The bailout: Still dead
I know what you're thinking -- the big rebound for the Dow today is a sign that the Wall Street bailout bill is a sham! But that's the wrong indicator, folks. You need to be watching the credit markets, not the stock indices. Start with LIBOR, an index of what banks charge one another for loans. As Investopedia put it, LIBOR is "the rate at which the world's most preferred borrowers are able to borrow money" (emphasis added). It hit an all-time high today, at 6.88 percent for an overnight loan. Ponder that for a bit -- nearly 7% interest on an extremely short-term loan to a blue-ribbon borrower. Ouch.
Anyway, the stock market's steady climb today may have been buoyed by hopes that Congress would take another stab at the bill. Lawmakers have done plenty of that today, floating alternatives on the left and the right. They're pretty similar, actually -- both revolve around a new self-insurance effort. There's also a renewed effort by some Democrats to provide more help to borrowers, and a push by Republicans to eliminate a provision that would steer a portion of any profits realized from the sale of assets acquired during the bailout to an affordable housing trust fund controlled by state and local governments. The GOP's concern is that the money would actually go to a low-income housing and community organizing group, ACORN, that Republicans despise. See this CBS News blog post, which seems a bit hastily written but gets to the heart of the matter. I'm with the GOP on this, not because of the shadow of ACORN, but because it's ridiculous to parcel out profits from some asset sales when taxpayers could take a beating on others.
Meanwhile, back in sunny California, supporters of AB 1830 are still licking their wounds over Gov. Arnold Schwarzenegger's veto. You can't blame the Gubernator for the subprime mortgage meltdown, but you can certainly fault him for not doing his part to prevent the next one. AB 1830 would have gone further than the Federal Reserve's new Truth in Lending Act rules ("Reg Z") to crack down on the excesses that fueled the housing bubble, particularly the damn-the-torpedoes, full-speed-ahead tactics by mortgage brokers and specialized lenders that proliferated as the market lost steam. Among the provisions of 1830 were a ban on loans that allowed subprime borrowers to grow more deeply in debt over time, and a prohibition on financial incentives that induced brokers to steer borrowers into more expensive or riskier loans.
In his veto message, Schwarzenegger said the measure would put state-licensed brokers at a disadvantage when competing with federally chartered banks that made subprime loans. A disadvantage in what respect -- having less ability to mislead gullible consumers, or to steer them into products that aren't in their best interests? Yup, that's a problem. The governor also complained that the bill would allow consumers to enforce its provisions through lawsuits, and would allow them to recover their legal fees if they won -- but wouldn't allow lenders and other defendants to recover their fees if they prevailed. "This provision will likely lead to increased litigation based on de minimis violations as plaintiffs attorneys will have much to gain and little to lose," Schwarzenegger wrote in his veto measure. The California Supreme Court disagrees on that point -- see Ketchum v. Moses ("Because a prevailing party will receive attorney fees only if the case is successful, there is little or no incentive to pursue nonmeritorious cases.") Besides, the Truth in Lending Act has a similar benefit for prevailing plaintiffs, as does the California covered loan law and numerous other consumer-protection laws here. Sounds like the governor was searching for a pretext, rather than finding legitimate flaws in the bill. (Full disclosure -- the editorial board pushed hard for the measure.)
Hey Mitchell, the repurchase agreements sound like a fine approach to a solvency crisis, with the caveat that Chile's banking industry in 1982 was nowhere near as large or as complex as the one in this country today. More tellingly, however, my interpretation of what's going on in the credit markets -- and I'm not an expert in this or anything else, so feel free to ignore me -- is at its core a liquidity crisis, not a solvency crisis. Folks are too nervous to lend, they're hoarding capital. The point of the bailout isn't to inject money into banks (i.e., recapitalizing them), it's to inject clarity into a market that's desperate for some. Once the government creates a market for these illiquid assets, the clouds of mystery that shroud so many of these balance sheets will be blown away. That's the theory, at least. And if you buy that notion, you would recoil at the idea of a wholesale suspension of "fair value" accounting rules (aka mark-to-market requirements) because such a change would undermine what you're trying to do by creating a market for these assets.
As for the impact, here's an excerpt from a release Cali Treasurer Bill Lockyer put out today:
“For 10 days, state and local governments have been closed out of credit markets – long-term and short-term – in spite of the fact that they represent no default risk and provide a good tax-free return to investors. The credit market is frozen because financial institutions are afraid to commit capital amid enormous uncertainty. Congress and the President need to adopt a responsible recovery plan, and get the job done quickly."
We can disagree about the approach, but the consensus among people with the best data about the credit markets is that something has gone wrong in a very dramatic way.
Posted by: Jon Healey | October 01, 2008 at 10:41 AM
Call 1-202-224-3121 to directly let your feelings known.
Stop the fleecing of the American tax payer. Stop bailing out corporations from the pockets of the middle class.
We just can no longer afford it.
Posted by: southoc | October 01, 2008 at 06:42 AM
The problem is your premise, Jon. They are no longer blue ribbon borrowers. And yes banks are keeping healthy reserves of cash on hand. That's good, that is what is supposed to happen.
We've crossed a government fiscal year and the boundary of a month. I have yet to hear of people not being paid, paychecks bouncing, runs on banks. Nada, zilch. In fact, like one might expect in the circumstances, at least some banks are trying to attract customers with higher interest rates. Given our abysmal savings rate, this is a great development. The market works!
If something must be done, this sounds like a much more sensible approach, rather than shoving off all the bad debt onto US taxpayers. A nationalization or two wouldn't be so bad either.
Posted by: Mitchell Young | October 01, 2008 at 04:43 AM