Picking Apart the Plan
By Barry Ritholtz - September 26th, 2008, 10:15AM
If you missed my boy Chris Whalen of Institutional Risk Analytics on SquawkBox, you missed some seriously straight talk:
>
Analysis
on the $700B bailout, with Chris Whalen, Institutional Risk Analytics and CNBC’s
Steve Liesman
See also: Chris Whalen of the The Institutional Risk Analyst:
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=311
Good stuff . . .
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September 26th, 2008 at 10:17 am
I just caught the end and was hoping to find the whole video. Thanks for posting.
September 26th, 2008 at 10:51 am
This plan is like:
a gnat trying to f*** a virgin elephant
trying to stem the rising sea from global warming by taking a thimbal of ocean out
its like trying to stop the earths rotation by turning your hamsters wheel around
any others….
September 26th, 2008 at 11:00 am
Barry,
I am just wondering whether you have a practical proposal for how to inject capital to unfreeze the credit markets in the short-term, bearing in mind that this problem is likely to arise repeatedly over the next year or so? Like you, I object to the blank check aspect of the Paulson plan, but it seems as though some kind of reflation is absolutely inevitable and will occur.
For those who think we are in a credit crunch, by the way, you ain’t seen nuthin’. I was in Argentina in 2001 when the banks were hoarding cash, the rich had already sent their money out of the country, small businesses could not get pesos to make payroll, and the government issued “patacones” – bonds or notes to be replaced with currency at a later date. Within months, there were people were scavenging for food. This is not something that anyone wants to see. Eventually they had a work out with the IMF, the peso devalued and everyone suffered except for the elite. That’s a credit crunch.
September 26th, 2008 at 11:06 am
The financial system failing is a symptom and not the root cause. Killing “good” jobs in America is the real root cause.
I have seen no plan that fixes that. Until that is addressed, we are pissing in the wind.
Putting money in the hands of the greedy, major corporations will just allow them to invest more in offshoring jobs.
Money doesn’t grow on trees. You don’t plant and grow it. You have to earn it the old fashion way.
That is the view from someone not on Wall St.
Why is that not correct? Please enlighten me.
September 26th, 2008 at 11:10 am
I caught the Whalen discussion with Liseman this morning, recorded Squawk on my Tivo while watching it and then watched it again. Just an incredibly insightful and truly knowledable individual in regards to this situation. Whalen put forward the most workable plan that addresses my concerns to date.
September 26th, 2008 at 11:15 am
I’m a bit leary. I’d rather the Treasury bought out WaMu for $2 billion, that’s friggin cheap.
September 26th, 2008 at 11:18 am
NB: Whalen’s plan is the House Republicans’ plan, the real conservatives’ plan.
September 26th, 2008 at 11:19 am
NB: Whalen’s plan is the House Republicans’ plan, the real conservatives’ plan.
September 26th, 2008 at 11:19 am
Raise the interest rates to 7% and all the money sitting on the sidelines will return to the banking system.
The nation will have to learn that there is a price to pay for capital and if you want to borrow, you have to pay.
America has spend more than it earned.
America has spend more than it could borrow at ridiculous cheap rates for the risk level.
Now it seems the only way forward is a bailout.
No
Everybody needs to tighten their belts.
Spend less than they earn and start paying off debt and start saving.
That is how Japan got out of the mess.
There is no easy way.
Raise interest rates and manage the pain.
September 26th, 2008 at 11:28 am
Glorious truth…
September 26th, 2008 at 11:33 am
After 10 minutes I still don’t know what Chris Whalen’s plan is. Steve tries to get him to say what his plan would be, but he doesn’t have one other than to say let the banks go under.
September 26th, 2008 at 11:42 am
If LIBOR does not want to come to the Fed funds rate,
Then the Fed funds rate must go to LIBOR
That will unfreeze the markets
September 26th, 2008 at 11:51 am
@Mike G ["This plan is like:
a gnat trying to f*** a virgin elephant
trying to stem the rising sea from global warming by taking a thimbal of ocean out
its like trying to stop the earths rotation by turning your hamsters wheel around
any others....']
…I humbly submit:
it’s like the Redskin defense trying to stop the Cowboy offense on Sunday
I mean, who ya gonna take away? The best QB in the game? The best RB in the game? Best WR? Best Tight End? Best O-Line? Hell, even the punter and place kicker are the best in the League.
