On Sat, Oct 16, 2010 at 1:34 PM, Dan Minette <danmine...@att.net> wrote:
> I'm not sure why you think the main argument against letting banks fail is > false. It is that the financial system as a whole could have collapsed if > there was no intervention. Maybe he thinks it is false because it IS false. A lot of financial company fat cats screamed for help to their cronies in Washington, and of course, their old chums came to their rescue. What's a trillion in taxpayer dollars between friends? By the way, he said "corporations". Why do you immediately assume he was referring to banks? I know it is hard to keep track of all the handouts the politicians gave to their cronies during their bailout spree, but off the top of my head: Fannie Mae Freddie Mac AIG Bear Stearns Citigroup BoA GM Chrysler Are you seriously going to argue that the failure to bailout all of those would have led to disaster? The politicians and their advisors have no clue about what would have happened without the bailouts. He is an example of the predictive ability of Obama's financial advisor: "The paper concludes that the probability of default by the GSEs is extremely small. Given this, the expected monetary costs of exposure to GSE insolvency are relatively small -- even given very large levels of outstanding GSE debt and even assuming that the government would bear the cost of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is less than $2 million." --Peter R. Orszag, et al. "Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard," in Fannie Mae Papers, Volume 1, Issue 2, March 2002. Dan Minette wrote: > As it stands, the estimate of the bailout costs are now > down to $50 billion, as the government sells some of the assents it got in > the bailout at bargain prices at a higher price. Still drinking the Kool-aid, I see. I know there is little hope of you seeing the truth, but I will give it a shot anyway. The Fed has purchased over $1.5 Trillion in MBSs from Fannie and Freddie, a large fraction of which are delinquent mortgages and valued on the books significantly higher than the amount at which the properties can be liquidated. And there are more big foreclosure waves coming in late 2010 and in 2011. The FASB has helpfully suspended rule 157, mark-to-market valuation, until at least 2013, allowing "substantial discretion" in asset valuation. In other words, the asset values currently on the books are pure fiction. You can get a decent idea of the market value of many mortgages by checking the FDIC auctions of mortgages it obtained from bank takeovers. Most of them are selling well below 50 cents on the dollar. What happens after 2012 when the Treasury backing of the bad GSE loans goes away? If a corporation engaged in this sort of fraud, the board and officers would have been put in jail. But when the politicians do it, the gullible think they are heroes saving the public! Dan Minette wrote: > I'm honestly curious what you think would have happened if the government > did nothing and just let the chips fall where they may. As I have explained to you before, there is a difference between allowing the bad companies to fail, and doing nothing. Congress should have passed emergency legislation streamlining the process for the bad shareholder and bondholder debt to be stripped away, allowing the solvent operating portion of the companies to be sold off, thus allowing the useful portions of the companies to continue operating, while properly penalizing the shareholders and bondholders who imprudently allocated their capital. I'll conclude with an excerpt from Ben Bernanke's Humphrey-Hawkins testimony before Congress in July. He was questioned by New Jersey Congressman Scott Garrett of the House Financial Services Committee. SCOTT GARRETT: You bought over a trillion dollars of GSE debt, and to that point, under normal circumstances, on the Fed's balance sheet what you have on there are Treasuries, or if you had anything else on there, I assume you would have a repurchase agreement for those securities on your balance sheet. Now of course around two-thirds of that are in GSE debt. BEN BERNANKE: Correct. GARRETT: So right now, those are guaranteed - whether they're sovereign debt or not, we don't know - but they're guaranteed by the U.S. government. But they're only guaranteed to when? 2012, right? After that, Congress may in its wisdom make another decision, and at that point in time, you may be holding on your balance sheet - two thirds of your balance sheet - something that is not guaranteed by the Federal government. First of all, you don't have a ... do you have a repurchase agreement on those with anyone? No. BERNANKE: I don't know what you mean by a repurchase agreement. We own those securities. GARRETT: You own those securities. Right. So there is no repurchase agreement outside to buy them back. You own them. BERNANKE: Right. GARRETT: So after 2012, if they're no longer guaranteed, is it fair to say that you may at that point in time actually engage in fiscal policy, because you basically are creating money at that time? And I know that you'd agree that it would be an unconstitutional role for the Fed to engage in fiscal policy - so where will you be at 2012 if they had to take a haircut on those because they're no longer guaranteed? BERNANKE: Well, first from the government's perspective, I, uh, such an act would, uh, there would, the Federal Reserve would lose money which the Treasury would gain. There would be no overall change to the position of the U.S. government. Secondly, the Federal Reserve act explicitly gives.. GARRETT: How would we be gaining? How is the Treasury gaining? BERNANKE: Well, if there's a bad mortgage and the Treasury.. it requires $10 to make it good, if the Treasury refuses to do that then the Fed loses $10, so one way or another the government's going to lose $10. But I would just say two things, one is that I think, uh... GARRETT: But if you didn't purchase them in the first place, it would just be a total - then what would have occurred? There would not have been the creation of that $10. Now that you've purchased them, and in essence if we don't back them up, then you will have created that additional $10. BERNANKE: Well, I hope that doesn't happen, because I think it's very important for financial stability and confidence that we, that we guarantee... GARRETT: Let's play out that hypothetical that it does happen. BERNANKE: Well, then the Fed would lose money there. But let me just point out that the Federal Reserve Act, that we did not invoke any emergency or unusual powers to buy those agencies. It is explicitly in the Federal Reserve Act that we can buy Treasuries or agency securities and so we did not do anything unusual there. GARRETT: In what status were they when you bought them? Were they in conservatorship at that point? BERNANKE: Um, yes. GARRETT: Is it normal practice for the Fed to buy agency securities when they're in conservatorship? Was that ever done before? BERNANKE: It's never been in conservatorship before. GARRETT: Well, there you go. So the normal practice is not what was followed here. It just seems to me that we may have gone down a different road than we've ever gone down in U.S. history, where the Federal Reserve has engaged in buying a security, it's not Treasury, it's not guaranteed by the full faith and credit of the United States for its lifetime, nor is there any repurchase agreement from any other entity that you purchased - that you have a trade with an agreement with - and that the Fed in essence could have created money if the government does not guarantee them. At least, that could be the situation we could find ourselves in 2012. _______________________________________________ http://box535.bluehost.com/mailman/listinfo/brin-l_mccmedia.com
