A Rescue Plan which Puts Americans First

Like you, I’m awestruck by the sudden implosion of our financial markets over the past weeks. The magnitude of the crisis before us is unprecedented but the storm clouds have been on the horizon for some time. Here’s an excerpt from an economic policy piece I authored last December:

Here’s what scares me about our economy……the collapse in the mortgage/ derivative securities market has begun rippling through the economy. Only $50 billion of the estimated $400 billion in losses sustained by investors in exotic mortgage/derivative securities have been accounted for. Our largest financial institutions have been weakened. Given the rapid decline in the value of the dollar during the Bush Administration’s unchecked stewardship of our economy, there is a very real concern that the Euro may displace the dollar as the gold standard held by investors and central banks worldwide. Should that happen, the dollar would weaken even further and, to put it simply, our economic strength would be undermined dramatically.

Nine months later only $500 million of the now $1.6 trillion of mortgage security-related losses have been accounted for, suggesting a further $1.1 trillion of further losses by Wall Street.

Observations about the crisis.

1. We're swimming in unchartered waters. Nobody on the Hill, in an Ivory Tower or on Wall Street has convincingly demonstrated the benefit to Americans for our bailing out financial institutions.

2. Arguments for immediate action resonate as fear-mongering by the very same people who have been reassuring the American public about the stability of our economy and our financial system up until weeks ago.

3. Americans of all political persuasions are outraged. Thirty-eight days before the election there is more finger pointing and political theatre in Washington than there is action. Resolving this crisis requires bipartisanship leadership colored by thoughtful, deliberative debate. Suggesting that this must happen over the span of one week is wreckless pandering. Yet your Congress is poised to recess this week?

• Congress and the Administration have but one remaining opportunity to architect a Rescue Plan that works. The consequences will affect all aspects of your future: economic growth, national security, global warming. We are quite literally at a historical crossroads.

4. The American public should absolutely not, as currently conceived, bailout shareholders of financial institutions. The Rescue Plan must assure that taxpayers receive a full return of their monies before shareholders receive a dime. The Treasury’s plan, even with modification for bipartisan oversight, caps on executive compensation and window-dressing to aid to homeowners, remains a shareholder bailout, the proverbial sow’s ear dressed up as a silk purse.

5. Panic-based warnings for immediate Government intervention argue that financial markets will implode and consumers will suffer lost jobs, savings and access to credit to support their businesses. This argument is strikingly analogous to those underpinning trickle-down economics. It’s premised on the assumption that a wealth transfer of taxpayer dollars to Wall Street will engender market liquidity thereby benefiting the public good; trickle-down economics is premised on the assumption that slashing tax revenues for corporations stimulates economic growth thereby benefiting public good.

I don't deny that this crisis requires extraordinary Government intervention. Alternative approaches to how the Government intervenes, who pays for the intervention and who oversees that intervention have been discussed. And there is a better mousetrap which can be enacted quickly, provide more protection to taxpayers and restore confidence in financial markets. Fundamentally, the debate needs to shift toward authorization of an investor of last resort as opposed to a buyer of last resort.

I was an investment banker on Wall Street and advised financial institutions, public and private. That doesn't mean that I'm a financial wizard-- but I have thought intelligently about this crisis. I've watch this drama unfold from the start. Were I (and many of my former colleagues with whom I've consulted) advising Washington in the same manner as I would a client seeking to invest in distressed institutions, I would turn to a tried-and-true investment model. Here's a snapshot of what I have advocated in letters, an Op-Ed piece and numerous diaries.

1. Establish an independent Government entity with its own budget and ability to hire and fire management. That’s akin to what public universities like UNC-CH do in forming quasi-independent investment firms like UNC Management Co. to oversee the university’s endowment.

2. Capitalize it with $X billion from the Treasury to make investments in financial institutions mired in the liquidity crisis.

3. Employ as its template investment instrument a convertible preferred stock paying a dividend and allowing for the conversion of the preferred stock into common stock. In that fashion, Americans will have priority over common shareholders in the event that these institutions fail while sharing in gains from a rise in their stock price—unlike the current bail-out proposal.

