So far, we in the US have had an ad hoc, half-assed, on-the-fly approach to resolving the credit and financial crisis.

The smartest bailout approach to date has been the British/Swedish/Buffett approach: Inject capital at a corporate capital structure level by buying preferred stock, rather than at the balance sheet level by buying bad assets.

Now, we read that the Treasury is considering following these other, smarter approaches:

"Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.

The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt."

Sure its a year late, and a trillion dollars short. Yes, this would have saved most of the firms that went belly up.

Better late than never . . .

>

UPDATE: October 9, 2008 2:18 pm

The way we have the government buys into a cop-any via prefereds is to match any private sector investment into banks on the same terms. So GE and Goldman Sachs get double the capital injection, and since Warren did it on those same terms, we know Uncle Sam isn’t getting ripped off.   

If you cannot raise dollar one, Uncle Sam doesn’t waste any good money on you.

>

UPDATE 2: October 9, 2008 2:40 pm>

Greg Mankiw discusses a similar approach:  How to Recapitalize the Financial System 

>

Previously:
5 Historical Economic Crises and the U.S. (February 09, 2008)
http://bigpicture.typepad.com/comments/2008/02/5-historical-ec.html

Global Financial Crises, Part II: Norway 1987 (February 10, 2008)   
http://bigpicture.typepad.com/comments/2008/02/global-financia.html

Sources:
U.S. May Take Ownership Stake in Banks
EDMUND L. ANDREWS and MARK LANDLER
NYT, October 8, 2008
http://www.nytimes.com/2008/10/09/business/economy/09econ.html

 

>

>

A few additional takes on this:

Reuters:

"The U.S. Treasury Department plans to start directly injecting capital in U.S. banks as soon as the end of October in exchange for passive investment stakes, according to a financial policy source familiar with Treasury Secretary Henry Paulson’s thinking.

Using authority granted to it by last week’s $700 billion market rescue legislation, Treasury would get common or preferred shares in the banks it capitalizes, the source told Reuters on Thursday. The government does not intend to seek seats on companies’ board of directors in the voluntary capitalization program.

White House spokeswoman Dana Perino said later on Thursday that Paulson is "actively considering" capital injections into troubled U.S. banks.

"Secretary Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly and how much money to put into each," she said.

A Treasury spokesperson declined to comment in detail but said: "Treasury has broad, flexible authorities under the financial rescue legislation to buy assets, provide guarantees and inject capital and intends to consider all of them."

NYT:

"Britain’s government offered banks like Royal Bank of Scotland, Barclays and HSBC Holdings up to £50 billion, or $87 billion, to shore up their capital in exchange for preference shares. It will also provide a guarantee of about £250 billion to help banks refinance debt and the Bank of England will double the amount it lends to banks under the special liquidity scheme to £200 billion.

“This is not a time for outdated thinking,” Prime Minister Gordon Brown said Wednesday. “We had to do more than just buy up assets.”

The package, mainly put together in the last 48 hours, was intended to restore trust in British banks that saw billions of pounds wiped off their market values. Its aim is to allow banks to again lend to each other and as a result to consumers and companies to try and prevent a dramatic downturn. Executives, investors and lawmakers welcomed the package as a first step to stabilize the banking system."

Bloomberg:

"Treasury Secretary Henry Paulson
signaled the government may invest in banks as the next step in trying
to resolve the deepening credit crisis.

Paulson told reporters in Washington yesterday that legislation
Congress passed last week to rescue financial institutions gave him
broad authority that he intends to use, beyond just buying
mortgage-related assets on banks’ balance sheets. He indicated that an
option available may be boosting companies’ capital with cash infusions.

"It is the policy of the federal government to use all resources at
its disposal to make our financial system stronger,” Paulson said. "We will use all of the tools we’ve been given to maximum
effectiveness, including strengthening the capitalization of financial
institutions of every size.”

Banks worldwide aren’t raising enough capital to offset losses:
while posting $592 billion of writedowns and losses during the crisis,
they have added just $442.5 billion of new capital, according to data
compiled by Bloomberg. The International Monetary Fund anticipates
losses will more than double to $1.4 trillion."

