What the latest bailout plan means

Now that the details are out, we can safely state that the US political and financial leadership has completely sold out the taxpayers and has done so in a manner that is startling, both in its recklessness and its brazenness.

The reckless part I will spell out in the details below.

The brazen part is in how this is being spun out, as if the entire plan were hatched in a hurried rush, at the last minute, after events forced the issue. This is the spin, but it is completely false.

Because many financial commentators, ranging from Roubini to Roach to Calculated Risk to myself, foresaw these events, we can be completely confident that these events were both anticipated and planned for long in advance. The only question left was how they were going to be 'sold' to the public. What better way than in the midst of a "massive financial panic" that required urgent action?

And now that the details are out, the plan is even more insidious than I ever dreamed.

On Friday the news started to leak out that perhaps $500 billion was the, uh, 'floor' for the bailout, and that it might be up to 60% larger than that:

[quote]WASHINGTON (Reuters) - The U.S. Treasury will propose a $500 billion to $800 billion government program to take toxic mortgage-related assets off the books of U.S. financial firms, banking industry sources said on Friday.

The sources said the government would acquire residential and commercial mortgages and mortgage-backed securities under the proposal, which needs Congressional approval.

A Treasury spokeswoman declined to comment.[/quote]

So it looks like we are being 'softened' up by Extremely Large Numbers coming in quick succession so that we'll be too numb to argue when the real plan comes out. For the record, my solution would have been very different.

Instead of buying these failed assets off of the banks for $500 billion, I would have preferred to see the banks receive $500 billion in loans, which they'd have to pay back from profits over time, while they retained the failed loans on THEIR books as a reminder to be more careful next time. Same cost to the government, but a very different message sent to reckless lending institutions.

And here are the critical elements from the real plan released yesterday (Sat., 9/20) (hat tip to Lemonyellowschwin for posting this in the comments yesterday). Full details are all the way at the bottom.

[quote] (a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.[/quote]

OK, this starts out kind of like I expected. The definition is a little vague, unfortunately, having stalled at "mortgage-related assets." I would have preferred that they spelled this out, because then we could have assessed which institutions were going to be helped out the most. Certainly these could have and should have been spelled out. This is vague enough to leave open the prospect that practically anything could be defined as "mortgage-related", and I am certain we will see this provision abused. 100% certain.

[quote] Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.[/quote]

Whoa! Stop! What is this "at any one time" language?? This means that $700 billion is NOT the cost of this dangerous legislation, it is only the amount that can be outstanding at any one time. After, say, $100 billion of bad mortgages are disposed of, another $100 billion can be bought. In short, these four little words assure that there is NO LIMIT to the potential size of this bailout. This means that $700 billion is a rolling amount, not a ceiling.

So what happens when you have vague language and an unlimited budget? Fraud and self-dealing. Mark my words, this is the largest looting operation ever in the history of the US, and it's all spelled out right in this delightfully brief document that is about to be rammed through a scared Congress and made into law.

But, certainly, if the combination of vague language and and unlimited budget will create the conditions for further fraud and abuse, at least we live in a nation of "checks and balances," right?


[quote] Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.[/quote]

This language literally took my breath away when I read it. I am now beyond shocked at what is openly transpiring before our very eyes. I can think of NO legitimate reasons(s) for the right of review to be stripped away right from the outset. The illegitimate reason I can think of pertains to the vast riches that are going to flow into the pockets of the well-connected as a result of this act of piracy.

Many such people became fabulously wealthy as a result of picking up real estate assets for pennies on the dollar during the S&L crisis, and that model has being reproduced here.

You can count on it.

This is just another straw, thrown onto an already-collapsed camel, that confirms the fact that the US political system is broken and that the rule of law no longer applies within the US.

My final comment: If it looks like a looting operation, smells like a looting operation, and behaves suspiciously like a looting operation, it might just be a looting operation.

More on this later.


Full language of the act:


Section 1. Short Title.