4. Invest in newly-issued convertible preferred stock of troubled financial institutions, providing them with badly-needing capital and leaving to them, not the Treasury Department, the job of disposing of toxic securities at a time and price they determine. Their financial condition would be no worse than had Treasury acquired those assets outright. Returns realized by the new Government entity from its preferred stock investment would be returned to the Treasury.

This mousetrap is vintage Warren Buffet. It is the convention he has followed again and again over the past 30 years to invest in firms under duress including GEICO, The Washington Post Company, Coca-Cola and my former employer Salomon Brothers. He did so again on Tuesday through a $5 billion investment in newly-issued convertible preferred stock of Goldman Sachs (one-time employer of Secretary Paulson, ex-Clinton Secretary of Treasury Robert Rubin, White House Chief of Staff Joshua Bolton, New Jersey Governor Jon Corzine, former director of the National Security Council Stephen Friedman, newly-appointed Wachovia CEO Robert Steele and former Obama campaign advisor Jim Johnson.) I worked for Goldman as a 21 year-old junior analyst after college. These folks and Buffet are, collectively, extremely bright.

Though Buffet has endorsed the Treasury's bail out plan, pay attention to how he structured Berkshire Hathaway's investment in Goldman. He negotiated that investment with executives of what is the world’s most-admired investment firm. They reached out to Buffet because they feared that their firm would go down in the panic spreading across financial markets.

Buffet didn't buy any of Goldman's mortgage investments, he made an investment. By all accounts he got a good deal.

Warren Buffet puts the interest of his shareholders first. The Congress should do likewise by putting the interests of Americans first.
________________

Comments or questions please post. I'll check in and answer to the best of my ability.

And-- it's nice to be back on BlueNC.

Comments

Good thoughts...

Jim -- I agree with much of what you put forth here, although I am skeptical that we can afford to borrow an additional "$X billion" from our global creditors given the chatter coming out of Europe and Asia. Warren Buffet has surplus capital to invest. Our government has $9.7 trillion in debt plus $53 trillion in long-term entitlement liabilities.

I also think we need to address one root cause of our dilemma -- the balance of power that has shifted overwhelmingly in favor of corporations as opposed to individual Americans over the past century.

An executive summary of my thoughts are below. More details are available in this blog post:

http://blog.lawsonforcongress.com/2008/09/26/what-to-do/

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Practically speaking, what should we do? As unpleasant as deflation sounds, collapsing our currency is worse. We must not collapse our currency to bail out corrupt institutions who benefited from unsound practices. A bailout attempt must not tip us over into a run on the currency. With an existing $9.7 trillion debt and $53 billion in long-term entitlement liabilities, we are not the world's best credit risk to abruptly increase our borrowing.

If pain is inevitable, how can we temper the economic turbulence to come?

Here is a plan that I would support:

1. Eliminate capital gains taxes on real estate purchases to encourage existing private capital to buy underlying real assets.
2. Affirm that all voluntary barter transactions between two individuals (human individuals, not "corporate persons" or legal entities) are tax-free, regardless of the medium of exchange.

The first step will help stem the fall in real estate prices without increasing debt or bailing out irresponsible borrowers or lenders.

The second step will restore a more reasonable balance of power between individual Americans who have been pistol-whipped in this economic mess, and the corporations who benefit from an unsustainable system.

Together, they will reduce near-term economic dislocations, while providing a platform for sustainable community-based growth over the long term.

This moment in American history calls for principled leadership by an irate minority in Congress who is willing to stand up for the American people. The human people, the individuals -- not corporations who already run Washington through their lobbying machines.

###

BJ

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

it

borrows it BJ or it prints it. Or it starts auctioning off national parks and offshore leases.

Yes-- this could result in a nosedive in the dollar and a period of inflation/stagflation. Maybe-- it depends in large part how much confidence sovereign banks have in the dollar.

Jim,

Following developments in oil and currency markets this week, I would say a signal has been sent that foreign investors generally don't have much confidence left in the dollar in light of this proposed bailout. I find little coincidence in the fact that oil went up $16- the largest single-day increase in history- on Monday, the first trading day after the announcement of the bailout proposal and its projected price tag last weekend. The dollar also took a significant decline on that day.

