Bailing out of the crashing plane? Or, bailing out the sinking ship?Or paying bail to get out of jail?

Bail-out has a couple of meanings, of course. John McCain who crashed more than a couple of airplanes may be confused, but let's stipulate that in this case, we are talking about bailing out institutions and individuals who probably should be in jail. The fact that the rubes bought the snake oil doesn't make the sellers any less duplicitous. And, I think we can all agree in principle that if there are purposes to government, they probably include protecting the buyers from the sellers. That, said, ever since I saw this morning's Piranha club, I've been thinking that at the end, we're going to end up owing the motherfuckers whom we have so graciously tried to help. And, that is absolutely absurd.

I felt something was really wrong when I decided that I was no longer going to read Fortune. I like Fortune in the same way I like Soldier of Fortune; it's just that I live more in the world of Fortune than that of Soldier of Fantasy these days, and I should be more interested in the Fortune 500 than in the muzzle velocity of the .50 Caliber Handgun.But, at some point I realized that all this crap about intellectual property and service industry meant that we were selling each other paper. I used to joke about my home town, that where once they made all sorts of marvelous things, today they are all either working at Walmart, MickeyD's or trying to sell each other mutual funds. It's not a joke, but it is funny. And for John McCain to try and say the fundamentals of America -- our workers -- are strong is both funny and a joke. Again, Walmart, MickeyD's and mutual funds. He selects someone as VP who is a supposed expert on natural resources and the exploitation of such. Extractive industries -- mining, pertroleum, piplelines, fishing, logging -- are reasonable fundamentals for a second world country or a third world country. At this point, the best thing I can say about the Republican ticket is that I kind of like Todd Palin. He reminds me of my brother-in-law, Murph, who carries a lunch bucket and worries about how he's going to pay the student loans for his kids and take care of the family.

This is how silly we are. I want a new car. The only one I really like is the Pontiac G8 GT Model. Ok, it's made in Australia. How silly is that? They brought back the GTO and made it in Australia. We didn't go along with it, so they went to this one. So, even in muscle cars, we have to go elsewhere. I drive a 2006 Charger SXT. I used to say I can feel the German in it back when Chrysler was a subsidiary of Daimler. Well, I still can, but the Charger was an iconic Muscle Car. Which, the Germans brought back for us. Absurd.

What we've been really good at the last few decades is allowing the wealthy to become wealthier through the manufacture of virtual paper. Derivatives, credit derivatives,  stock-instruments, etc. are paper. When I took Finance for my MBA, and when I taught it both here and in China, there are formulas for valuing a stock. Lots of them. But, basically, the price of the stock should have some relation to the earnings. Ever since the Greenspan ascendency, however, the brokerage houses and the stock issuing companies have been absolutely uninterested in earnings or divedends. The stock value should be reflected in the stock price. It's not. Stocks, not unlike tulip bulbs, have become valued in their own right. Executives are judged, not by the profit they make or their handling of crisis or their execution of strategy; they are judged based on the stock price.

Obviously, I think this is fucking insane; a form of hypercaptialism that is delusional. Or rather, that is a more reformed type of Kleptocracy. So, what is to be done? (And yes, I'm thinking about Lenin...)

I was reading Politico this morning and one of their features is called The Arena where a variety of commentators weigh in on issues of importance. I'd just finished reading the volumes on this in the Times, and scrolled through a Reuters piece on Paulson's eagerness to get the deal done.  Interestingly, Reuters described two key questions remaining:

Two key questions, however, remained unanswered even after Paulson appeared on four national television talk shows. What price will the United States pay for these toxic debts, which spawned a global credit crisis. When will it start buying them? (AXE emphasis) Paulson painted the proposed intervention into private markets as a necessary evil, arguing the consequences of inaction would be so dire that the large burden taxpayers would shoulder would be worth it. This is not something that we wanted to do. This was something that was very necessary," Paulson said... We did this to protect the taxpayer." (Bullshit. AXE emphasis.)

What I found interesting about this morning's Arena was a sort of universal unstated agreement that the bail-out should really be considered a "buy-out." I don't have any great grief with public-private entities and I don't have any issue with nationalizing things that are virtual monopolies. In fact, virtual monopolies should be either nationalized or government-private partnerships to prevent piratical plundering by the plutocrats. So, I'm not opposed to the government taking over the financial institutions so long as the ultimate benefit is to the tax-payer, not the plutocratic bureaucratic hybrid this course of action  creates. Robert Reich's piece was the most detailed from a policy perspective. To summarize: " We have to do this, so ok, but there are conditions. Or, fuck it, we'll pick up the pieces in the morning."  He has five recommendations. I am going to send a note to my Senators later advocating that they push for just these sorts of guarantees...

