Banks May Say 'Thanks, But No Thanks' To That New $700 Billion

from the hello-adverse-selection... dept

Mon, Oct 6th 2008 10:41am — Mike Masnick

Last week, in that big post about the financial crisis, one thing I mentioned is that despite all the talk of "moral hazard" -- the bigger fear might be moral hazard's sister problem: adverse selection. That is, it would only be those with truly awful assets and no other options that would take the government up on its offer to buy its "toxic" assets. That may be happening. Reports are coming out that some on Wall Street are considering saying "thanks, but no thanks" to the new ~$700 billion that the Treasury Secretary has been given. The article paints the issue as being about the strings that come attached to it, such as limits on executive pay and golden parachutes. That almost certainly could be a part of the reasoning, but a much bigger part may simply be that these banks recognize that the assets they have aren't quite as toxic as they're being made out to be.

Yes, there are bundles of highly questionable mortgages, but contrary to what the media tells you, plenty of the people who possess those mortgages are still paying -- and even if they're not, the property and houses they represent still do have some value on the market -- or will someday. Thus, it may be that the only banks that really take up Paulson on a buyout offer, are those with really toxic assets that aren't likely to appreciate in value. That's not good for anyone. The more you look at this bailout, the worse it seems. It also makes you wonder why there isn't more of a focus on using a so-called "stock injection" plan, whereby the gov't becomes an investor in the banks, rather than just buying out certain questionable assets. That would, in theory, help avoid sticking the taxpayers with only the worst of the worst assets.

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Filed Under: $700 billion, adverse selection, bailout

34 Comments

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hegemon13, 6 Oct 2008 @ 10:46am

Just wait
I expect the party wars to start within hours, maybe minutes. Both sides will be blaming the other for their changes making the bill unpalatable. And Paulson will be sitting there with the "I told you so" attitude about the pay limits.

Here's the deal. If you are a CEO that has screwed up so badly as to require this bailout to survive, you don't deserve a high salary. And, if you are a CEO who is taking taxpayer money to rescue your private company, you had better be willing to take a pay cut to be in at least the same financial universe as those who you are mooching off of.
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Chris Charabaruk (profile), 6 Oct 2008 @ 10:54am

Re: Just wait
+1 for sensibility.
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Anonymous Coward, 6 Oct 2008 @ 11:06am

+1 for Palin comments.
I lol'd
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SteveD, 6 Oct 2008 @ 11:09am

Well the upside...
Well the upside is that it won't cost anything close to 700 billion in the end right?

...

...right?
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W4RM4N, 6 Oct 2008 @ 11:18am

Facts?
Yes, there are bundles of highly questionable mortgages, but contrary to what the media tells you, plenty of the people who possess those mortgages are still paying -- and even if they're not, the property and houses they represent still do have some value on the market -- or will someday.

I will ask a question and try not to sound like a prick, because that is not my intention. Mike, you state that plenty of those people are paying, but then immediately state "even if they're not." Do you have any facts to prove the media wrong? I am a home owner, and see a lot more home auctions than ever before.
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mobiGeek, 6 Oct 2008 @ 11:21am

Re: Just wait
One problem with your stance is that a bunch of the CEOs in charge of failed/failing banks today aren't the ones who got them there.

Another problem is that if you put in such limitations, then you can't possibly attract quality bank leaders...at least none who are focused on their own personal wealth...which I would think would be all of them.
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Anonymous Coward, 6 Oct 2008 @ 11:26am

Most home owners are indeed paying their bills.
But this crisis isn't about the regular Joe Smoe paying his bills and who has good credit. It is about the loans given to people with no credit at insane %'s. And loans far beyond their means to pay back. And with current unemployment numbers being what they are .... well.... More people will fail to pay their bills.

