The "Arm Twisting" Open Thread...

217 needed to pass

The vote has already gone at least 30-minutes.

Must be fun down on the floor right now...

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Diplomacy is the art of saying 'Nice doggie' until you can find a rock.

"After two years in Washington, I often long for the realism and sincerity of Hollywood." -Fred Dalton Thompson

... they had not come out so strongly against waterboarding, eh?

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Diplomacy is the art of saying 'Nice doggie' until you can find a rock.

I think I can say, and say with pride, that we have legislatures that bring higher prices than any in the world. ~ Mark Twain

A leading, or trailing, indicator?

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Diplomacy is the art of saying 'Nice doggie' until you can find a rock.

DOW: -8%
NASDAQ: -11%

Gonna be a bad, bad day on the street.

Say a prayer for our good friend Streetwise, folks. Methinks he's going to need it.

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Diplomacy is the art of saying 'Nice doggie' until you can find a rock.

Dear Steve: Since things are moving so quickly with this legislation I've
taken the liberty of sharing some "Coles Notes" on problems in the
currently proposed draft legislation. I have done a deal or two…..these
are the issues I’d be worried about if I were Treasury Secretary For A
Day.

Good luck and keep 'em honest!

1. THE PLAN MISSES THE KEY ISSUE – WE SIMPLY GIVE MONEY BACK TO WALL
STREET AND CROSS OUR FINGERS THAT SUCH FIRMS WILL RETURN LIQUIDITY TO MARKETS.

Financial institutions who receive government support are under
no obligation whatsoever to use such funds to provide liquidity to the
financial markets. Thus this aid package fundamentally misses the real
problem and may not provide liquidity of trading we need. Instead, such
financial institutions could simply distribute the cash to shareholders
and partners, and provide no further help to the economy.

2. TAX LOSS CARRYFORWARDS WILL MEAN THEY DO NOT ACTUALLY PAY TAXES.

Importantly, any tax levy in 5 years on troubled financial institutions
will be avoided by such bailed out firms. Financial institutions holding
troubled assets will incur TAX LOSSES today from the sale of such assets
to government and thus will be except from paying taxes for very long
periods of time as a result of tax loss carryforward rules (the amount of
such tax losses will depend upon how they originally accounted for the
assets in their financial statements - some firms may record massive tax
write downs). In fact in 5 years they may still have sufficient tax shelter from the sale of these troubled assets that they will not be subject to the special tax on financial institutions. Ironically, the financial institutions that avoided these troubled assets and thus did not incur tax losses will be the ones who carry the burden of the new tax since they will not have tax shield available.

3. The total exposure of government is possibly $3.131-TRILLION - well in
excess of $700 bn since this is simply an upper ceiling on the maximum outstanding at any one time (per notes on page 40 of the Act). The plan is designed to absorb substantially more troubled assets - as government sells such assets the proceeds from sale can then be used by the Secretary to buy more troubled assets. This establishes a “revolving” loan facility which can be used over and over again to buy troubled assets and then sell such assets. The true exposure of government debt is illustrated by the requested increase in the statutory limits of total debt allowed. This new bill requests to increase the allowed debt by $3.131-trillion
(from $8.184-trillion to $11.315-trillion, per pp. 68, line 8). See http://www4.law.cornell.edu/uscodehtmluscode31usc_sec_31_00003101----000-.html for current wording and limit on government debt.

4. Credit card loans and car loans that are secured by a home loan (very
common in USA) are included in the bail out package. See pp. 14, line 18. Any type of purchase on a credit line secured by a home can be acquired or guaranteed by the government. Since such loans are very common this means virtually any type of debt can be taken over by the Secretary. Thispackage goes well beyond subprime mortgage loans.

5. There is practically no cap on what a financial institution can sell to the government. The cap has been set at $100,000,000 (pp 38, line 24). Thus a small number of big-time offenders can dump their bad debts onto government. If it is only a small number of firms that hold large amounts of such paper then the government should consider allowing them to fail. Government intervention is appropriate to stop systematic broadly-based risk. Not a handful of firms. The private sector could easily buy up a handful of firms with such troubled assets (e.g. JP Morgan easily absorbed WaMu and other institutions like Barclays are seeking opportunistic
acquisitions)

6. There is no clarity on the type of deals the Secretary can structure. He has a free hand to deem what is appropriate - even if such deals are not at fair market value. pp 35 line 10 outlines the mechanism for how government takes an equity or debt position in the selling financial institution. Importantly, there is no mention or requirement for the Secretary to use fair market value in determining the value of debt bought by the government. As mentioned earlier the selling financial institutions
can flip debt acquired from other struggling financial institutions to the government. There is no consent requirement for the Secretary from any oversight committee. Suggested improvements:

(a) Have Secretary establish fair market value for consideration paid when buying, insuring or guaranteeing troubled assets.

(b) Have Selling/insured financial institution indemnify government against any and all losses resulting from the troubled assets bought, insured or guaranteed. Thus the downside risk of loss will be mitigated.

(c) Have government receive equity participation IN ADDITION to the indemnification.

(d) Place limitations on distributions/dividends to shareholders until the loans are repaid. There is no limitation on dividends and other distributions to partners/shareholders from the financial institutions. Repayment of government obligations should rank ahead of dividends and other partner/shareholder distributions until the government loans have been fully repaid with interest. Otherwise the financial institutions may simply use the government's capital to repay shareholders and then cease operations - making the equity value of such firms (or subsidiaries) useless.

7. NO PARENT COMPANY GUARANTEE. Guarantees of payment should be received from parent companies of firms and entities that have actual value/substance. In many cases the mortgage operating companies of major financial institutions are worthless as a result of poor loans thus equity in such subsidiary loan firms is worthless. Guarantees from the parent company have far more meaning and value. As seen in the Lehman melt-down – the mortgage arm of the bank was let go but the investment banking arm and equity trading arms were purchased almost immediately – they have value while the loan desk was dropped like a rock.

8. THE BROADER FINANCIAL COMMUNITY WILL BE TAXED IN 5 YEARS FOR TODAY'S LOSSES BY A SMALL NUMBER OF WALL STREET FIRMS.

Per Page 90, line 4. After 5 years the President may submit a new legislative proposal (tax act) to recoup losses in this program. Such legislative proposal is to be applied to the entire "financial industry". Thus losses from this round of debt acquisitions/insurance (from a small number of financial institutions) is to be passed on to the broader financial industry in 5 years (after the2012 presidential election).

9. The new Act allows financial institutions to acquire troubled assets from distressed companies and "flip" them to the government at a profit. pp 9, lines 18-22. Financial institutions can sell their troubled assets to the government AND MAKE A PROFIT if such assets were purchased from Fannie Mae, Freddie Mac or companies in receivership like Bear Sterns and Lehman Brothers etc.

These notes may be copied, quoted, paraphrased any anyone WITHOUT attributing credit in any form to the writer.

Megan McArdle:

But Pelosi is the one who was vested with the ultimate responsibility for shaping the legislative process in the House. She not only dropped the ball; she picked it up and drop kicked it through her own goal.

I think I can say, and say with pride, that we have legislatures that bring higher prices than any in the world. ~ Mark Twain