1. The government (i.e. taxpayers) gets an equity stake in every Wall Street financial company proportional to the amount of bad debt that company shoves onto the public. So when and if Wall Street shares rise, taxpayers are rewarded for accepting so much risk. (AXE Comment - that is how capitalism works. If I buy up your debt, I get a stake. If not fuck you, why should I buy bad debt? And, if I have an equity stake, which in Finance is generally referred to as stock, and I have a lot of your stock, you work for me.)

2. Wall Street executives and directors of Wall Street firms relinquish their current stock options and this year’s other forms of compensation, and agree to future compensation linked to a rolling five-year average of firm profitability. Why should taxpayers feather their already amply-feathered nests? ( AXE Comment -- for every Bill Gates who grows value and is rewarded with stock options that are 10 BS artists like Ken Lay. Screw it. Stock options should be made illegal. Compensation in firms where the US taxpayer has an equity stake must be limited to something reasonable. I consider the Government Senior Executive Service salaries a place to start. And, bonuses should be tied to performance, which is not the goddamn stock price, but retirement of bad debt and increased profitability, defined as a positive move on the balence sheet. )

3. All Wall Street executives immediately cease making campaign contributions to any candidate for public office in this election cycle or next, all Wall Street PACs be closed, and Wall Street lobbyists curtail their activities unless specifically asked for information by policymakers. Why should taxpayers finance Wall Street’s outsized political power – especially when that power is being exercised to get favorable terms from taxpayers?(AXE emphasis and comment --Since these guys are going to be something like quasi-civil service, the civil service rules on political donations and politics should apply. And, as has not been the case for the past eight years, rigorously enforced with violatiors losing jobs, paying fines and if they leaned on anyone, going to jail. In Guantanamo.)

4.  Wall Street firms agree to comply with new regulations over disclosure, capital requirements, conflicts of interest, and market manipulation. The regulations will emerge in ninety days from a bi-partisan working group, to be convened immediately. After all, inadequate regulation and lack of oversight got us into this mess. (AXE comment -- Yes, yes, hell yes! But, the same thing should apply to all industries and fields, not just the ones that we have a piece of...although, since government should provide infrastructure, one could argue that the taxpayer has an intrinsic stake in all firms, including those that are privately held. Actually, I do argue that point...but then, I'm some sort of Leveller-Anarchistic-Jefferson-Jackson-Lincoln-FDR fan. )

5. Wall Street agrees to give bankruptcy judges the authority to modify the terms of primary mortgages, so homeowners have a fighting chance to keep their homes. Why should distressed homeowners lose their homes when Wall Streeters receive taxpayer money that helps them keep their fancy ones? (AXE Comment -- Mo, because it doesn't begin to go far enough. The reason that mortgage rates vary is because of risk. The factors that determine the price of a loan include, but are not limited to, the cost of the capital and the risk involved in loaning it. We have a marvelous structure used in the GI Bill where loans are insured. Banks and mortgage companies hate GI loans because they are limited in what they can charge in terms of add-ons, and the risk is limited. All mortgagees should be offered to convert their loan to a federally insured rate equal to the GI Bill rate plus a premium based on a percentage of their credit score. Since the higher the credit score, the lower the risk, the premium should be the inverse of the percentage. (Math!) In other words, if my credit score is 750 and we decide on a credit premium of 1% of credit score, my premium would be 1 divided by 750 or .13%. If the cost of capital amounts to 6%, the insurance will cost me an additional .13 or 6.13%. Fixed.  If the credit score is 500, the premium is 1/500, or.2%, or 6.2%. It's affordable, and makes sense.)

 

One last AXE suggestion -- derivatives and their ilk should be banned as should selling short, selling long, flipping and so on. If you can't accurately explain a financial instrument to a high school graduate working on a factory floor, or in Mickey D's which is more likely in our debased state, it should be illegal.

And, to make me really happy, Phil Gramm  should be torn apart by horses and eaten by pigs. That's probably negotiable. But, as someone wrote somewhere, it's a consumation devoutly to be wished...

Comments

[sglover]

"Maestro" Al Greenspan is an essential part of any balanced swine diet, too.

[Crusader AXE]

Hmmm. Given big Al's ethnic heritage, it would be unfair to fed him to swine. Not to Al, but to the swine. No, for him I think the iron cage from the roof of the Fed would be appropriate.

[bk]

Can I just say bravo for this post. An amazing summary of the key issues. I love the Piranna Club, too!