Dodd Steps in the Right Direction
These proposals from Chris Dodd seem like steps in the right direction to me:
Senate Democrats want to add tough new measures to the Treasury Department’s proposal to bail out financial firms, including strict limits on executive compensation and a provision that would allow the government to take shares of any financial institution that participates in the program.
Senate Banking Committee Chairman Christopher Dodd of Connecticut began circulating his 44-page draft Sunday night. The draft is likely to prove problematic for the Bush administration, which has tried to prevent lawmakers from making big changes to a much simpler proposal it unveiled over the weekend. Treasury’s plan would allow the government to buy up to $700 billion in mortgage-related assets from banks and others to prevent a worsening of the financial market turmoil.
Still, you need to watch the legislative mechanics here. If progressives start out by saying “yes a bailout is needed” and then adding “but we also need this other stuff” then what’s going to happen is the conservative bloc will say “well, you guys need to radically scale back your good stuff” and then progressives will be cornered. You need to insist on the provisions that could make this plan a good one. What’s more, while this sounds like an improvement over the Bush/Paulson plan it still doesn’t seem to do much of anything to help restructure mortgages a step that’s vitally necessary from both a fairness and an effectiveness perspective.
48 Responses to “Dodd Steps in the Right Direction”
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September 22nd, 2008 at 12:03 pm
If progressives start out by saying “yes a bailout is needed” and then adding “but we also need this other stuff” . . .
Absolutely. Democrats need to start out by saying that this trillion dollar Wall Street giveaway is a bad idea and that it will not fix the economy. Do not believe the Republican line that now is not the time for partisanship. Now is absolutely the time for partisanship. Democrats need to start calling the Paulson plan what it is. A trillion dollars in Wall Street welfare. And they need to come up with their own distinct plan.
September 22nd, 2008 at 12:03 pm
i’m coming around to the belief that the dem position should be: “no, we don’t need this bill as far as we can tell. prove to us we do.”
September 22nd, 2008 at 12:10 pm
There is a simple problem with Dodd’s proposal and that is that there is not enough equity in the entire banking industry. Following Dodd’s proposal would lead to the government basically owning most of the banks in the U.S.
I wonder if people will still believe this is unnecessary after the stock market drops 20% or so further.
September 22nd, 2008 at 12:10 pm
Hmmm. Our host and resident trustfund scumbag obviously doesn’t like my $2 Trillion Income Surtax on the Rich — to pay for the Bailout.
I wonder why.
Pretty pathetic to be a “Limousine Liberal” and have to get around on a bicycle. Must be a codecil in the will.
September 22nd, 2008 at 12:15 pm
Following Dodd’s proposal would lead to the government basically owning most of the banks in the U.S.
Fine with me. If the banks are very valuable, then certainly there will be a lot of interest from private investors to buy back that equity from the government.
If you go begging to the Godfather to bail you out, you should expect that he’s going to want to be cut in on a piece of the action.
September 22nd, 2008 at 12:18 pm
bill, if the alternative to a bailout is a 20% stock market decline, it’s a no-brainer: let the market decline.
to be fair, the issue isn’t stock prices: it’s the fear that massive downward revaluation of assets and contraction in leveraging will lead to a very large number of bankruptcies and freeze the entire economic system.
i don’t think that’s likely to happen if we don’t pass a bad bill this week, so i’m ready to play chicken: let the capitalists deal with some creative destruction if they aren’t willing to accept a decent bill.
September 22nd, 2008 at 12:23 pm
“The draft is likely to prove problematic for the Bush administration, which has tried to prevent lawmakers from making big changes to a much simpler proposal it unveiled over the weekend.”
This is the sentence that sets up the view many people will take. The administration has proposed a ’simple plan’, and Democrats are trying to make it all sorts of complicated. Simple = good, complicated = bad. Walk carefully, guys.
September 22nd, 2008 at 12:29 pm
Howard,
The alternative to the Paulson plan is likely a huge credit contraction and deflation in the United States, a freezing of the entire credit market, and a deep recession. That’s my opinion. Plus, if the government buys whole loans at 50-60 cents on the dollar and can hold them for a few years the odds that they will lose a great deal of money are small. The government is buying assets (many of which are performing and still paying interest) that it may be able to sell in the future. This may also stop home price decreases as some of the excess supply can be sopped up for a few years.