It is about a system proposed by government and abused by companies allowing the sheriff of Nottingham to tax the hard working people of his city beyond their means. Except in the real world there is no hero in fancy tights to save the day and ensure ultimate fairness.
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pluckyplum, 6 Oct 2008 @ 11:32am

stock injection
The stock injection plan is being heavily lobbied against by all the banking companies. To paraphrase from the excellent "This American Life" from this week, the bailout plan is like someone giving you $1000 to take all the crap from your basement. The stock injection is like someone giving you $1000, then moving into your house, rearranging all the furniture, bossing you around and possibly even kicking you out. From the bank's perspective, they hate this plan, and even though it's probably much better for the government and the taxpayers, their they will fight like hell to not let it happen.
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Hulser, 6 Oct 2008 @ 11:41am

Re: Facts?
Well, since you backed up your criticism/question of Mike's lack of facts with anecdotal evidence, I'll jump in here and provide some anectodal evidence of my own. I don't think it's a surprise to anyone that the media sensationalizes the news. Based on my experience, the media has focused on the people that aren't paying their mortgages for whatever reason. Not to put words in his mouth, but I believe all that Mike was trying to do was say that in spite of the media's focus on the people who aren't paying, there is a significant portion who are. And as Mike pointed out, the banks still own the hard assets of the actual houses.
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Anonymous Coward, 6 Oct 2008 @ 11:45am

Re: Well the upside...
It's the government. They'll spend it all just to prove the point that they were right and really did need it all. Maybe next time you'll listen when they ask the first time.
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Aaron Von Gauss, 6 Oct 2008 @ 11:48am

Wrong Solution to the Problem
The problem with the plan is that the "crisis" is not about a lack of funds, but rather it is about a lack of confidence. You can throw money at the problem, and it might help short term, but that isn't going to restore the confidence - just postpone the event. What compounds the problem is now that you have all of this attention on the issue, investors and the public do stupid things which cause even more problems. Think of it as a self fulfilling prophecy.

Money is going to be needed to help correct the economy, but a single approach solution will not work.
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Mike (profile), 6 Oct 2008 @ 11:53am

Re: Facts?
Mike, you state that plenty of those people are paying, but then immediately state "even if they're not." Do you have any facts to prove the media wrong? I am a home owner, and see a lot more home auctions than ever before.

A lot more home auctions hardly means that everyone in your neighborhood has stopped paying their mortgage, right? The point is that even if MORE people aren't paying their mortgages, the majority of people ARE still paying their mortgages, meaning those securities do have SOME amount of revenue coming in, and therefore are not worthless.

And the reason I stated that even if they were not, was to set up the hypothetical to prove that these assets are not "worthless." Even if EVERYONE stopped paying their mortgages, these properties would still have value.
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PixelPusher220, 6 Oct 2008 @ 11:56am

Re: Re: Just wait
While you point out a valid concern, wouldn't the companies who fail to take a lifeline bailout be abdicating their fiduciary duty to shareholders?

If someone is offering to obsolve you of your debts (for some 'strings' of course - nothing is 'free') and you don't take it...me thinks a nice lawsuit would be quickly forthcoming. Shareholders aren't exactly in a forgiving mood these days...
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Urban, 6 Oct 2008 @ 11:57am

Re: Wrong Solution to the Problem
Right, because how can there be a lack of funds when money is printed as needed?

The current US economy is equivalent to peeing your pants to stay warm. Feels good now..... But wait a few minutes.
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Urban, 6 Oct 2008 @ 11:59am

Re: Re: Just wait
Yeah, you really can't expect to attract talent without paying a billion dollars a year in salary plus perks.
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the_dukeman (profile), 6 Oct 2008 @ 12:02pm

property values
After looking at the 1980's S&L bailout, this current mortgage situation could well be fallout from that. Until the early 1980's property values slowly and steadily rose, making real estate a sound investment. By the time the S&L bailout occurred, they were out of control. Since the bailout was in no small part based on hoping these values would gain again after the inevitable slump from the financial institution failures with bad mortgages, they fulfilled their own prophecy by soon escalating the property values again for no other reason than to try to make their money back from buying the toxic assets. When investors saw how much the prices were inflated, and that folks were willing to pay those escalating prices, an investment price spiral ensued.

So in a way, the bailout plan from the S&L debacle directly set up this current situation by causing the property values to be propped up instead of allowing them to devalue to the proper price point and steady the market. Estimates of the S&L bailout plan having a 5-10 year economy impact are in fact false. It continues to this day.

Thinking on Capitol Hill is that the government will make their (our) money back by selling the toxic assets at a later time. But they will inevitably prop up the property values again instead of allowing them to return to the levels that will ensure good growth in the future. The analysts hope that a 5-10% drop in prices will be sufficient. I suggest that they really need to drop 70% to put them back to the growth rate before the S&L bailout and the 5 preceding years.

