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More Bailout Details Emerge - Ok, This is Maddening

Tonight we found out how the first $250B of the taxpayers $700B bailout of the financial system would get used. According to the bill passed by Congress this money would be used to buy bad assets off of bank balance sheets. Instead it is being used to purchase non dilutive preferred stock mainly in a small number of large banks. We were also told by treasury officials that they only expected to need about $50B of that money a month, and just wanted to the full amount in their back pocket. Well they are already going back to Bush to authorize the next round.

Ok, so the details (from NY Times)

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch.

The goal is to inject massive liquidity into the banking system. The government will purchase perpetual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.

Now here's where I get pissed

1. NON DILUTIVE PREFERRED, that is the definition of moral hazard, you are bailing out a company yet rewarding those who made bad investments. We were told during congressional hearings by Paulson it was important for this money to be used in a way that didn't reward the stock holders. The plan was to take large dillutive equity chunks out of banks that were bailed out via warrants or preferred stock. Guess we were LIED to!!!

2. Lets see Wells Fargo and Bank of America get rewarded with an extra $5B for getting a sweat heart FED back deal to take out a competitor. Yeah that gets a sets a good precedent. What do you want to bet, Wells and BofA knew about this little kickback when they were at the bargaining table? Seriously, it appears the plan is too consolidate the whole banking system into a dozen or so "winners" that the Treasury has chosen to survive this mess. My putting their support behind the large banks it undermines the ability of the smaller ones to gain depositors and investment further hastening this consolidation.

3. It was absolutely critical for us to pass that bailout bill without much time for debate, yet a week and a half later, we're using the money for a purpose not even authorized in the bill.

I guess my suspicions that this is simply a looting operation by the major banks has now been confirmed. This could not have been carried out in a way more beneficial for the bankers and the shareholders and less beneficial for the taxpayers. Hope you like your Citigroup, JP Morgan/Chase, Morgan Stanely, Bank of America overlords...

* The image on the right is what I think of Hank Paulson right now, and yes that's the mask for my Halloween costume this year. These guys are more concerned with bailout out there buddies right now that solving the real financial crisis that is getting worse by the day, not better.

Posted by Matt Heaton on 10/14/2008 01:06 PM

Comments (55)

Bailout in the Mortgage / Finance Channel

bailout, rant

55 Comments on More Bailout Details Emerge - Ok, This is Maddening

OCT

2008

Seriously last week after the bailout passed I told myself I was gonna stop ranting and posting about it. We'll I'm still pissed off, so obviously that hasn't stopped.

Thhis is a bit over complicated for me. I must admit that there was so much new information since all that credit crunch started, so many new terms, new notions. Looka like you are very comfortable with them. I envy you, I am confused, lost...

OCT

2008

I agree with Jon. It's so complicated that I don't know what the "right thing to do" is. But I do know that every time I look at the stock market, I feel sick. My kids' college funds are in a state 529 savings plan, which means an index fund. One kid is a college freshman and the other is a HS senior. If the stock market vaporizes. so does the money we saved for 18 years. . . .

Wall Street has turned into a Las Vegas Craps Table. This is a good post Matt and brings to light what should be on the minds of all who actively post and comment on AR. We've turned a corner this past month and there's no looking back now. All we have are the memories of a system that made sense as long as regulations were in place and strictly enforced. Now it's crooks steeling from crooks. What does the future hold ................

Mike Lewis

Matt, I really appreciate your posts on this subject. They are among the best simplest explanations of what is going on.

Sooooo what do you REALLY think Matt? I'm chuckling as I read this- yeah- it's maddening, but we knewit would be. Unfortunately, it'sdone NOTHING for TEDs.

Hi Matt, I also heard on the morning news that the legislation will severely limit CEO pay. I'm hoping !

It really amazes me.. everything that is going on in the financial market. Being in real estate, of course I want money to be readily available to buyers, but not at the expense of the future generations of American citizens!

