Arkansas Blog

Just for fun, a link to trailers for Oliver Stone's film "W." We've got to find our laughs where we can.

Rep. Vic Snyder (D-Ark.):

"To hell with the Wall Street firms. That's not what I'm worried about. I'm worried about the people in Arkansas" who could be hurt by a frozen credit market.

As usual, St. Vic is right on target. I'm happy he's my congressman (most of the time).

Sadie is sorry. Still hasn't figured out the clicky thing, so here's the site: http://www.wthefilm.com/

(I swear I'm going to figure it out, just like W.)

Oil prices went down $10 yesterday, and the dollar is stronger today.

Max -- I'm starting to think you are secretly in love with Bob "Death Star" Johnson. This is the second time you've mentioned him this week, without any real reason to.

Just warming up for session or lewdly fantasizing?

"Oil prices went down $10 yesterday, and the dollar is stronger today."

Reallawyer, what are you saying? That meaningless little one-liner is beneath you and us. Unless Palin's patented inanity is catching.

And it's not.

At clicky, if you're interested in FACTS AND IMPLICATIONS about the impact of this, you will find excerpts from 7 different sources, starting with Motley Fool.

Act FAST, reallawyer, because it's obvious this condition can start relatively young (see Palin), and we've all seen what's happened to McCain, and to Ronald Reagan.

As Dan Quayle so aptly put it, "It's a terrible thing to lose one's mind."

We hope you'll recover in time to chime in for our live-blogging during Thursday night's debates!

I think I love you, Ms Bates.

That link should be a mandatory clicky. It does a way better job of what I failed miserably at explaining yesterday.

I'll send on any more gallows humor I get. The best stuff comes from the London banks. They're funnier over there.

OK, thanks for the round-up NormaB. So long as gold stays at 350 oz+ I think America is still grand.

MARTHA B, and eark, this one is for you. A Libertarian view of the bailout. The fellow has creds:

" The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources ....

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets. ............
Jeffrey A. Miron, senior lecturer in economics at Harvard University.

It's clicky

.

.

I see MarthaB's in the hizzy. I hope you can speak to my many, rambling questions/comments.

I understand this bailout plan about as well as I'm going to, thanks in some part to you. I still have some issues with it (not that that matters to anyone) and you are the most informed opinion on the blog of late (IMO).

Say we give the $700,000,000,000 to Wall Street. The problem as I understand it isn't lack of money, it's fear and trust-- two things you can't necessarily buy with money. I think this point is getting lost, missed, or ignored. Couldn't we just as easily give the industry $900,000,000,000,000,000,000,000,000 and banks still 'refuse' to extend credit to one another?

I'm having a hard time believing Wall Street is being/will be punished for this-- and I know that they aren't the only guilty parties, but I think most will agree their hands are the dirtiest. A pillar of capitalism is that businesses fail while others succeed. Seems for every bank that fails lately, there's one waiting to buy it up. And as far as the 'Big 5' investment banks go, is there no other company on earth that can step-up and do what these guys do? Stephens? Citi? Chase? Could it be that this is an opportunity for other firms and entrepreneurs? Could they not get us out of this? I'd bet there's a legion of them convinced they can because they are learning from this crisis. Plus, they've not undertaken overly risky/irresponsible practices. I'd be inclined to bet on this bunch.

Is this bailout not encouraging the riskiest of investment practice? Is it not telling Wall Street (again) that the burden of catastrophic losses can and will be written off and shifted to the American taxpayer (and "you're welcome" for the profits)? That's exactly the message I'd be getting if I were a banking CEO. Hell, this bailout would be the best news ever. You are in the industry. Do you honestly believe this is not the message the financial sector will read?

Why not bankruptcy instead of bailout, as the above post alludes to?

I just see more panic and "do something even if it's wrong" thinking than clear, thoughtful decision-making.

Any comment would be appreciated, MarthaB.

I'm more inclined to the let 'em file bankruptcy view.

Another idea that's been batted around is to give Paulson $150 billion now, and come back and do this thing right in January.

