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US Economy

tomahawk6 said:
Breaking News:

FBI Investigating Fannie Mae, Freddie Mac, Lehman Brothers and AIG for Potential Fraud

Damn! This could be bigger than Enron and Yukos!
tomahawk6 said:
Breaking News:

FBI Investigating Fannie Mae, Freddie Mac, Lehman Brothers and AIG for Potential Fraud

American Spectator

"You look at Obama's economic advisers, the guys he has counted on from day one and who have raised him a ton -- and I mean a ton -- of money: Franklin Raines and Jim Johnson, both of them are waist to neck deep in the mortgage debacle."

Both Raines and Johnson have served as CEO of Fannie Mae, with Raines taking over from Johnson. Both are key political and economic advisers to Obama.

"How can Obama go out with a straight face and saw it was Republicans who made this mess, when it is his key advisers who ran the agencies that made the big mess what it is?" says a Democrat House member who supported Sen. Hillary Rodham Clinton. "It's his people who are responsible for what may well be the single largest government bailout in history. And every single one of them made millions off the collapse that are lining Obama's campaign coffers.

Who knows what the FBI may turn up.

This could be a very scary moment in US History, using the financial crisis to subvert the US Constitution:


Michelle Malkin:

    Both parties in Washington are about to screw us over on an unprecedented scale. They are threatening us with fiscal apocalypse if we don’t fork over $700 billion to Treasury Secretary Henry Paulson and allow him to dole it out to whomever he chooses in whatever amount he chooses — without public input or recourse. They are rushing like mad to cram this Mother of All Bailouts down our throats in the next 72-96 hours. And right there in the text of the proposal is this naked power grab: “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.”


    My question for fellow conservatives: Do you trust this man?

    I don’t.

    Do you trust Hank Paulson’s judgment?

    I don’t.

Read the rest for Paulson's impeccable ChiCom connections and less-than-impeccable judgment.

Then add this: The Obama and Goldman Sachs connections.

And this: Kevin Hassett on "How the Democrats Created the Financial Crisis"
Connect all those dots and you have the makings of a blockbuster novel.
This article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail addresses two points raised here:

FBI investigating Wall Street; and

My question: “Can the Democrats in the Congress resist the temptation to try to use the bailout plan to strengthen Obama’s position by insisting on ‘more’ (money) for Main Street?”

FBI launches probe into Wall Street meltdown
Fraud investigation comes as Federal Reserve chief urges Congress to approve $700-billion bailout lest U.S. suffer Main Street ruin


From Wednesday's Globe and Mail
September 23, 2008 at 9:21 PM EDT

WASHINGTON — The U.S. Federal Bureau of Investigation is looking at potential fraud at four failed financial institutions whose problems helped prompt Washington's controversial $700-billion (U.S.) mortgage-bailout plan: mortgage lenders Fannie Mae and Freddie Mac, insurer American International Group Inc. and investment bank Lehman Brothers.

The FBI probe, still preliminary, targets the companies and their top executives, a law enforcement official told The Associated Press. The latest inquiries bring to more than two dozen the number of companies under investigation in the wake of the mortgage-market meltdown.

Critics have complained that AIG and several other collapsed companies hid the extent of their deepening financial problems from regulators and investors by understating excessive debt and risky investments.

The FBI is already investigating three failed California banks: Countrywide Financial Corp., IndyMac Bancorp Inc. and New Century Financial Corp.

The investigation comes on the heels of U.S. Federal Reserve Board chairman Ben Bernanke and Treasury Secretary Henry Paulson begging skeptical senators Tuesday to give the Treasury sweeping powers and a $700-billion cheque to buy up bad mortgage debts.

Mr. Paulson and Mr. Bernanke, warning that the United States is facing a total freeze-up of lending that would hurt all Americans, ratcheted up pressure on Congress to quickly give the Treasury the broadest possible authority to deal with the crisis.

“If this is not done, it will be of significant adverse consequences for the average person in the United States,” Mr. Bernanke told a packed Senate banking committee hearing during nearly five hours of testimony.

The tough talk comes as Mr. Bernanke, Mr. Paulson and Securities and Exchange Commission chairman Christopher Cox undergo a two-day barrage of questioning about the proposed bailout from key committees in both houses of Congress: the Senate Tuesday, the House of Representatives Wednesday.

In spite of the dire tone, key members of Congress apparently remain unmoved, including Barney Frank, chairman of the House financial services panel, and Senate banking committee chairman Christopher Dodd. Mr. Dodd called the plan “unacceptable” in its current form.

They and others want the cash to be conditional on capping the salaries of bank executives, and want better controls on how the money is spent.

Others want to cut the amount from $700-billion to an interim infusion of $50-billion.

Congress is reflecting widespread public disgust that the bailout would reward the reckless bankers who helped drag the economy into crisis.

“This massive bailout is not a solution,” Republican Senator Jim Bunning of Kentucky complained, echoing the frustration of many members of Congress. “It is financial socialism and it's un-American.”

The Bush administration has set a deadline of this weekend to get the legislation passed. But both sides acknowledged the timetable could slip a bit.

Uncertainty over the fate of the bailout and questions about whether it would even work continue to weigh heavily on financial markets. U.S. and Canadian stocks fell sharply Tuesday, and the Fed was forced to intervene again to inject billions of dollars of liquidity into short-term credit markets.

Taking on critics who have complained the government is bailing out Wall Street, Mr. Bernanke said the plan is actually a lifeline for the entire economy.

And distancing himself a bit from the Mr. Paulson, who is a former chief executive of investment bank Goldman Sachs, Mr. Bernanke pointed out that he is a college professor and has never worked on Wall Street.

“I don't have those interests or those connections,” Mr. Bernanke testified, Mr. Paulson at his side. “My interest is solely for the strength and the recovery of the U.S. economy.”

Mr. Paulson spent his entire career on Wall Street, including seven years as head of Goldman Sachs, one of the companies at the epicentre of the financial turmoil. He has also surrounded himself with top advisers from the financial services industry.

Mr. Bernanke pointed out that if credit markets are not working, jobs will be lost, the economy will shrink and recovery will be long time coming. “This is a precondition for a good, healthy recovery by our economy,” he explained.

Mr. Paulson urged senators to defer their concerns about lax regulation of Wall Street, excessive salaries and rewarding bad corporate behaviour until market confidence is restored. He said Congress likely will be working on those issues long after he has left the administration of President George W. Bush, whose term ends in January.

“I'm frustrated,” Mr. Paulson told senators. “The taxpayer's already on the hook. The taxpayer already is going to suffer the consequences if things don't work the way they should work. And so the best protection for the taxpayer, and the first protection for the taxpayer, is to have this work.”

Mr. Paulson and Mr. Bernanke also took on critics who worry that the bailout would jeopardize the government's gold-plated triple-A credit rating, which allows it to finance its growing debt at relatively low interest rates.