On Tuesday and Wednesday, oil went down a bit (though not enough to cover the $16 spike on Monday) while the dollar recovered some. On these days, all of the news about the bailout was negative, be it the reporting of the bombs being lobbed at Paulson and Bernanke in committee hearings (the Joint Economic Committee hearing was brutal for Helicopter Ben), or the news of the unhappiness about the plan among members of Congress for various reasons.

On Thursday, there was announcement in the morning of a "general agreement" reached on a bailout plan. At the close of trading, oil was up significantly and the dollar down. (This was before the meeting at the White House, when McCain was apparently being a douchebag and riling up strife and indignation about a proposal.)

On Friday, when more political difficulty about the bailout was reported, oil went down again and the dollar recovered.

I just don't see how we can pull off a bailout without sinking the dollar.

how the hell

do I delete a redundant comment?

Just leave it

Usually I will delete duplicate comments, so don't worry if you make one. Also, once a comment has a reply you can no longer edit it. That can be a bit frustrating.



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Vote Democratic! The ass you save may be your own.

I'd agree

with your contention that

I also think we need to address one root cause of our dilemma -- the balance of power that has shifted overwhelmingly in favor of corporations as opposed to individual Americans over the past century.

However, the crisis in financial markets is not going to be remedied by reforming the tax code. We are in the midst of a liquidity squeeze and a classic run-on-the-bank mentality not seen since 1929.

The Government must intervene-- no matter what the short-term cost may be. However that intervention needs to happen in a reasoned way which protects the interests of taxpayers over those of shareholders. It must have the highest probability of allowing for a timely and efficient recoupment by the Treasury of the billions of dollars which we have no alternative but to invest.

The panic and lack of liquidity won't be quelled by changing tax policy. This is a crisis which requires intervention now.....and an orderly payback tomorrow.

What about the idea of adding a tax to every trade?

I wrote about this earlier. I'd pass on equity investments in favor of certain, sustainable revenue. I don't really want the government to be owning companies, but I'm happy to have the government taxing companies.

A toll booth on Wall Street. A quarter of a percent tax on every trade ... forever.


_____________________________________

Doubts about Dole?

taxing

trades won't work in the near-term James. It does nothing to address the lack of liquidity in the market. Literally, investors are withdrawing funds from banks, money market funds and short-term borrowings by companies to finance working capital needs and investing in Treasure bills to the extent that yields on certain Treasury bills were negative (i.e., there was so much demand for a safe haven that investors bid so high to own Treasury bills as a sanctuary that they were willing to sacrifice any return/interest whatsoever.)

The other drawbacks to taxing trades are that it would penalize institutions which aren't part of this mess, drive investors to trade on other exchanges outside the USA to avoid the tax and the cost would be passed on to investors in the market-- including a hefty chunk of our state's $80 billion pension fund.

Increasing taxes as envisioned in Obama's tax plan-- for the most part-- will address fundamental inequities in our individual and corporate tax code.

I like this, but this problem has a head and a tail

Invest in newly-issued convertible preferred stock of troubled financial institutions, providing them with badly-needing capital and leaving to them, not the Treasury Department, the job of disposing of toxic securities at a time and price they determine. Their financial condition would be no worse than had Treasury acquired those assets outright. Returns realized by the new Government entity from its preferred stock investment would be returned to the Treasury.

I think this is a great idea, but I'd also like to see each institution form a specific "fund" for this money to be injected into, and allow private investors to throw money in the same fund as well. The institution can then turn around and work the money how they see fit, but everybody and their mother can monitor the performance a lot easier.

But that's the tail of the problem. The head is abandoned and distressed properties that have caused values to plunge. I know there's a lot of folks out there who preach that property values had increased way too much and this "correction" was inevitable and necessary. But unless we can stimulate the market and get people to start buying up these properties, values will continue to drop and solid mortgage-holders will continue to walk away from negative-equity loans. Which will continue to erode mortgage-backed securities.

This may not please some folks here, but incentives to move these properties are going to have to come from state & local efforts, maybe even more than Federal ones. For instance: granting a 3-5 year moratorium on property taxes for the new buyer of a foreclosed & empty home would be a start. For that matter, municipalities themselves should/could purchase some of these properties with an extremely low-interest state or Federal loan, and later turn a decent profit after values increase again.

