Equity participation is nice, but it probably does not protect taxpayers, and it doesn't offer real control of these financial institutions.
But it has the nice effect of kicking the problem down the road so that the current cast of cronies who've profited over the past decade (or, really, three) can avoid real accountability.
In fact, the likelihood of this actually being a liquidity crisis is probably less than the nasty alternatives, in which case the best solution is to simply cut to the chase and nationalize, expropriating assets of those who've profited, and start putting some of them in jail. Fai de bèn a Bertrand, te lou rendra en cagant
I don't follow: in a scenario where the Treasury sells at a loss and ends up owning 100% of the equity, you have real control and nationalisation, right? A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Buying up a ShitPile™ isn't the same, because it's a disorganised mess of claims and counterclaims, and not a strategy for the entire indutry.
True nationalisation would mean ownership and strategic management, with the explicit goal of running the finance industry for the benefit of Main St, not Wall St.
The Dodd plan has some elements of that, but it falls short of going all the way.
Except that that's not how they were run, even in the Soviet Union in the 1960's, if Galbraith is to be believed. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
I don't think there's an organic need in complex planning systems. The problem is setting aims - jobs, quality of service, profits, pick any two - and getting a balance between dynamism and stability.
Monolithic state enterprises vs predatory freebooting capitalists aren't the only two possible options.
To paraphrase Gilmore
"The Internet interprets rentiers as damage and routes around them"
Apparatchiks probably are Damage, too. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
And neither of them appear to have been the dominant forms in the 1960's, again if Galbraith is to be believed. I wasn't alive to see it, were you? A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
The "dynamism of markets" narrative simply doesn't apply. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
I agree that there's no such thing as inherent market dynamism. But I don't see that as the issue.
It's really about management culture. The problem with nationalised industries is that they're managed by ignorant civil servants and equally ignorant time-serving pols, who are parachuted into departments where they're supposed to offer expert direction even though they have no fucking clue.
The problem with piratical freebooting industries is that they're run by vampires and psychopaths.
Somewhere between those extremes are lean cultures which move fast and actually work well.
There's nothing inherently economic about this - it's almost entirely a management problem.
By the mid 70s that effort had largely run of steam - certainly in the UK, and probably also in the US. I don't know enough about Soviet Rrrrussia to say anything plausible about what was happening there, but the Soviets didn't seem to have a similar innovation culture, and never really got over their pseudo-Lysenkoist ambivalence about science.
By the 80s a lot of these middle ground enterprises were dead, dying, or on life support, which suggests they can't really have been all that responsive.
HP used to be very good but nowadays its more their tech support than anything else thats of great quality. Tech companies in general are no better than their nuts and bolts counterparts in having new ideas. google just has so much money nowadays it can afford a scattershot development approach, either that or buy up anything that looks like its a got a good chance of being successful. Any idiot can face a crisis - it's day to day living that wears you out.
But not.
I'm really starting to dislike Apple. If you take away the maDz Dezignz Skillz there's a fascist jackboot behind that funky Gap-wearing facade.
Apart from the shiny, they're good at building closed consumer markets which they can dominate ruthlessly, in the same way that Microsoft tries to build and dominate business markets.
Jobs was smart enough to realise that hardware and software are drug pusher techno-teasers now, and you make your money from building a content bazaar and renting out space in it.
All I know is that while the addicts are still enslaved by the shiny, it's getting harder and harder to find Apple journos, many of whom used to be fans, who actually like Apple any more.
Wouldn't it be a huge surprise if there were good reasons for that?
But it's always good when a company doesn't kill viable products just because it can.
In some cases the phone bricks itself on the spot.
Then the police have to be called in to some locations because there's serious danger of rioting.
Purely dispassionately - really, does anything about this seem sane to you?
Yep - buy Apple, and you'll be special. But not.
Reminds me of a mate and I seeing the Levellers in Wolverhampton, and literally crying with laughter at the crowd all chanting in unison "Theres only one way of life and thats your own" Any idiot can face a crisis - it's day to day living that wears you out.
is it so ruthless, when people are contributing apps from all over that work on apple's OS?
apple just makes IT easier for luddites and non-nerds to enjoy worry free computing, the whole 'think different' was good pr, but only could take on a rebel, 'creative' aspect because MS was ruthlessly locking people into bloatware that didn't work very reliably.
as apple got bigger, quality went down in some areas, but unless you're into linux, apple still represents a middle way, happy medium between gateswarez and the future, which undoubtedly will go to open source, peer to peer, drm free eventually. power to the people!
it's an interim thing...
(and yes the mac superiority complex is as ugly as any other!)
once you work with a mac, it's hard to go back, but one day i want to go beyond, to the starry firmament where the really free spirits live and code... ~"When an inner situation is not made conscious, it appears outside as fate." Karl Jung~
Just to contribute a bit more to the total OT-ness of this subthread:
Have you looked at Ubuntu? The Momcat has been trying off and on for years to kick the M$ habit. She has had a spin or two with several different Linux distributions, but even with live-in tech support (me) she never really got completely comfortable. Like a smoker breaking down, she would always eventually go back to the borg. About two years ago she tried Ubuntu and immediately fell in love. She shows every sign of being quite happy with it. She has gone through at least one complete upgrade with essentially no help from me. She still keeps an old W98 installation for the odd anime DVD that won't play nice, but she rarely uses it anymore. Now where are we going and what's with the handbasket?