Mr. Bernanke, for example, said doing nothing could also affect the credit rating. And he pointed out that most, if not all, of the money would be recovered as the investments were sold off over time. “This is not an expenditure of $700-billion. It's an investment,” he said.

Much of the uncertainty over the plan centres on concerns about how it would work. The two men offered some suggestions, including so-called reverse auctions in which banks would compete to offer their loans to the Treasury.

But Mr. Paulson insisted he wants the broadest possible powers to deal with just about any eventuality. For example, he refused to rule out the purchase of securities linked to auto or credit-card loans – outside the plan's strict focus on mortgage-related assets.

Mr. Bernanke said authorities are dealing with something that is “unique and new” in the recent history of financial crises. Unlike the savings-and-loan bailout of the 1980s or the Japanese financial crisis in the 1980s, he pointed out that he is now dealing with otherwise healthy banks that are shrinking and have virtually stopped lending.

Also at the hearing, SEC chairman Christopher Cox urged Congress to grant his agency immediate authority to regulate the $62-trillion global credit default swap market, which is a complex form of insurance designed to protect against soured investments. Risky operations in the credit default swap market forced AIG, one of the largest insurers in the world, to get an emergency government loan last week.

“Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure,” Mr. Cox told the committee.

The FBI investigation can do nothing but good. If it clears the companies and executives – or, at least, does not find enough evidence to charge anyone with anything – then the markets will be calmed, a bit. If the FBI finds that someone did something (criminally) wrong then Americans, especially, will be comforted when they are hauled into court.

Chris Dodd and Barney Frank appear to have answered my question with a resounding “NO!

To reiterate some old thoughts.  Governments may do as they wish but the inertia of the market prevails.

If the price of oil rises it is because the value of the dollar has fallen - not the inverse.  The price of oil in dollar terms has risen by an Order of Magnitude (10 fold) since Bretton Woods in 1944. The price in terms of Gold Bullion still shares the same order of magnitude. (Chart to follow later when I return to my own computer)

.....No other nation ever had it quite so good. Before the dollar, the pound sterling was the pre-eminent monetary brand. But when Britannia ruled the waves, the pound was backed by gold. You could exchange pound notes for gold coin, and vice versa, at the fixed statutory rate.

Today’s dollar, in contrast, is faith-based. Since 1971, nothing has stood behind it except the world’s good opinion of the United States. And now, watching the largest American financial institutions quake, and the administration fly from one emergency stopgap to the next, the world is changing its mind.

“Not since the Great Depression,” news reports keep repeating, has America’s banking machinery been quite so jammed up. The comparison is hardly flattering to this generation of financiers. From 1929 to 1933, the American economy shrank by 46 percent. The wonder is that any bank, any corporate borrower, any mortgagor could have remained solvent, not that so many defaulted. There is not the faintest shadow of that kind of hardship today. Even on the question of whether the nation has entered a recession, the cyclical jury is still out. Yet Wall Street shudders.

The remote cause of its troubles is the paper dollar itself — the dollar and the growth in the immense piles of debt it has facilitated. The age of paper money brought with it an increasingly uninhibited style of doing business.

The dollar emerged at the center of the monetary system that took its name from the 1944 convention in Bretton Woods, N.H. The American currency alone was made exchangeable into gold. The other currencies, when they got their peacetime legs back under them, were made exchangeable into the dollar.

All was well for a time — indeed, for one of the most prosperous times in modern history. Under the system of fixed exchange rates and a gold-anchored dollar, world trade boomed (albeit from a low, war-ravaged base). Employment was strong and inflation dormant. The early 1960s were a kind of macroeconomic heaven on earth.

However, by the middle of that decade it had come to the attention of America’s creditors that this country, fighting the war in Vietnam, was emitting a worryingly high volume of dollars into the world’s payment channels. Foreign central banks, nervously eyeing the ratio of dollars outstanding to gold in the Treasury’s vaults, began prudently exchanging greenbacks for bullion at the posted rate of $35 per ounce. In 1965, William McChesney Martin, chairman of the Federal Reserve, sought to reassure the quavering dollar holders. He lectured the House Banking Committee on the importance of maintaining the dollar’s credibility “down to the last bar of gold, if that be necessary.”

Necessary, it might have been, but expedient, it was not, and the Nixon administration, on Aug. 15, 1971, decreed that the dollar would henceforth be convertible into nothing except small change. The age of the pure paper dollar was fairly launched. .....

Source - NYT Sept 24 2008, James Grant Op-Ed

Edit:  And in 1972 the oil producers of the world ran screaming from the dollar driving the price of oil through the roof and, in reaction to having their primary asset valued at the whim of Nixon's Treasury, fought back and were vilified as having created an oil Cartel.  Enter Inflation.  Enter NEP. 

You want protection?  Buy Reality.

Porkbellies, Oil (actual, real in the barrel oil, not prospects of oil), Land, Gold and toilet paper, and be prepared to barter.
An alternative view as to the underlying cause of the collapse (and probably even more valid then many others)


Fred and Fan and the Financial Crisis

I see that Obama has written to protest the massive payouts to the CEO's of Fannie Mae and Freddie Mac. Of course Obama already got his in the form of campaign contributions; and of course the usual lobby benefits. Long Time readers will recall I have been in opposition to Fred and Fan for many year.

Monty save me the trouble of saying I told you so:

  Subject: Futurology: Peter Drucker saw the collapse of the big investment banks coming - in 1999!

    My memory is no longer what it was, but every once in a while a little voice whispers reminders about things I once read.

    As I watched the big investment banks collapse, the voice reminded me that Peter Drucker had *predicted* it in 1999, in his book, _Management Challenges for the 21st Century_, starting on page 55.

    Drucker's reasoning is somewhat different from the "Greedy Bastards!" explanation the politicians and talking heads have been throwing around. (I keep expecting someone to re-coin the old phrase, "Malefactors of Great Wealth", in complete ignorance that anyone had used it before.)

    Drucker starts with the observation that, as of his writing, demand for Financial Services had been increasing, but the demand was for *retail* services to affluent, aging populations in developed countries, looking for safe places to stash their wealth to protect their retirements. The fraction of the Financial Services market that consisted of traditional big-corporation deal-making and money-making, though, was flat, maybe even declining.

    Alas, the response of the old investment banks was to expand their capacity for big-corporation services, leaving the market for such services tremendously over-supplied. "And as their legitimate corporate business became less and less profitable ... these corporate-banking giants ... have increasingly resorted to 'trading for their own account,' that is, to outright speculation, so as to support their swollen overheads. This, however, as centuries of financial history teach (beginning with the Medici in 15th-century Europe), has only one -- but an absolutely certain -- outcome: catastrophic losses." [p. 56]

    Now if Drucker was right, are not attempts to preserve the excessive capacity for big-corporation services, that the failing investment banks represent, fundamentally misguided?