One thing popped into my head.. why not stop doing business with the banks who are "winning" as a result of this crises. Credit unions are more friendly- all I have to do is cancel my BofA account. Think about it.

Thanks for sharing, Nicole Weidauer

The Egerer & Weidauer Team, Keller Williams Realty North Seattle

Hey Matt, Have you ever seen zeitgeist the movie? This is all sounding a little too familiar... - if you have not watched it, go to www.zeitgeistmovie.com and watch during your next hour and a half of freetime. Let me know what you think...

Matt,

I reblogged this. Keep up the good work. I like reading your take on what's happening.

Once again, an excellent Matt. We currently don't have time to really digest everything you wrote but agree with our main points. This is not what most of us were hoping for but what most of us figured would happen.

Matt: It is ivery interesting to see how all of this is going to play out in the long run.

Thanks for the update Matt. The whole situation makes me sick!

Why am I not surprised. One can almost never believe what the politicians say. And they wonder why we, the man on the street, have very little faith!

Interesting read......CLICK HERE

You can also count on this:

Middle America will, once again, get the short end of the stick.

Unreal. Such a historic use of government taxpayer money that is implemented so fast with such uncertainty of the specifics... is a recipe for danger. Should I bend over now or later?

Matt, I had my own little rant last week...3 days sick on the couch, listening to the news about the CRAP...thought I would have a stroke, lol. Anyway, I have stopped watching the news now and I am going back to live with my head in the clouds....In the mean time, I thought I could at least supply us all with this...sounds like we will be needing it!

Classic photo. Surprise, Surprise lied to again. Don't you think they should have mandated that a percentage of the funds received by companies must be used to loan. I don't feel to comfortable that they think this effort will start the loaning process again. Banks are going to make the lending criteria more stringent isn't that funny. Seems they don't have to worry about anything to receive loans or money. At this point they don't even have to show that they can do a better job.

Elizabeth - Soooooo Funny. LOL

Matt - great subject! I've tried to explain to my kids just whats going on right now and I generally stumble around like a dummy. Thanks for some good points! I for one have always held that personal responsibility is so very important in our lives - I'm always telling my kids that if they want to succeed they have to work hard for it and once they get some success they have to work harder to keep it. Also, sometimes you will fail, but that should be a learning experience to help you along in life. Now it seems like everyone is turning to the government with their hands out when they fail. That money they give out has to come from somewhere doesn't it? Yes! Successful hard working people! Its all very troubling to me.

What I hate the most is that this whole mess seems to be too complicated for most everyone, even economists, to completely understand better yet explain. All we consumers see is our retirement accounts shrinking and in my case jobs being lost due to sales like Wachovia.

Matt,

Looks like the oversight function that was supposedly installed in the bailout plan isn't there. The large banks are consolidating power and now they become so big that they will never be allowed to fail, no matter what.

Matt, What can you expect from politicians. They never tell the truth, fill their own pockets with green, and keep their supports happy. We better have a more defined bail out plan in place soon before we have to spend another trillion on pork. AJ

A wise man once said:

"Instead this bill is a method by the pig men of Wall Street to throw as many taxpayers in front of the train as possible, hoping to slow it down before it hits them."

I can't remember who said it exactly...oh, yeah, that was YOU!

Keep up the good work! You should be an investigative journalist on CNN, or is that MSNBC, or should I say Headline News.....oh forget it! You'd never survive considering you not saying EXACTLY what the "pigs" want to hear ;)

Matt, Before I have a chance to get my head around this stuff the 700B will be gone and wasted. Incredible But predictable.

"Guess we were LIED to" - that is what we have been taught to expect from these guys, why expect otherwise

It's the same old story. I think it's good to see more and more people waking up to what's actually going on.

Now that you see that you can't trust these guys, start looking into the origins of the Federal Reserve and try to find out who actually owns the Federal Reserve. The real solutions can only happen when enough people actually understand the system that we actually have.

Matt - now you got me pissed off too, and I don't even get half this stuff, but just like Mary Pope Handy, and living in the same area, I have one in college, one in High school, and one in Jr High, and all this stuff quite frankly scares the living crap out of me.

