We have seen the enemy and he is us. A couple of years ago it was clear to nearly everyone that the real estate markets were becoming overpriced for most Americans.
Well clear to nearly everyone except for the mortgage lenders who in a greed driven frenzy continued to push new loans as if the money they were lending wasn't theirs. It wasn't.
In June of 2006 Henry Paulson became Treasury Secretary
"The Secretary of the Treasury is the principal economic advisor to the President and plays a critical role in policy-making by bringing an economic and government financial policy perspective to issues facing the government. The Secretary is responsible for formulating and recommending domestic and international financial, economic, and tax policy, participating in the formulation of broad fiscal policies that have general significance for the economy, and managing the public debt. The Secretary oversees the activities of the Department in carrying out its major law enforcement responsibilities;..."Mr. Paulson had been an employee for Goldman Sachs until becoming Treasury Secretary. He is the consummate insider and assumed his responsibilities right at the time the real estate markets were reaching their peak.
It is highly unlikely Mr. Paulson was unaware of the extent of the risks to the US financial system presented by a real estate market at full boil, yet he did nothing.
Fast forward to September 2008, Mr. Paulson is now about as believable as his boss, the president. Throughout the development of the current fiscal crisis, Paulson has dragged his feet, avoiding any proactive response which might mitigate the growing problem.
The question I ask is why? Either he didn't anticipate the developing severity of the financial problem, or he didn't want to take an action which would be opposed by his cronies in the banking sector.
Whatever the answer, neither response gives me much confidence to "trust him" now for a fix to the problem.
What the Treasury Secretary is asking for is the power to take over the banks bad loans, no questions asked, "trust me"
Well I don't trust him in this rush to judgment for a solution to a problem which is both extremely complex technically and fundamentally simple.
At the core of the technical problems are the derivative instruments which by public acclamation, "nobody seems to understand". This is nothing more than misdirection, something the current administration is very good at. These are complex instruments, if a lending institution doesn't fully understand their implied risks they should have avoided using them.
The fundamental problem is simple, the lending institutions made bad loans on assets which were overvalued relative to what the borrower could pay. By making these unsound loans, the lenders acted as agents which helped cause the price inflation in the real estate market.
The Congress of the United States should not write a blank check for $700 Billion dollars from taxpayer funds.
Congress should take action like it is a USA Sovereign Wealth Fund
The problems can be solved by investing in this country but with the goal of making returns in excess of US Treasury Debt.
The failing lending institutions should be the ones who pay, their mistakes were fundamentally simple, so the solution should be fundamentally simple. It is time the lending institutions receive a referesher course in Capitalism.
1. The bad loans should be assigned an intrinsic value (IV) and a premium.
2. The IV + the premium = the face value, 100% of the loan value.
3. The IV = the marked to the market value at the time of the bailout.
The Treasury should negotiate in behalf of the US Taxpayers to purchase the loans for less than the face value, preferably the presently established market value.
If the negotiated price is greater than the market value, the Treasury should be issued preferred stock or debt from the lending institution at rates similar to those recieved layely by the Sovereign Wealth Funds.
The Treasury should seek board seats on the lending institution which receive financing and use their board votes to oversee executive payments and bonuses.
If all this seems onerous to the lending institutions too bad, if they do not want the financial help let them go bankrupt. No pain, no gain.
The USA Sovereign Wealth Fund should seek to make a profit for the American Taxpayer.
Experts See a Need for Punitive Action in Bailout by Peter Goodman for the NY Times.
Cash for Trash by Paul Krugman for the NY Times.