    Rod Montgomery==monty@starfief.com

My objections were technical and structural as well. I pointed out that a Price to Earnings Ratio of 80 meant that it would take 80 years for the company to earn back the money you just paid; that in some cases the stock prices in essence predicted that a company would have more than 100% market share in a growing market! In those days the stock brokerage houses sold the stocks and pocketed their commissions. Some firms began to cut commissions. The brokerage houses responded by getting into the gambling game themselves. "Playing the market" was always considered a high risk suckers game. For those who wonder why, see http://www.edge.org/3rd_culture/taleb08/taleb08_index.html and in particular see Figures 1 and 2 in the section titled The Dangers Of Bogus Math. I hesitate to give an indication of those sections because you may be tempted to read those and not all of that essay (which is a summary of  The Black Swan, which I also recommend  (http://www.chaosmanorreviews.com/open_archives/jep_column-323-c.php).

Of course much of the efforts to get out of this situation are misguided. But the most misguided of all is the notion that massive government action can make it possible for great many people who otherwise could not own a house will be able to afford one if the government gets in the act. It was the enormous expansion of Fannie Mae and Freddie Mac's ability to consolidate the mortgages they held into packages, sell those packages using their quasi-government status as a guarantee, and use the proceeds to make even more mortgage loans. This was a formula for disaster.

If a person cannot afford to pay back a loan, then government guarantees to the lender will induce the lender to loan the money anyway. That will put one more buyer in the market. Sellers will accordingly raise prices, and qualified buyers who would have been willing to buy at the lower price find they can't do so on their current incomes. Mortgage companies are hesitant to loan the addition sums -- which often went to Jumbo status. But comes now Fannie Mae and Freddie Mac to say "Sure you can! We'll help you do it! Let your customers join the American dream." And the companies make the marginal loans. Salespeople get the idea. Go push those no-down no-principal payment no-income-verification loans until we have the spectacle of a $25,000 a year illegal immigrant put into a $475,000 house with no down payment. And of course the price of the house goes up, so that people who might have been able to buy it will be unable to do so; and since builders make more from high priced houses rather than "affordable housing", they build the more expensive houses.

This is no way to get more people owning houses.

It might have been better to have national lotteries, heavily subsidized by public money so that the expected value of a lottery tick was positive, in which the prizes were a house given in fee simple to the winner. Depending on the proportion of the subsidy to the ticket price, this would be a form of distributism, an alternative to socialism championed by Hillaire Billoc as remedy to the Servile State which Socialism almost certainly would become. Distributism literally redistributes wealth: it does take money in taxes, but it does not keep it; it hands it to citizens in fee simple, and they are not dependent on government for keeping it. They may have voted for property taxes  before being given some property, but there will now be a change in attitude.

This is not an essay in favor of distributism; I am pointing out that there are better -- and much cheaper -- ways of seeing to it that more people own houses than to deliberate bubbles while paying out obscene amounts to money to mangers and using obscene amounts of money to lobby Congress for even more money to prime the bubble pump.
Great explanation of the bailout and what it may acheive.


Democrats Try to Hijack the So-Called "Bailout"
Congressional Corruption
Hatched by Dafydd
Republicans see the collapse of the mortgage market as a potential catastrophe that requires emergency measures... but an aberration caused by government intrusion into the market, not an indictment of capitalism and free markets.

Democrats see it as proof positive that capitalism has been proven to be a fad that will soon pass away, like pet rocks... and a golden opportunity to reintroduce failed liberal fascist economic policies straight out of the platforms of Woodrow Wilson, Franklin Roosevelt, and Jimmy Carter.

Which George W. Bush will show up... the veto-wielding Bush with a spine that we've seen in Democratic spending legislation after the 2006 elections -- or the wimpy, appeasing Bush that we've seen in legislation on racial preferences, Israeli-Palestinian "negotiations," and Republican spending prior to the 2006 elections? The choice will spell the difference between a small-footprint intervention or a massive repudiation of decades of progress on free-market economics.

But first, let's again talk about how we got into this mess.

Subprime mortgages, securitization, and toxic assets
This is the crux of the crisis: Back in the cretaceous period, when a bank or S&L issued a mortgage, it held that mortgage until the borrower paid it off. But in the contemporary era, what starts out as a mortgage is typically bundled with other mortgages into a "mortgage-backed securitie" (MBS) -- essentially bonds that can be traded on the open market. Bizarrely, in the process, bad debt automagically becomes good investment.

How are MBSs created? Let me quote from an excellent sumary in a newsletter by John Maudlin (free registration required):

Let's jump back 18 months. I spent several letters going over how subprime mortgages were sold and then securitized. Let's quickly review. Huge Investment Bank (HIB) would encourage mortgage banks all over the country to make home loans, often providing the capital, and then HIB would purchase these loans and package them into large securities called Residential Mortgage Backed Securities or RMBS. They would take loans from different mortgage banks and different regions. They generally grouped the loans together as to their initial quality as in prime mortgages, ALT-A and the now infamous subprime mortgages. They also grouped together second lien loans, which were the loans generally made to get 100% financing or cash-out financing as home owners borrowed against the equity in their homes.

Typically, a RMBS would be sliced into anywhere from 5 to 15 different pieces called tranches. They would go to the ratings agencies, who would give them a series of ratings on the various tranches, and who actually had a hand in saying what the size of each tranche could be. The top or senior level tranche had the rights to get paid back first in the event there was a problem with some of the underlying loans. That tranche was typically rated AAA. Then the next tranche would be rated AA and so on down to junk level. The lowest level was called the equity level, and this lowest level would take the first losses. For that risk, they also got any residual funds if everyone paid. The lower levels paid very high yields for the risk they took.

Then, since it was hard to sell some of the lower levels of these securities, HIB would take a lot of the lower level tranches and put them into another security called a Collateralized Debt Obligation or CDO. And yes, they sliced them up into tranches and went to the rating agencies and got them rated. The highest tranche was typically again AAA. Through the alchemy of finance, HIB took subprime mortgages and turned 96% (give or take a few points depending on the CDO) of them into AAA bonds. At the time, I compared it with taking nuclear waste and turning it into gold. Clever trick when you can do it, and everyone, from mortgage broker to investment bankers was paid handsomely to dance at the party.

So what started as mortgages -- ranging from very secure prime mortgages, which are doing fine, to lousy subprime mortgages for too much money to borrowers who really didn't have either the credit history or income to justify such loans, many of which are currently in default 60 days or more -- were, by the magic of "securitization," turned into bond-like securities; and in the process, many of the bad and even defaulted loans were transmaugrified into AAA-rated investments.

