cost? How much additional indirect costs?
The attack on short sellers is a diversion from the main problems of irresponsible financial institutions over leveredging and making investments they don't understand.
It was exacerbated by Fannie and Freddie buying low quality mortgages without recourse and guaranteeing these mortgages.
Congress should require F & F to buy mortgages only if they have recourse from the seller and only if the seller is financially sound.
Under the current system, mortgage originators have an incentive to make any loan they can sell regardless of loan quality.
Part of the problem is that home prices are too high for the average person to afford. The Paulson plan is an attempt to manipulate home prices in order to defeat the law of supply and demand.
The sudden change of short sale rules created a government short squeeze of enormous proportions. The resulting short squeeze led to a steep decline. The resulting volatility led to panic.
The panic led to the Paulson bailout plan.
The panic appears to have caused congress to play "follow the leader" with Paulson as leader.
Paulson, more than anyone, has caused the panic.
Chris Cox has political experience, but no financial experience.
He was chosen to be the head regulator of the securities industry because he was opposed to regulation.
He was a leader in the repeal of Glass Steagall. This repeal led banks to speculate in risky investments.
Chris Cox claims to be a free market advocate. However, his short squeeze manipulations constitute some of the largest interferences with free markets of all time.
Some believe that we need the Paulson plan to prevent a recession. Instead, the plan could be the tipping point to cause a depression.
We need Glass Steagall, not the Paulson plan.
We need more divestitures and less mergers in order to have more competition which is necessary for a free market.
We need to avoid allowing corporations to become too large to fail,
which means that the taxpayers will have to bail them out if they fail.
Lehman's Bankruptcy Creates Systemic Risk
Jumbo Mortgage Risk Will Topple the Teetering GSEs
Requiring all loan sales to GSE's to be with recourse would do much to solve the associated problems.
St. Joe Stands Out Among Highly Rated Stocks in Highly Rated Funds