David Cay Johnston has a long list of questions; let me see if I can provide a few answers.
Ask this question — are the credit markets really about to seize up?
They already have seized up. That’s the problem. All you need to do is look at the TED spread, which is now a whopping 250 basis points.
If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate.
I suspect that 2.99% was a teaser rate on a credit card: a way to get much more money from you further down the line, rather than a profit center in and of itself. Indeed, since Citibank’s own cost of funds is higher than 2.99%, you can be almost positive that’s the case.
As for revolving small-business loans, those are the last things that banks will want to pull. They’re not defaulting, they represent a long and extremely valuable business relationship, and they’re making money day in and day out for the bank. So I’m not sure why you think that banks should be pulling them just because there’s a more general credit crisis.
If the problem is toxic mortgages then how come they are still being offered all over the Internet?
For much the same reason as Citibank is trying to sell you a credit card: the few people still offering them think that they will be profitable at this point, given high enough downpayments, high enough underwriting standards, and high enough fees. They might even be right. It’s the old mortgages which are toxic, not the ones which haven’t even been written yet. But in any case, my guess is that these offers come from small and sleazy mortgage originators who pose little systemic risk and will, if they run into trouble, be allowed to fail.
Why oh why oh why would taxpayers be bailing out banks that are continuing to sell these toxic loans?
They shouldn’t; there’s no particular reason to believe that they will be.
How does the proposal help Joe and Mary Sixpack who can afford their current monthly payment, but not the increased interest rate that has been or soon will take effect?
It doesn’t.
Every day bankers work out loans with customers — so why are taxpayers being asked to act when banks are largely on strike, refusing to negotiate revised deals with many loan customers?
Again, taxpayers aren’t being asked to help out Mr and Mrs Sixpack, who aren’t going to be helped by this particular piece of legislation, beyond the degree to which all US residents will benefit, if it goes right, from a more smoothly functioning financial system. This is a bank bailout, not a homeowner bailout.
As for the question about banks being largely on strike, that’s a separate issue. There are two reasons why it’s hard for them to negotiate revised deals. The first is that they sold and sliced the loans — the servicer you deal with isn’t the owner of the loan, and no one really knows who the owner of the loan is, but the servicer has very little discretion when it comes to loan mods. The second is that servicers are simply overwhelmed: they simply don’t have the staff or the capacity to modify the number of loans that people are bringing them. Neither of these issues is insurmountable, but this is not the issue being addressed by the bailout legislation: you’re asking it to do something quite separate from what it’s designed to do.
How about interviewing small landlords who were drawn into these toxic loans. Are banks negotiating with them? If not it means more foreclosures and renters who had nothing to do with this being evicted. Ask why banks are refusing (landlords I spoke to said they are) to negotiate with small landlords.
See above. This legislation is not, narrowly, designed to prevent foreclosures — it will do so only in a very big-picture way, by stimulating the banking system and the economy. I certainly agree that banks should modify landlords’ loans rather than foreclosing, and that if they do foreclose, they should allow renters to stay in the house rather than evicting. But again, let’s not try and have this legislation be all things to all people: it’s hard enough drafting a simple bank bailout.
What steps are being taken to take back bonuses, fees and other compensation from the folks who got rich selling toxic mortgages and illiquid investments that Secretary Paulsen claims are threatening the whole system.
Which folks did you have in mind? The ones who ran subprime mortgage originators which have now gone bust? It’ll be pretty much impossible to get money back from them. The MBS and CDO desks in investment banks? Most of them have been fired at this point, there’s not much work for them any more. The senior executives at the banks? They’ve seen their net worth plunge along with their share prices. There might be a couple of fat-cats still around whom the government could ask to repay their bonuses. But it would be gesture politics. And what about the people who really made out, like those who were so fortunate that their last surviving parent in Southern California died at the top of the market in early 2006, and that the estate sold the house for three times more than it’s worth now? Should they repay some of their money too?
How will adding $700 billion to the national debt ease strains on the credit markets?
That’s an easy one. The national debt is not part of the credit markets: credit is the spread between risky debt and risk-free debt, where risk-free debt is defined as US government debt. So the size of the national debt has very little effect on credit markets, except for relatively marginal "crowding out" issues which are more than offset by the current flight-to-quality trade.
Do we need a bailout of American and foreign banks? Show us in detail the reasons for this, and the numbers: make the case.
See Brad Setser, for starters. Americans have $13.6 trillion in mortgage debt. That kind of sum doesn’t need to be written down very much before all the capital in the US banking system is wiped out.
Is there a market solution to this? If so, why impose a government solution? If not what does that tell us about our entire economic theory?
I’m not sure what you mean by "a market solution", but if you mean finding $700 billion from any source other than the US government, the answer is no. What does that tell us about our entire economic theory? That the government has a greater ability to raise enormous sums of money in the middle of a crisis than anybody else.
Is there a less expensive solution?
We don’t know how expensive this solution is going to be: for all we know, it might make a profit. Yes, there are less expensive solutions, but they involve wiping out shareholders in financial institutions and often some bondholders too. I’m not saying that’s necessarily a bad thing — I approved of Lehman’s creditors taking a haircut, for instance. But on a systemic level, it could cause much more harm than this bailout.
How do we know this will not just be a downpayment on a much bigger
bailout?
We don’t.
Is there a solution that provides direct help to those who took out these loans, rather than those who sold them?
In practice, no. In theory, yes. The government could just divvy up the $700 billion among people who took out certain mortgages in certain years. That might do the trick, although it probably wouldn’t have much effect on house prices — it would just be a huge transfer to people who bought (or refinanced) at the top of the housing bubble from those who didn’t.
If AIG and others are too big to fail, what does that tell us about government anti-trust policy and regulatory policy and inaction?
About anti-trust policy? Almost nothing. TBTF isn’t the same as being a monopoly. About regulatory policy and inaction? Much more: it was clearly inadequate.
Why have both Goldman Sachs and Morgan Stanley made clear that they want IN on this deal? Get skeptical and ask the basic questions — who benefits, how much and what makes this plan so attractive that Goldman and MS want to participate? Ditto for GE. That they are others want to be included should prompt a great deal of skeptical questioning.
No one has yet submitted any bids, so we’ll see whether Goldman Sachs and Morgan Stanley and GE end up selling assets to the bailout fund in the end. But it makes all the sense in the world for them to want the option of selling. If it doesn’t make sense, they won’t; if it does, they will. That’s better, for them, than being excluded ex ante.
But also I don’t think that Goldman Sachs and Morgan Stanley became banks so that they could participate in this deal — they probably could have gotten themselves added to the list anyway.
How does banning short selling of the stocks of 900 companies help the markets? (The markets are heavily biased toward the sell side, so why constrain the shorts, who often turn out to be right about stocks whose share prices has been artificially inflated.)
You’re right, it doesn’t help the markets, except in that it might (or might not) have helped precipitate a sharp and short stock-market rally on Thursday.
How does banning short selling of this growing list of companies show a commitment to "free markets," a stated goal of this and a long lost of previous administrations?
It doesn’t.
During this short selling ban, why are there no parallel controls on insiders getting out of their positions?
Because it was enacted in a rushed and ill-thought-through manner.
Reporters… Let’s do our job — be skeptical and ask the core questions, not the detailed ones around the edges.
Yes! That is always a good idea.
(HT: Avent, who makes more good points.)