The banks and other financial institutions that securitized mortgages (and resecuritized already securitized MBSs) would make their nut by skimming some percent, typically fifty basis points (0.5%), off the loan rate; thus, if they began with a package of mortgages at 6.5% (they tried to bundle like with like), they would securitize them into an MBS that paid 6%, keeping the difference -- and hoping there would be few enough defaults that the mortgages would produce more than 6% net.

What happens when loans are defaulted is very complicated and not really germane to this post; they created different tiers, or "tranches," with different ratings -- AAA down to junk -- for different prices, that distributed the losses from worst tranch up to best. Not important here.

But defaults, of course, are where the whole pyramid scheme broke down. While housing prices continued to rise, everybody was happy and there were few defaults. But starting a couple of years ago, when the housing bubble burst and the mortgage default rate shot up, a bunch of banks found themselves holding very insecure securities, losing money hand over teakettle. The crash began among the lenders and spread to secondary markets (the MBSs and CDOs) and even tertiary markets (insurance underwriters like AIG). In short order, institutions all over the world found themselves holding pieces of paper whose value was impossible to determine -- which are referred to as toxic assets.

Toxic assets are illiquid, meaning they cannot be bought or sold because nobody knows how much to offer for them; they are frozen. If you hang onto them, they might regain some value later... or they could disappear completely. Worse, illiquid securities see their ratings drop; and current law forbids some types of funds from holding anything but AAAs... which means they may be forced by law to sell -- but unable to sell because of illiquidity!

Not only that, but current law also requires that such securities be "marked to market," meaning they must be valued at the last price offered by some institution that was desperate to sell -- because of the law in the previous paragraph. Thus, even institutions that didn't have to sell their toxic assets had to reprice them; this meant that a number of financial institutions suddenly did not have sufficient reserves for the amount of loans or leveraging they had out. That meant they needed to get hard cash and fast... which meant they would have to panic-sell a bunch of securities, precipitating a new round of re-rating and re-valuating.

Eventually, nobody had a clue what anything was worth anymore; and nearly every financial institution in the world, it seems, was involved up to the fourth cervical vertebra in this mess.

It was that uncertainty that caused the mortgage market to collapse. It's like trying to buy a car when all you can see is a grainy photo in a newspaper: You can't test-drive it, inspect it, or even kick the tires. You don't even know whether it contains an engine... how can you possibly make any kind of offer whatsoever?

Worse yet, the seller has never seen the car either, and he knows no more about it than you!

So what is to be done? Obviously, since the problem is the inability to set a value for these instruments, which makes them impossible to buy or sell (illiquid), the solution is to find a way to value them. Enter the Paulson-Bernanke emergency rescue plan.

Treasury presses the reset button
As proposed by Secretary of the Treasury Henry Paulson and Chairman of the Federal Reserve Ben Bernanke, the putative "$700 billion" "bailout" is actually neither: It will neither cost that much, nor will it bail out those financial institutions that wrote bad loans for people they knew were not likely to be able to pay them off.

As I understand it, here is the basic plan. Note that I'm drawing this from many sources, it's not yet written in stone -- or even in ink -- and I can't give you sources. If you want more information, you're on your own! But here is what I've been able to glean:

The Treasury is given authority to spend up to $700 billion (outstanding at any particular moment) to buy MBSs, CDOs, and related instruments that have become "illiquid." These "toxic assets" will be purchased from their current owners at a huge discount... meaning the banks and other investors who purchased these pigs in pokes will, in fact, take a significant financial hit... they're not being "bailed out."
So the Treasury can buy up these toxic assets; what do they do with them?

I believe the plan (which has not yet been formalized in legislation) is to create a Treasury owned and managed resolution corporation that will take ownership of these toxic assets. Analysts will then pore through each MBS, determining the status of all the underlying mortgages and making a report publicly available. This will make the opaque assets completely transparent. All the financial fundamentals will be visible, so analysts at private companies can examine all of the securities and decide how much they would pay for each.

The resolution corporation will then auction off each of the the now-transparent MBSs, selling it to the highest bidder; that very action allows the market to reset the value of the security.

That is why I characterize this rescue operation as "pressing the reset button."

Once some corporation has examined the fundamentals of the security and offered the winning bid for it, the MBS becomes (by definition) liquid; it is no longer a toxic asset. Its value has been reset... and it can go up or down after that point based upon subsequent, well-understood events (defaults, repayments, prepayments) in the underlying mortgages and reevaluations based upon other, market-based criteria. In other words, it becomes just like a mutual fund.

The crisis was the inability to value MBSs; the solution is to reset their values. The beauty of the Paulson-Bernanke plan is that this resetting is done by the free market, not by government decree.

Finally, note this point:

When the Treasury-owned resolution corporation auctions off the now-transparent MBSs, it can use that money as income. Since the asset is now much more valuable than before (having been scrubbed into transparency), if it becomes saleable, then it will certainly sell for more than the discounted rate at which the corporation bought it. In other words, the resolution corporation will make a profit on every security it resells -- so the program will not actually cost $700 billion... it may even end up completely in the black.
That's why the Paulson-Bernanke plan is neither a bailout -- the so-called beneficiaries in fact must pay dearly for their folly -- nor massively expensive, since it resells most of the securities it bought, and at a profit. It could still end up costing money, depending on how many of the MBSs end up still toxic even after the complete report (if too many of the underlying mortgages are in default, for example); but the losses won't be anywhere near $700 billion, and they may be less than the profits.

Democrats: fingers in the pie, finger in your eye
But the loyal opposition is not content to use the Paulson-Bernanke emergency mortgage-market rescue plan to rescue the mortgage market from the current emergency; how dull that would be, especially in an election year. Rather, they see America's crisis as their opportunity to enact or re-enact by extortion every awful, failed, thoroughly discredited, socialist-populist scheme they have tried, or always wanted to try, over the past century. Senate Democrats demand:

Contingent stock in every, single company that sells its toxic assets to the resolution corporation; this would give the federal government a degree of ownership of virtually every bank, savings and loan, or other financial institution in the entire country. It is liberal fascism at its purest, and it would lead directly to much greater government control of private capital.

They demand that bankruptcy judges be allowed to rewrite the terms of the underlying mortgages, in order to "provide direct assistance to homeowners caught in the foreclosure crisis"... in other words, to allow people who took out loans much too big for houses they could not afford to nevertheless keep those houses, even though they cannot make the payments. All at the expense of financial institutions that are teetering at the brink as it is.

Democrats demand "limits on the pay of top executives whose firms seek help." That is, Congress would set the salaries and bonuses of executives working at companies that are in serious trouble because of the mortgage meltdown... and that's always worked out so well in the past!