This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

(2) Secretary.--The term “Secretary” means the Secretary of the Treasury.

(3) United States.--The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.[/quote]

This is a companion discussion topic for the original entry at https://peakprosperity.com/what-the-latest-bailout-plan-means-2/

Chris, does this mean the Paulson Administration can deputize every bank in the country?
“(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;”
That gives me a warm, secure feeling… not.

Thanks Chris, the content is excellent and crash course is very well done.
The way I understand this deal and correct me if I am wrong, but it seems that it should work. If the government buys this toxic debt for say 10% on the dollar, it has essentially purchased 7 trillion dollars of bad debt for $700 billion. At the same time, the financial institutions are relived of 7 trillion in bad debt in exchange for their original capital of $700 billion. This in turn allows these financial institutions to be fully capitalized again and able to lend out another $7 trillion!! No run on the banks and these financial institutions get to take a one time extraordinary write off of ~$6 trillion.
While this is the end of American capitalism as we know it and we will no-doubt be in a massive recession, it should prevent a massive financial collapse and could even be a good deal for the taxpayers as it is likely that we would get a significant return on the investment over say the next 20 years.
Obviously these are some broad assumptions and I am probably missing something but it seems to me that this should prevent financial Armageddon? With what the gov’t is doing, do you expect some short-term stability, say over the next year or so ?

I can not express how angry and frustrated this garbage makes me. If someone had asked me about the sub-prime mess a year ago, my response would have been, “We are in for some rough weather lasting maybe 6-9 months.” But since last August, I have watched as the Masters of the Universe that got us into this mess (e.g., Wall Street whiz kids, Treasury Dons and Fed intelligentsia) have made not just bad decisions—but decisions which are directly contrary to the best interests of our country.
To add insult to injury, the results will directly reward the same morons that created & stoked the monster that is the current banking (and shadow banking) system and then stood by and watched it capsize into crisis. Even more insulting is their soothing rhetoric that “All is well. Go home and shop” (which makes me laugh because I think about Kevin Bacon in Animal House–but I digress).
We have reached a cross roads and had better decide–soon-- whether we will be led by these dolts or we will lead them. Personally, I think the old tradition of using Tar & Feathers ought to make a comeback.

Well, it all sounds good the way you describe it, but I have this concern. If these idiots and crooks didn’t have the know how, or the ethical motivation, to handle business correctly in the first place, why should we think that giving them a fresh start will cause them to behave any differently. Hence, how in the world can we expect them to operate in such a way that they would earn sufficient amounts to EVER pay the interest on this, much less full payback?Isn’t this just another example of shifting wealth from the working class to the wealthy elites?
Ben (half of dbajba)

That’s right - this has just turned into a GLOBAL bailout plan, funded exclusively with U.S. taxpayer money/fiat debt. Chris, I think you better hurry up with Chap. 20 because we don’t have much time left…

It should be pointed out, that while this bill may be every bit as bad for the economy and the nation as Chris states, the section providing that the act “may not be reviewed by any court of law” must be read in its proper legal context. This provision does NOT have the full effect implied by its words, and its purpose is to “fill the legal envelope,” and is very common in law.
Congress doesn’t have the power to prevent the Supreme Court from reviewing congressional legislation. The surpeme court can do so regardless of what language to the contrary appears in the law.
When such language is used, the court will give it as much of the intended effect as is allowable, so far as it goes. In other words, this is the equivalent of the congress telling the court “we know what we are asking for is impossible, but we ask the court to assign as much meaning to this clause as is it can.”
The effect of this provision is on lower courts only, and the intent is to to give the supreme court primary jurisdiction over the law. This one part of the law, at least, is not an insidious attempt at dictatorship - it is a common legal tool used in the most important bills designed to give the supreme court first bat at hearing the issue.

oops. pardon the duplicate post

A fiat currency requires fiat Law for the system to “work”.
Fiat literaly translated from Latin - let it be, or by decree. We no longer have Rule of Law but rule of man by decree.
Fight organized crime - Reelect nobody -vote early and often

You misunderstand the nature of the crisis. Many of the banks in question are insolvent not, as implied by the Fed, facing liquidity issues. To prevent being taken over by the FIDC most of these banks are refraining from ‘writing down’ mortgage related losses on the argument that these ‘assets’ will be worth more later.