AP/IHT:

"Hard-hit British banking stocks recovered after the government announced a 50 billion pound ($88 billion) plan to partly nationalize major banks and promised to guarantee a further 250 billion pounds ($438 billion) of bank loans to shore up the beleaguered sector amid the world financial crisis.

But the drastic moves failed to soothe wildly fluctuating markets, and many shares ended Wednesday sharply lower.

Prime Minister Gordon Brown billed it as a "radical" plan to stabilize banks so that they could resume normal lending and other operations, rather than trying to buy up bad assets as the United States is doing.

"All these are investments being made by the government which will earn a proper return for the taxpayer," he told a news conference. "This support is on commercial terms. We expect to be rewarded for the support we provide."

At the same time, the Bank of England made at least 200 billion pounds ($350 billion) in short-term loans available to banks to help restore liquidity to the frozen credit market."

Telegraph:

"The Bank of England has extended the collateral it will accept for the Special Liquidity Scheme (SLS) and other open market funding operations. Use of the SLS, which allows banks to swap untradeable mortgage securities for liquid Treasury assets, is also being extended from the early estimate of £50bn to £200bn.

Widening the range of collateral that is eligible will make it easier to access the SLS as well as the Bank’s weekly funding operations, for three month, one week and overnight money. Any asset that is backed by a Treasury guarantee will now be eligible for acceptance by the Bank of England when previously only AAA-rated mortgages qualified. The collateral extension will allow the banks to replace with lower quality assets the estimated £100bn of AAA-rated securities already deposited at the SLS. The banks will then be able to use their best assets in the money markets to help get them moving again.

The Bank of England will continue to demand a "haircut" on the assets, swapping gilts worth less than the assets being deposited, and charge a punitive rate for use of the scheme, which remains open until January 31. A long-term replacement will be unveiled next week."

Sources:
Paulson Signals Treasury May Invest Capital in Banks
Rebecca Christie and Simon Kennedy
Bloomberg, Oct. 9 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=au4PnE_L1TCQ&

How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced – indirectly through the back door – into the TARP legislation
Nouriel Roubini
RGE, Oct 9, 2008   
http://tinyurl.com/public-capital-injections

Treasury may capitalize banks by end of October
Reuters  Oct 9, 2008 1:27pm EDT   
http://www.reuters.com/article/businessNews/idUSTRE4986RB20081009

Financial Crisis: What does the bail-out plan actually mean?
Telegraph  1:10AM BST 09 Oct 2008
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3160484/Financial-Crisis-What-does-the-bail-out-plan-actually-mean.html

UK steps in to save its banks, cuts interest rates
Associated Press, October 9, 2008   
http://www.iht.com/articles/ap/2008/10/09/europe/EU-Britain-Bank-Turmoil.php

Britain Announces Huge Bank Bailout 
JULIA WERDIGIER   
NYT, October 8, 2008
http://www.nytimes.com/2008/10/09/business/worldbusiness/09britain.html

Category: Bailouts, Corporate Management, Credit, Derivatives, Finance

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

55 Responses to “Will the US Fashion a Smarter Bailout Plan?”

  1. Sinomania! says:

    Better late than never. I hope it happens. The only reason it hasn’t it bad )and sad) ideology, the notion of the government owing banks and essentially (even if only temporarily) ‘nationalizing’ the industry is just too much for the old political establishment obsessed with Laissez-Faire (pronounced dead by the President of France on Sept. 25th) and free markets.

    The bigger problem is viewing this crisis as only an Atlantic Alliance event. Yesterday’s “coordinated effort” included a rate cut by China although it was not widely reported or discussed. Fact is China, Japan, Russia, and the Mid East hold trillions of dollars. We need a true international summit between US, EU, and China, with the resource nations and fx holders like Japan, in the process, to fashion a new Bretton Woods type order. All of these measures seem to be band-aids.

  2. PureGuesswork says:

    Yes, bit by bit, the execution of measures to get us out of this hole will get better. C’mon, Barry, we are a democracy. Everything we do is supposed to be messy and subject to constant re-evaluation. That’s the way it has worked in the past and the way it will work this time. Meanwhile we get to complain and criticize and that is all part of the process. Keep it up. Ultimately this is a system that works. God protect us from one depending on philospher-king technocrats who come up with the “proper” answer every time.