They also have structural demands:

The 44-page Senate proposal, pulled together by Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the banking committee, would require the Treasury to run the rescue plan through a new "Office of Financial Stability" to be headed by an assistant treasury secretary. It would also establish an "Emergency Oversight Board" to monitor the bailout effort, made up of the Fed Chairman, the chairman of the Federal Deposit Insurance Corporation, the chairman of the Securities and Exchange Commission; and two non-government employees with "financial expertise" in the public and private sectors, one each appointed by the majority and minority leadership in Congress.

In addition, the Senate proposal would require monthly reports to Congress, rather than the biannual reports that would be required under the Bush administration’s proposal.

This sounds like an invitation to micromanagement -- and unless I miss my guess, the "Emergency Oversight Board" will somehow end up stuffed with former members of the Clinton administration and/or Barack H. Obama's campaign, like Franklin Delano Raines, James Johnson, and Jamie Gorelick... the same people who ran Fannie Mae and Freddie Mac into the ground and ran many of the very multinationals that offered subprime loans, hedge-funds and other derivatives, or that insured these toxic assets, thus creating the crisis in the first place.

While former Clintonista (and now Charlie "Tax Ducker" Rangel's lawyer) wants the Democrats to go even further:

Barack Obama has tried to run as a unifying centrist. Now it may be time for him to clear the fog and talk, walk and sound like a true FDR liberal -- reminding the American people that at times like this, the government is a friend, not an enemy, contrary to conservative theology. Indeed, now may be the time for him and the Democratic Congress -- urged on as recently as Thursday by Treasury Secretary Henry Paulson -- to take the next 30 days to enact something reminiscent of FDR's first 100 days. It should be more than just a $700 billion bailout. It should also include billions to help homeowners avoid foreclosure, to assist the auto industry, to upgrade the nation's infrastructure, and to spur development of alternative energy sources.One can always trust Democrats to find a way, in any crisis, to throw gasoline at the bull.

President Bush (and the upcoming President John S. McCain) must remain stalwart and demand an up or down vote on a clean version of the Paulson-Bernanke rescue plan... no add-in spending, no wage and price controls or upgrading the nation's infrastructure, and specifically, no damned earmarks.

Anything less than this standard of rectitude and disinterested statesmanship would be an economic betrayal of America... and must lead to electoral ruin for any party which puts immediate self-gratification ahead of national economic survival.

The option to do nothing:


An Alternative to the Wall Street Bailout

September 24, 2008 - by Arnold Kling

I am concerned that the bailout might be the cause of the problem that it purports to solve.

Treasury Secretary Henry Paulson [1] described the problem as follows:

    The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.

The heavy use of the plumbing metaphor almost makes one picture Paulson with his pants riding down a couple inches, leaning over a financial toilet bowl. It is clogged with unwanted securities backed by mortgages, supposedly because the sellers cannot find any buyers.

However, the market could be clogged because the prospects for a bailout are destroying the motivation to sell mortgage securities. If you sell this week and take a big loss, you will look pretty stupid if there is a bailout next week where comparable securities fetch much higher prices.

It could be that a Congressional rejection of the bailout proposal, rather than clogging the markets, will unclog them. If Congress goes home having sent financial institutions a clear signal that there will be no bailout of any kind, then sellers will bring their securities to market, and we will find out what the market thinks they are worth.

In the worst case scenario, the market will assign low values to the securities. Firms that are sufficiently capitalized to hold mortgage securities will earn profits at the expense of weaker companies that have to sell securities or go bankrupt. In the end, it may turn out that the winners really took advantage of the losers. That is capitalism at work in financial markets.

In order to absorb mortgage securities, healthy institutions may need to cut back on other lending, including new mortgage loans and loans to small businesses. That would hurt the economy.

In the case of banks, regulators have a solution to the problem of reduced lending. Bank lending is limited by [2] capital regulations. Banks are required by law to have capital set aside in proportion to their outstanding loans of various types. Regulators could loosen those requirements temporarily, because of the unusually dire need for lending. This regulatory forbearance concerning capital requirements could be applied only to new lending, effective the date that the policy is announced.

Loosening capital standards is risky. If a bank subsequently makes reckless loans and goes under, the cost to the government’s deposit insurance fund will be higher than if the regulations had remained tight. However, that is a straightforward risk, which can be monitored closely on an ongoing basis by the civil servants of the Federal Deposit Insurance Corporation (FDIC) using techniques that they have in place today.

Another form of forbearance would be to loosen accounting standards. In particular, regulators could drop the requirement that firms mark securities to market values when markets are illiquid. The risk of this approach would be that firms with real losses would hide them, which is what happened during the [3] S&L Crisis. Again, particularly in the case of banks, regulators could adapt to control the worst risks of forbearance.

In contrast, the bailout proposal takes the Treasury into completely uncharted territory. The Treasury has no expertise in evaluating mortgage credit risk. This is a very complex mathematical problem. I know, because I used to do it for a living.

Ben Bernanke and Henry Paulson are asking Congress for a $700 billion stake to enter this business at a time of unprecedented difficulty in predicting home prices. If they were taking their plan to a venture capital firm to seek funding, they would be laughed out of the office. Their proposal is sketchy, with no financial projections included. Their qualifications for running the business are unimpressive-neither Bernanke nor Paulson has a background in mortgage default modeling. The business is sure to be encumbered with all sorts of political mandates and requirements from Congress, imposed by the same Congressional leaders [4] who encouraged Freddie Mac and Fannie Mae to plunge into subprime mortgages.

The risks of enacting the plan are far worse than the risks of doing nothing.

Article printed from Pajamas Media: http://pajamasmedia.com

URL to article: http://pajamasmedia.com/blog/an-alternative-to-the-wall-street-bailout/

URLs in this post:
[1] described the problem: http://www.ustreas.gov/press/releases/hp1149.htm
[2] capital regulations: http://en.wikipedia.org/wiki/Bank_regulation
[3] S&L Crisis: http://www.econlib.org/Library/Enc/SavingsandLoanCrisis.html
[4] who encouraged: http://online.wsj.com/article/SB122212948811465427.html
Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is a rather bleak view of the US economic situation:

A nation of debtors


From Saturday's Globe and Mail
September 26, 2008 at 11:17 PM EDT

BELLINGHAM, WASH. — The mall is almost empty.

At the once-busy Bellis Fair mall in Bellingham, Wash., there are only a few customers browsing the aisles of the Target, Kohl's and Sears stores.

Outside the Bellis Fair Target store, the three members of the Baca family sit on a bench. “Can't really shop, no money,” says Stephanie Baca, a caregiver with a visiting nurse service, who holds her nine-month-old daughter Naomi on her lap.

Ms. Baca's husband Marlon, who works at a restaurant in the mall, sits next to her. Since they don't have money to spend, today's mall activity is “just walking around,” Ms. Baca says.

