Image by earthpro via FlickrAppropriate: It Became An Earmark Attachment
Can Anybody Say ‘Oink?’
The Senate attached the provisions of the failed House bill we’ve all come to abhorrently know as ‘The Bailout’ to the Mental Health and Substance Abuse Parity Act (HR 1424), and passed it by a vote of 74-25. Both Barack Obama and John McCain voted in favor of the bill.
Pork barrel earmarks were added to very worthy endeavors long sought by the more progressive members of Congress, and also some measures that were aimed at specific demographics of the US.
Earlier in the week, the House defeated the bill, and the stock market reacted by dropping nearly 800 points, the largest point drop ever. It was not, however, the largest percentage drop. It wasn’t even in the top 5 worst days for Wall Street.
And an astute observer of the Dow Jones Index will notice that the rally which began the day after the Bailout was mentioned combined with the fall after it was defeated and the correction upward from there, left us actually a bit on the upside on September 30th.
The Senate is selling a pig in a poke. And the poke smells nasty. They did drop a couple of pearls in with the putrid carcass, but nothing worth the estimated 1 trillion dollars this bailout is estimated to cost. Add to that: they are lying on the face of it.
Take the CEO-type golden parachutes. The common understanding from listening to these guys would be that they won’t be allowed. In fact, if you read the text it specifically says that the guys who are already employed as senior management of these companies are exempt from that rule. That means that the very guys who made this mess will reap millions and possibly hundreds of millions in rewards for nearly bankrupting the world.
How about the raise in the FDIC insurance from 100 thousand to 250 thousand? That sounds great, right? Well, it is – but it’s smoke. There is no immediate substance in it for most of us because it’s not the banks generally that are in trouble. It’s the securities and investment firms. Banks have to work by stricter guidelines and usually don’t make these kinds of investments.
Mark To Market Derivatives
After reading the thing all week and studying the implications of everything I can find in the text of the proposal, I think it’s all about one thing and one thing only. Everything else is a smokescreen to make us look the other way. That one thing is the section eliminating the need for ‘mark-to-market’ assets required by FASB157.
That’s a nice little rule that went into effect earlier this year, in February, which requires securities firms holding paper assets to value them each day based on what they can sell them for… that day.
For most assets, that’s okay. But these assets are based on derivatives of other assets and then grouped together in a way that makes it very hard to know even exactly what the asset is. Some very interesting mathematics went into creating these things.
When they were first introduced everybody loved them. They seemed to allow an unlimited amount of secure leverage, something never seen before. So they were traded fiercely, and sold easily from one Great House of Finance to another around the world. Pretty soon, everybody had some.
How Much Are These Beanie Babies Worth?
Then somebody noticed that the math wasn’t predicting actual returns, because the math grossly underestimated default rates on the basic underlying assets: home mortgages. Suddenly, everyone was leary of the things and nobody wanted to buy any more.
Word gets around that nobody would buy any new derivatives and folks start wondering how much the ones they’ve got are really worth. So they try to sell a few, but everybody’s wondering and so everybody wants to sell a few. Nobody’s buying.
Bottom Line: About A Trillion Dollars For Worthless Paper
In every market, however large or small, the buyer sets the price. If I’m selling you a car for $1000 and you offer me $800, and I take it, then you set the price. If I say 900 and you say yea, you still set the price because without you there is no sale. You are the one with the capital. You set the price.
So when there are no buyers, there is no price. If there is no price, the price essentially is zero. The value is gone. The paper is worthless.
I am Jon. It’s late. I need to sleep.
A great conversation with many informed and some ill-informed comments is going on over at The Big Picture. Click and check out what many people are saying about the bailout’s provisions.
The previous version was 110 pages. This one is 451 pages. I can’t read it all tonight. As soon as I work my way through it, (assuming the House passes it) I’ll discuss it more here.-jon