In such, these assets will not for the most part be sold at ‘10%’ face value. Instead, they are likely to be sold at anywhere from 30% to 90% face value. Why, because the banks can’t sell at low rates. If they did, they’d fall below their capital limits.

Another misunderstanding. Even if the banks are leveraged 10:1, they are still on the hook for the $7 trillion in losses. They have obligations to meet. Otherwise those huge nasty Credit Default Swaps will kick in, and various debt owners (whom the government has been protecting most religiously) will be stuck with enormous losses.

In other words, if the banks sold $7 trillion for $700 billion they’d be marking down $6.3 trillion in losses.

Which is about 12x as much listed so far.

It can’t prevent a financial collapse, because the finances were never there in the first place to collapse. What the banks are asking for is for the US government to make all the ‘illusionary assets’ into real assets. No matter how you look at it, if the banks have to write down $6.3 trillion that means someone is going to lose $6.3 trillion as compared to where we ‘thought’ we were in 2007 and most of 2008.

I’d note: More realistic estimates put the raw cash at between $1-2 trillion.

Not really. Much like that financial money that ‘disappeared’, American capitalism was never there in the first place. :wink:

Its is zero sum game. For the banks to win, the tax payers must lose. There is no other possibility.

Nope. It might buy short term stability for 1-6 months. After that point the USA will probably no longer be able to borrow enough cash to buy these assets. Once people start doubting the government’s ability to pay, everything will fall down like a house of cards. This is simply way to much, I seriously doubt the USA can find $1-2 trillion dollars in the environment of 2009. Don’t forget all our lenders have either been burned, or are facing their own economic difficulties.

i suggest a listen to wait wait dont tell me on npr.paula poundstone summed it up in two comments"i am well qualified to be a financial analyst i lost my house a long time ago --i was way ahead of the curve"
and the clincher “now that the dollar has so little value we can put george bush on it”

Luigi Zingales, a Professor at the University of Chicago School of Business has written an excellent short essay entitled “Why Paulson is Wrong.”

Correcto-mundo, Doctor M. This is bigger than 9/11. Bigger than the Crash of 1987. Probably bigger than the New Deal, which was the greatest expansion of central government ever.
Some are calling it the “PATRIOT Act of Finance” in its sublime high-handedness. If this gets done, words such as “capitalism,” “democracy,” “economic freedom” and “representative government” will no longer apply to the US.
I call the new system Kleptofeudalism. Under this system, a one-percenter group of privileged Kleptocrats owns and operates the country. Meanwhile, Worker/Suckers – the remaining 99% of the population – serve as their livestock. Worker/Suckers exist only to service the Treasury debt, and breed more Worker/Suckers to keep servicing the debt in generations to come. As in feudal times, class lines will solidify into iron curtains. The chances of your children advancing from Worker/Sucker to Kleptocrat will be virtually nil.
This is literally the most radical event which has happened on North American soil since the Declaration of Independence was issued on 4th July 1776. But this is an anti-Revolution, a rollback of liberty, an enslavement. It is a fundamental and irrevocable alteration of our form of government.
The only certainty, under the coming tyranny, is that the dollar is doomed to become a weak, Third World currency, which may not even be accepted outside CONUS borders. As refugees from 1930s fascism learned, gold is good. But diamonds may be more concealable and transportable.
Frankly, I fear social unrest. If busted plutocrats can loot the Treasury for $700 billion on a whim, why shouldn’t the jobless homeless loot stores for clothes and shoes? There is no answer, other than than “the ‘law’ is only for little people.” And such an answer may not be satisfactory.
Congratulations on proclaiming – well in advance – “The End of Money.” Ding ding ding, it’s here. Now what?

