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Ryland Group Inc. Message Board

  • apostate_001 apostate_001 Sep 22, 2008 3:59 PM Flag

    Negotiating the Bailout

    I want to call your attention to the hasty negotiations that are going on in Congress concerning the 'bailout bill'. That a bill will be passed is a foregone conclusion. I discussed in a past blog how Ben Bernanke and Henry Paulson decided that a bailout would happen and told Congress they have no choice. Congress didn't question their word on this subject or ask for an in depth explanation. Congress and everyone else seems to have willing accepted the refrain that "a huge bailout bill would be more palatable and less costly than the utter meltdown of the financial system". This was accepted in a span of 48 hours or less, without details and without adequate discussion. Nevertheless, a bailout is going to happen. Word out is that Congress hopes to have both Chamber's and the President's approval on the bill by this Friday, September 26.



    However, the exact terms within the bailout legislation are still open for debate, and that is the subject of this message. The content of the bailout bill is hugely important given its size, and, the current negotiations will somewhat determine whether the taxpayer will receive any bang for its fiat buck.



    In general (because there are no specific details in circulation), the alternatives under negotiation on Capitol Hill are as follows:



    Plan I. Paulson is pushing a legislative version of the bailout, which would essentially be a blank check to Paulson. Paulson was on the Sunday talk-show circuit selling the bailout but committing to nothing. It appears this version is backed by Republican legislators. The Treasury Secretary (currently Paulson) would be given the directive to buy up bad debt (not just mortgage debt, but possibly credit card debt, auto loan debt, and similar consumer debt) from whatever entity that he--using his discretion--deems appropriate (including possibly buying up bad debt from hedge funds and foreign entities, as he admitted on television just yesterday)--at whatever discounted price he negotiates. Remember, these credit tranches are causing this problem because they are so complex and hard to assign a market value. After buying such debt, under the direction of Paulson, our government would--as time rolls on--attempt to resell that same debt back to players in the financial market. Of course, Paulson and the Treasury Dept. do not have the man power to accomplish this assignment with their limited staff so--Paulson has already indicated during the talk shows--that outside Wall Street firms and 'expertise' would have to be employed to handle the day-to-day implementation. Alert! Do you see a red flag? I do!! In other words, the fat cats on Wall Street who have made billions while screwing up the financial system will be employed to negotiate with their brethren, while supposedly acting on behalf of taxpayers. Yikes. This concept makes me think of such things as $800 toilet seats bought by the Defense Department, no-bid contracts to companies for providing services in Iraq, and acres of empty FEMA trailers sitting in Louisiana. I ask you: "Is the taxpayer likely to get a good deal"?


    (continued below)

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    • Plan II. Plan II is much like Plan I except that various Democratic legislators are making noises about 'conditions' to be included in the legislation. Foremost among such conditions is relief for home buyers in default on their mortgages...a somewhat vague concept. This concept is that Wall Street shouldn't get all the benefit; rather Main Street should get relief from Uncle Sam also. Obviously such relief would take the form of mortgage interest rate reductions, payment deferments, or even principal writedowns, or similar, related to the mortgage debt that the government buys under this bailout (as well as, perhaps, the estimated $5 trillion of Fanny and Freddie mortgages previously issued and guaranteed by our government in last month's bailout). Much could be written about the justice or injustice inherent in such a concept of mortgage relief. The current bagholders (i.e., defaulting mortgagors) are an assortment of persons owning multiple homes, foreigners, past speculators/flippers in the RE market, and perhaps some people with jobs. Another key condition to be found in Plan II and not in Plan I would be 'oversight' ...again a vague concept. This can be interpreted as scaling back the degree to which Paulson would be given a blank check in negotiating when spending the $700 billion, or more, and then reselling the same bad paper later (supposedly when our credit markets become fluid again and our economy is robust). In other words, the Democrats want to hang onto some control over to whom, for what, and when this bundle is paid out. (Side Note: Paulson, a cabinet-level appointee, may be replaced when a new President takes office on Jan 20, 2009.)



      I suspect the final bailout bill will resemble Plan I--unfortunately. Why? Let me list some reasons: Congress is convinced that it has a gun to its head and that the markets are about to pull the trigger. Also, the Democrats are not organized about what exactly they want in the bill (probably impossibilities given the current debacle). Congress is scheduled to go on vacation at the end of this week to campaign and nothing deserves more priority than campaigning (an outrageous excuse to hurry along such important legislation!). The public is not paying sufficient attention or doesn't understand what is going on.



      Contact your representatives in Congress! It is urgent! This bill is being conceived and finalized all within one week. Raise hell! If ever there was a time a Congressman might stop and read a constituent's letter, it is just before an election.

 
RYL
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