Lately, the couple has looked for ways to cut costs. “We just try to see where things are the cheapest. Anything – clothing, food, gas,” she says.

The fabled American consumer, driver of two-thirds of U.S. economic activity and de facto engine of the world's economy, is vanishing from the aisles of the nation's stores. Already reeling from the implosion of the country's housing market and the jobs shed by the slowing economy, the voracious U.S. consumer is now being choked by evaporating credit. The meltdown on Wall Street, which also has its roots in the housing debacle, is creating a lending lockdown between banks that is now turning off the spigot of cash to businesses and consumers.

Businesses are struggling to get credit, with short-term markets seized up as interest rates soars and lenders hoard cash. The liquidity crisis took down Washington Mutual Inc. on Thursday night as its latest kill, the biggest bank failure in U.S. history. Consumers are feeling the pinch as lenders tighten credit card limits and home equity lines of credit, and toughen mortgages and student loan requirements.

Even if the cash were available, it's not clear consumers are in the mood to spend. Once so hungry to borrow and spend, an ever-more fearful consumer now looks poised to retreat further from the malls and bars, pinching pennies. The growth in credit has slowed substantially, with car and home loans already all but stagnant, and is teetering at the edge of a decline, which would be a first since 1992.

“There's no doubt the consumer has downshifted, and part of the reason is they're borrowing at a slower rate – but make no mistake, they're still borrowing,” said James Paulsen, chief investment strategist at Wells Capital Management.

The credit crisis has created a greater change, one sharply away from the free and flagrant-spending days of recent years. “That one is attitudinal,” Mr. Paulsen said of the change. “Among consumers. Among lenders. Among everyone. It's a cultural thing that will take, at a minimum, a couple years to rebuild – if not longer.”

The apparently waning appetite of American consumers is among the greatest risks facing the U.S. economy – with major potential reverberations in Canada and around the world. With so many exports going south, from auto parts to oil to lumber for houses, a U.S. recession means hard times if not worse for Canada.

Cash register-shy consumers could undermine the massive $700-billion (U.S.) bailout that is being negotiated in the nation's capital to quarantine bad bank debt and prod banks back into the lending business.

The government bailout is all about rebuilding shattered confidence, to slowly soak up the disastrous lending decisions of this decade that have unfolded in spectacular ways and are on the verge of ramming the world's most powerful economy in to the ground. It's about believing the money can keep moving.


The fortunes of the Bellis Fair mall rose with those of hungry American customers.

The mall opened in August, 1988, located on Interstate 5 north of Bellingham. The mall's development was a huge local controversy, with opponents fearing the gutting of the quaint city's downtown and proponents saying Bellis Fair was the key to salvaging the local economy.

It did. The large mall – in a city of 100,000, it is almost half the size of Toronto's Eaton Centre – draws visitors from a much wider area, 13 million in all annually, which includes upwards of three million Canadians on cross-border shopping jaunts.

A lot of that shopping was financed by credit.

Since the late 1990s, the personal savings rate in the U.S. has plunged to almost zero from 3 per cent of income, according to figures from the Federal Reserve and research by Innovest Strategic Value Advisors Inc. Meanwhile, the amount of disposable income going to service credit card, mortgage and other debt has risen steadily. Real wages haven't risen much, but credit card debt is up 80 per cent.

Bellis Fair is owned by General Growth Properties Inc. of Chicago, a firm founded in Iowa five decades earlier by Matthew Bucksbaum and his brother Martin, and is currently run by Matthew's son, CEO John Bucksbaum. The family owns about 9 per cent of the company and in 2000, during the good times, the family foundation created the Bucksbaum Award, $100,000 handed out every two years to a visual artist, the richest such prize in the world.

As consumer spending climbed, General Growth, which owns more than 200 malls across the country, renovated Bellis Fair in 2003, right at the same time house prices were shooting higher. Consumers pulled equity out of their homes, borrowing to fill those houses with the wares sold at the Macy's, Target and other Bellis Fair stores.

Just last summer, sales were up as much as 20 per cent from a year earlier, mall manager Dennis Curtis said at the time. Now, much like Wall Street, Bellis Fair is up against the wall. Its owner is also being hammered. With almost $20-billion of debt coming due over the next three years, concerns have mounted about the company's ability to refinance, and its shares have been pummelled, falling more than 50 per cent since June. On Monday, the company said it is considering asset sales or a merger because it can't refinance its debt on affordable terms.

Empty Bellis Fair and its struggling owner are not alone. U.S. stores are looking at the weakest holiday shopping season since 2002, according to the National Retail Federation. Neiman Marcus, the high-end U.S. retailer, said this week that the “months ahead will be difficult.”

Credit crunched

With banks pulling back on lending, credit is quickly becoming less available to consumers.

American Express Co., for instance, is lowering credit limits at twice its normal rate. Even in good times, the company constantly monitors how much credit is available to cardholders, with an eye to increasing limits for good customers or cutting back to reduce risk of default on less reliable accounts. In a typical year, Amex will change the credit limit for one out of five of its customers, with most of those changes being increases. About 4 per cent of borrowers see their credit cut in a normal year.

Starting in summer 2007, as the subprime mortgage debacle emerged, Amex began to retrench, gradually tightening its lending. Now, Amex is lowering the credit limit for 10 per cent of its customers, said Kimberly Forde, a company spokeswoman.

Amex looks for obvious signs of potential distress, such as whether a person has a subprime mortgage, or lives in Los Angeles or Miami, two markets where housing prices have been decimated in the past year, Ms. Forde said.

Still, credit card debt continues to growth. Revolving loans – credit card debt – grew at an annualized rate of nearly 5 per cent in July, according to the Federal Reserve, a rate lower than the average for the years 2006 and 2007 but higher than in 2004 and 2005.

Loans for cars and home equity borrowing are freezing up faster. These so-called non-revolving loans grew only at a 0.5-per-cent rate in July compared with steady growth of around 5 per cent as recently as the spring.

Total consumer credit in the U.S. stands at nearly $2.6-trillion and is near its first decline since 1992, the end of three difficult years that were also marked by widespread financial trauma. Consumer credit growth in July was 2.1 per cent, down sharply from 5.1 per cent in June and less than a third of the 7.5-per-cent growth in recorded in late year's July-September period.

Every kind of credit is getting crunched. The Student Loan Network, a U.S. information service, said more than 30 lenders have cut off loans to students since mid-2007 and added that it is “virtually impossible” to get a student loan without a co-signer.

Many smaller banks may further pare back lending because of the effective nationalization of Fannie Mae and Freddie Mac. Small banks invested in shares of those two mortgage giants because they were, in theory, safe and steady investments that delivered reliable dividends. But those dividends have been halted – which according to the American Bankers Association, will suck more than $100-billion away from the mostly small banks, reducing their cash flow and ability to lend money.