Hi Lew -

I'll try to answer as best I can...thank you for the compliment. My opinions aren't necessarily correct, but that's never stopped me from sharing them (as my dad will tell you).

1) the $700B number is kind of a wild guess in terms of what is needed to get rid of the assets on bank balance sheets that aren't actually worth the amount that they are being held at on the books...it's probably a little on the generous side because after all this agitta who wants to come back and beg for more? i talked to a big bank CEO recently and he thinks that there have been ~600b of writedowns in total with anywhere from 400b-800b still needing to happen. So the $700B is kind of a "safe" number for paulson to ask for. could we potentially give him $150-$200 and come back in Jan as someone suggested yesterday? definitely possible.

2) banks are in business to loan to each other and other people and make money off the spread between their lending costs (typically LIBOR) and what they charge to GE (Libor + 0.10%) or a company with poor credit quality (Libor + 5%). those banks that have actual retail businesss make money by taking our deposits and then lending them to companies...but they need the commercial paper market to keep things flowing from day to day (literally sometimes it just is to even out the books overnight!)

since we can all agree that bankers LEURVE money, i think we can also agree that if banks have the capacity on their balance sheets to lend (because we took away those toxic assets that no one was willing to accept as collateral) and the ability to get short-term funding (so they can keep things moving smoothly) they will promptly get started again.

3) bankruptcy vs bailout -- okay, so if these institutions go bankrupt, stockholders, unsecured creditors, and some secured creditors are scewed. you sell off the parts for the best you can get and *hopefully* some people get a few pennies on the dollar. also screwed are "counterparties" -- the people on the other side of all these weird trades that were done as well as a lot of very normal trades (like farmers who grow wheat and corn buying futures to hedge their exposure). since there is no Chapter 11 for banks, only liquidation, bankruptcy means huge and immediate dislocation.

if banks are 'bailed out', the stockholders (hedge funds like me, your mom and her pension funds) are screwed (becaue the government takes the equity), but there aren't the same huge global ramifications for the other stakeholders, which is theoretically good.

as an example, there have been like 6 bank privatizations in Europe in the last 3 days many of which resulted from exposure to Lehman.

4) unfortunately saying that "for every bank that fails, there is another willing to buy it up" isn't really true. in the case of Bear, JP Morgan wouldn't buy it without the Fed guaranteeing them up to $30b of losses. (NOT a $30b loan. The Fed literally said, ok, up to $30B of Bear's liabilities you can give to us and we'll take care of them. Gratis. You don't owe us a dime.) No one would buy Lehman as a whole, which is why they had to file. No one would buy AIG, which is why the gov't took over. JP Morgan would only buy Washington Mutual with government guarantees. Bank of America signed a deal to buy Merrill but there are no government protections -- many people in my business think BofA shareholders won't approve a deal without them so ultimately that deal won't happen. (Chase, btw, is JP Morgan. And Stephens is a great little boutique but they can't take on the hundreds of billions of dollars of exposure these institutions have on their balance sheets. So you really only have 3 buyers - JPM, Citi, and BofA.)

I think we can avoid 'encouraging the riskiest of investment practice' by putting stronger regulations back in place. For Goldman Sachs and Morgan STanley to now be banks, not brokers, already accomplishes a LOT. Though we need more, banks are more highly regulated than brokers in terms of leverage and the types of operations they can undertake. So already we have more oversight. There is a significant DC task force establishing oversight and rules for hedge funds. I think we most DEFINITELY should accompany any action we take in the short term with long-term policy decisisions to make sure the same excesses don't happen again in some new, repackaged form.

Hope this is interesting.

The "bailout" will nationalize losses, but what's new? Consumers always end up paying for greed on wall street one way or another.

Those who think this problem is only about mortgages, and that the "bailout" will solve the problem, are very naive. The "mortgage crisis" is a symptom not a cause.

I'm not opposed to the government assuming the mortgages for pennies on the dollar, but it won't fix the economy. At the very best, it will just delay the inevitable, and add more to our debt in the long run.