Whatever the case, pumping liquidity into the big institutions is not necessarily going to equate to a turnaround in the housing market, which is what is really needed right now..

Don't touch our local taxes

... we have a LOCAL finance crisis coming and don't want to start playing games by selectively exempting some from property taxes.

You're right on about the "head" of the problem -- how about getting more existing private capital to take a plunge and buy these distressed properties?

Wonder what would happen if we eliminated the capital gains tax on real estate -- not paper derivatives or mortgage securities, but the real estate itself?

There is a LOT of private money on the sidelines right now. Providing an incentive for individuals to invest in real assets would go a long way to paying off bad mortgages with existing money, and stabilizing property values by purchasing distressed properties.

These properties would likely be rentals, and more rentals would lower rental rates -- thus making housing more affordable while people save up to "try again."

Here's a warning shot about the local/state finance trouble ahead:

http://www.carrborocitizen.com/main/2008/09/25/a-growing-sense-of-dread-on-jones-street/

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

I'm talking about encouraging the municipalities

we have a LOCAL finance crisis coming and don't want to start playing games by selectively exempting some from property taxes.

themselves to waive their local property taxes, not a top-down demand. They're already not getting property tax revenue for these (foreclosed) homes, so waiving the property tax won't cut deeper into their current collections. Doing this could help to secure a stronger future revenue base, and it could also inject more local consumer spending immediately.

Wonder what would happen if we eliminated the capital gains tax on real estate -- not paper derivatives or mortgage securities, but the real estate itself?

I'm sure that would spur investors to purchase properties, but since they wouldn't actually realize the benefit from the capital gains tax elimination until they resold the property (at a profit), I fear this would mainly encourage short-term flipping of properties, as opposed to the long-term assumption of responsibility that a true homeowner would bring.

Granted, the private assumption of the (bad) debt represented in the properties would pull the risk out of the mortgage-backed securities and help stabilize Wall Street, but here's the thing: we got into this mess in the first place because the securities changed hands so quickly that risk was impossible to track. If we start flipping properties in a high volume to generate short-term profits, I fear something similar will happen again.

No, property taxes are not contingent

on who owns the house (unless, of course, the government takes ownership of the house. Doesn't make sense for the government to pay taxes to itself, which is why private ownership is necessary for preserving the tax base.)

If the bank forecloses on an owner, the bank takes ownership, and owes the property taxes. The bank also should pay to keep the lawn mowed if that's what the neighborhood covenant require. But enforcement of lawn care can, and is, an issue as lenders struggle to keep up with foreclosures.

Keeping property in private hands will preserve the local tax base. Municipalities should ideally be able to do whatever they want, but I don't know that many municipalities would willingly part with tax revenue to support the property market.

Likely effects of eliminating capital gains taxes on real estate:
- Increase attractiveness of real estate as an asset class for investors
- Keep properties in private hands so they remain on local property tax rolls
- Ownership will reduce the collateral damage that abandoned properties cause on their neighborhoods
- Increased amount of rental property would hold rental rates down so housing is affordable while people save up for their next attempt at buying a house

Ultimately, though, this is at best an ingredient to blunt the blow of asset deflation. We are going to see a painful economic transition regardless as we deal with an absolutely historic credit bubble. That’s why my long-term concern is enabling sustainable local economies and shifting the balance of power from corporations to individuals by affirming no taxation on person-to-person barter transactions.

Jim's other point is well-taken -- how do we deal with an immediate liquidity/solvency crisis? That I don't know -- from my understanding of the system and how bubbles correct, the current crisis simply demonstrates the system working "as designed". It's a feature, not a bug. If there was a easy solution, we'd have done it already.

The Fed's target interest rates for lending are low, but uncertainty is high. There is no confidence for banks to lend to each other, because they're all technically insolvent and unable to survive a run -- but that's a "feature" of fractional reserve banking. The confidence problem is psychological, and based upon uncertainty surrounding underlying assets on balance sheets.

Again, if there was an easy short-term solution, we would have done it already. We are indeed between a rock and a hard place, and I don't believe our national balance sheet and currency would tolerate borrowing and printing more money to pretend like everything's magically ok again.

As Jim said below, God bless us.