Now is the best time for that price adjustment so the real estate market can have a bright and steady growth prospect. Otherwise the same thing happens again in 15 years, if the economy doesn't collapse anyway in the next year due to marginalized price adjustments in the real estate market. They should take their medicine now and force the economy heal itself instead of just using a band-aid. Because the real estate prices were so inflated, investment vehicles in all sectors relied on those false values to make their profits. And so goes the self-fulfilling prophecy.
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Anonymous Coward, 6 Oct 2008 @ 12:09pm

Re: Re: Facts?
speaking of anecdotal evidence, the last time the stock market was this low was 4 years ago. this seems to happen around elections. I have personally conspiracy theorized that this is a media manipulation by the media owners to drum up republican vote, since the Republicans are giving big tax breaks to the wealthy, while slashing gov't programs for the underprivileged. Just a thought. /conspiracy_rant

Although, since McCain and Palin are such a bunch of Mavericks, I'm sure ultra rich don't support the R ticket time with all the "change" they are "sure" to bring to D.C. /sarc
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Michael Long, 6 Oct 2008 @ 12:18pm

Parachutes
"The article paints the issue as being about the strings that come attached to it, such as limits on executive pay and golden parachutes."

Let's see, run the company into the ground, take my parachute, and go elsewhere, or save the company and cut my salary and benefits in half?"

"Hmmm......"
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UncleTom, 6 Oct 2008 @ 12:18pm

Its Christmas . . .
The Banks and large institutional investors have been waiting like kids on Christmas Eve to see what Santa was bringing. Now that the republicans have been paid off with pork and the "Bush bailout" finally passed, it will take a few months for the "fat cats" to decide whether or not they like thier presents . . . be patient.
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Casey, 6 Oct 2008 @ 12:23pm

Re: Re: Wrong Solution to the Problem
"The current US economy is equivalent to peeing your pants to stay warm. Feels good now..... But wait a few minutes."

That is fantastic - I gotta relay that one to people at work.
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Truthseeker, 6 Oct 2008 @ 12:26pm

I hope not like Palin
Where they say "thanks" to the money and "no thanks" to giving it back . . .
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James, 6 Oct 2008 @ 12:31pm

Who's fault???
Dont blame the Dem. or Rep. alone, they both contributed. The CEO's even if they inherited the problem still knew about it and did nothing to fix it, they just piled on(have to show growth or I don't get my bonus)(can anyone say sheer greed). The initial morgage writers that didn't check the income of the applicant becouse they were getting their % of the deal regardless (this is the point at which a person making $40,000 a year and got a $300,000 loan). Lets not forget the people borrowing the cash to begin with and not really looking to see if they could afford the payment (understanding that the "variable rate" morgage took a payment that might have been under control and made it impossible to keep up, thanks for the wonderful idea). Finally lets look at Wall Street and their wonderful idea of taking a piece of paper and treating it as a commodity or a actual stock in a specific company and trading it as if they actually had a clue to the true value of what that paper was worth. Anyone in control of credit or the lending and loan end of the banking industry is a little responsable for this meltdown.
At the start of this mess the Banking industry was crying that we "need this money". Now that they have it, they don't want it?? Could this be that suddenly someone out there in bankland realized that with Gov. funds, comes Gov. oversite. Well we cant have that, since we've done such a wonderful job so far of regulating ourselves.

"If were the people who don't understand, and the people in charge are the ones that do understand. How did we get here to begin with???
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neil, 6 Oct 2008 @ 1:16pm

Re: Re: Facts?
"Even if EVERYONE stopped paying their mortgages, these properties would still have value".

Um, no!

if EVERYONE stopped paying their mortgages, then the properties will have zero value due to the fact that no one wants them. because if some one wants even one of them they whould buy it an be paying a mortgage on it. deffinition of everyone is all thus no one with a mortgage thus no one wants and if no one wants you have too much supply they walue drops to zero.

if you said if most people stopped paying their mortgages, then some one could still want the properties and your statment whould be correct but because you said everyone you are dead wrong.
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Chris, 6 Oct 2008 @ 2:06pm

Stock injection is probably what will end up happening.....
Because it will be the absolute worst thing for taxpayers. If the gov't buys the troubled assets and the bank goes under anyway at least the gov't owns the assets. If the gov't owns stock in the bank and it goes under STOCKHOLDERS GET PAID LAST after all other creditors are paid.