"okay, so if these institutions go bankrupt, stockholders, unsecured creditors, and some secured creditors are scewed."

So very true, MarthaB. And I'm watching this up close and personal with an elderly friend in Conway who, at her broker's recommendation, bought $90,000 worth of Lehman Bros. Holding bonds earlier this year. The $90K was about 1/4th of her net worth. If she's lucky, she'll get 30-cents on the dollar by the time the dust settles. Absolutely sickening. Wish she'd have called me before her purchase instead of after.

Gawd I love this blog, the humor, the wit, the facts make my day, except strangegloves.

The palin debate media steamroller is now in motion. She's ready, she's gonna dance like a butterfly & sting like a bee. Old Joe don stan no chance. He's gonna be sliced into whale blubber, run over by a snoe mo beal. Why its already over folks, at least that's what has come from her "trainers". I speculate she been jogging back & ferth to the bridge to knowhow.

I just love that picture.

PS for Sadie on the clicky. Your not by your lonesome, I haven't figured it out either. I think Max has hexed me.

I'm still amazed how many people just blindly follow the advice of brokers. Never make an investment decision without understanding it yourself.

Has anyone ever sued a broker for giving bad advice?

The following is lifted from http://globaleconomicanalysis.blogspot.com/ Particularly interesting is the move by the Irish government to safeguard it's banking system for two years. Anyone think this will work better than the Paulson plan?

How To Stop A Run On The Banks

The global banking system has frozen up. There is no trust between banks and there is no trust by depositors of banks. This has caused a run on the banks, and has led to the failure of Washington Mutual and Wachovia. Internationally, several large banks have failed.

Bloomberg is reporting Libor Rises Most on Record After U.S. Congress Rejects Bailout.

The cost of borrowing in dollars overnight rose the most on record after the U.S. Congress rejected a $700 billion bank-rescue plan, putting an unprecedented squeeze on the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers' Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.

"This is unheard of, the money markets should be the engine driving the financial system but they have broken down," said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy's largest lender. "Any institution that hasn't completed its 2008 funding needs by now is going to be in very serious trouble. More banks are going to need to be bailed out."

The seizure in the credit markets is tipping lenders toward insolvency, forcing U.S. and European governments to rescue five banks in the past two days, including Dexia SA, the world's biggest provider of loans to local governments, and Wachovia Corp. Money-market rates climbed even after the Federal Reserve yesterday more than doubled the size of its dollar-swap line with foreign central banks to $620 billion. In Europe, banks borrowed dollars from the ECB at almost six times the Fed's benchmark interest rate today.
Why the Paulson Plan Fails

The Paulson plan fails because it does not stop mistrust between banks or mistrust by depositors. All it does is throw $700 billion in taxpayer money down a black hole.

The Paulson plan is also unconstitutional. There is no constitutional authority for the US Government or the Federal Reserve to use public (taxpayer) money for what is definitely a private purpose (bailing out Wall Street).

Finally, the Paulson plan takes time to implement fairly, and there are many holes in the oversight process.

Irish Government Moves To Safeguard Banking System

FXStreet is reporting Irish Government Moves To Safeguard Banking System.

The Irish government Tuesday announced a surprise decision to safeguard the Irish banking system for two years, guaranteeing all deposits, covered bonds, senior debt and dated subordinated debt of the four main banks.

"It has done so following advice from the governor of the central bank and the financial regulator about the impact of the recent international market turmoil on the Irish banking system," the government said in a statement.

The government said it aims "to safeguard the Irish financial system and to remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets."

Finance Minister Brian Lenihan said Tuesday that the guarantee will mean a commercial charge for Irish banks, but this would be decided by the Central Bank of Ireland; he gave no more details on the charge.

He said that the decision to guarantee the banking system for two years was primarily aimed at addressing liquidity concerns, protecting taxpayers funds and crucially ensuring banking funds don't dry up.