It’s sick, I know. Sorry, NFL. The ‘Boys are back.
September 26th, 2008 at 11:52 am
leftback, so, if one expects the US to go the route of Argentina, is “buying foreign stocks and precious metals” through my broker enough to “get my money out of the country”? Or am I kidding myself about those moves protecting my money?
September 26th, 2008 at 11:58 am
“Everybody needs to tighten their belts.
Spend less than they earn and start paying off debt and start saving.
That is how Japan got out of the mess.”
DID they get out of the mess?
I’m not sure it would work here anyway. American spending underlies the global economy. Like it or not. If we lived within our means you would REALLY see a meltdown.
That said, the other day I was in my local credit union standing in line (to make a DEPOSIT!) and I overheard the loan officer talking to a borrower on the phone. She gave the terms of the loan that had just been approved: a cash-out refinance, 15 year fixed rate of 7.375%, $80,000 financed against a home appraised at $245,000, about $30,000 in credit card debt paid off with the refi, total monthly payment $735. Sounded pretty good to me. Now let’s hope they cut up those credit cards and live within their means. I can’t imagine it, the addiction is too deep. But maybe they learned something.
September 26th, 2008 at 11:58 am
Barry:
Exchanges like this between Whalen/Leisman are exactly what this country needs more of. You have access to some really smart people on both sides of this bailout plan. How about you organize a debate about the possibloe solutions from doing nothing to Trillions of injections. It would truly show the Big Picture.
September 26th, 2008 at 12:12 pm
@ wunsacon:
The problem with sending money out of the country is deciding where to send it, since everyone may be deflating together.
Seriously, there is one big difference between US and Argentina. Scale. The IMF bailout involved just a few $B for that crisis. In addition, there was little interconnection with other economies and banking systems, except for Brazil. The problem that everyone has pointed out here is that this thing is a few $T ($5T according to Marc Faber), and at some point you can’t solve debt by creating more debt.
Tim Duy has a good post at economistsview today that you should read – bailout or no bailout, we are going to see a global slowdown.
http://www.nakedcapitalism.com/2008/09/tim-duy-economy-downshifting-bailout-or.html
September 26th, 2008 at 12:14 pm
I’ll take the recession that’s deep, but quick. Most people on “main street” will be better off that way. Unemployment benefits will cost a lot less than $700B.
September 26th, 2008 at 12:20 pm
Myr
As I understood the plan Whalen put forward it would be the following:
FDIC triages all suspect banks and puts them into receivership or gives them a clean bill of health.
For those who need capital to make a go, capital injection by the Treasury but warrants on the backside. Bad debt still stays in the banks hands.
I’m not an expert, but as I understand it once you goto receivership your debt and equity gets pretty much cleaned out. Wamu debt there now saying you will get somewhere in the neighborhood of pennies on the dollar from the shell left behind.
Banks and institutions then can bid for the rights to the assets of the firm (again, US taxpayer doesn’t touch the toxic waste). If going forward, in order to facilitate the transaction the acquiring firm needs a capital injection to get it over the hump, the government gets upside warrants.
FDIC cleans up anything left behind or makes whole anything necessary. Whalen pegged it at 110 banks that could go under and the plan could be anywhere between 200 – 250 billion in total costs.
September 26th, 2008 at 12:22 pm
Barry,
What do you think about the idea that the bailout is only for the primary dealers of the Treasuries.. and this is the first step in ringfencing the .gov financing capacity?
September 26th, 2008 at 12:29 pm
My first thought this morning was that anyone who was still holding the common stock, the preferred or any level of debt of banks like WaMu at this stage of the game is clearly not capable of rational thought. Private equity and hedgies are not too smart.
It does make a lot of sense to engineer some form of triage: recapitalize the sound banks only, and let the rest fail, rather than throw good money after bad. There is clearly no alternative to having a large number of bank failures, and these will arrive sooner or later in any case.
September 26th, 2008 at 12:29 pm
“I mean, who ya gonna take away? The best QB in the game? The best RB in the game? Best WR? Best Tight End? Best O-Line? Hell, even the punter and place kicker are the best in the League.
It’s sick, I know. Sorry, NFL. The ‘Boys are back.”
And how many playoff wins do these best of the best have?
September 26th, 2008 at 12:33 pm
I agree with DoktorD.