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

Right, but a lot of the mortgage holders

If the bank forecloses on an owner, the bank takes ownership, and owes the property taxes.

of foreclosed properties are simply not paying the county and/or city property taxes. They know that (in N.C. anyway) the local municipality will accrue the taxes and (maybe) eventually sell the property to collect the lien, but they (the city) will then have to give what's leftover from the sale to the previous owner/mortgage holder. Or if the mortgage holder executes a sale, the property taxes can then be paid, with maybe a delinquency fee added. But those revenues (for the most part) are just not rolling in.

Jim's other point is well-taken -- how do we deal with an immediate liquidity/solvency crisis? That I don't know -- from my understanding of the system and how bubbles correct, the current crisis simply demonstrates the system working "as designed". It's a feature, not a bug. If there was a easy solution, we'd have done it already.

Right, but here's the problem: thanks to deregulation, the firewalls that used to separate the different financial fields were stripped away. Money from all different sectors got tied into the mortgage-backed securities, so it's not just a housing bubble, or a tech bubble, or even a lending bubble. This bubble popping could suck the blood out of every industry and institution that was even remotely connected to the investment market.

Agreed. That is the problem.

The financial industry lobbied heavily to repeal Glass Steagall, setting the stage for a fantastic race to the bottom.

Here's a creative thought -- so Paulson wants $700 billion to buy toxic debt, "restore confidence", and get banks lending again?

Why not just round up to $1 trillion, but issue it in Treasury Notes, instead of Federal Reserve Notes?

What's a Treasury Note? That's debt-free currency printed by our Treasury that carries the same legal tender status as the private debt money issued by our Federal Reserve. Except our government doesn't need to borrow from foreign lenders or the Federal Reserve to put it into circulation. We'd just create it, and exchange this debt-free paper money for the banks' toxic debt.

Sound odd? It's not unprecedented -- check out how Lincoln funded the Civil War when foreign lenders were only offering financing at usurious interest rates. We've used public money (in that case called "greenbacks") to preserve the union before, maybe it's time to try again.

What do you think, Jim? Would the Fed go for that?

:-/

BJ

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

Okay, it's not hard to accomplish,

but I am really confused.

Why not just round up to $1 trillion, but issue it in Treasury Notes, instead of Federal Reserve Notes?

What's a Treasury Note? That's debt-free currency printed by our Treasury that carries the same legal tender status as the private debt money issued by our Federal Reserve. Except our government doesn't need to borrow from foreign lenders or the Federal Reserve to put it into circulation. We'd just create it, and exchange this debt-free paper money for the banks' toxic debt.

First of all, how can you describe Treasury notes as debt-free? Treasury might be able to print them up and use them to purchase stuff (like securities), but those notes are going to come back to Treasury in 2-5 (or whatever) years to be redeemed by the note-holder, right?

So the U.S. Treasury would be going into debt, while also devaluing other previously issued notes as well as the dollar itself. Unless I'm missing something. Plus, the Federal government would be acquiring real property like there's no tomorrow, and taking it out of the private market to boot.

I'm sure I'm missing something, 'cause this idea sounds like something that would choke a Libertarian...

No, I'm trying to make Paige choke...

... and a United States Note/Treasury Note really is debt free:

A United States Note (known popularly in its day as a "greenback") is a fiat paper currency that was issued directly into circulation by the United States Department of the Treasury. These bills of credit were also known as Legal Tender Notes because of the inscription on each obverse face stating "This Note is a Legal Tender." They were among the first national United States currency, authorized by the Legal Tender Act of 1862 and began circulating during the American Civil War. After the death of Abraham Lincoln on 15 April 1865, additional "first charter period" (i.e. banks chartered between 1863 and 1882) National Bank Notes and Gold Certificates of 1865 were issued. The notes were issued until January 1971, after which they were entirely replaced by the Federal Reserve Notes which had circulated alongside them since 1914.

http://en.wikipedia.org/wiki/United_States_Note

The U.S. Treasury would assume no debt to issue these notes. It would simply issue them. Would it devalue the dollar? I believe that it would, since it would circulate at par alongside it as legal tender, but it would not put us further in debt to the banking system that created this mess in the first place.