  3. leftback says:

    Doug Dachille was on TV briefly this morning explaining the problems of the present plans, including how the bailout plan to buy MBS was a complete piece of idiocy, and also how nobody will buy (and hold) equity in banks because of the FDIC takedowns that have occurred with recent failures. I am holding some bank stock right now, but it has been a bad policy to own banks on Fridays…

  4. E Thomas says:

    How much do you want to bet that JPM will be the first government aquisition?

  5. Bruce in Tennessee says:

    Leftback,

    What kind of bids for the Lehman dregs tomorrow?

  6. Bluzer says:

    Beginning to look more than just a credit crisis. Seems like they can’t give away the money. The banks don’t want it cause they don’t want to lend. The consumers, finally,don’t want to consume. Without consumption businesses start layoffs prior to going belly-up. Consumers hurt more and tighten further. And the viciousness sets in. The whole economy seems to be seizing up. What to do? What to do?

  7. Victor says:

    Kucinich already introduced a bill for a similar plan, before the existing one got pushed through. He was swept under the rug. The problem is the Kucinich bill didn’t help the wealthy stay that way. When will he ever learn?

  8. CNBC Sucks says:

    It’s about time. Given the AIG boondoggle debacle, you have to wonder how much government bailout money kleptocratic “capitalists” have pocketed or spent cavalierly in this process of maintaining the facade of capitalism in this country.

    Is this topic in your new book? It should be.

  9. DL says:

    “The smartest bailout approach …[is to] …inject capital at a corporate capital structure level by buying preferred stock, rather than at the balance sheet level by buying bad assets”.

    I agree with the foregoing. If this proposal had been on the table two weeks ago, I would not have been so opposed to the bailout bill.

    Equally important is quickly shutting down those banks that are both insolvent and hopeless. We have far more banks and financial institutions than we need.

    Of course, one sticky question is, who gets to decide who lives and who dies?

  10. D. says:

    Like I’ve said a number of times, America is so afraid of socialism that everything will be done to avoid any semblance of it until it realizes that it has no choice because ageing Americans want their social net.

  11. lithuania says:

    Idiots. I can’t decide what makes me angrier, (1) the failure to grasp the situation and act appropriately and forcefully, (2)the fact that ex-Goldman types, PIMCO and others will make billions again as the Ferris Wheel is repaired through TARP, commercial paper purchases, private equity investments, etc., or (3) the frightening lack of knowledge about economics and the financial markets being exhibited by the two presidential candidates.

    Iceland might not be so bad after the fall. According to Wikipedia, it enjoys a superior quality of life ranking and boasts the second highest lifespan in the world – over 81 years.

  12. Rob P says:

    Anyone besides me think that tomorrow will bring a hellish squeeze on the shorts? It’s just odd to me that with all the down lately, the ban lift today and hungry shorts licking their lips for the financials, that it is beginning to feel like a setup!

  13. What fun to watch an airhead idealogue like Michelle Caruso-Cabrera report on how the socialists in Europe are leading us to a solution.

    Such irony. As the sun sets on the worst presidency in history, the Bush Administration again finds itself groveling for help from Old Europe.

  14. johnnyvee says:

    The U.S. always does the right thing after exhausting all other alternatives.

  15. Rosabarba says:

    Don’t miss the British/Swedish buffet at the Sacramento Airport Hilton. Delicious (everything comes with gravy), and you get unlimited trips to the salad bar.

  16. Mike Norman says:

    Sweden had 7 banks at the time of that rescue. The U.S. has 7,000 and all publicly traded banks in the U.S. are potentially at risk for this type of bailout plan, which includes punitive action to existing shareholders. It is no wonder why bank shares are plummeting today. Great idea, Paulson! As Bill Seidman said, this is not a vote of confidence, but rather, a wholesale injection of fear and the loss of confidence.

  17. leftback says:

    @ Bruce:

    I haven’t the remotest idea what will happen with the Lehman dregs tomorrow but I do know that fear of the unknown in terms of the lack of transparency of CDS positions is a big part of the mess and is keeping a lot of people away from investing.