September 22nd, 2008 at 12:30 pm
As I understand the Dodd plan, it calls for contingent shares in the companies equal to the purchase price of the assets, which helps diminish the downside risk for the government on a bank by bank basis. But it shouldn’t lead to nationalizing the entire banking industry, unless perhaps the government systematically overpays for the assets.
September 22nd, 2008 at 12:36 pm
Bill
If the government pays 50-60 cents on the dollar as per your comment above, then the sellers (banks) really will be insolvent. A loss of that magnitude, given the enormous leverage involved, will wipe out many banks’ equity.
The real estate losses are real, not temporary. The real estate market was a in a bubble, the mortgages are written for more than the houses are worth now or are l;ikelyto be worth for the next decade. To save the banks, the government essentially has to buy the bonds for much more than they are likely to worth.
This plan seems much more focused to me on protecting financial institutions and their creditors than on keeping the damage inthe financial sector from spreading to the rest of the economy. I have a big interest in the latter, very little in the former.
September 22nd, 2008 at 12:37 pm
Too important to fail: This isn’t the first time financial elites (as opposed to those who eat arugula) have been forced to explain that they are too important to be treated like everyone else.
They make the same argument around capital gains tax cuts: Capital is simply too important to be taxed at the same rate as labor. It’s very important! Where do you think jobs come from? Therefore, cut them to 15% or, better yet, 0%. Sure, it may be irritating to know that the multimillionaire down the road is paying a tiny fraction of what you pay in taxes. But he’s important! Too important to tax.
It must be a wonderful position to be in. The more you succeed, the greater your wealth, the more your vital importance and bigness require the rules to be loosened, until you are finally completely free to spend $700 billion with zero oversight and not even the faintest possibility of Congressional or court oversight.
Wall Street titans are too important to tax, drunk-with-money mortgage lenders are too important to allow to fail, and Paulson is too important to accept oversight. Got it.
September 22nd, 2008 at 12:38 pm
I don’t think we can afford not to do this. We face an imminent economic threat. This bill will cause us to be greeted as liberators on Wall Street. And it will more than likely pay for itself in just a few months. Trust us.
September 22nd, 2008 at 12:38 pm
“If we design it so it’s punitive and so institutions aren’t going to participate, this won’t work the way we need it to work,” Paulson said.
I say great. Any guess on which list will be longer, the bailout opt-out or the you can’t short my stock list?
September 22nd, 2008 at 12:40 pm
Yes, these are steps in the right direction, but could we please get a move on? Several of the recent Democratic (and Republican) rejoinders to the bailout plan, including Dodd’s, are improvements that are aimed at helping the plan succeed in its actual goal of stabilizing a crumbling financial market, creating liquidity, and saving the country from a mega-recession. Let’s make those changes fast. But some of the other stuff I’m hearing about, including on this and other lefty blogs, is just wish-list stuff that does not in any way have to be passed this week along with the bailout. Let’s stay focused on the task at hand.
We can do the other good stuff later, after we have stopped the ship from sinking. Indeed, I suspect that no matter who is the next president, the public will be absolutely screaming for the activist government measures the progressives have been trying to sell for years. We’re in a whole new political environment. If Obama is elected along with a large Democratic Congressional majority, we’ll get everything we want.
But if the market and US financial system tank while we dawdle on the bailout so we can debate the Democratic wish list, Democrats will be hammered for it, and will take the blame for diddling while Rome burns.
In fact, I think Obama should take the line that McCain is distracting the country with populist pandering and demagogic expressions of outrage, while failing to propose anything substantive that will address the systematic problems. For McCain, it is all about personalizing the crisis, affixing blame to individuals, issuing crowd pleasing calls - Cox, overpaid executives, reaching for the popular “Cuomo” name”, etc. - rather than addressing the foundational problems.
September 22nd, 2008 at 12:40 pm
That’s not what’s being proposed. They’re talking about the lower tranches of MBS that probably aren’t worth 50 cents on the dollar right now. The last language I read was vague enough that CDOs containing LBO debt would qualify. These things are assets only in the accounting sense of the word, in the real world, they’re worthless toxic garbage that Paulson and friends wants the government to cough up billions for.
September 22nd, 2008 at 12:43 pm
This nonsense of “Paulson’s bill or nothing” is just that.
Congress is the f***ing Congress. They can pass whatever g** d*** “rescue” plan they want, to be run by anyone they want.
They don’t HAVE to ask Bush Jr. or Hank Paulson for his permission.
