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Stock Ideas Investors Daily Edge Bailing on the Bailout / For Now
Stock Ideas Investors Daily Edge Bailing on the Bailout / For Now 
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| Bailing on the Bailout / For Now |
| Friday, 03 October 2008 | ||||||||
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On Tuesday, Congress stopped for Rosh Hashanah. It’s not a bad idea to take a spiritual break once in a while. It’s the spiritual rather than the practical that has bogged down. The vote on a bailout failed on Monday, as you know. Work resumed Wednesday (as I write). But this time, Congress needs to serve up a new rescue plan with four qualities it missed in the last: • Leadership • Confidence • Trust • Transparency The mechanics of the bailout that failed on Monday were imperfect, but they were sufficient to the job of shoring up banks so business can proceed. Any plan will be imperfect. But what will it take to make one work? And by that I mean to get real estate and business lending and other credit back on track. Start with leadership. Poll after poll shows that the average person is equally likely to be (1) angry that the bailout bill was not passed even if they aren’t sure how it works, or, (2) angry that the fat cats are getting all the money and believe it does nothing for them. Few see the failed bailout as a help to borrowers or the rest of us. The Leadership Vacuum Needs Filling In fact, many of the things people hate or fear about bailing out rotten banks were addressed in the rejected plan. But the details were so badly explained people were unaware they even existed. The media spent too much time reporting on personalities and politics and put nearly zero effort into actually discussing the plan’s content. But don’t blame the media entirely. That’s a failure of leadership. No one has stepped up to clearly say, “This plan passes money through these institutions only to buy assets from them—at a loss to them and hopefully at a gain to the buyer. This will keep that problem from hurting us further, and this is how it will ultimately benefit you… ”
No one has clearly said, “This is not a reward for errant bankers, the money has to go there first in the same way antibiotics have to go to the sick to avoid spreading disease to us all…” No one has stepped up to explain how working this way will actually do more to get the credit system back on track than direct aid to homeowners will. The failed plan (as well as the next version) attempts to do one thing: get those toxic asset-backed securities out of the system’s arteries so good blood can flow again. This does benefit Main Street ultimately, because both consumers and businesses depend on reasonably available credit. The current lockup in lending is dragging the economy down, far more than the actual losses of the failed banks can do alone. By the way, the market is already taking care of many bad banks. They are being seized or sold. So ultimately, the banks involved with the “bailout” money will largely be different from the banks that made the loans. It will be Bank of America, not Countrywide for instance that will be able to sell these distressed assets and do more lending. But this message is being lost as well because the plan has such poor leadership to speak for it. In the Land of the Blind, Can a One-Eyed Paulsen Be King? The problem of leadership is that Treasury Secretary Henry Paulsen can’t inspire anyone even if he can and would do the job correctly--he spent too much time denying a problem for us to automatically feel good about trusting him at the helm. What? Suddenly he’s a visionary? Paulsen’s failure, unfortunately, reflects backward to his boss, President Bush. Bush’s efforts to get a plan done are good, and I appreciate that he did step in, but the push to make his clueless secretary a key player is the plan’s weakest point. I might add that neither of the presidential candidates said anything significant about the banking crisis at an early stage, either. Leadership includes vision, and none of the above showed they had any in this area. So we need someone else to take charge. So far, the proposed plans have put the Secretary of the Treasury and Board of Governors of the Federal Reserve in charge, mostly the Secretary. No one is reassured by that. But it also proposed an Office of the Special Inspector General for the Troubled Asset Relief Program. How about putting out some trial balloon rumors on who that might be? A little practical politics would be good here. The bailout should have a prominent face—but not the Treasury Secretary's. It should have a commissioner –or Special Inspector if you will – who will tell us how it proceeds. Regulations and future legislation would also benefit from the thoughts of an advisory council made up of people who were not part of the problem. Too bad we can’t draft Warren Buffett. That would inspire the country quickly. Looking for Ben—Franklin, That Is By chance, this week I have been reading a biography of Benjamin Franklin. The not-yet- United States was in far worse condition in 1776 when Franklin went to France to beg arms and money for the Revolution. Our childish history books told us that the French were happy to help because they loved Franklin and hated the English. That was not quite the way things went. France’s own war with the English (King George’s War here, the Seven Years War there) had too recently ended for them to want to get embroiled again. Aiding the colonies was not a free cheap shot. It was very