That quote is from a Treasury spokeswoman, quoted by Forbes, on why the bank bailout will need $700 billion.  A spokeswoman who probably has joined the unemployed today.

There’s a lot of people suggesting that we should let them all die (including me, in a fit of deep fury, when the bailout first was proposed).  Others have suggested that simply improving the more stable banks ability to give mortgages would help, so folks could refi with those, and leave the bad financial companies to wither.

Unfortunately it’s long past being just a mortgages issue.

The original sub-prime mortgages have been securitized into investments which returned a good percentage with an aggregated low risk, and were part of the formula that many companies used to approximate future revenues.  They loaned and invested based on that approximation.  Several relatively small companies sold ‘insurance policies’ (its more complex than that, but it comes down to hedging against risk) that they weren’t sufficiently collateralized to back.  It turns out there was a lot more risk involved than was visible.  When the bad loans became endemic, these insurance policies were called in by the major companies to preserve capital.  The small companies folded, not able to actually provide the liquid assets needed to back the policies.

Where we are now is that there have been huge losses, and companies who offered hedges against those losses are backing out of their obligations because they don’t have the liquid funds to meet them.  Those companies will close, bankrupt, and because nobody will ever want to do business with them again (and there’s probably quite a bit of legal action that will happen).  They are mostly small to medium sized hedge funds and independent insurers, basically.

This leaves the larger companies holding the bag for billions in risky, unhedged investments.  They want to get rid of them, not because they are all going to go to $0 worth, but because there’s NOBODY who’s willing to provide insurance on them right now, and in the financial market an uninsurable investment is not acceptable.

The bailout plan is to allow the government to acquire these securitized mortgages and hold onto them while the financial system rebuilds itself, and companies who are sufficiently capitalized to insure against the (now recognized to be higher) risks.  Then the government can re-sell them back into the system slowly, hopefully recouping a percentage of the amount that ends up being spent.

The problem right now is that EVERYBODY wants to sell, and NOBODY wants to buy.  In that kind of a market, even good quality doesn’t protect you from being pounded flat.

The reason for the government investment is to provide the market time to come to its senses, and breathing room to realize that these are not universally bad investments, the risk was just underpriced.  To make up a homily on the spot, if everybody’s terrified into immobility of the mouse in the room, nobody’s able to go and bring the cat in.

The reason this is far beyond mortgages is that when all these big companies have a large amount of risky investments that they can’t hedge against, they don’t lend money, because they aren’t comfortable knowing how much spare they have.

When these large financial institutions don’t lend money, people can’t get home loans, home improvement loans, student loans, car loans, business loans.  This trickles down to every single segment of society, from CEOs to greeters at Home Depot to startups to teachers to mechanics.

That’s the disaster that we need to avert.  And it pisses me off to no end that we’re in the situation where we HAVE to hand money over.  I’ve railed against this in public and private, but of all the insane things about it that make me deeply infuriated, the worst of all is that now that it’s gotten to this point, we have no real choice.  We’re forced to make a move like this.

I too want heads to roll.  The most common phrase around the office regarding this is ‘Heads.  On.  Pikes.’  There must be accountability, and it must be large and visible, not detail-oriented and generally annoying like Sarbanes-Oxley.  Several CEOs should lose their jobs, sans parachutes.  Several of the regulations which were eliminated in 1999 will be reinstated.  Maybe there’ll even be CEO compensation limits, and some government ownership of these companies in exchange for government assistance.

The reason that ‘700 Billion’ was picked out of the air, is not because there’s some knowledge of how much of these securitized mortgages there are out there (there isn’t, and if there was, I bet it’d be a lot more than $1T).  It’s because what is needed, far more than anything else, is a symbol of motion.  It’s for one person to come into that room of fear-frozen people, and corner the mouse for a few minutes while someone else goes and grabs the cat.  It had to be a number that shocks the conscience, because otherwise people would be asking nervously, ‘Is..that going to be enough…?’  And calming fear is, in the end, what this is really about.

That all said, one political party has de-regulation as an express political plank of their platform.  I know I’m generally preaching to the choir here, but they should learn just how out-of-touch that particular political plank is on November 4th.

—  Morgan Schweers, CyberFOX!

1 Comment

  1. On colin Says:

    But where should the heads roll? Should it be the simple minded free market economist (Nobel prizes and all) who took thought patterns suitable for the 18th century and convinced governments that their panaceas were correct. Should it be the right wing commentators who pander to the basest instincts of greed and selfishness. Should it be the political lobbies who make politician frightened to fix what clearly needs fixing in many areas for fear of loosing votes.