Tuesday, September 30, 2008

Ouch!

So, senators and representatives are all coming out with statements re what to do about the current financial crisis. So far, this blogger hasn't read any that specifically chart out what to do to clean up the current mess vs. "feel good" measures or "after the fact" proposals that might prevent a future reoccurrence of the issue but are too late to help with the immediate crisis.

Example number one comes from Marcy Kaptur (D-OH, and serving her thirteenth term in the U.S. House of Representatives as the senior-most woman in Congress). The transcript (with this blogger's comments inserted):

The SPEAKER pro tempore. Under a previous order of the House, the gentlewoman from Ohio (Ms. Kaptur) is recognized for 5 minutes.

Ms. KAPTUR. Madam Speaker, I would like to place in the Record the measuring sticks against which I will weigh any proposal brought before this Congress to bail out Wall Street investment houses.

Number one, financial reform must come first. America needs reform, not a bailout. Over the last 20 years, legislation has been passed by this Congress, H.R. 1278 in 1989 called FIRREA, interstate banking in 1994 which created those big mega banks, and H.R. 10/S. 900 in 1999, which overturned the Glass-Steagall Act that allowed banking, real estate and insurance all to be under the roof of the same firm.

Well all those bills together have created a highly concentrated financial system, particularly in housing finance, rather than a decentralized one like that which we had for most of the 20th century. This bailout is the result of high-risk misbehavior by distant financial giants. They have sucked equity out of local communities and turned local markets into derivative, debt-ridden communities rather than independent, robust, credit markets with prudent savings and lending practices.

Reform should restore those prudent and transparent banking practices defining the difference between banks and investment houses and protecting and restoring the protections that existed prior to 1999 when that Glass-Steagall Act was eliminated. Conflicts of interest at bond rating agencies should be addressed by such agencies becoming public. Reform, as I say, and regulation should come first out the door before the money, not later.

  • Is she seriously suggesting going back to the pre-interstate banking days, before Riegle-Neal in 1994? And reversing FIRREA (which allowed bank holding companies to acquire thrifts - is that really a big problem now?) and Gramm-Leach-Bliley (which allowed commercial and investment banks to consolidate) to reinstate Glass-Steagall? Some argue that these measures increased risk... Maybe so, but is she suggesting the unwinding of JP Morgan Chase's 'rescue' of Bear Stearns? (Note: Bear Stearns as stand alone investment bank failed and it was acquired by a commercial bank.) Any way, even if (and it is a big if) she is correct here this is not something that addresses the immediate problem...

Number two, Main Street housing market deflation must be stabilized as step one. A moratorium should be placed on all home foreclosures for 120 days. That will take us into the new year. And deflation in the housing market really is what has triggered this credit crunch. The Federal Reserve could use its influence through its regionalized structure to bring parties together to work out affected loans in places like Ohio to stabilize local real estate and housing markets. That is where the real assets are and where the markets must clear and adjust.

What a crime it would be if people are thrown out of their homes and an institution somewhere over in England like Barclays becomes the owner of those assets and gets them at fire-sale prices. We need to put those assets back in the hands of the American people.

The traditional home loan backed by savings deposits was converted into a bond during the 1990s and then securitized into those international markets. The time-tested loan standards of character, collateral and collectibility were shelved, and therefore to reform this system it must be decentralized again, with the community savings and home loan bank system being reestablished with an emphasis on increasing savings deposits with enhanced local mortgage origination and oversight, as opposed to concentration of activity in Wall Street investment houses.

  • Here too, one can argue that a temporary moratorium on foreclosures is something that needs to be done. And it's true that we are no longer in the halcyon days when we would get our mortgages from the corner bank. However, suggesting that a foreclosure moratorium will stop housing deflation is... this blogger struggles for words. Suffice it to say that this is not cause and effect...

Number three, a new Financial Assets Management Board should be formed to manage this mortgage refinancing and workouts at the local level, similar to FDR's Homeowner Loan Corporation.

  • OK, perhaps a good idea., not exactly sure what this does for the current difficulties...

Fourth, the Department of Justice should be authorized to investigate the wrongdoers, to track down the fraud, misrepresentation of asset value, insider trading and related crimes in this scandal. There should be over 500 attorneys and accountants and support staff to conduct thorough investigations, forensic accounting and prosecution.

  • Ditto - perhaps a good idea., not exactly sure what this does for the current difficulties...

Fifth, any Federal dollar that is expended must result in equity to our taxpayers. If our people are going to be forced to fund unlimited private sector bad debt, our people must receive an equity share in every Wall Street financial company proportional to the amount of bad debt held that is shifted to the taxpayer.

Our people are being asked to take 100 percent of the risk. They should be afforded the benefit of any future profits. A 0.25 percent transaction fee should be charged on every Wall Street trade or Chicago Board of Trade transaction, and that $150 billion a year that will be yielded should pay the American people back over time.

  • A 0.25% transaction fee on every stock trade... True, it will raise the amounts mentioned, but who exactly does she think this money will be paid by? Hmm, this blogger will pay the 0.25% fee every time he trades - and when the company running his 401(k) trades, etc., etc. - and then he will be "paid back over time." Hmm, that's really sticking it to Wall Street and standing up for Main Street! Somehow, he's doubtful that he will ever get that money back once it's out of his pocket...

Sixth, a select congressional committee should be established to hold hearings, do proper oversight and advise the next President and Congress on mortgage and financial recovery operations and additional means to assure any necessary repayment of public investment.

  • As with numbers three and four above, perhaps a good idea, not sure what it does for the current crisis.

Seven, standards for executives and compensation structure in the financial services industry should be established. Those outlandish salaries that they get should be curbed, and all bonuses, stock options and exceptional compensation for those individuals and their boards of directors should be discouraged. We should help to pay the bill by going after some of their assets.

  • Ditto, as above (i.e. not sure what this does for the crisis). Note: not every CEO helped himself (herself?) to outlandish salaries and perks, though many did. Congress setting salaries doesn't exactly inspire confidence in this blogger. This is one of those "keep the crowd with pitchforks happy, and in a happy coincidence, going after the executives rather than the senators and representatives who also presided over this melt-down" type measures.

Finally, Madam Speaker, I would like to place this in the RECORD, and also include bankruptcy reform as one of the major changes that we need to make in any measure. These are the steps that would actually result in market recovery, not just bailing out unknown assets and bad debts from Wall Street.

Bottom line: Some of this might be useful for the future, but it doesn't give much re what to do to solve the immediate crisis!


Here is someone else who thinks that a 0.25% fee on stock trades will make sure that it is Wall Street who pays and not you and me! He also claims an added benefit - this fee on stock trading will "... tamp down toxic speculation, while encouraging healthy investment. The reason is pretty straightforward: When there's no cost to trading, there's no cost to gambling. The current system is like going to a casino where the house never takes anything; a gambler's paradise. Without costs to the transaction, people of large means are encourage to speculate - to, for example, buy a million shares of a particular stock over a day or two purely with the goal of driving up the stock's price (because everybody else sees all the buying activity and thinks they should jump onto the bandwagon) so three days down the road they can sell all their stock at a profit and get out before it collapses as the result of their sale..." Hmm, this blogger hadn't realized that a) there is currently no cost to trading, and b) he can easily time the market and move stock prices in the desired direction at no risk!

 
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