While lenders are tightening up, money previously lent is not getting paid back. Foreclosures are escalating and, on Thursday, Discover Financial Services, the No. 4 credit card company, said its loan-loss provision surged 80 per cent in the quarter ended Aug. 31.

TransUnion, a credit tracking agency, said this week that the number of U.S. auto loans that were past due more than 60 days rose 11.5 per cent in the second quarter from a year earlier, adding that the “availability of home equity for financing auto purchases has diminished significantly.” And the number of Americans past due more than 90 days on one or more of their credit cards rose 14.3 per cent as average card debt per borrower ticked up past $1,700.

Consumers raise white flag

Signs of the squeeze on consumers are littered across the landscape. Measures such as the Consumer Comfort Index are near a record low, suggesting Americans are uncharacteristically depressed about their economic prospects. Conducted since 1985, the comfort index's previous record low was set in the early 1990s recession; a new low was reached in May at minus-51.

Those surveyed are asked three straightforward questions about the state of the economy, their personal finances and whether today is a good time to buy things they want and need. Readings of minus-49 and minus-50 were recorded in August and while the measure ticked up to minus-41 last week and the week before, sentiment is still severely negative

The vise gripping the consumer is being tightened by an array of economic problems. The number of Americans filing for initial unemployment claims is at a seven-year high. Expensive gasoline keeps gobbling up available dollars and has reduced demand for the fuel every week since the spring. Gas sales are down 8 per cent from a year ago.

Housing, the root of the contagion, remains moribund. Sales of existing homes, reported this week, are still flatlining. New homes sales continue to plummet, falling 11.5 per cent in August – to the slowest rate since the hard recession of the early 1990s. On Friday, KB Home, one of the largest home builders in the U.S., said its quarterly loss quadrupled from a year earlier and noted half of its home buyers backed out of contracts.

And mortgage rates are still going up. Freddie Mac on Thursday said the rate on a 30-year fixed mortgage rose to 6.09 per cent this week, lower than 6.42 per cent a year ago, but higher than 5.78 per cent last week – with the rise in rates erasing about half the decline in the weeks since the government's effective takeover of the agency and Fannie Mae.

The jump in mortgage rates this week is another tangible sign of tighter credit, said David Rosenberg, economist at Merrill Lynch. “As a result, we expect little rebound in home sales activity. We continue to believe that the bottom in housing is still at least a year away.”

Now, every penny counts

Battered by the bleak news from Wall Street and Washington, many Americans are frightened about the prospect of yet another blow.

“I don't know what's going to happen to the economy,” said Barbara Foster, after doing some banking at a Washington Mutual branch near Bellis Fair mall.

“It seems like it's going to collapse. I'm horrified. I haven't even looked at my retirement account, it's so scary.”

Ms. Foster, who has held health care positions and is looking for work, is in full scrimp mode, where every expenditure, from whether to buy blueberries to even renting a movie is scrutinized. “We've been living on credit for so long, the government and the people, it's insane,” she said.

Near Bellis Fair, at the Slo Pitch pub and casino – open 24 hours a day – it's also pretty empty. “I'm cutting back on all and any extras,” said Mike Glick, a technology consultant, nursing a beer.

“Like gambling. I'd be playing pull tabs, I'm not doing that. And I took the bus here,” Mr. Glick said. He figures he's in good company. “Normally, this bar would be full. People are in conservation mode, to pay mortgages, rent, those basic bills. Just in the last six months, it's been a huge change.”

And Mr. Glick, who has closely followed the amazing implosion of Wall Street this month, has little faith the situation will turn around any time soon.

“I don't think we've seen the real depth of how far this'll go,” said Mr. Glick, in a ball cap, sweater and blue jeans, dismissing the rescue plan. “You have to be a real fool to believe that. This isn't going to be solved by Congress approving $700-billion.”

As I have said, and as John McCain said last night, this is, in Churchill’s words, not the beginning of the end of the crisis – it may just be the approach of end of the beginning. We have not found the “bottom” yet, and things cannot start to get better until they have reached that “bottom” point.

In following what is happening regarding the "bailout", I find nobody has any clear understanding of

1. what happened (maybe they just don't want to point the finger)

2. what's the best way to sort it out

3. how is this going to affect the everyday person

on that basis, I don't think people or businesses are going to do anything dramatic, except sit tight and wait for a glimmer of change.....
I am not an economist, but I can tell you that for the most part - average, everyday people like the ones I work and socialize with - are NOT happy with this bailout. This is from people of both political stripes. This is seen merely as more Government rescuing of fat cats that squandered and mismanaged millions of dollars.

"What about all the small companies? What about me? Where's our bailout?", are the types of comments I hear. Reading about WaMu's chairman getting a $20M wage package for 17 days of work doesn't help.
muskrat89 said:
I am not an economist, but I can tell you that for the most part - average, everyday people like the ones I work and socialize with - are NOT happy with this bailout. This is from people of both political stripes. This is seen merely as more Government rescuing of fat cats that squandered and mismanaged millions of dollars.

"What about all the small companies? What about me? Where's our bailout?", are the types of comments I hear. Reading about WaMu's chairman getting a $20M wage package for 17 days of work doesn't help.

A lot of economists aren't happy either - and, as nearly as I can tell, the unhappiness is spread all across the political spectrum: far left to extreme right, albeit not for all the same reasons.

As to those overcompensated celebrity CEOs, see my comments here.
Well the credit markets are poised for a meltdown. No credit and the economy will grind to a halt with the attendant layoffs. If that happens opinions will no doubt change. The bailout is intended to free up the credit markets and allow for these mortgages to be sold in an orderly fashion. If the US economy grinds to a halt so will the global market place - depression is the quaint term economists use I think. I for one dont want to see door #2.
Looks lik a deal is close.

So it looks like a deal is shaping up

Treasury purchases plus mbs insurance (cantor)

Strong oversight/taxpayer protection

Limits on executive comp

No liberal add-ons (acorn, bankruptcy judges, proxy access)

Govt equity stake likely to be scaled back or dropped. No staff-level enthusiam for it.

Limit on amount of first tranche of money (less than $700 billion)

This deal gets 100 house gop votes
Ok the deal is once again off. This latest news isnt good at all. Could be bank runs next week. Congress needs to fully fund FDIC and provide protections for money market accounts.

The huge European bank Fortis is apparently about to fail. The ripple effect on the American banking system could be disastrous, with bank runs, liquidity crises, and stock sell offs possible Monday. Wachovia may well fail next week. As Larry put it, this really will be 1933 soon if we don't move rapidly to stabilize the banking system
Wachovia may well fail next week

Wachovia has been in a bidding war since the start of the year.....the bidders have all backed off since the talk of a bailout, hoping to pick up Wachovia at a bargin basement price....
I have a brokerage account with Wachovia. Panic is a powerful force and a simple run on a few banks can get out of control. I have zero confidence in the democrat Congress to do whats right.
History is not comforting on this point:


FDR Lengthened The Great Depression

One of the new Liberal key talking points is that FDR oversaw the Great Depression - Obama and Biden have repeatedly stated this. The implication is that the left can steer us through this financial crisis.