    I would note that there has been a fair amount of selling of Treasuries in the last few days and that is an awfully large market, so there is fuel to start a big fire under equities, or even some of those despised MBS products.

    Barry is completely correct. The government should be an investor here just like Buffett, and get preferred stock – of course if there hadn’t been so many fools on the hill this would have been in the original bailout bill.

  18. Mike in NOLa says:

    We should get something at least half as good as Warren: preferred stock that primes others, paying maybe 5% to start. They can keep their crappy MBS and they can figure out what to do with them. The interest rate can increase steeply yearly to create an incentive to buy us out. Why is is so hard to figure out?

    But, these guys only want us to buy their crap because no one else will and they have no faith it will ever be worth anything.

    Anyone see Chanos on CNBC this morning? He made a lot of sense. How did he get on?

  19. Steve Barry says:

    @Rob P…what shorts? new shorts are just being placed on financials…as for QQQQ, short ratio is .5 days…laughable short interest. Index futures are flat in terms of trader positions. We are going down sir.

  20. robert says:

    let them die. what the hell are we doing propping up bad managers and bad banks? a cleansing purge will be good for us in the long run.

  21. Anonymous says:

    Without better oversight on what banks do with the new capital, this will be an even worse disaster than the first ideas of TARP.

  22. CNBC Sucks says:

    lithuania – Also, Icelandic women are known to be partiers and tend to, shall we say, “associate” uninhibitedly.

  23. leftback says:

    Does anyone ever stop and say to themselves: “this is complete insanity, how on earth did this happen?”. I have found myself saying this quite often lately.

    It seems to me that it will be a long time before the financial industry is turned over to the “quants” again. The financial “engineering” that gave us MBS and CDS was never well tested. It is very important to test models to destruction.

    In science there is occasionally a mania for mathematical modelling of everything that absorbs a vast amount of time, money and energy until a simple experimentalist (like Copernicus) comes along and points out that one of the underlying principles is obviously wrong (sun does not rotate around the earth) so that all of the models are worthless. That is sort of where we are now, with Roubini and others playing the role of the observer of the obvious.

  24. t2k says:

    Shorting all US banks is a patriotic duty this week so Hank can buy in at the lowest possible price and hose the existing shareholders, fire incompetent management and close down/sell off most of the banks. Sooner the better. Maybe he has a mate helping him do just this. I would in his position :-)

  25. Socialist says:

    It makes me sad when I think about Greenspan’s quote “once in a lifetime financial crisis”. He’s 82. I’m in my 30′s. I now have the pleasure to experience my second financial crisis. There were 3 tough years in socialist Sweden. My father had to cash in on his 401k when the house market went down and the bank came knocking on the door.
    McCain sounded like a communist in the last debate. Why would the government buy personal dept and renegotiate the loans? Not until you cashed in your 401k and all your savings. I don’t want to sound too much like a socialist, but what happened to personal financial responsibility? Crying for the government to help you all the time…
    You should try to live under a federal bank that increased the interest rate to 500% to protect the Swedish currency (Thanks George Soros).

  26. Transor Z says:

    @sinomania!: Right on! China and Russia need seats at the big table. Has to be the next president’s first order of business to help convene a global economic summit. Everything will depend on getting new rules and buy-in.

    @leftback: Remember Feynman at the Challenger Commission dunking a section of O-ring into ice water and pinching it with pliers?

  27. batmando says:

    Responding to Mish’s exhortations, I got off my ass and spent the better part of a day faxing every Representative and Senator at least twice after the first bill passed the House, saying essentially what Mike in NOLa said:
    “We should get something at least half as good as Warren: preferred stock that primes others, paying maybe 5% to start. They can keep their crappy MBS and they can figure out what to do with them. The interest rate can increase steeply yearly to create an incentive to buy us out.”
    I heard no discussion in House, Senate or by the Tweedle-Dee/Tweedle-Dum (Dumber & Dumbest) candidates for the Presidency of ANY alternatives to buying the toxic crap off the excreters of self-same crap.