Since when the f*** did Congress become some sort of ad hoc committee called together by the g** d*** Secretary of the Treasury who has been a complete idiot throughout this entire crisis?
September 22nd, 2008 at 12:48 pm
I think Gene is likely overstating the problem. The only assets subject to this plan are supposed to be mortgage-based assets for which there currently isn’t a market (AKA “illiquid” assets). That is only a subset of mortgage-based assets, let alone bank assets in general. So, banks could likely sell off these particular assets at a substantial discount and remain solvent.
September 22nd, 2008 at 12:50 pm
“If we design it so it’s punitive and so institutions aren’t going to participate, this won’t work the way we need it to work…”
“way we need it to work” = make my buddies rich. Spoken like a true Goldman Sachs scumbag.
September 22nd, 2008 at 12:55 pm
One of the ways that this will jumpstart bank lending again is by following a “good bank/bad bank” structure. If people know that there are no hidden surprises in the banks capital will flow to them again from the sidelines and the banks can start lending again. Every dollar of assets put into the banks can fund 10 of lending. As it stands today the markets are frozen and no bank trusts another. That needs to change and quickly or we will enter a deflationary spiral ala japan in the 1990’s. There needs to be a huge stimulus package AND the Paulson plan passed now to help the economy.
September 22nd, 2008 at 1:19 pm
No, that’s the SEQUEL to the Paulson plan, AFTER the Treasury has been looted of AT LEAST $700 bil. Because there’s no rational reason to believe this will do more than keep the house of cards standing for just a bit longer. I’ll take my recession straight up WITHOUT getting anally raped first, thanks.
This scam is noting but the “Patriot” Act and AUMF all over again. Fuck NO.
September 22nd, 2008 at 1:23 pm
Re Dan Kervick’s comment “We can do the other good stuff later, after we have stopped the ship from sinking.”
—————
Bullshit. Bullshit. Bullshit.
You know that there is no way in hell that Democrats will be able to raise taxes on the wealthy if the increase is attempted AFTER the Bailout is approved. The only course is to pay for it by imposing a $2 Trillion Income Surtax on the Superrich as Part of the Bailout.
If you try it later, Republican Senators will filibuster it and they will be sustained by a few corrupt Democratic Senators. Like Zell Miller and the other 11 Democratic Senators who forced Bush’s $2 Trillion tax cut through in 2001.
Have you seen that “$5 Trillion Federal Surplus” lately? Or the $3 Trillion Bush stole out of Social Security/Medicare?
Plus this Bailout will probably cost Obama the Election– as tens of millions of working class Democrats discover how they have been fucked by a Democratic Congress.
“Change You Can Believe In” my Ass.
September 22nd, 2008 at 1:28 pm
You know, if I’m looking for something in return for lending money, I always hand out the piles of cash first.
Oh, no. That’s completely fucking arse-backwards.
September 22nd, 2008 at 1:33 pm
Matt,
Take a look at this… just to make your day.
http://www.economist.com/blogs/freeexchange/2008/09/how_much_for_the_junk.cfm
I starting to get the feeling that Paulson is reluctant to give his old pals in the finantial industry a haircut, and the reason that he doesn’t want scrutiny is because its going to be a rip off, where they will selectively paying some more than their junk assest are worth, and some investors are going to wind up making a killing at tax-payer expense.
This country is starting to look more like the Mexico that everybody despises
September 22nd, 2008 at 1:42 pm
Dodd’s bill does include restructuring mechanism, via enhanced authority for bankruptcy judges to alter mortgage provisions of foreclosed homeowners.
September 22nd, 2008 at 1:52 pm
Summary of Dodd proposal here.
September 22nd, 2008 at 2:00 pm
Full text of the bill now available here.
September 22nd, 2008 at 2:03 pm
Unfortunately Matt, A BAILOUT IS NEEDED.
This is not a matter up for political debate, it is a statement of fact. Doing anything but acknowledging this up front, while it may weaken one’s negotiating position, would set them up for charges of irresponsibility, incompetence, and inability to understand the facts presented before them.
September 22nd, 2008 at 2:08 pm
Re TH’s comment “This is not a matter up for political debate, it is a statement of fact. Doing anything but acknowledging this up front, while it may weaken one’s negotiating position, would set them up for charges of irresponsibility, incompetence, and inability to understand the facts presented before them ”
———–
Facts? What Facts?
Anybody seen any Facts in this Seance?
Did one drop off of Paulson’s Ouija Board and roll under the Shaking Table?