All my equity and life savings in our homes are gone, the little funds we have left are FDIC insured, well WTH does that mean? Anything? Nothing? Should I get a Folgers Coffee can, and hide it under my bed now? Dang! How's that for transparency commenting? Thanks for letting me vent on your Blog post. I should have probably just said, "Great Post, thanks for sharing!" :-/

Thanks Matt for the information ...I am even more pissed at Congress/Democrat leaders because they are looking at helping the people that messed up with their own mortgages - while the responsible people that pay off their loans just keeps paying in taxes - higher interest cost - lower home values - etc.

And the Democrat leaders what even more money (after this bailout plan) for another stimulus/welfare checks going out to people that are not paying any taxes ...what's another $100 billion on top of the $700 billion (or, is it $1.2 trillion) - say Barney & Nancy: How many zeroes is in a trillion?

Again, Thanks for the post - Great Job!

I heard my Hank Paulson Halloween mask shipped today, I'm gonna have fun with that one. Though I might have to watch out for the mobs with pitchforks and torches within a couple weeks if I wear it.

Where can I get one of these mask? This whole deal is a huge crock of s*%$ ! Its funny how we have no say at all! I agree with whoever said lets get the torches and pitch forks, let burn a few gas pumps while we're at it! Thanks for the news no matter how depressing, we should all just sit tight and wait on OBAMA to save us all!!!! Holy S**& what are going to do? Ron Paul for president!

I'm not surprised at all. Let's all vote against any member of congress who supported this bailout package. Persoanlly, I'm voting for Bob Barr. I don't care if I'm the only guy in Ohio who votes for him.

Here's a list from the Libertarian website:

http://www.lp.org/blogs/andrew-davis/congressmen-who-sold-out-the-taxpayer

It's such an obvious rip off and plundering job that they should be ashamed - but they have no shame.

Home Realty and Mortage: http://benandhank.com

I was going to ask where I could get one of those cool masks for Halloween -- Thanks for the Link!!

Scary, Scary stuff.

yikes

Because the Treasury is investing in the banks by helping to recapitalize them, it will go a long way towards thawing the credit markets, which are locked up. They are not functioning. Inter-bank lending rates, as measured by LIBOR, have fallen from 4.81875% (last Friday) down to 4.635% today. LIBOR should be w/in about .50% of the Fed Funds rate - which is now 1.50%. This should facilitate banks lending to each other again... And incidentally, should also enable larger scale loan modification process to begin by the banks due to the added capital reserves to their balance sheets.

It should be noted that the banking lobby was dead-against the ability of the Treasury to take equity positions in their companies. In fact, no one is quite sure how the language survived in the Act. This provides the gov't an avenue to realize revenue from this as well. So the money IS being used for a purpose explicitly provided for in the bill.

I'm almost (ALMOST) past the point of being pissed about any of it, simply because I knew, and said, in the beginning that the money would be mis-used and abused as soon as we gave them the go-ahead. When are people in this country going to learn that you CANNOT EVER trust politicians? Have they ever once done what they promised or been good stewards of OUR money? I said it before and I'll say it again... they'll be back asking for more money in 6 months or less. Actually, I take that back, they won't ask for it. They never do. The pushed it through this time without our blessing, and they'll do it again.

Sorry if I sound bitter, but I'M BITTER! :)

The thing that really gets me is that we will send most of the crooks back to Congress. Everyone seems to think that is the "other guys" Rep that is the problem. It seems that we vote with our emotions instead of our intellect in November.

Great post by the way Matt. Thanks for digging out the numbers.

I want to see how they're going to limit executive pay. They should cap it at 30 times the lowest paid or 20 times the average.

Lowest is $10/hr or 20,000

so highest would be $600,000

if avg is $30/hr than highest would be $600,000.

Sunil: Here's the catch on the executive pay, which you weren't told by Congress. If you read the fine print it in the bill it ONLY applies to new employment contracts, not existing ones. It's a joke...