    On NPR’s “This American Life” last Saturday, an excellent chronology and explanation of the whole mess from GBLA repeal of Glass-Steagal to CRA to NINJA loans to MBS, CDOs, CDS, etc, ended with the question, “Why have no alternatives been put forth to the Paulson bail-out proposal of buying the toxic crap?” At the very last, they mentioned it was rumored, not confirmed, some Senator had sneaked in a provision giving the Treasury Sec’ty the “option” to inject capital into banks. (Can anyone confirm which Senator(s) this might have been?) Then silence until yesterday’s news of possible capital injections.

    Why Obama did not pick up and run with this is beyond me. After all, what counsel IS he getting from Volcker? Especially in light of McCain’s riding the hobby horse of buying up all the mortgages gone bad.

    I also remember reading (source?) that $700 billion would buy up, at present valuations, 23 of the 24 KBW banks with enough left over to take a chunk of JPM too. (True?)

    $700 billion divided by 140 million taxpayer’s is about $4700 each. Hell, I’d match that $4700 of my taxes with $4700 in my IRA to buy shares in the banks willing to take the capital injection with appropriate covenants e.g. exec compensation and other safeguards. Let us all have a share of whatever upside there might be instead of just eating their crap. If any bank rejects the offer, let them find their own way out of the mess they created.

  28. leftback says:

    @ Socialist: Desperate people (McCain) do desperate things.

    No need to worry about Iceland, people. They can retire gracefully from the hedge fund business and fall back on their traditional trades: ice harvesting and ice fishing.

    Q: What do Icelanders do when confronted by a polar bear?
    A: Run behind him and kick him in the ice hole.

    The people of Greenwich can also retire from the hedge fund industry and return to their 19th century business of clam-digging and smuggling.

  29. lithuania says:

    Response to
    lithuania – Also, Icelandic women are known to be partiers and tend to, shall we say, “associate” uninhibitedly.

    I’m an attractive woman who parties, stays fit, earns a good living, and enjoys shooting trappe with a shotgun. Alas, for any would-be Icelanders, I’ve found a Texan that suits me just fine. We’re going to the Texas Tech-A&M game next week. Yes, I love football too!

  30. Bruce in Tennessee says:

    Leftback,

    You are not the only one with thoughts like this. Einstein, in contemplating quantum mechanics, thought that the ideas were almost insane. The idea that one could change sub-atomic physics by just observing, the Heisenberg Uncertainty Priciple, was said to have evoked the response “God does not play dice with the Universe”….

    And economics, it seems, is less predictable than quantum mechanics..

    You and Einstein…probably related somehow….

  31. Steve Barry says:

    CNBC in full desperation mode, going on the offensive…saying the Credit Ice Age is melting…saying gas prices will be massive stimulus

  32. Don Luskin says:

    I’m against this plan; it’ll dilute shareholders.

    I favor a plan that transfers money directly from taxpayers to stockholders.

  33. Stormrunner says:

    What could be better than the one we alraedy got, for the banks that is, further illustrating my point of the existance of a single party system. The Gub run by the banks vs the tax base.

    http://articles.moneycentral.msn.com/Investing/SuperModels/its-a-great-time-to-be-afraid.aspx

    For an example, he said, check out Section 113 of the bailout bill, titled “Minimization of long-term costs and maximization of benefits for taxpayers.” This is the section that Congress haggled into the bill to ensure a payoff, via warrants, for citizens if mortgages purchased from banks are later sold for a profit. Yet Emilio says bank lobbyists snookered the government by sneaking in an exception under subsection 3a, “Conditions on purchase authority for warrants and debt instruments.” The clause, titled “Exceptions — De Minimis,” states that any debt instruments worth less than $100 million won’t trigger the payback provision.

  34. leftback says:

    @ Bruce: Einstein wouldn’t have been a complete tool and called for a rally this week. I hadn’t counted on the central banks dithering in the face of a generational crisis. Enjoy the burger.

    This is a useless market today, I am going out for lunch – in Manhattan, where nobody is jumping out of windows and actual commerce continues to take place with exchange of currency…

  35. Steve Barry says:

    Don…skip a step and have the taxpayers send the money directly to me, as a holder of QID.