It's basically a way to be "helpful" and go along with what the Fed/Treasury are suggesting, but call their bluff. In other words, "Sure, we'll give you the money you're asking for, but we're absolutely not going to pay you interest for the privilege of bailing you out."

Put it this way -- having Congress empower the Treasury to issue our nation's own fiat currency is more Constitutional than delegating the issuance of our currency to a private central bank where all money is created through the people and our government(s) taking on debt.

Even before Greenbacks, see also colonial scrip:

http://en.wikipedia.org/wiki/Colonial_Scrip

BJ

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

the Rescue Plan-- however it may emerge

will not address plunging real estate prices or ease conditions for homeowners in any meaningful way. Remember, the current bill is about buying back mortgage securities, not restructuring a home owners' mortgage.

There will be some token effort to address the public anger over the pain felt on Main Street. But it will be no more than that--- a band aid on a mortar wound. Likewise, much as I'd agree with curbs on executive pay, within the context of a $700 billion rescue plan that is, frankly, a nano-particle on an elephant's but.

In the long term, easing the liquidity/credit crunch will make it easier for consumers to have access to credit to buy homes, cars and the like. A few months ago, I traded in the car we drove during the campaign for a cheaper, more fuel-efficient model. Months earlier, the dealer selected Chase to finance the loan b/c it offered the best terms from a host of financing sources. When I went back and traded for a cheaper model-- and cut my payment in half-- the only bank which would provide financing was a small community bank in Davidson County. My credit hadn't changed-- nobody was lending to other than AAA borrowers.

A truly interesting plan, but what about CDX

- that is, the underlying problem of credit default swaps.

I'm persuaded by this analysis http://finance.yahoo.com/expert/article/yourlife/109609

Why not just have Congress declare certain CDX transactions void or illegal contracts since we've already seized AIG (and no one can value these "assets")?

Pertinent parts of Stein's analysis here

The amount of subprime that defaulted was at most - after recovery in liquidation - about $250 billion. A huge sum but not enough to torpedo the US economy.

The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn't have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default.

The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)

These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.

Because these giant financial companies never dreamed that the subprime mortgage securities could fall as far as they did, they did not enter a potential liability for these CDS policies anywhere near their true liability - which again, is virtually bottomless. They do not have a countervailing asset to pay off the liability.

 

no doubt that

the "derivatives market" of which credit default swaps are but one sector has grown to staggering proprotions. The amount of debt guaranteed under these contracts is somewhere on the magnitude of $60 trillion. The derivative market is not regulated-- a vestige of having a 20th century regulatory system juxtaposed with a 21st century financial marketplace.

But CDXs are not the root cause-- and that's not to dismiss the threats they pose. The problem with the CDX contracts is that they insure securities which are toxic-- and when that happens the party who has "sold" credit protection to another firm can demand more collateral from the "buyer/counterparty" who bought the CDX on the other side. That is the crux of why AIG and Bear Stearns collapsed-- they didn't have the to cash and/or unencumbered securities to ante up and nobody would lend to them.

Remember, investment banks often have $30 in debt for every $1 in equity (or more.) Imagine buying a $300,000 home and putting down $1,000-- and having to, say, refinance your $299,000 mortgage every day.

So how to correct? That's part of the $700 billion question. But, for sure, large financial institutions like Goldman and Morgan Stanley are going to shrink their balance sheets-- that is, sell off financial assets and pay down debt. That's why Goldman and Morgan applied for and received new charters as bank holding companies last Monday. They want to be able to take deposits-- which is a more secure, permanent way to finance their business than having to refinance daily. In becoming banks, both firms will have to comply with stricter capital guidelines which limit, basically, the amount of debt they can borrow to $6 for every $1 in assets. In so doing, they'll have to shed some of the aggressive risk-taking which has been fundamental to their earnings growwth.

And......I'm starting to sound like a securities analyst! Just trying to explain.....

Bottom line: there's no magic bullet. A lot of these adjustments will take time. However, the liquidity crisis requires triage right now.

We are in the midst of the economic equivalent of an event like Pearl Harbor.

Well said Jim. Insightful. Unfortunately......

This is an event where Wall Street, with the aid and complicity of our President,Treasury Secretary and many Congressional representatives, are taking us for another ride.

The Savings and Loan Debacle under the first President Bush Administration taught us nothing.

