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MOAB - Mother of All Bailouts

September 18th, 2008
By ELROD

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In the midst of Wall Street’s fourth straight troubling day came rumors of a massive Congressional bailout plan to purchase troubled assets from all banks and dispose of them. Rumors of this plan emerged when Democratic Senator Chuck Schumer spoke of it on the Senate floor this afternoon. Suddenly, the Dow skyrocketed 600 points from its daily low to close at 410 points up. Yes, Wall Street liked the Mother of All Bailouts (MOAB).

MOAB will be developed by Congress in conjunction with the Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Details at this point are unclear, but a possible model is the Resolution Trust Corporation of the early 1990s, which disposed of assets from hundreds of failing S&Ls and then folded back into FDIC in 1995.

While MOAB will please investors in the short term - it signals willingness of the Federal Government to commit the full US Treasury behind stabilizing the troubled credit markets - the long-term effects are dangerous to say the least.

1. This would be an unprecedented exposure of risk to the taxpayers. Did we decide to make these faulty loans? No. So why should we have to bail these irresponsible banks out? What does this do to the dollar? What is the inflationary impact?

2. Whatever happened to moral hazard? When the Fed let Lehman Brothers fold on Monday, analysts praised Paulson and Bernanke for preventing moral hazard, which is a term that refers to the willingness of governments to bail out investors and shield them from losses due them for poor behavior. Profits are privatized and losses are socialized. It encourages more reckless behavior. It seems now that the government cares little about moral hazard.

3. This “comprehensive” plan is more of a giant band-aid than a proactive mechanism to prevent this from happening in the future. Considering the moral hazard generated by this MOAB, investors in the future will conclude - rightly - that if they form large enough combinations they will be “too big to fail” and so suffer no real risk of bankruptcy. The only way to prevent that is a completely new and rigorous regulatory mechanism, backed by the President and Congress. To put it mildly, we have no such regulatory mechanism or environment in place right now.

4. As Calculated Risk points out, this new MOAB entity may actually “reduce regulatory capital as losses are realized. The opposite of the goal!” After all, these are fully-functioning banks whose assets would be handled, not entire failed banks awaiting full-on liquidation. The problem at hand is a shortage of liquid capital, not just the presence of bad assets.

Do you think the Mother of All Bailouts is a wise move for the Federal Government? Is this the proper use of taxpayer dollars? And what does this say about “free-market capitalism” when its biggest advocate (Bush Administration) goes this far in expanding governmental interference in the market?

Cartoon by Tab, The Calgary Sun



This entry was posted on Thursday, September 18th, 2008 at 11:04 pm and is filed under Wall Street, Newsweek Blogitics, Federal Reserve, At TMV, Corporations, Politics, Economy, Society, Business. You can leave a response, or trackback from your own site.

Viewing 7 Comments

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    That the voice of a banking industry lobbyist or a big investor counts much more than that of an ordinary Joe.

    Regular people who are hitting hard times need to stop whining and pull themselves up by their bootstraps-BUT corporate execs must be protected from the consequences of their own bad decisions at all costs. CEO's must retire with their golden parachutes intact- if the little people lose their jobs or take a pay cut- well they don't usually donate to the RNC anyway.
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    I loved the article I read that said the point was to buy bad assets from the banks so they could, and I quote, "resume business as usual." Business as usual!

    But yes this is a terrible idea and I'm not sure it is hyperbolic to say it puts the health the United States government at risk. The problem is that we don't know how much bad stuff there is (for instance, Citigroup, JP Morgan and Bank of America have TRILLIONS of dollars in "mark to model" assets that could be worth pennies on the dollar) and once the government starts the process it will start a flood of writedowns. I can guarantee that the ratings agencies will at least be forced to pretend like they are going to downgrade the debt rating of US Govt Bonds.

    Best case scenario it will add hundreds of billions to our debt, worst case it could cause complete currency collapse. The real reason they are doing it now is because the entire global financial system will collapse if they don't because it's becoming apparent that all the players are insolvent.

    China has already publicly stated that the world should think hard about moving away from the dollar as the reserve currency and if this happens there is no reason not to. From my understanding it's actually worse than the Great Depression....I can't think of a country that has failed from deflation but can think of tons that have failed from hyper inflation.

    And it's all going to be drawn up over a single weekend!
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    Oh I should also add that if this is true it might not matter what reality is. The mere chance that it will put the government on the line for near endless losses will be enough to cause China, Japan, et al. to dump bonds and then we are royally f*****.

    I'm scared that people don't understand what this actually means, and that it is to easy to point to guaranteed catastrophe if we don't do something so the panicked populace will agree to anything that might stave off system failure, even if it means a high likelihood of permanent failure.

    I have to add that all the Democrats' plans seem just as bad. The key difference between programs that work and those that don't are completely based on asset valuation. Buying houses that are 30% below historical value because no one else can at the moment is arguably a good idea for the government.....buying houses that are still 30-50% above historical value is awful. Buying bad assets from already failed companies at prices below what the assets should be worth even from a worst case scenario because no one else has any money can help reboot the system.....buying bad assets half way down the decline is idiotic.

    So far all the plans are to try to prop up asset values which is impossible except through severe inflation.
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    Unfettered capitalism... bailed out by socialism.

    (I know, I know, I just don't think it's been repeated enough yet ;-)
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    To start my take on this, here's something from earlier today (9/18)

    http://www.startribune.com/business/28613189.ht...

    that shows what Paulson, Bernanke and now (God help us) Congress, are dealing with:

    "Oil shot up early in the day, moving back above $100 as investors sought it as another haven. But crude fell back with the market's realization that the financial turmoil will likely exacerbate the drop in demand that has taken oil down sharply from its July record of $147.27 a barrel."

    For "investors", in the above quote, substitute, "greedy, ignorant, numb skulls". It's like: OMG, OMG, better put the money in the mattress. Oh, it's burning!

    The central problem that Paulson is referring to is that these dunderheads are afraid that the value of mortgage backed securities will fall to zero; which, of course, it will, if no one wants them. As if, every single mortgage that was ever created, no matter the soundness of the lender or borrower, is worthless. Probably, the only thing that's certain about this whole catastrophe is that this isn't true.

    Now, it takes the tax payers, through our representatives, stepping in to say: OK, you win. Your stupidity and cringing silliness are too much. Go to the bathroom and clean yourself up. We'll put an arbitrary floor on the value of these assets, since you can't, and aren't even interested in trying to, figure it out on your own.

    How, can this be the time for posturing about "moral hazard"?
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    What is el Rushbo-- The Limpy One saying about the bailouts?

    He and his sidekick Hannity have been predicting for monthsthat we will turn into a socialist nation if Obama/Biden win in November because Obama pledged to raise taxes on the top 1%, and raise the cap gains tax by 5%.
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    Instead of only blogging and ranting, can the taxpayer do something like sue the treasury, fed etc and stop the bailout
    That is the only way that this whole drama being enacted on the pretext of saving homeowners is being enacted... if home prices fall it is obvoiusly good for the home buyer ... so why is a free fall of unrealistic home prices bad for home buyers?

    CAN WE DO SOMETHING CONCRETE TO STOP THIS JACKASSES FROM MAKING IT INTO LAW
 
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