Americans – the people and the government MUST learn to live with LESS credit, not more. The insanity of too much credit got us into this mess and all the three stooges (P.B. & B.) want us to do is continue in this debt cycle.
Evidently my company is in the minority but we don’t borrow money to make payroll or CAPEX – we earn it.
September 26th, 2008 at 12:34 pm
I ran across this report on Bloomberg which pretty much characterizes the entire bailout plan and where Paulson got his 700 billion from. Sept. 25 (Bloomberg) — U.S. Treasury Secretary Henry Paulson’s proposed $700 billion bank rescue aims to help “poorly run” companies and the primary beneficiaries would be Goldman Sachs Group Inc. and Morgan Stanley, said BB&T Corp. Chief Executive Officer John Allison in a critique of the plan.
Treasury “is totally dominated by Wall Street investment bankers” and “cannot be relied on to objectively assess” the impact of government policy on the financial industry, Allison wrote in a Sept. 23 letter to Congress. The letter was verified by Bob Denham, a spokesman for BB&T, North Carolina’s third- largest bank.
Allison, 60, said Congress should “hear from well-run financial institutions” as lawmakers consider the plan, which seeks to ease the
credit crunch by buying troubled mortgage- related assets. Under Allison, Winston-Salem, North Carolina- based BB&T avoided the
subprime mortgage market, whose collapse led to the credit crisis.
BB&T has risen 26 percent this year, the best showing in the 24-company KBW Bank Index.
September 26th, 2008 at 12:38 pm
“The financial system failing is a symptom and not the root cause. Killing “good” jobs in America is the real root cause.”
This reminds me of McCain’s pet ex-exec, Ms Carly Fiorina. She jumped all over our **** a couple of years ago, complaining about how anyone could possibly think there was such a thing as an “American” job.
September 26th, 2008 at 12:43 pm
Just got sidetracked by the book title to the right of this comment:
“Hernando Desoto: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else”
In my best Bill Clinton-to-the-grand jury voice, “it depends on what the meaning of the word ‘triumphs’ is.”
September 26th, 2008 at 12:57 pm
“And how do we figure out the price?”
Whalen: “If we have competent people in the private sector doing the calculations, we won’t have any problems”. That’s cute. Whalen has a gift for making absurdity sound appealing.
September 26th, 2008 at 12:59 pm
This will forever be known as the week the GOP lost the businessman vote.
And of course, McCain knuckles under and heads to the debates.
They are going to get walloped in October, playing chicken with the entire credit system like this.
September 26th, 2008 at 1:00 pm
I say they let Walmart get banking status as fast as they let Morgan Stanley. I’m sure senator Dodd ( I mean BAC) wouldn’t like it. Like them or not, you can bet they would do it right. They would probably offer 1 percent lower loan rates than any competitor.
September 26th, 2008 at 1:16 pm
I LOVE Whalen’s plan!!!
This is what I’m talkin ’bout.
That is what ultimately returned confidence to the banking system in the 30′s!!!! It is right and it should be done. F Paulson’s pig of a plan. You can slather as much lipstick as you want on it but it still smells like bacon.
September 26th, 2008 at 1:22 pm
BR, that is a solid clip, you’ve done a great job of outlining the many flaws of Paulson’s plan. What would you do? Any thoughts?
September 26th, 2008 at 1:36 pm
What a great idea. All the banks have to do is insure all their loans. Why didn’t I think of that? Why didn’t the America Bankers Association? Why those Republicans are a special breed.
I can give them the name and number of my Allstate Agent.
September 26th, 2008 at 1:37 pm
Leftback,
I find it very interesting that the market rebounded as strongly as it did today….
Maybe some element of “The Sky is Falling” was thought about, and someone figured out there may be less expensive ways to skin a cat.
September 26th, 2008 at 1:54 pm
Thanks Barry. I was not too familiar with Chris, but thanks to you he is now included in to the list of bright lights. I have heard him speak a few times now and am impressed. A final thought- more than anything else, I feel the majority of us put a high value on honesty – a somewhat scarce resource in an industry deluged with profit motives. Thank-you Barry for carrying the torch!
September 26th, 2008 at 2:07 pm
Has there been a big increase in cash leaving the country?
If banks have been strapped for cash would they not increase yields on Deposits and CD’S (to attract cash)?
Has there been any significant change up or down in the amount of money these financial lobbyists have been giving these schooks in Congress?
Have there been any reports of any finance people taking their own life?