September 22nd, 2008 at 2:11 pm
Paulson was telling us a month ago that the financial system was sound and there was nothing to worry about. Paulson was telling us a few days ago that there would be no more bailouts. If he didn’t know what he was talking about then, why should we believe his scare talk now?
So you, TH, can take your all-caps YELLING and shove it. Nothing should be done without due deliberation and strong safeguards.
September 22nd, 2008 at 2:20 pm
I’ve seen no discussion from the administration (or anyone else for that matter) outlining the consequences of not passing this Wall Street bailout. Where is the “Powell at the U.N.” dog and pony making the case? Have they decided that we might not fall for that again? Or do they just not want to tell us how screwed we are no matter how many trillions Hank hands out?
September 22nd, 2008 at 2:37 pm
You know that there is no way in hell that Democrats will be able to raise taxes on the wealthy if the increase is attempted AFTER the Bailout is approved.
I know no such thing. Obama’s tax plan all along has been to tax the wealthy at a higher rate, and cut taxes for everyone else. I see no reason at all to think that if he is elected along with substantial Democratic majorities in Congress, that package won’t be passed.
But here’s what’s going to happen if these partisan games continue, lead by the accountability free rabble-rousing of blogospheric yahoos and fatheads like Matt: Some Democrats start feeling their oats, and start making a bold play to load up the bailout with their wish list of goodies. The markets lose confidence that the financial firm bailout will be accomplished with any alacrity. This reignites last week’s panic, the stock market falls another 1000 points or so, frantic trading drives the value of financial assets yet lower, and and the remaining financial giants fail before we can bail them out. Credit dries up everywhere; jobs start being cut left and right and growth grinds to a halt or goes negative. Mr. and Mrs. America are out of work, out of their houses and out on the street. And Democrats then take it on the head for playing political games, creating partisan gridlock and holding up the government for redistributive goodies when they needed to act to save the sinking ship of the US economy.
No thanks. I’m not signing up for this entertaining pleasure excursion to Stupid.
We need a better bailout plan than Paulson’s plan. Even some Republicans agree. So lets do it! Economists have already come forth with the alternatives over the weekend. Senate leaders need to bang the necessary heads together, work out a compromise, and get the plan passed, fast.
Some of you have convinced yourself that the financial crisis is some kind of phony, manufactured invention designed to extort money from the US taxpayer for the sole benefit of Wall Street fat cats. But based on everything I read and heard last week, from a diversity of sources, I’m not buying your paranoid grand conspiracy. The ship actually is sinking, and this is no time to get bogged down by the fantasies of the next generation of conspiracy-mongering 9/11 Truthers. Progressives and ordinary people didn’t drill the holes in the hull, but you are on the ship, and I am on it too. I don’t know about you guys, but I am in no mood to drown.
Hell, if the economy goes into a super-deep recession or depression, then even CAP might fold, and even Matt might lose his position. But he can always call up a friend at the DC Harvard Club, and find some other sinecure. And tenured college professors and New York Times columnists probably also won’t have to pay a price for ivory tower dithering. A lot of the rest of us will.
September 22nd, 2008 at 2:48 pm
So Dan- What do you think of Dodd’s plan? I don’t see anybody saying do nothing. I see alot of people saying the Bush/Paulson plan is ridiculous. I’m of the opinion that our present condition will deteriorate a great deal no matter what is done but I’m not for handing Hank a $700,000,000,000 check.
September 22nd, 2008 at 3:04 pm
No evidence has yet been presented that handing $700 billion to Hank Paulson to dispose of as he pleases would, in fact, solve this crisis.
Forget about injustice and bankrupting us and all. There’s no evidence whatsoever that this is any more than putting a massive temporary injection of capital into any of Hank’s friends he chooses.
September 22nd, 2008 at 3:20 pm
nukev,
I suppose the idea behind the Krugman-Dodd alternative is that instead of buying those “trashy” mortgage-backed security assets alone, for which we may have to overpay greatly to accomplish the bailout, we buy up chunks of the companies themselves, which are better taxpayer investments overall since they possess both trashy and non-trashy assets. Personally, I have no idea who is right. Some say that the mortgage-backed securities are actually undervalued by the market right now, so we taxpayers may do well to buy them, even at a high price. Others say otherwise. Anyway, this I accept as a real, substantive, timely debate about the nature of the bailout that we should have over the next few days.