    GM is now at 1929 levels…it took until 1954 for the market to fully recover losses from the 1929 crash and GM made a round trip in another 54 years.

  36. Rob P says:

    @Steve Barry: “new shorts are just being placed on financials…”

    That’s exactly my point! Up out of the gate this morning and then piling into the shorts later on. I don’t know… just seems fishy to me.

  37. Steve Barry says:

    and to top it all off, Erin Burnett says the lower gas price stimulus may “stave off recession.”

    We must be still far away from the final market bottom, at which Erin cries on the air.

  38. Stormrunner says:

    Forgot the punchline!!

    Emilio says that banks will simply issue their debt in tranches of $99 million or less, and avoid allowing the government — and thus taxpayers — to get a piece of the banks’ profits. “It’s a joke,” he scoffed.

  39. Steve Barry says:

    @Rob P…the shorts are hitting GM it seems, not so much the financials. You won’t get a squeeze tomorrow though…too soon.

  40. Mike in NOLa says:

    Batmando:

    Obama did not run with this because most of his biggest contributors are from Wall Street and he’s just as corrupt as the rest.

    As one column put it, Wall Street has “captured” Treasury via Paulson, and they are not about to let it go.

  41. Horace says:

    A cabal of bankers robs you blind and you all think it’s incompetence or just part of the messy process of democracy. Maybe you deserve to be fleeced. . . but your children don’t. So grow up and figure it out.

  42. karen says:

    @leftback, if you go to lunch, you will miss the breakout rally (which continues to elude us.)

    actually the spx just broke down from it’s mini triangle but this market is so squirrely, anything is possible.

  43. VJ says:

    So far, we in the US have had an ad hoc, half-assed, on-the-fly approach to resolving the credit and financial crisis.

    Considering who comprises the captain and crew of the SS RIGHTWING TITANIC, why would there be any surprise ?
    .

  44. Old Bob says:

    Cnbc:to hear kudlow and burnette this morning you would have thought the market was up 5000.

  45. Dave D. says:

    “Yes, this would have saved most of the firms that went belly up.”

    I’m not sure why BR would have wanted to save the asshats that went belly up. For one thing, they made awful decisions. For another, the financial sector was clearly in a bubble and was likely to shrink, crisis or not.

    If there wasn’t a risk that the government would prop up the competition, this might be a good time to start a bank:

    Money is cheap, and new banks wouldn’t have the bad assets that draw suspicion about their capital base and solvency, and more importantly, everyone would know that they were in good shape. This could lead to a run (deposits, counter parties, employees, etc) on the bad banks, in the form of a transfer to the new good banks, and just put the bad banks out of their misery. Today, banks are hoarding as much cash as they can; this is breaking the bridges between savers and borrowers. New banks with clean balance sheets wouldn’t have to hoard cash; their bridges would be free for money to flow. Perhaps subsidizing the creation of new banks would be a cheaper/less-moral-hazard-inducing alternative to propping up the existing reckless banks. Plus, if they were subsidized (but not in the form of government ownership), the government could put them under tighter regulations: no CDS exposure, tighter leverage restrictions, whatever.

    I don’t see how propping up the current banks (whether via capital injections or buying their bad assets), many of whom are suffering the fate of their own bad decisions, is much different than, say, bailing out Chrysler in 1979. And we know how BR feels about that:

    Barry Ritholtz — who runs an equity research firm in New York and writes The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout actually helped cause the decline. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.

    If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

    Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80 percent of all new vehicles in this country, according to Autodata. Today, it sells just 45 percent.

  46. VJ says:

    Steve,

    and to top it all off, Erin Burnett says the lower gas price stimulus may ‘stave off recession’.

    During her recent appearance on ‘Meet the Press’, Burnett told Brokaw:

    “I also think it’s important to notice that the job losses we’ve had so far in this slowdown … are not as bad as in a usual recession.”

    Why don’t they just have her wear a bikini and be done with it ?
    .

  47. Winston Munn says:

    Will the US Fashion a Smarter Bailout Plan?

    With the same dumb people running the show, it’s doubtful.

