[4Tran]

I think that it's good news that the bailout plan as proposed failed. Hopefully it'll mean that Congress will take their time and come up with a better one.

The plan was basically Paulson's with a few modification (admittedly for the better). However, all it'll really accomplish is some temporary increase in spending, only to make the big crash that much bigger when it hits.

Originally Posted by Aquillion

I am getting the sense that a lot of people here don't understand what the bailout plan really is; they just hear 'a trillion dollars', then lock up and start screaming, imagining a trillion dollars being randomly given away to wealthy fat-cat bankers.

That isn't what it is at all. A post by an economist I know explains it better than I could. It is long but please please please read it, this is very important; it could easily be more important than the Presidential election. Understand that for the past few years, the Bush administration has been desperately struggling to salvage its economic conservative legacy; they instantly tossed it in the fire just now. They did not do this lightly. Nearly half the Republican party turned their back on economic conservative principals. They did not do this because lol they wants the monies.

This guy seems to have a decent idea of where the problem originated, but I fail to see how just dumping money into the financial system is supposed to solve anything.

Here's a counterpoint from someone who managed to predict this whole mess: http://www.rgemonitor.com/roubini-mo...itors_of_banks

Thus the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer - the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.

So this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the financial firms (not just banks but also other non bank financial institutions); with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money.

Indeed, the plan also does not address the need to recapitalize those financial institutions that are badly undercapitalized: this could have been achieved by using some of the $700 billion to inject public funds in ways other and more effective than a purchase of toxic assets: via public injections of preferred shares into these firms; via required matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization; via suspension of dividends payments; via a conversion of some of the unsecured debt into equity (a debt for equity swap). All these actions would have implied a much lower fiscal costs for the government as they would have forced the shareholders and creditors of the banks to contribute to the recapitalization of the banks. So less than $700 billion of public money could have been spent if the private shareholders and creditors had been forced to contribute to the recapitalization; and whatever the size of the public contribution were to be its distribution between purchases of bad assets and more efficient and fair forms of recapitalization (preferred shares, common shares, sub debt) should have been different. For example if the private sector had done its fair matching share only $350 billion of public money could have been used; and of this $350 billion half could have taken the form of purchase of bad assets and the other half should have taken the form of injection of public capital in these financial institutions. So instead of purchasing – most likely at an excessive price - $700 billion of toxic assets the government could have achieved the same result – or a better result of recapitalizing the banks – by spending only $175 billion in the direct purchase of toxic assets. And even after the government will waste $700 billion buying toxic assets many banks that have not yet provisioned for such losses/writedowns will be even more undercapitalized than before. So this plan does not even achieve the basic objective of recapitalizing undercapitalized banks.

The Treasury plan also does not explicitly include an HOLC-style program to reduce across the board the debt burden of the distressed household sector; without such a component the debt overhang of the household sector will continue to depress consumption spending and will exacerbate the current economic recession.

Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented - many on the RGE Monitor Finance blog forum - alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners.

This doesn't mean that there's only a single possible solution or anything like that, but there has to be an attempt at looking at such a faceted problem from many different points of view, and that takes time. And it's tons better than simply throwing lots of money at the problem.

From a logical point of view, if a housing bubble is partially to blame for the mess, then isn't it also necessary for the housing market to correct itself? Any plan that fails to take that into account seems to me to be rather inadequate.

Originally Posted by Fipskuul

The system has been there for a long time, and they have been part of the system. Being a player of that system, if they didn't have the clue on what is going on in reality, they must really be stupid. But, I doubt they are.

Most economists can understand the workings of the economy within their own purview, but it's easy to weed out the good economists from the bad ones by looking at who actually knew this mess was going to happen and who has a clue about how to fix it. It's also a good idea to look at an economist's prediction record - it's often a whole lot worse than you'd imagine.

Originally Posted by TinyRedLeaf

Now, we say the whole idea is stupid and shouldn't have been implemented in the first place. Hindsight, unfortunately, is 20-20. Was it always a question of greed? Or was it more a systematic problem? I feel it's the latter, not the former. A problem this huge couldn't have been caused by any grand plan, no matter how "intelligent" Wall Street operators think they are.

It was mostly greed. There are lots of banks who took the conservative route and resisted investing into the subprime market and are much better insulated as a result. Moreover, it's certain that a lot of the big companies involved were cooking the books to hide how much their assets were actually worth (and they're probably still doing so now). It's also fairly likely that the ratings agencies were in on some of this.

Originally Posted by GuidoHunter_Toki

Has anyone else heard about what some treasury spokeswomen said about the $700 billion figure. "It's not based on any particular data point; We just wanted to choose a really large number."

Wow, just wow.

That they were doing so isn't too surprising, but the sheer brazeness of saying it out loud is unfathomable.

Originally Posted by Solace

While not the sole problem, the speculation is killing the market. Because the bill didn't pass, investors are panicking and making the problem *worse*. I question those choices on the actions of today's market plunge.

Speculation had little to do with the big drop on Monday. Short selling of most the financials has already been forbidden. Instead, investors seemed to be trying to find some sort of refuge from all the chaos.