If the CEOs don't like the compensation limits they should remember that as far as I can tell there are no indemnification terms either. They could be sued by their shareholders for breach of fiduciary duty. Note that I haven't read all 400+ pages of the bill yet so I might be wrong on that.
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Mark Peskin, 6 Oct 2008 @ 2:20pm

Nothing's that simple...
Don't forget that, even if nobody takes the government up on its offer, by making it the govt. has effectively created a market for these assets which doesn't currently exist. That along should have *some* salutory effect, although it may not be enough to contain this train wreck.

As for stock injection, short of a wholesale collapse of the banking system, with forced nationalizations a la AIG, that's not going to happen. The banking shareholders will join forces with the radical free market Republicans in the House to make sure of that.
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Mike (profile), 6 Oct 2008 @ 2:33pm

Re: Re: Re: Facts?
if EVERYONE stopped paying their mortgages, then the properties will have zero value due to the fact that no one wants them. because if some one wants even one of them they whould buy it an be paying a mortgage on it.

Not quite. The properties may still have value to *others*.

Plus, you seem to be confusing value and price. The two things are different.
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Rose M. Welch, 6 Oct 2008 @ 2:40pm

Re: Facts?
What does being a home owner have to do with seeing home auctions? If anything, you'd think renters have more of a vested interest.

I have a sub-prime mortgage. We had a hard time securing financing because the only things we'd ever gotten loans for were vehicles, and those loans were paid on time and usually paid out before the due date... Which is apparently bad in an industry that lives off of interest. :)

We secured our loan on our own based on our actual income and we have no problem paying it every month. I buy less fresh fruit now, and the better cuts of meat are out of range. For my birthday (today, woot!) we're having a home-cooked meal instead of going out... But the mortgage is not a problem.

If anything, the financial issues have made us take a good look on what we were doing with our 'disposable' income and rearranging accordingly... Which is a good thing no matter what the market is like.
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Matt, 6 Oct 2008 @ 3:03pm

Were we lucky at $700 billion?
The number is now at $900 billion (and sure to rise). I'm all for literally throwing these a$%holes of the top floor of their high-rise office buildings. They can land on the oxygen stealing politicians below...

http://www.cnbc.com/id/26751385
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Una Ware, 6 Oct 2008 @ 4:35pm

It's not houses/mortgages...
It's not houses or mortgages, it's credit that everyone is freaking out about. No one wants to lend money because the lending insurance "game" went bust.
Borrowed money is very hard to get now for businesses and soon to be for individuals which means ...reduced capital improvements, companies having trouble meeting payroll obligations and eventually a bad Chri$tma$.
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Anonymous Coward, 6 Oct 2008 @ 8:14pm

Re: Re: Re: Facts?
HUH?
"media manipulation by the media owners to drum up republican vote"

I am not sure what country you are living in, but in this country, the media is OWNED by the libs. The only candidate benefiting from the economy right now is Obama... And I can show you article after article on how the clinton administration pushed Fannie/Freddie to loan money to people who could not afford their houses, including a great one from the ultra conservative new york times.

Now I know that no one person/group/administration is to blame for this "crisis" but the way I see it, it started way before the current presidency...
In case you were interested the article can be found here:

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=& amp;spon=&&scp=2&sq=holmes%20fannie%20mae&st=cse
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Chris Charabaruk (profile), 7 Oct 2008 @ 6:49am

Re: Well the upside...
Hah. Keep on dreamin'.
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hegemon13, 9 Oct 2008 @ 6:20am

Re: Re: Re: Facts?
Um, historically, Democrats, not Republicans, have the advantage when the economy is in trouble. Not to mention that your theory is of the most ridiculous, tin-foil hat variety.
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hegemon13, 9 Oct 2008 @ 6:22am

Re: Re: Re: Re: Facts?
In the case of a mortgage company, value and price are exactly the same thing. The company does not want several thousand houses to live in. They want their money out of them.
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Vigdor, 13 Oct 2008 @ 7:26am

stock injection plan
the stock injection plan is definitely the right way to go. You have to ask yourself what the hell were all these government guys doing wailing around and why did Paulson want to buy toxic assets instead of preferred stock?

There's a tremendous site about the stock injection - it has 4 parts that are must viewing! Check it out http://www.StockInjectionPlan.org - go there it's your duty!
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