Sunday, September 21, 2008

Bailout Weekend Round-Up

Secretary Paulson made the tour of the weekend talk shows pushing the pros of the $700 billion bailout.

Side note - I find more than a little irony in the fact that Mr. Paulson was quick to let the market decide the fate of Lehman Brothers, but when Goldman Sachs was threatened - the firm where he served as the Chairman and CEO from 1999-2006 - there was suddenly a risk to the entire fate of the US economy.

The NY Times published the draft of the bailout document on Sunday.

The most troubling items within the text:

1) The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.

So, if the government buys $700bil in bad debt and determines that some of the debt can be resold at cost, the government can replace that debt with MORE BAD DEBT. In effect, this can be a permanent dumping spot for bad loans. This might ENCOURAGE more of the same activities that got us here in the first place.

2) Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

WHAT? You are asking the American taxpayers for $700 billion and you want your authority to be non-reviewable and not to be reviewed by any court of law or agency? Where can I get a deal like that? Both political parties need to work together to strike this from any bailout package.

3) Foreign Banks

This is going be a political hot potato, but given the nature of the global financial system a number of foreign banks (HSBC, UBS, etc) can be expected to ask to be part of any bailout. Their argument is simple, we made the same bad loans to the same foolish US consumers, so if you're bailing out Citibank and Goldman, you should bail us out too.

Their argument is sound, but in an election year I wouldn't go near this issue. "Let's send US taxpayer dollars to save foreign banks" would not be a popular campaign slogan.
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So, now in the post bailout era, how's business?

In a nutshell - awful. There will be pockets of light this quarter but companies will start reporting earnings in the next 3 weeks and I think the numbers will be startlingly bad. The weakness of the US consumer will finally start to show through and we might retest our lows in early October.

Cheers!

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