Send out the following to everyone you know -=============================================
As a tax payer - I thought you would want to know that Congress is voting on a bill that will add $700 BILLION to your debt. This is a debt that can NEVER be repaid - only the interest can be paid and the interest is whatever “they say it will be”. That amounts to interest on $11,000 per person (man, woman and child) in the U.S. every year for the rest of you lifetime.
Contact your congress person and tell them to vote “NO” to adding to your debt and that poor practices by savings, loans and other institutions are not your responsibility. Tell them you will watch their vote and if they vote for this - you will campaign against them when their term is over.
What you can do:
Forward this email to as many people as you can by Monday morning (Sept. 21 2008)
Email your congress representative on:
Attention Representative ______________,
I will watch your vote on this bill and if you take part in passing this debt onto me and my children and grandchildren, I will campaign against you when your term is up. Let poor lending and banking practices speak for themselves and quit burdening me with their problems.
Your Taxpayer
===========end email==========

Chris,If I can get the pastor at my local church to agree to allow me to show the crash course to my congregation, would you allow me to do so? I would not want to do so without your blessing. I so appreciate your efforts to open my eyes. I wish I could do more. In my poverty, I have become a registered user. I will always consider that the most important money I’ve “invested” in my life.


DPS - I put the Crash Course out there specifically so that people would use it however they felt like it.


Thank you for asking though.


Hopefully the new, faster server will make the experience quicker and easier for you.


Chris Martenson


MH - the "PATRIOT Act of finance".


That is a perfect description as the two Acts share everything but a similarity in volume.


Like you, I worry about whatever awaits in "Act III".


Chris Martenson


Chapter 20 ... working on it... but everytime I think I have the problems sets described, the boundaries move...


Chris Martenson




Even if I shared your enthusiasm for the Supreme Court as legitimate balance of executive and legislative power (sorry, but I lost that completely and irrevocably in in the 2000 election decision), I would point out that it takes years and years to get something onto the docket of the Supreme Court.

And even then they can decide to either hear the case or not.


After this looting operation has run for several years, it will be cold comfort indeed to have the Supreme Court weigh in with a decision that all this was unconstitutional.


The damage will have been done, the money all gone, and the suspects retired (or living in Paraguay).


I guess, though, my greatest barrier is contained in my opening sentence. The 2000 election ruling based as it was (supposedly) on the 14th amendment was so far off base, and so utterly without merit, that I have not yet been able to recover even the slightest sense of respect for the Supreme Court.


Since then, I've watched the court "divide their rulings", sometimes 5-4 this way and sometimes 4-5 that way, with the common denominator always being a validation of the expansion of government over individual and states rights. Kelo V New London being a perfect example. There a supposedly "liberal" majority decided that municipalities could seize private property for "public use" even if that public use was "higher taxes from that piece of property".


So, yes, I tend to take the wording of these documents very seriously and do not, as you do, assume it's just "boilerplate" language. It's there for a reason and it will be used for the reason it was intended.

Chris Martenson

Chris, excellent videos BTW. But I have a question. If the entire economic house of cards is going to collapse anyway, what does it matter if the feds bail these banks out? Seems to me that it would just be a drop in the bucket of debt the US owes and is on the hook for. When it all comes crashing down won’t that debt just evaporate anyway?

It’s kinda like a mortgage when the next great depression hits. There is no way the government will tolerate having millions thrown out of their homes (mass rioting would occur, and with these mortgages in the hands of the government it is more likely they will forgive them), and there is no way people will be able to pay their mortgages in a depression. So I can see governments decreeing a moratorium on all loan payments. Essentually wiping out everyone’s debt. You just don’t want to be at the beginning of the crash, and get tossed out, but hang on long enough for the moratorium.