Is there anybody in the Space Station? How nervous are they?
September 26th, 2008 at 2:20 pm
Posted by: DoktorD | Sep 26, 2008 11:42:12 AM
“…I humbly submit:
it’s like the Redskin defense trying to stop the Cowboy offense on Sunday
I mean, who ya gonna take away? The best QB in the game? The best RB in the game? Best WR? Best Tight End? Best O-Line? Hell, even the punter and place kicker are the best in the League.
It’s sick, I know. Sorry, NFL. The ‘Boys are back.”
I’m sorry but the best QB in the game? The man hasn’t won a single playoff game? Please… the Cowboys are filthy good this year but lets not get ahead of ourselves… Tony Romo, the best QB in the game… That’s laughable cept for the fact i’m so depressed about how messed up our country is I don’t feel like laughing
September 26th, 2008 at 2:20 pm
If anyone needed more evidence of the stress in the credit markets, all one has to do is look at the FNM/FRE spread to 10 yr Treasuries today. The conservatorship of FNM/FRE, now explicitly backed by the full, faith and credit of the US govt, was announced on Sunday Sept 7th. The FNM 10 yr spread the Friday before was 75bps and fell to 50 the Monday after the announcement. It is right now back to 77.5 bps. The FRE 10 yr spread right before the takeover was 79 bps and closed at 55 the following Monday. It is right now at 79 bps.
September 26th, 2008 at 2:25 pm
leftback, thanks for the link. Good article.
September 26th, 2008 at 2:37 pm
Christopher Whalen for Treasury Secretary!!!
September 26th, 2008 at 3:05 pm
worth,
If you get a chance to actually read that book, De Soto basically discusses how capitalism in the West was built on the ideals of rule-of-law, equality of opportunity, etc. Where capitalism doesn’t work is when it’s basically South American-style crony capitalism, is what he documents.
Now, one could say that the failure of capitalism in this country corresponds directly with the failure of the rule-of-law and corruption of regulators, thus transforming the Wall St/Washington axis into a form of crony capitalism. It’s not so much that ‘Western’ capitalism has failed, it’s that we’re becoming less and less a ‘Western’ capitalist state.
Whether cronyism is as inevitable an end result of capitalism as totalitarianism is an inevitable end result of communism is left as an exercise for the reader.
September 26th, 2008 at 3:25 pm
My one question, and I’m perfectly serious. Does anyone know what the hell they’re doing???
September 26th, 2008 at 3:25 pm
This guy seems like a pompous wonk. The free market, supply side rhetoric created this situation. Now these hypocrites expect the same free markets to solve it. I don’t see it. I certainly don’t want anyone bailed out at taxpayers expense but the posturing to promote a particular ideology is not constructive. The solution needs to be flexible and evolutionary.
September 26th, 2008 at 3:51 pm
judyo – That might actually be the most insightful, concise, and poignant comment that I have seen on any blog at any time.
Well, today is actually the one day ever when I rooted like a CNBC moron for the Dow Jones False Prophet Index, just so John McCain will not have anything to base his simpletonian economics attacks on Barack Obama tonight.
September 26th, 2008 at 3:53 pm
Whalen? 1st time seeing him…..very impressive dude.
Not sure i share his confidence in FDIC’s backstop….i would like to hear more on that.
September 26th, 2008 at 4:02 pm
Dr. K.N.,
You’ve managed to accomplish a heretofore impossible feat: describing the degeneration of the American state of affairs as “crony capitalism” without putting it all on Bush (or even mentioning his name).
For that, sir, you are to be commended. This clusterf*** is well beyond the reach and doing of just one man or one cabinet or one party or even one city, even if that man IS a Harvard MBA!
And thanks for the take on that book. Sounds like it’s worth a read.
September 26th, 2008 at 4:42 pm
Thanks.. I agree that the mess has been a long time coming (some more vocal metalbug folks trace it back to 1913) and there are an awful lot of fingerprints at the scene of the crime..
