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The $700 Billion Bailout Package Has Nearly Arrived
And No One Outside Wall Street Executive Suites Likes It
For years
now, many enlightened financial observers have been warning that the
national debt was a ticking time bomb. Guess what? The time bomb has
exploded.
But the
so-called geniuses on Wall Street didn't see it coming, did they?
Apparently they were far too impressed by their own financial theories,
"innovations" and models, not to mention extremely lucrative salaries
and bonuses.
And the
response of the global markets (and the DJIA itself) to the Great
Bailout Fiasco of 2008 has been anything but enthusiastic. Even
before the failed vote in Congress just now, the FTSE had already
plummeted ...
… the Hang
Seng Index in Hong Kong had slumped …
… and
virtually every other major stock market that counts including Europe
(France and Germany), Japan, and Canada (our biggest trading partner)
went nowhere but downwards.
Even traders
on the NYSE know a financial turkey when they spot one, especially once
Congress failed to assemble enough votes to pass it.
Some of
America's closest Western allies and trading partners have been
particularly scathing.
Canadian
Prime Minister Stephen Harper, who is currently running for re-election
on October 14, has come forward and said, "A lot of things have gone
wrong here and, by the way, there were a lot of warning signs. This
should not be a huge surprise. I certainly had expressed my concerns
about some of these things to my American counterparts in the time
leading up to this."
The rest of
the Group of Seven (G7) industrialized nations have also been less than
complimentary over the way the U.S. financial system has been managed.
French
President Nicolas Sarkozy recently raised the idea of a November summit
of the world's major economies to rein in America's "mad system"
and establish "principles and new rules" to regulate financial
markets and punish those who "jeopardize people's savings."
German
Finance Minister Peer Steinbrueck last week also claimed that the
"Anglo-Saxon" model of banking has "an exaggerated fixation on
returns."
On the
whole, U.S. allies have refused to back Treasury Secretary Henry
Paulson's $700 billion rescue plan. This is despite their own problems
which have snowballed over the weekend. Major Belgian-Dutch financial
services firm Fortis has been partly nationalized by Belgium, the
Netherlands and Luxembourg via a EUR11.2 billion ($16.3 billion) bailout
following fears that the European giant was on the brink of insolvency
following large credit-related write-downs.
The British
government was also forced to nationalize mortgage lender Bradford &
Bingley due to that firm's risky $91 billion mortgage and loan
portfolio.
But what
stank so badly about the now-failed plan that Congress couldn't bear to
pass?
A 228-205
Failure As Congress Rejects The Bailout Package
Despite
enormous pressure from the Treasury, the Fed and the White House, the
House of Representatives voted to reject the $700 billion rescue package
even though supportive House leaders kept the voting period open 40
minutes past the allotted time in a failed attempt to convert "no"
votes to "yes" votes by pointing to damage being done to the markets.
It would
seem that despite all the screaming and fear-mongering, congress is not
entirely convinced that the credit freeze will actually drag down not
just Wall Street investment houses but also the savings and portfolios
of millions of working Americans.
Or at least,
they want a far better deal than the one that was forced onto
their laps with such haste. Even though the latest deal was supposedly
strengthened by new taxpayer safeguards, there were still key problems
about accountability and cost.
One of the
things that stuck us as most peculiar was this section:
Section 135. Preservation of Authority.
Clarifies that nothing in this Act shall limit the authority of the
Secretary or the Federal Reserve under any other provision of law.
This sounds
awfully dictatorial to us despite so-called safeguards in the form of
the Financial Stability Oversight Board (charged with ensuring that
policies protected taxpayers and were in the economic interests of
America) and a congressional oversight panel (charged with reviewing the
state of financial markets, the regulatory system and the Treasury's use
of its authority under the rescue plan).
Further
problems:
The SEC
retained the ability to suspend mark-to-market accounting rules on a
case-by-base basis, leading to all kinds of potential abuse due to
lobbying and favoritism. Essentially, some banks would have been forced
to report excessive losses (and then driven into bankruptcy) and others
would have been allowed to "fake" solvency long enough to survive. There
have already been a lot of fingers pointed as to why Lehman Brothers was
allowed to fail completely and other institutions (such as Merrill) were
allowed to merge with a suitor. This package would have magnified that
conflict of interest immensely!
Also,
Paulson could have chosen to buy assets from any financial institution
that does business in the United States (including pension funds and
even foreign central banks!) with wide discretion over what he
could buy and how much he could pay.
And don’t
forget that if this had passed, another $2,300 would have been
added to your share of the national debt, with all bailouts potentially
amounting to a staggering $1.8 trillion (or $15,000 per US
household).
Where To
From Here?
It won't
take long before Paulson comes up with another version of his plan. What
could he do to make it more appealing to U.S. politicians and taxpayers?
He might want to take a look at what Sweden did in 1992.
After years
of ineffective regulation, short-sighted economic policy and a property
boom that was going bust, Sweden was faced with a major financial crisis
of their own, one very much like the one facing America right now.
But the
Swedes didn't just bail out its banks and investment houses by having
the government take over bad debts, they forced all banks to write down
losses and issue warrants to the government. In turn, the government
announced that the state would guarantee all bank deposits and creditors
of the nation's banks, formed a new agency to supervise institutions
that needed recapitalization, and created another agency to sell off
mainly real estate assets originally held as collateral.
The
government became an owner and when distressed assets were sold, the
profits flowed to taxpayers including final payouts as the banks were
taken public once the crisis was over. No banks were spared unless they
wanted to find their own way out of the mess, and several subsequently
decided to preserve their shareholder equity by arranging their own
recapitalizations. Even so, the government seized a large proportion of
the country's banks and drained share capital before injecting cash.
The plan
cost 4% of the country's GDP (as compared to 5% of U.S. GDP for the
now-failed Paulson Plan) and the final cost was less than 2% -- perhaps
even zero depending on rate of return calculations! -- once all
positions were wound up. The country was back on its feet in record time
with minimal damage to its reputation and economic viability.
Now how's
that for a vastly improved plan?
However, it
remains to be seen if our own government will have the will and the
integrity to implement a similarly tough program. We can only hope!
Good investing,
Nick Thomas
Analyst, Charts of the Week
www.oxburyresearch.com
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