The executive salaries thing, on the other hand, seems like an unrelated crowd-pleaser that may hold up passage of the bailout as we debate the fine points of the virtues of the free market for labor, and the nature of distributive justice.
Don’t get me wrong. For several years I have advocated a Maximum Wage Law. I also believe the extravagant executive salaries have played a role in bringing us to where we are, in that when people are grossly overcompensated for the value they contribute to their firms, they are insufficiently incentivized (I guess “moral hazard” is the term we are using now) for avoiding bad mistakes. How much incentive do you have for getting things right if it is just a question of a difference between four houses and a fifth, and if you’re going to get a king’s ransom severance package even if you are let go?
But I don’t believe passing a new executive compensation package this week is at all essential to the bailout. People are fed up with extravagant executive compensation, and there is a public mood to do something about it. I suspect we will be able to get an even better law if we right the financial ship first, and then think more carefully about the legislation in more leisurely circumstances. But my feeling is that time is of the essence right now, and we can’t waste time on such a debate in the present circumstances, which demand immediate action. Nor should we be wasting time on debates this week about stimulus package pump-priming with green investment and infrastructure expenditures. Again, there is a lot of public support for these kinds of legislation, and we can do that stuff next week, or next month, or in January if need be. My motto is “bailout package first.”
September 22nd, 2008 at 3:31 pm
Dan-
Democrats control congress. They introduce the “Dodd Bill” and Republicans and Bush oppose it because it contains oversight and limits on executive compensation? Given “the world will end” scenario, I just don’t see Americans finding the Dem’s at fault when it would be Republicans fillibuster or Bush’s veto that kills the only chance to avert catastrophe.
September 22nd, 2008 at 4:12 pm
Re Dan Kervick’s comment “And Democrats then take it on the head for playing political games, creating partisan gridlock and holding up the government for redistributive goodies when they needed to act to save the sinking ship of the US economy.
”
————-
How is giving $1.5 TRILLION to the richest people in the USA –to fix a trainwreck said rich people caused — NOT “redistributive goodies”??
NOT “political games”??
Short answer:
NO
September 22nd, 2008 at 4:13 pm
The estimable Mike Shedlock over at Mish’s Global Economic Trend Analysis figures the total is actually $1.8 trillion:
What new taxes is the political class proposing to raise this kind of money? If they intend that we should borrow it, what tax increases will pay the approximately $6 billion PER MONTH debt service on such a sum?
September 22nd, 2008 at 4:15 pm
Speaking of “redistributive goodies”, what was that $2 Trillion tax cut for the rich in 2001?
Or the capital gains cut?
Or The theft of $3 Billion plus from Social Security/Medicare Trust Funds. T
Or the $1 Trillion war to grab some oil deposits for Houston?
I repeat:
NO
September 22nd, 2008 at 11:59 pm
I suppose the idea behind the Krugman-Dodd alternative is that instead of buying those “trashy” mortgage-backed security assets alone, for which we may have to overpay greatly to accomplish the bailout, we buy up chunks of the companies themselves, which are better taxpayer investments overall since they possess both trashy and non-trashy assets.
There is a general misconception, since both use the word “equity” that the Dodd and Krugman ideas are similar. And since Krugman went ahead and endorsed the Dodd plan (after misrepresenting it and probably misunderstanding it, based on bum press reports), that confusion is understandable.
However, the “equity” is Dodd’s plan is nothing like the direct equity investments called for by Krugman/Yglesias to stabilize the system.
Under Dodd, *if* the Treasury has a loss on a security and *if* they choose to sell that security and realize the loss (rather than buy, hold, fund, and experience losses on a cash flow basis), the Treasury can, in effect, revise the original terms of the purchase. In effect, if they bought an asset for $10 billion and later sell it for $8 billion, they can go back to the seller and require the issuance of shares equal to 125% of the loss, (in this example, $2.5 billion). A bonus wrinkle - the share price is based on the level at the time of the original purchase, not the final sale; this relieves distressed firms and hurts firms whose shares have recovered.
That does not represent new money or new capital for the seller - the original proceeds were $10 billion and that is all they get.
It does represent dilution of the original investors, it means that the “seller” is still exposed to price risk if the security drops (even due to broad market movements rather than original mispricing), and it makes it very unlikely that private investors will want to buy equity, given the uncertain possibility of sudden dilution based on a Treasury decision to book a loss.
However, it does give taxpayers protection against loss, which is the goal. The goal is not to recapitalize or even stabilize the financial firms.
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