Sunday, September 28, 2008

It's a Deal

Early this morning, as most Americans slept perhaps restlessly in light of the current crisis, Congress came to agreement on a plan that has a little of what everyone was looking for: (1) big money injected quickly into the market (2) limits on golden parachutes for executives of failed firms (3) stock warrants for the government in return for the bailout (4) and as a nod to the House Republicans a market-based solution through insurance alternatives to the government buying distressed securities.

The details have yet to be put in writing, and that is the task for Sunday. Perhaps the market will know where things stand by the time the bell rings Monday morning. I have a feeling it will be years before we fully comprehend the effects of this momentous occasion.

More here at Breitbart.


Kelly J. Bozanic said...

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them."
~ Thomas Jefferson

Are the only two options depression or bailout? No doubt we are truly in a financial crisis with global impact, but I have a hard time believing the only option to avoid total market failure is this bailout plan. As a professor reminded us this week, bad times can make bad laws.

The 106-page draft of the bill is available here.

Alison M. Kilmartin said...

I agree. I think something was needed, although I am not knowledgeable enough to know exactly what. However, I do not think that this was the way to go.

I am especially concerned about draconian restrictions on businesses and executives that may drive the best and brightest out of our markets and into foreign competitors'.

I posted a while back on the need for integrity in the market. If executives had acted with integrity in the first place and not tried to get away with this sub-prime, tranche, securitization nonsense, we might not be where we are today.

It's possible too that politicians and not just executives are responsible.

Kelly J. Bozanic said...

The video is compelling, but I would hesitate to pinpoint the cause of the financial situation as resulting from only one source, there were many factors at play. As with most propaganda, the video must be taken with a grain of salt, there is a lot of political spin in it.

I am curious about your distinction between politicians and executives. Aren't the executives merely acting within the boundaries the politicians set? To play Devil's advocate, is it incumbent upon the executive to tell politicians they left a loop-hole? In our markets, the more information you possess, the more profit you stand to earn. Maybe a more fundamental problem is that financial regulation is complicated and nuanced, and politicians are struggling to understand the details, let alone legislate accurately? I don't mean to justify the executives' actions, I simply don't think they are solely to blame. Likewise, the politicians did have a role to play in all of this, yet placing blame on one party seems counter-productive . . . I guess we are in an election year, though!

A lot of the structured finance is good for the economy, when adequate disclosures, etc. are given. Securitization is not the bad guy here. Your point about integrity in the market, though, is well taken and worth revisiting.

Alison M. Kilmartin said...

I think my comment that "politicians and not just executives" is in line with your suggestion that no party is solely to blame. You are preaching to the choir there.

I like your observation that the nuance of the market may be over politicians heads, and I think that very well may be true.

I see your point about loop holes and the defense for taking advantage of them, but again I suggest that integrity should prevent the market from taking advantage of politicians' ignorance and, as a result, playing foul while the referees aren't looking or even know what to be looking for.

With all that said, I recall a bright young law student teaching me about securitization of loans and how "brilliant" it was that the market found a way to make money out of nothing. If a law student could see that, certainly a run of the mill politician could see that, and as we all know from the Red Lion, there are no free lunches. Making money out of nothing really was and is too good to be true.

Kelly J. Bozanic said...

Securitization is not a "free lunch," it is complex contracting with consideration on all sides. People abused the market, people failed to give proper disclosures, and people failed to ask the right questions. Demonizing securitization for the failure of people is like blaming alcohol for drunk drivers.