Rick: To respond to a few of your points.

Of course the banking lobby would be dead against it. Why the hell does that make a difference, should our government just be an extension of the banking lobby and do what they want? Taking substantial positions that dilute shareholders is critical to preventing the moral hazard with the bill or all you are doing is rewarding shareholders for making bad investments.

Banks do need to be recapitalized but it can be done without massive tax payer expense and moral hazard. But it wil probably do very little to unlock the credit markets, the issue is trust, not that there isn't money there. There is money to lend but no one trusts the person they are lending it to.

Think of it this way. I'm a big bank, I know I'm holding tens of billions of bad debt on my books and off balance sheet which I've yet to fess up to, no ones called me out on it and made me come clean. Since I'm dirty and we've already seen several companies implode I start to assume that everyone else is dirty and lying about their balance sheets. So now I won't lend to them, not because I know they're insolvent, but because I don't know. That's why lending is locking up, everyone is worried they won't get payed back not because they don't have the money to lend. Until you force transparency and force the insolvent players out in the open where they can be dealt with through existing methods, you won't significantly unlock the credit markets no matter how much money you throw into the tornado.

LIBOR came in this morning, but no where like you would have expected if this had been successful at unlocking the capital markets, and the TED spread continued to widen throughout the day. We'll have to wait a few more days to see the trend, but I don't this made a material difference.

OCT

2008

Paulson vs. Bank Execs: Who is telling the truth?

Some very interesting commentary on this whole thing.

"Bankers and industry experts said that aside from a handful of token restrictions, the capital injections more closely resemble a blank check."

"To make the point more clearly: the public at large was taken not just once, but twice, It was hosed in the unduly generous terms given to nine banks (the lack of writedown of assets to realistic values, the failure to wipe out current equity holders and subject debt holders to a haircut, the merely symbolic limits on executive pay). But it also got a less obvious shellacking in the way legal and regulatory processes were trampled. Given the Treasury and Fed's combined banking authority, and the dubious valuations of many types of assets on these firms' books, the powers that be could easily have compelled any bank to accept a much less favorable deal, or frankly any deal they wanted them to take. And it would not have taken all that much additional effort (although it might have taken some planning, which is a persistent shortcoming of this Administration)."

1) forget about moral hazard for a while. it's a nice notion, but not our utmost priority right now. unlock the markets first, and we'll deal with it a year or two into the recession. it will be a nice "make work" program for wall street.

2) trust is paramount, and currently the system is lacking enough to function. our modern system is trust based, not gold. the only player that can jump start the trust is uncle sam...

3) if we use tools that harm current or future shareholders, banks won't be able to attract the other investors (soverign funds, private equity, hedge), to shoulder some of the load. we'll have to keep spending and we can barely afford the first traunch.

4) stop looking at this through the old lenses. all bets are off. it's NEW NEW DEAL time. put a plan together for you & your family for the next 12 months on the off chance that you will have no real estate income during that time...

Everytime I read some of this I get crazy. Tell Brad the Folgers can is a bad idea, it rusts under the bed. There was a good video that I passed on the other day explaining it all. Most folks outside the market just don't get it, that's what I think the officials are betting on! John Q Public can't be outraged if they don't understand it! Everyone has their hand in the pie - YOUR PIE.

Matt, Don't sweat it. Just keep pounding away at work trying to make a better life for you and your loved ones. That way you can pay more taxes to help support all the irresponsible. I'm sure all the politicians will appreciate it as they draw their pensions and health care benefits all at tax payer expense.

Brilliant move.... Steve Winn and Donald Trump suggested the same so there is not a blanket check. Moreover, Steve sent a letter to Washington asking them to rethink their bailout into buying preferred stock. Thanks God they listened.

It is the least ugliest of the bailout ideas. I love it and strongly believe that we will see this turn into a positive in a few years. Finally a great move by government.