  48. AGG says:

    Isn’t it amazing that all those great “Keep the government out of business” fundamentalist, social darwinian, survival of the meanest capitalists aren’t weighing in here screaming bloody murder because socialism is on the march. My God, they should be frantic at the prospect of government owning a stake in banks. What will that do to the “efficent market religion”? Won’t big bad government impede the “proper” allocation of resources?
    Why are you predators so quiet? Did William Jennings Bryan stomp your prehensile tail? And what would our “funding fathers” Vanderbuilt, Astor, Derby, Bingham, Girard, Payne, Rogers, Rockefeller, Flagler, Harkness, Carnegie, Frick, Phipps, Sage, Harriman, Hill, Morgan, Mellon, Green, Baker, Stillman, Weyerhaeuser, Field, Clark, Duke, Armour, Weightman and Woolworth say about this? All those mentioned were worth at least 75 million BEFORE 1914. Those were the days of Oil, Steel, Railroads, Finance, Lumber, Copper, tobacco, meatpacking, etc. that made this holy land of capitalism. In September of 1896 some of these “great men” pumped 16 million into an effort to undercut William Jennings Bryan. It worked. The “market” brand of democracy (the best money can buy) was firmly established and that is what we’ve had since.
    What we have now folks, is a paradigm shift. The trend is your friend. Go with and you’ll survive. Go against it and you’ll lose everything.

  49. leftback says:

    @ Karen: Go to the end of the thread on “Trading Snafus”.

    Yes life goes on out there, even C is open for business.

  50. Roger Bigod says:

    I inherited some Confederate money that I’m thinking of offering to Mr. Paulson. It’s at least as valuable as some of the paper he’s buying with the bailout. And I would agree to spend the proceeds, which would contribute to lagging consumption. Although the original owner wasn’t exactly patriotic in some conventional sense, he was less foreign than many of Paulson’s beneficiaries.

    I’m just a little concerned with the future value of the dollar, even with accrued interest, so I’m wondering if I should hold out for a better exchange rate.

  51. just doug says:

    What keeps getting lost in all the bailout blather is that the government cannot make losses disappear – it can only move them around (and add to them), so no matter what they do there will still be a loss to the economy >= the losses of the financial companies and counterparties, and that is not a positive going forward no matter what gyrations are performed.

  52. zackattack says:

    There must’ve been a bazillion people I’ve been reading since 2004 who all saw this coming and laid it out chapter and verse. Yet the greatest economic minds of our generation didn’t even think there was a problem until a few months ago?

    Second, why doesn’t Fed/Treasury have an off-the-shelf playbook for this type of situation?

  53. censeo says:

    SEE: The world is at severe risk of a global systemic financial meltdown and a severe global depression

    PrintShare
    Nouriel Roubini | Oct 9, 2008
    http://www.rgemonitor.com/roubini-monitor/253973/the_world_is_at_severe_risk_of_a_global_systemic_financial_meltdown
    _and_a_severe_global_depression

    Read and consider: Economic Intervention redux. (Keynes and Galbraith are at the door–the back door right now.) Why do we need it? Global governance has been defaulted to corporations who are beholden to no-one and no thing. Nation states have their unique imperatives founded variously on heritage, tradition, principles, common mores’ all ultimately obliged to do the commonweal.

    Moneterism alone does not make political economy work. (No. Turns out you can’t take the ‘political’ out of Political Economics.) Put bars on Milton Friedman’s ivory tower window. If anyone is fool enough to want a word with him let Uncle Milt drape his locks down to him. Get our your Samuelson instead. As for Greenpan: he belongs in Madame Tussault’s.

    Nine years. Nine years since Glass-Steagel was eviscerated. The coup de grace to 30 years of adherence to the demented concept of deregulation and it’s 1929. Happy days are… . Deju vu all over again. Hoovervilles proliferated across the county 80 yrs ago. I can’t wait to see Central Park filled with ex-McMansionites in their corrugated “Bush”boxes. Greed isn’t good and Midas thought life was like a box of chocolates. Well. He was right–sort of.

  54. Rob says:

    The collateral extension will allow the banks to replace with lower quality assets the estimated £100bn of AAA-rated securities already deposited at the SLS. The banks will then be able to use their best assets in the money markets to help get them moving again.