risky. The aid began in stealth and with doubts. Moreover, the colonies had no credit, no stature, and no established military. It was crazy to trust us. Not even everyone in America was for separation from England. Franklin’s own son, governor of New Jersey, opposed it to the end. Franklin himself lived in Britain and worked there for many years trying to bring the colonies and mother country together before Britain’s actions finally turned him to the view that independence was the only course left. Yet at a key point, a man like Franklin who spoke clearly was able to convince doubters abroad. Others at home, you know the names—Washington, Jefferson, Adams, Paine—did the same here. Things were also worse in the Great Depression than they are now. The financial community has done itself a great disservice in preaching the felony of FDR as gospel so loudly. The turnaround in the economy then had only some to do with New Deal spending and much more to do with the sense that someone was truly in charge. FDR was charismatic. People believed something better was possible—and they believed it in far worse times. Oh Say Can You See…. What the Plan Is? Transparency is critical to confidence. The failed bailout included monthly reports. That was barely noted in any news coverage. It is a critical point and one of the better provisions in the plan so far. Those of us out here on Main Street know we may have to swallow a plan we don’t wholeheartedly love. But we do want to know that the wheeling and dealing will not proceed under tables and behind closed doors. Who is getting how much? On what terms? What losses and gains incur? What is the government paying for the bad loans it buys? Will it be 20% of face value, 50%, 80%? There is a huge difference and a delicate balance in that rate, which the defeated legislation did not even mention. The monthly reports will reveal that. Also each $50 billion tranche will get its own report on how the prices were set. It would help if some guidelines were incorporated in the bailout legislation itself. Wanted, Bankers Sober as a Bartender Rebuilding trust in the banking system is critical to real success. We now have a few banks that did not get in trouble. They remained sober, boring and responsible. Just what a bank and bankers should be. Why are these banks not noted in the leadership, perhaps in an oversight committee to lead and interpret what is going on? Banking is hard to understand. If Warren Buffett still admires Goldman Sachs, if Wells Fargo comes out strong enough to grab assets from the losers, as do other bankers, I want to know that people like this will be in on the deal. I don’t want the same clowns who screwed it up to be the ones in charge of the repair work. Our view of bankers is tainted now. Time for the boring, sober, gray-suited crowd to run the recovery and build confidence again. The actual bailout may last a few years. The rebuilding of bankers reputations will take much longer. Look back to the savings and loan crisis of the 80s. I had money in an S&L that was well run, friendly and convenient. But after the crisis, even good S&Ls disappeared. The very words “savings and loan” have a taint. Now the word “bank” carries one, too. Several sections of the bailout plan that failed directed it to “assist homeowners” and “minimize costs to taxpayers.” That is vague wording. Add some detail, Congress, and we may like your plan better. It’s not that you won’t do those things—it’s that you need to say it louder and prouder before we believe you. Bankers have been gamblers—it is their reckless pursuit of fat profits on tiny margins, which can only be done with sleight of hand, that brought us to this stage. Time to stop blaming people who only wanted to own a home—perhaps their judgment was impaired, but they’re amateurs. Bankers were supposed to know better. It will take many years for “banker” to rank among admirable professions again. Believing Will Come from Seeing Finally, the entire bailout, rescue, reorganization or whatever you like to call it has one big job—to make us confident in our potential for growth and prosperity again. Available credit is key to that. None of us here on the Main Street level have any interest in merely stopping old bankers’ wounds from bleeding out. If the bankers could bleed without hurting us, we’d let them do it. We need to know that the plan’s assistance to banks will actually make the credit system work again for us. The bailout needs to express how it accomplishes that more clearly. What are the obligations of institutions that are allowed to sell their bad loans to government? Can they unload their troubles then still sit on money, keeping credit tight? This is a concern because we already know that adding liquidity to a system and making credit from the Fed available does no good in itself. The Fed has tried that for months, but scared bankers almost ceased lending no matter how easy and cheap overnight money got or how many extra institutions were allowed to borrow directly from the Fed. Making cheap money available is not enough. I would hope that the next version of the bailout addresses the liquidity problem directly. We’ve had enough non-working trickle-down economics in America to be suspicious that saving a fat cat will end up helping a poor Joe. Surely a new bailout plan will succeed and soon. Congress saw what could happen when it plays games. Let’s hope this next round is better than the last. P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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