I didn't think the original bail out plan was a good idea - buying up bad assets that have no current value? And the purpose of buying those assets was to recapitalize the banks and remove the bad stuff.
So if [there is a value] and the market price is 22 cents, buying at that price defeats the purpose of recapitalizing; so to make the buyout effective the gov't would have to buy ABOVE market price - thus overpaying for those bad assets.

When this bill was passed the verbiage for what they were doing NOW was stuck in kind of under the radar. NPR Planet Money has been reporting on this alternative verbiage that gives gov't the option to buy shares instead of just dumping money on toxic waste.

If we were to do it the old way - throw money at the banks, what if it didn't work?
Now at least if we're buying shares we have stakes in the company and the company is under pressure to preform.

And to those who "don't know what's going on" - real estate is directly affected by the current economic situation and it would be in your best interest to be able to advise - or at least have a clue - when a customer needs "counseling."

Honestly, I'm not for this partial "nationalizing" of banks, but I'm not the one making the rules.

Sounds like its time for a Line Change!

A lot of this is over my head. I know something has to be done but this does not sound like it is going to lead to anything positive.

Lyn: Brad can use a plastic coffee can however be careful of house fire or it'll be lost just as fast as the stocks :)

Incidentally, I believe AP News is reporting that former Eastern Soviet block countries are asking US, British, France & et al; what is the difference between capitalism & socialism as far as government owning interest in banks? Surprising no answer from these countries.

Got an email from a fellow broker that is very interesting concerning this bailout/rescue plan the body reads as follows:

RE-ELECT NOBODY!
   Worthy of your time and attention regardless of your Party Affiliation

   545 PEOPLE
   By Charlie Reese

   Politicians are the only people in the world who create problems and then campaign against them.

   Have you ever wondered why, if both the Democrats and the Republicans are against deficits, WHY do we have deficits?

   Have you ever wondered why, if all the politicians are against inflation and high taxes, WHY do we have inflation and high taxes?

   You and I don't propose a federal budget.    The President does.

   You and I don't have the Constitutional authority to vote on appropriations.   The House of Representatives does.

   You and I don't write the tax code, Congress does.

   You and I don't set fiscal policy, Congress does.

   You and I don't control monetary policy, the Federal Reserve Bank does.

   One hundred senators, 435 congressmen, one president, and nine Supreme Court justices    545 human beings out of the 300 million   are directly, legally, morally, and individually responsible for the domestic problems that plague this country.

   I excluded the members of the Federal Reserve Board because that problem was created by the Congress.   In 1913, Congress delegated its Constitutional duty to provide a sound currency to a federally chartered, but private, central bank.

   I excluded all the special interests and lobbyists for a sound reason.   They have no legal authority.   They have no ability to coerce a senator, a congressman, or a president to do one cotton-picking thing.   I don't care if they offer a politician $1 million dollars in cash.   The politician has the power to accept or reject it. No matter what the lobbyist promises, it is the legislator's responsibility to determine how he votes.

   Those 545 human beings spend much of their energy convincing you that what they did is not their fault.   They cooperate in this common con regardless of party.

   What separates a politician from a normal human being is an excessive amount of gall.   No normal human being would have the gall of a Speaker, who stood up and criticized the President for creating deficits.   The president can only propose a budget.   He cannot force the Congress to accept it.

   The Constitution, which is the supreme law of the land, gives sole responsibility to the House of Representatives for originating and approving appropriations and taxes.     Who is the speaker of the House?   She is the leader of the majority party.    She and fellow House members, not the president, can approve any budget they want.   If the president vetoes it, they can pass it over his veto if they agree to.

   It seems inconceivable to me that a nation of 300 million can not replace 545 people who stand convicted -- by present facts -- of incompetence and irresponsibility.   I can't think of a single domestic problem that is not traceable directly to those 545 people.   When you fully grasp the plain truth that 545 people exercise the power of the federal government, then it must follow that what exists is what they want to exist.

   If the tax code is unfair, it's because they want it unfair.

   If the budget is in the red, it's because they want it in the red.

   If the Army & Marines are in   IRAQ , it's because they want them in IRAQ.

