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Deika Morrison: Reasoning the Reasons

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Deika Morrison: Financial Security Tips+Tools

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Saturday, September 27, 2008

Some questions/comments on the Paulson bailout Plan - Posted 9.24.08 on Facebook

I am in favor of an urgent solution – not “any” plan that creates a bigger problem.


1) Why is there a “need to encourage participation”? Is there a serious crisis or not? We are told the patient is about to have a heart attack. I buy that. We are told that we need a specialist. I buy that too. But am I really to accept that the specialist will not try to prevent his OWN heart attack? Because that IS the heart that is about to have a heart attack. He will not try to prevent his OWN heart attack unless the Congress forgets about some type of legislated taxpayer benefit and limits on executive compensation? Does anyone else find this very odd?

2) In legislation, language is critical. This is not a handshake agreement. This is law. And bad law can be infinitely worse than no law. It’s nice to see that Paulson now realizes he “wants and needs oversight”, therefore the language of 8 needs modification. Taxpayers funds cannot be spent without some kind of oversight, so this is no great concession, frankly. As for the rest of the legislation, there are other problems with the language. For example, in legislation, “is authorized” has a very specific meaning and there is a lot of “is authorized” attached to unlimited unquestioned non-reviewable power for Paulson. On the other hand, the legislation has language such as “consideration” – means to think about – for the taxpayer. That is even weaker than a “may” which means optional action. Where is the mention of a tangible benefit to the taxpayer in any kind of language in the legislation. If this is supposed to be a grant, then say so. But don’t try to convince everyone the taxpayer will benefit when there is no legislated type of benefit. There is nothing wrong with a difference of opinion in the “type of benefit”. But Congress must legislate a benefit of some kind with “shall” language, or it would be in complete dereliction of its sworn duty. Bankers know more than anyone that there is never something for nothing; and none of them would agree to that if it were their money. Some language like “the taxpayer SHALL receive all or part of the profit, and said profits SHALL be determined by audited financial statements” would be a start.

3) As for executive compensation, there is a problem beyond the offensive “optics”. First, at the levels these executives are used to there is disincentive to fix the problem quickly. Without compensation caps, Congress would be setting up a lucrative “bailout industry”. Second, the more money spent on salaries, the less money to unclog the financial system that Bernanke and Paulson are at pains to stress that needs as much money as it can get (therefore why they say tranches cannot work)

4) The unregulated complex exotic financial instruments are a significant contributor to this problem, to be diplomatic. Bailout or no bailout, this is a serious problem. The Credit Default Swaps (CDS) are only one type. CDS are an estimated $58 TRILLION market of instruments that most people do not understand, or can value, and as the SEC has said - finally – must be regulated and is ripe for fraud and manipulation (http://www.reuters.com/article/marketsNews/idUSN2332572720080923?sp=true) Even regulated, the market is too large, too interconnected causing a massive contagion risk which we are seeing in this domino effect.

Unless there are – simultaneously with the bailout - some restrictions on the creation of complex exotic financial instruments, and regulatory reform for the creation and trading of complex exotic financial instruments, Congress is handing over $700B to allow these same people who created a clogged mess with complex exotic financial instruments to financially engineer more complex exotic financial instruments in an unregulated environment. Is there not something wrong with what Congress is being asked to do? If you think that what Congress is being asked to do in its current form without any restrictions and regulations for these complex exotic financial instruments, start saving for the next bailout.

5) This bailout is silent on the ratings agencies. This is a serious omission. Ratings agencies are considered gospel to some, and there will be no global – I repeat, global – financial stability until something is done. If ratings agencies "like" something (an instrument, an institution, a country etc.), they make an announcement and people buy, buy, buy. They decide they don’t "like" something (again, an instrument, an institution, a country etc.) as much anymore,. they make an announcement and people sell, sell, sell or run to banks asking for their deposits (otherwise known as a run). It is an open debate that ratings agencies are not rated or have no oversight and this is a problem. There are many reasons this is a problem. The main one is that there is no transparency. No one really knows how they make decisions, and therefore they add a further element of unpredictability in a market starving for stability. If the objective is global stability in the short run, it will not happen if ratings agencies are not addressed in some constructive way. They serve an extremely useful purpose in principle. In a crisis, there needs to be a constructive concerted effort to restore confidence and stability in the markets - and the ratings agencies have to be a major part of that effort with considered actions. I urge everyone to read this : http://bloomberg.com/apps/news?pid=20601109&sid=ah839IWTLP9s&refer=news

6) Paulson keeps saying it’s his “hope” and “if the plan works as it should”? Has anyone considered just distributing $700B to taxpayers which will 1) improve the people's confidence 2) increase spending allowing companies to have more revenues 3) improve companies ability to pay taxes and keep people employed 4) allow people to stay in their homes and pay their debts? Now, that may be an extreme and I am not advocating that, but the point needs to be made - Paulson's plan is an expensive "hope" that what I have just described will happen and happen soon.

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Reasoning The Reasons by Deika Morrison is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.