The truth is that FDR actually extended the great depression by 7 years.

From UCLA:

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

Sounds awfully close to what is happening now.

When you hear praise of FDR’s New Deal, be wary.

Substitute Obama for Roosevelt…

From A New Deal
Roosevelt’s Obama’s task in the fall campaign was a relatively simple one: avoid doing anything to alarm the electorate while allowing Hoover’s Bush’s enormous unpopularity to drive voters to the Democrats. He traveled extensively giving speeches filled with sunny generalities; he was perpetually genial; and he continued to criticize Hoover’ Bush for failing to balance the budget and for expanding the bureaucracy. But he only occasionally gave indications of his own increasingly progressive agenda. On one such occasion, at the Commonwealth Club in San Francisco, he outlined in general terms a new set of government responsibilities: for an “enlightened administration” to help the economy revive, to distribute “wealth and products more equitably,” and to provide “everyone an avenue to possess himself of a portion of that plenty sufficient for his needs, through his own work.”

The rest is history.
Is there a potential solution? If these calculations are correct then there is a potential "out". On the other hand, allowing politicians to get their hands on this amount of money and resources is probably an invitation to an even greater disaster.....


Uncle Sam’s Multi-Trillion-Dollar Oil Lockup

September 26, 2008 - by Tom Blumer

As I write this column, the two major news stories are that:

  1. The Treasury $700-billion-plus bailout of the financial industry [1] is in jeopardy — at least the blank-check, right-now, no-accountability version Treasury Secretary Paulson and Fed Chairman Bernanke appear wedded to.
  2. Harry Reid and Nancy Pelosi have apparently [2] bowed to reality and will not try to renew the ban on offshore drilling for oil and natural gas that has annually been enacted into law for over a quarter-century.

Assume for the moment that the bailout passes and that the ultimate taxpayer loss runs into the hundreds of billions (in theory, it should be less than the amount Paulson and Bernanke want; but never underestimate the government’s ability to make a bad thing worse). Where is that money going to come from?

How about item 2 above?

One of the untold stories of the offshore drilling ban is how much the country has lost in tax revenues over a period of decades because of it.

[3] Congressman John Peterson (R-PA) seems to be virtually alone in making this huge point. The numbers are stunning. In a PDF available [4] at Peterson’s home page (at “Charts and Other Useful Information”), he tells us that “the United States is the only industrialized nation in the world which prohibits offshore exploration and production of domestic energy.”

The government collects royalties on oil and natural gas when it is extracted. Peterson’s office has obtained information from the Minerals Management Service and the Energy Information Agency showing that the average royalty rate based on market prices of the resources when extracted is 15.17%.

Earlier this summer, Peterson’s office prepared this summary ([5] in HTML format here) of how much royalty money is just sitting there offshore:

[6] reservesandroyalty0708.jpg

Even if you adjust Peterson’s calculations to reflect current prices of roughly $100 a barrel for oil and [7] $8/mcf for natural gas, the royalties locked up still amount to over $1.8 trillion (about $500 billion from natural gas and $1.3 trillion from oil).

But that’s only the beginning.

Estimates of known reserves have almost always been low and there is no reason to believe that things are any different now. An October 2005 OpinionJournal.com article quoted [8] at this entry at my blog said that because of technological progress:

    Between 1980 and 2002 the amount of known global oil reserves increased by 300 billion barrels, according to a survey by British Petroleum. Rather than the oil fields running dry, just the opposite has been happening.

[9] Here’s one example of finding and/or getting more than originally thought: Over twice as much oil has come out of Prudhoe Bay than was initially predicted. It would not be at all surprising if that result is repeated with offshore reserves, especially because Congress has prohibited even exploring the areas involved for years. At the current price of oil, we’re talking at least another $1.3 trillion in royalties.

Then there’s shale oil. [10] This Wikipedia entry shows over two trillion barrels in estimated U.S. reserves. Again assuming that only 10% is recoverable, that’s another $3 trillion in potential royalties.

If you’re keeping score, we’re at about $6.1 trillion. That’s more than 60% of the current national debt of [11] of $9.8 trillion — and I ignored any potential additional royalties from natural gas. I also haven’t considered potential oil from sands, oil and gas from North Dakota’s Bakken Formation, oil and gas from the Great Lakes, or oil and gas from other inevitable future discoveries.

Oh, and I forgot to tell you that, according to a spokesman for Congressman Peterson, the royalty rate for land-based extraction is typically much higher than 15% and that states also collect substantial royalties on top of what Uncle Sam gets. (I never expected this or I would have called on Tuesday.)

Is anyone else besides me infuriated that for decades, while usually whining that taxes haven’t been high enough, both the executive and legislative branches of our supposedly “by the people, for the people” government have mostly done all they can to keep us from using and benefiting from our own resources?

Here’s the financial industry bailout tieback: I don’t think it’s a good idea, especially in its current unaccountable form. But if it happens and its unprecedented scope finally forces us to face up to the fact that taxpayers only have so much money, that the national debt is becoming nearly unmanageable, and that there’s a realistic alternative available for doing something about it, it might actually turn out to have been a good thing.

Note: A previously posted estimate relating to the Bakken Formation was in error, and has been removed.

Article printed from Pajamas Media: http://pajamasmedia.com

URL to article: http://pajamasmedia.com/blog/uncle-sams-multi-trillion-dollar-oil-lockup/

URLs in this post:
[1] is in jeopardy: http://apnews.myway.com/article/20080923/D93CKBG01.html
[2] bowed to reality: http://news.yahoo.com/s/ap/20080923/ap_on_go_co/offshore_drilling
[3] Congressman John Peterson: http://www.house.gov/johnpeterson/
[4] at Peterson’s home page: http://www.house.gov/johnpeterson/index.shtml
[5] in HTML format here:

[6] Image: http://pajamasmedia.com/files/2008/09/reservesandroyalty0708.jpg
[7] $8/mcf for natural gas: http://tonto.eia.doe.gov/oog/info/ngw/ngupdate.asp
[8] at this entry at my blog: http://www.bizzyblog.com/2005/10/10/opinionjournalcoms-peak-oil-rebuttal/
[9] Here’s one example: http://www.investors.com/editorial/editorialcontent.asp?secid=1501&status=article&id=156848&

[10] This Wikipedia entry: http://en.wikipedia.org/wiki/Oil_shale_reserves#North_America
[11] of $9.8 trillion: http://www.treasurydirect.gov/NP/BPDLogin?application=np