   If they do not receive social security but are on an elite retirement plan not available to the people, it's because they want it that way.

   There are no insoluble government problems.

   Do not let these 545 people shift the blame to bureaucrats, whom they hire and whose jobs they can abolish; to lobbyists, whose gifts and advice they can reject; to regulators, to whom they give the power to regulate and from whom they can take this power.   Above all, do not let them con you into the belief that there exists disembodied mystical forces like 'the economy,' 'inflation,' or 'politics' that prevent them from doing what they take an oath to do.

   Those 545 people, and they alone, are responsible.

   They, and they alone, have the power.

   They, and they alone, should be held accountable by the people who are their bosses

   provided the voters have the gumption to manage their own employees.

   We should vote all of them out of office and clean up their mess!

   Charlie Reese is a former columnist of the Orlando Sentinel Newspaper.

   What you do with this article now that you have read it is up to you, though you appear to have several choices.

   1.        You can send this to everyone in your address book, and hope' they' do something about it.

   2.        You can agree to 'vote against' everyone that is currently in office, knowing that the process will take several years.

   3.       You can decide to 'run for office' yourself and agree to do the job properly.

   4.       Lastly, you can sit back and do nothing, or re-elect the current bunch.

   YOU DECIDE, BUT AT LEAST SEND IT TO EVERYONE IN YOUR ADDRESS BOOK, MAYBE SOMEONE IN THERE WILL DO SOMETHING ABOUT IT!

This is difinite food for thought.

I agree with George Wilson. Lets vote every one in congress and the senate out of office. I don't care if they voted yes or no on the bail out bill; they and the American people are responsible for the current state of affairs. We do need change, so lets start by changing the existing problem makers to potential problem solvers. The current politicans are bought and paid for by lobbyists, which if I recollect correctly the Federalist Papers warned against. People it is our civic duty to fire our government; send a clear message to all politicians that We the People have woken up and are tired of corruption and are taking back our government from factions. Once all the current agents of faction are out we should launch investigations and hold the corrupt accountable.

Just my two cents.

Thanks,

Sam Trevino

We all realize that something needed to be done to change the economic situation, but, obviously, the politicians, both Democrats and Republicans, have only their special interest groups and contricutions in mind. Now Obana is trying to put a stop to foreclosures, so that the people who don't want to make their mortgage payments can continue to live in their homes at no cost...and continue to deflate property values. And, then, when the ban is lifted, we will face another 3 years of this foreclosure mess. Not only should we all be P---ed off at the large financial institutions being rewarded for their contribution to this mess, but the homeowners who were greedy and knowingly bought more than they could affort expect the rest of us to bail them out. What happens to those of us who are both homeowners and real estate professionals? We take a double dose of abuse.....can't sell a house due to the falling prices and loan problems and also pay our mortgages along with the mortgages of those homeowners who do not think they have any obligations to pay their debts. The politicians continue to get richer and the real estate brokers and agents continue to feel the effects; and there is nothing that we can do to change this, which is the most frustrating part. Terri White Broker/Owner Las Vegas Properties

The bail out makes me killing mad! All the bail out money should have gone directly to the Small Business Administration and anyone who needed an emergency disaster loan / bailout loan could apply there. Any qualified borrower should have been able to buy a car, get a small business loan or even a home loan. I'm DISGUSTED that our money is getting sucked up by the people who put us in this position. The bailout is not going to fix anything and it's going to keep costing us into eternity. I HATE my congresswoman for voting yes.

All of the banks should have been left to canibalize eachother and when they decided the SBA was getting too much business they could have jumped in and started lending.

Why should we give money to banks and then let them decide how much of it to lend when we can go directly to the people who need it, qualify them and give them the money NOW?!

A natural evolution and survival of the fittest should have been allowed to run through Wall Street.

Matt, Thanks again for keeping us in the loop. I empathize emphatically! But, there were no surprises here for me.

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More Bailout Details Emerge - Ok, This is Maddening

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