Though the quote “if you can’t solve a problem, enlarge it” is attributed to Rumsfeld, it looks like that advice has been followed by many people over many decades..
http://en.wikipedia.org/wiki/Hernando_de_Soto_(economist)#Main_thesis
For better or worse, a system of trust and credit is really necessary for a modern economy. Unfortunately, where there is no trust, there is no credit, and thus there is no economy.. I guess the question is ‘how do we regain trust in the system’, and the answer to that is well above my paygrade. I just know it doesn’t involve giving lots of money with no strings to the same gang of idiots that got into this mess…
September 26th, 2008 at 4:51 pm
worth,
way to be able to tell Beans when the Bag is untied. K.N. had that book’s message nailed down tight.
and, right you are, the path, to here, has been a long one, covering most every throughway, and byway, of our Land.
this place, what is, currently, ‘up’, is far-distant from the ‘down-home’ origins that sowed our, former, Greatness.
obviously, continuing in the same direction, with our Compass askew, will not return us to our proper moorings.
September 26th, 2008 at 5:06 pm
O, K.N.,
the deal w/ 1913 has, to me, more to do with utilizing a private bank to Organize Debt into Currency, and then having the Gov’t call it ‘legal tender’.
The Legal Tender Monopoly should be sheared from the FedRes Notes, and the USTreas should, again, issue credit & currency directly.
see E.O. 11110 for starters..
The canard that ‘Central Banking’, is Necessary, for a modern economy, is a work of Art that Bernay’s would be Proud of.
Also, in a ‘Free Banking’ marketplace, some would choose, as they should be Free to, a fiduciary media backed by any # of commodities, including Au.
This, #5 on the Hit Parade:
5. Centralization of credit in the hands of the State, by means of a national bank with state capital and an exclusive monopoly.
We call it the Federal Reserve which is a credit/debt system nationally organized by the Federal Reserve act of 1913. All local banks are members of the Fed system, and are regulated by the Federal Deposit Insurance Corporation (FDIC).
Is The problem. We can’t go, instantaneously, from 100-0, but the Goal should be to get the Gov’t out of, and the People back in to, the Responsibility for their Financial Affairs.
September 26th, 2008 at 5:38 pm
It’s about time an article mentioned FASB. When the impaling starts…it should be Bond Rater/Accounting Standards/Bond Rater/Accounting Standards on the kebabs. ~m
September 26th, 2008 at 5:43 pm
VERY impressive exchange on both sides. Where Whalen has the weight of reason, it strikes me, on first listen, he’s assuming more than a little blue sky. But hey, a way forward.
My question: are his details in the House GOP plan? If so they have not been publicized. And, NB, he didn’t say a word about tax breaks.
September 26th, 2008 at 6:02 pm
those of you who are citicizing Whalen’s plan are missing something. the market is full of many different animals; Whalen is not suggesting that the same morons who got us here are the ones who will come in and value the assets properly and buy them up. His is talking about the Buffetts of the world, and there are plenty, who have capital, credibility, and experience to participate. for example, Marty Whitman has just raised $5B to start a private pool to buy distressed assets. he’s going to make a killing, but only if the Paulson plan doesn’t ruin his the chance. for god’s sake we know we don’t want another gov’t dept. managing assets…the house republicans are totally right here.
September 26th, 2008 at 6:36 pm
Smart Guy. Wind it down case by case. Lehman BK was a mistake because that’s what caused the money markets to implode. Hope somebody is listening
September 26th, 2008 at 8:06 pm
I’m just more convinced now that nobody knows the solution.
September 26th, 2008 at 8:15 pm
Barringo,
I love you… you know that… but you and Whalen are full of shit.
This very day… 9/26/08, JP Morgan has a-l-r-e-a-d-y facilitated the liquidation of another 31 bil of bad mortgage paper, 31 bil m-o-r-e than those chicken-shit WaMu mofos were able to conceptualize on their own.
They had to get shitcanned (mid-flight, according to urban legend) to clear the way for the recognization of the loss. The loss was a fuckin’ loss… get over it… losss isss losssss!
You’ve just witnessed exactly what Paulson and Anke are intending to do… to force (the word is “FORCE,” Barringo) banks to shit or get off the pot. Yes, JPM doesn’t have enough deep pockets to ratchet all of these bankin’ mofos out of their shit securities, but UNCLE FUCKIN’ SAM does have the deep pockets.
Sometimes, Barringo… I swear… you do need adult supervision.
September 26th, 2008 at 11:06 pm
I will back up part of what Eclectic reports. I just watched the debate with a friend from JPM, and she says it is rather scary the uncharted territory they are entering in all the write offs they will have to make on all this- hundreds of billions.
September 27th, 2008 at 12:58 am
How the financial crisis happened… factual video.
http://www.youtube.com/watch?v=H5tZc8oH–o