bailout bungle?
Nov. 12th, 2008 01:17 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
javasaurusOK, let me get this straight...
Take a deep breath and read this sentence out loud:
Much of the current economic problem is due to a burst housing bubble nightmare in which housing prices dropped while balloon mortgages jumped and millions of people ended up in foreclosure which resulted not only in terrible financial stress for the people involved but for the mortgage institutions as well which ceased having sufficient capital to make loans and the economy skidded to a halt. <--- look! a period! Breath now!
Congress agreed to allocate $700B as a bailout fund for the curent banking problem. Congress agreed to make this allocation (despite having less than no money itself) for the purpose of buying the bad loans from the banks. Now, however, it appears that instead of buying the bad loans, the government is instead going to buy shares of the banks (directly from the banks, not the public stock market), which will infuse money into the banking system that the banks can then use for loans. At least that's the idea. However, the banks are not required to use the money for loans, so instead banks are using the money to buy other troubled banks. Thus the American public is paying for these mergers while the economy is still standing still watching its own toenails grow.
To make matters even more interesting, apparently the IRS or the Treasury or some such institution of wisdom decided to make changes to existing tax regulations. It used to be legal for businesses to buy failing companies as tax shelters -- using the failed company's losses to offset the parent company's profits for tax purposes. About twenty years ago, Congress put limits to this kind of tax shelter. The Treasury has now negated that law, and this makes bank mergers very attractive. So not only will taxpayers foot the $700B which might be used to help banks merge, but those same banks will avoid paying more than $100B in taxes themselves because of those same mergers.
And guess what! Now there is also talk of using some of the $700B to help bailout non-banking industries (like the failing US auto industry).
Most of this is readily Googleable, if you want more info. Below is one link that is tough to find, on the Treasury action.
Washington Post article about the Treasury ruling.
Take a deep breath and read this sentence out loud:
Much of the current economic problem is due to a burst housing bubble nightmare in which housing prices dropped while balloon mortgages jumped and millions of people ended up in foreclosure which resulted not only in terrible financial stress for the people involved but for the mortgage institutions as well which ceased having sufficient capital to make loans and the economy skidded to a halt. <--- look! a period! Breath now!
Congress agreed to allocate $700B as a bailout fund for the curent banking problem. Congress agreed to make this allocation (despite having less than no money itself) for the purpose of buying the bad loans from the banks. Now, however, it appears that instead of buying the bad loans, the government is instead going to buy shares of the banks (directly from the banks, not the public stock market), which will infuse money into the banking system that the banks can then use for loans. At least that's the idea. However, the banks are not required to use the money for loans, so instead banks are using the money to buy other troubled banks. Thus the American public is paying for these mergers while the economy is still standing still watching its own toenails grow.
To make matters even more interesting, apparently the IRS or the Treasury or some such institution of wisdom decided to make changes to existing tax regulations. It used to be legal for businesses to buy failing companies as tax shelters -- using the failed company's losses to offset the parent company's profits for tax purposes. About twenty years ago, Congress put limits to this kind of tax shelter. The Treasury has now negated that law, and this makes bank mergers very attractive. So not only will taxpayers foot the $700B which might be used to help banks merge, but those same banks will avoid paying more than $100B in taxes themselves because of those same mergers.
And guess what! Now there is also talk of using some of the $700B to help bailout non-banking industries (like the failing US auto industry).
Most of this is readily Googleable, if you want more info. Below is one link that is tough to find, on the Treasury action.
Washington Post article about the Treasury ruling.
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no subject
Date: 2008-11-12 07:24 pm (UTC)no subject
Date: 2008-11-12 07:34 pm (UTC)Oh, and since when is the Treasury Department in charge of tax law?
Oh, you were talking about the first part. If a paragraph is a single sentence, the sentence is too long and/or the paragraph is too short.
But it looks good lit by disco lights.
no subject
Date: 2008-11-12 07:47 pm (UTC)no subject
Date: 2008-11-12 08:11 pm (UTC)no subject
Date: 2008-11-12 08:12 pm (UTC)no subject
Date: 2008-11-12 09:02 pm (UTC)no subject
Date: 2008-11-12 08:10 pm (UTC)Using the money to fund mergers doesn't help get loans flowing again, which is the point of the "bailout." Many companies use short-term loans to stock inventory and pay employees. Some companies (including, for example, Sirius/XM, by the way), use longer-term loans as start-up capital, and refinance those loans if necessary. Sirius/XM has some really large loans coming due next year that they will either have to pay or refinance. If nobody is providing loans, this will be a problem.
I could be wrong, but I believe that government ownership of significant (non-controlling) interest in a bank is unprecedented in the U.S. The initial claim is that the government will not be using those shares to vote on bank policy. Maybe this is a good investment for the government -- the shares will eventually increase in value, and the government can sell the shares. Will they sell them back to the bank? Or on the open market? I doubt the banks want that many shares on the market, or they could release more shares on Wall Street themselves. Or is the government going to pay more than current market price? Too many unknowns, and the bank will end up losing money in the long run (by buying back the shares at elevated prices) or lose a portion of control. If the government bought the mortgage bundles, as they claimed they would do, then the banks would have liquid capital for loans, and they wouldn't have the incentive to use it for mergers istead (many of the failing banks would no longer be failing).
The problem with the Treasury action (other than its potential illegality -- apparently some in Congress think it might be), is that it furthers the desires of banks to merge rather than make loans.
So the basic problem is that $700B which was supposed to help stem the tide of recession will instead vanish in a puff of smoke, along with an additional $100B in lost tax revenue, and will likely have minimal impact on the current ecomonic problems of the country.
I don't have a problem with Congress making loans or grants to prevent a major U.S. industry from collapsing. But the $700B wasn't marked for that purpose. It wasn't supposed to be a blank check (debit card?) for the Treasury to use as it sees fit.
no subject
Date: 2008-11-12 08:24 pm (UTC)it's still a major case of every dollar they get is one dollar out of their original budget that can stay to the original budget item, be it bonuses, executive retreats in ritzy hotels, or buyouts.
[clarification - there are some aspects of recent events that aren't as clear-cut as the media tries to present. for "bonuses", most companies in this industry pay piddly starting salary and the bonus is the norm expectation - if you actually remove the bonus you WILL get massive resignations to the point where the company will STILL cease to function, defeating the whole purpose.
similarly, the whole "flying first class" in the latest AIG hotel giveaway - any exec worth his weight (or even half that) has enough frequent flier miles and medallion points and all that to warrant free upgrades any time the seat is available. there is in this country an effective permanent "first class" as far as the airlines go.]
as for the "dollar collected and spent is one less dollar spent" - it's for similar reasons that "faith-based initiatives" are a problem with regards to the 1st amendment: every dollar collected by the feds is one less dollar out of their normal donation pool that has to go to evangelical activities (regardless of whether or not they cheat and evangelize during their charity activity, which is against the law but never enforced), meaning in effect that the feds are paying our tax dollars for evangelical activities, promoting an establishment of religion.
this, btw, is NOT sarcastic. hence the more serious looking icon. Vivian doesn't take crap from corporate shrills...unless it tastes really really good.
no subject
Date: 2008-11-12 10:53 pm (UTC)Seriously, though, I knew some stupid crap like this was going to go down.