Investors welcomed the news. By 0755 GMT, Allied Irish Banks PLC (AIB) was up 14% at EUR5.70, Anglo Irish Bank PLC (ANGL.DB) was up 22% at EUR2.81, Bank of Ireland PLC (IRE) was up 6.7% at EUR3.49, and Irish Life & Permanent PLC (IPM.DB) was up 22% at EUR4.35.

The guarantee runs from midnight on Sept. 29, 2008, and expires at midnight on Sept. 28, 2010, and follows the decision last week by the government to guarantee deposits in Irish banks up to EUR100,000.

The government said it aims "to remove any uncertainty" and "maintain financial stability for the benefit of depositors and businesses and is in the best interests of the Irish economy."

Davy Research analyst Scott Rankin said: "The Irish government has taken out its bazooka."

This is urgent we must get this to EVERY senator before the Senate takes a vote.

Fax Title: How To Stop A Run On The Banks

Dear senator

Today the Irish government announced a surprise decision to safeguard the Irish banking system for two years, guaranteeing all deposits, covered bonds, senior debt and dated subordinated debt of the four main banks.

The Result

Investors welcomed the news. By 0755 GMT, Allied Irish Banks PLC (AIB) rose 14%, Anglo Irish Bank PLC (ANGL.DB) rose 22%, Bank of Ireland PLC (IRE) rose6.7% , and Irish Life & Permanent PLC (IPM.DB) rose 22%.

Why Ireland's Plan Works

What Ireland is fighting is the same thing that the Fed is trying to fight here (outflows from banks and money market funds into short term government debt.)

The problem is NOT mom and pop pulling bank deposits, it is corporate treasurers and state treasurers whose jobs are on the line pulling deposits from weak banks and putting them into stronger ones.

The fastest way for the US and other governments to solve this is to raise deposit insurance ceilings. This is a far better option than ballooning the Fed's balance sheet more.

Furthermore, I would highlight that fully guaranteed deposits would put the US government even more at the top of the capital structure of banks. Existing senior debt is all of a sudden now fully subordinated to a potentially unlimited amount of insured deposit debt.

Why the Paulson Plan Fails

The Paulson plan fails because it does not stop mistrust between banks or mistrust by depositors. All it does is throw $700 billion in taxpayer money down a black hole.

The Paulson plan is also unconstitutional. There is no constitutional authority for the US Government or the Federal Reserve to use public (taxpayer) money for what is definitely a private purpose (bailing out Wall Street).

Finally, the Paulson plan takes time to implement fairly, and there are many holes in the oversight process.

Stop The Run On Banks

Temporarily guarantee all deposits at US Banks. Implement rules to ensure weak banks do not misuse this privilege by adopting risky lending practices. Orderly shut down all undercapitalized banks.

Senator, please scrap the Paulson proposal in entirety and try something that might work, that is constitutional, and does not put taxpayer money at risk.

Your Name
Your Phone Number

Note: I am in principle opposed to FDIC insurance.
It IS A Moral Hazard.
However, I Fear the Paulson Proposal Far More
We CAN readdress FDIC later down the road.
There will be time later to take care of this.
We Must Provide Congress A Better Alternative NOW.
This is it.

You fix the mortgage situation because of Main Street, not Wall' Street. Dumping a few million (or more) families on the street while watching their homes and apartment buildings rot.. will exacerbate the problems causing a decrease in tax revenue on every level from the very pool who will be expected to pay for all this mess for generations. Ignoring Main Street for a small percentage of the big problem is one of the best and most important solvable solutions we know about today. Otherwise.. we kill our working middle and lower class soul a little bit more and only the cynical rich (Friedman School Reaganites) will feel good about themselves.

God I hope you people don't own clubs.. because when things get tough I know the elite AR Bloggers while be the first in their neighborhoods to run out and club the the new hoards of homeless people like baby seals. Stop worrying about the people with several homes and a yacht.. and demand help for your brothers and sisters in your own communities (or just outside your gated community).

Helicopter Ben poured six hundred billion in new liquidity into the mess yesterday... And we didn't even get a thank you card! Wake up!