The very people who are responsible for breaking America are being relied upon, now, to ensure the Fix-management of what is surely a desaster we cannot dodge, but one they greatly benefitted and profited from. We are depending on the fox to ensure the safty of the hens. This is insane.

America is happily blind Jim; wrapped up warmly in our flag and singing the praises of our brave leader as he, and those he permitted to rail us, march our country into third world status. How sad for a great people. How very sad.

I love my country....and my heart is breaking.

I remain your friend. MARSHALL

Marshall Adame
2014 U.S. Congress Candidate NC-03

well Marshall

I'm glad to know that you remain my friend! Likewise here.

You won't get a great deal of argument from me on your comments. It's sad but the reality is, I fear, that the United States of America is/has become America, Inc.

The foxes come in both colors: red and blue. Wall Street is the top industry donor to both Republicans and Democrats this year. Fannie and Freddie were known for their largess in lobbying and contributing to both sides of the aisle.

And this mess has roots tracing back to Reagan. He began the dismantling of New Deal programs, the Democrat Party moved to the center under President Clinton, Alan Greenspan enable too much cheap money and we as a nation quit saving and began a borrowing binge to finance our lifestyles. Homes were treated like ATM machines; and financical institutions dispensed the cash wrecklessly.

And now....it looks as if the Congress is going home. They'll likely bang something out to sell to Americans.

God bless us.

America is happily blind

America is happily blind Jim; wrapped up warmly in our flag and singing the praises of our brave leader as he, and those he permitted to rail us, march our country into third world status.

I don't know about all that. I think Americans will respond to this in the long term. Economics being highlighted as a central issue is moving people left in presidential politics which should help us in the long term.

But as far as the immediate and short term goes I don't think its blind partisanship or apathy that are directing the American people, its ignorance. I've only had 1 economics class (honor intro to economics), and all I know of Wall Street is what I could see of it from a circle line boat tour (recommended to me by a friend) that I took on a vacation to New York earlier this year. This week has been a learning experience for me, and I think a lot of Americans. I definitely don't understand all the specifics, but I see the liquidity concern and I wouldn't turn my support away from a leader who said this issue is important enough that it warrants a few more days of debate and dissection.

As a regular Joe, what are my options. Do I need to be calling my congressmen right now saying don't rush something of this importance?

Hi! This is Patel Soprano! Your Car note is due Amer Camel Dude!

It's call the old shuffle what is under the shell game. Sorted like Washington Mutual last night. The Feds seize it last night [ In two days over 16 billion was withdrawn by deposters, Classic Run on the Bank example] and than ten minutes later Citco-Chase own it. 10 months ago, the Massive secret Banking interests in Dubia loan Cito-Chase a forture to keep it a float and it appears the Boys in Dubia want Wachovia too.

Two months ago, Wachovia outsource their collections departments out to a unknown India company cutting over 4000 local employees.

It appears the next collection call one gets will be a craze India with a Camel Herding voice threaten to repo your goat herd in a Tony Soprano strip Club.

I really enjoyed that skit, and after the laughs, realizing ....

how close it is to the truth. Is the bailout to help the American people or to keep the 'parasites' in these investment houses in business? It has been brought up that this could be tackled from the bottom, by trying to re-do these mortgages with lower rates and settlements to keep these people in those homes being foreclosed. And that is the big obstacle causing the crisis, according to Bernanke and Paulson in the most recent hearings. But the latest news says that the Dems will drop any plan to help the mortgagees in favor of the Repub plan to reward the parasites again. I hope I'm wrong, but the corporations really do run Congress, so 'third world', here we come!

Wow, just wow.

Rep. Dennis Kucinich (D-OH):

“Why aren’t we helping homeowners directly with their debt burden? Why aren’t we helping American families faced with bankruptcy. Why aren’t we reducing debt for Main Street instead of Wall Street? Isn’t it time for fundamental change in our debt-based monetary system, so we can free ourselves from the manipulation of the Federal Reserve and the banks?

It's time to get creative:

http://blog.lawsonforcongress.com/2008/09/28/a-bipartisan-drama-resuscitating-a-dying-republic/

BJ

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District

William (B.J.) Lawson, M.D.
Congressional Candidate, North Carolina's 4th District