No largemature corporation is fleet-footed. It's a planning organization
I wasn't alive to see it, were you?
I turned 21 in '63. The economy was dominated by a large number of large corporations, in every industry. Banking and finance was a rather small area. The sort of industrial policy to which Gailbraith refers required consensus amongst a wide number of participants. That is much less so today. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
AFP via google: FBI probes finance giants for fraud: report
The US Federal Bureau of Investigation is probing allegations of fraud by 26 Wall Street firms including several investment giants whose collapse sent world markets into turmoil, US media said Tuesday. The FBI has set its sights on investment titan Lehman Brothers, mortgage giants Fannie Mae and Freddie Mac and insurer AIG, in a wide-reaching inquiry that comes as lawmakers rush to agree a 700-billion-dollar government bailout of the troubled US financial sector. ... FBI Director Robert Mueller said last week that the bureau was probing 24 financial institutions, but gave no details other than to describe them as "large corporations" that may face allegations of misstated assets.
The FBI has set its sights on investment titan Lehman Brothers, mortgage giants Fannie Mae and Freddie Mac and insurer AIG, in a wide-reaching inquiry that comes as lawmakers rush to agree a 700-billion-dollar government bailout of the troubled US financial sector.
...
FBI Director Robert Mueller said last week that the bureau was probing 24 financial institutions, but gave no details other than to describe them as "large corporations" that may face allegations of misstated assets.
And if the rot is real, and this isn't a liquidity problem, but rather, that the shitpile really is an overleveraged shitpile, then the 125% of loss equity stake will be worthless.
If the toxic waste is taken off the balance sheet, on terms that recapitalize the firm, which is a senior equity stake in that firm worthless? Exercise of the senior equity stake only destroys the value of existing, which would be junior, equity ... by no company ever goes bankrupt because a class of common shares loses value, even if it is completely wiped out.
And in extreme cases that is what a non-dilutable senior class of common shares will do ... if there is net equity overall, then the preferred shares will claim that equity up to their face value. If there is nothing left, common shareholders get nothing, if there is something left, common shareholders get something. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
But, not all other things are equal, and if the scenario I describe comes to pass, it will be much more than the "assets" envisioned in the current bailout which will be at risk, it will be far wider swathes of the American economy which will be deemed overvalued, with corresponding debt obligations essentially irrecoverable.
Credit card debt, corporate debt, especially in highly leveraged sectors of the economy (starting with those implicated in the private equity boom of the past few years), prime mortgage debt, municipal debt.
If this were simply a liquidity crisis limited to the "assets" currently under "assault" because of lack of proper market pricing signals, that would be one thing, and then, you would be right.
But if the rot is systemic, and therefore not simply limited to the 700 billion we are currently talking about (but rather, three times that, as some believe, starting but not ending with Roubini) then all that equity won't buy you 100 meters of ocean front in McCain's home state. Fai de bèn a Bertrand, te lou rendra en cagant
"Solving a liquidity crisis" is what we have been doing, and how the Fed ended up with such a shitpile of its own on its balance sheet, in pseudo-collatoralized repo loans to borrowers liable to go bankrupt, where the value of the repo asset by no means adequate as collateral for the loan.
And we certainly are not going to have any serious problem doing without half of our current finance sector, as long as the remaining half covers all the bases and has sound balance sheets.
The question I have about Dodd's plan is that it requires the Resolution Trust authority to wait until an appropriate time to try to sell the acquired financial assets, with the disposal proceeds determining how much the firms on are on the hook for. SO they swap shit for cash that they can use to buy Treasuries, and kick the can on realizing their capital loss down the road.
What keeps up the pressure to actually ever resolve those assets? That's what I'm not 100% sure on. Preference shares with restrictions that kick in when the dividend rate is not met ensure that they try to avoid going for any more asset disposal than they have to, and then rather than resolution hanging over their heads, coming back to a profit position and meeting the preferred dividends allows the operating condition of each firm to dictate how quickly they get out from under the restrictive conditions. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
Short answer is bankruptcy. The "resolution" in Resolution Trust Corporation means liquidating assets to pay bank(s) creditors and (re)insure the bank(s) depositors. Proceeds from sale of assets are rarely, usually never, distributed to common shareholders. Owners of equity hold claims to a firms net earnings. A bankrupt firm by definition reports zero net income. And retain earnings, if not exhausted, are accounted as asset for liquidation. The RTC seized the assets of over 700 bankrupt S&Ls. It didn't buy equity or assets. It did not profit from its roles as conservator or receivor. The fact that the RTC issued a substantial number of its own bonds to finance its fiduciary duties, so incurring interest expenses and not fully recovering FDIC and administratives costs from proceeds, contributed to bottom-line loss to the enterprise.
RTC 1995 Financial Statement, GAO audit of operations 1991-1995 (pdf)
It seems to me that perhaps you are confusing RTC and RFC, the Reconstruction Finance Corporation. Congress established that GSE to purchase preferred shares and corporate bonds and lend cash to companies --industrials and banks-- unable to raise capital in the private sector. Preferred shares normally subordinate all other classes of equity and, depending on provisions, specify immediate dividend payments, calls (or not) and warrants. The RFC didn't "profit" either from income (plowed it back investment) but did provide much needed liquidity for, gee, 20 years.
20 years is indeed a reasonable benchmark term for today's market "resolution," in the colloquial sense of the word.
See "Economic Consequences of the Operations of the Reconstruction Finance Corporation," Sprinkel, Beryl W., The Journal of Business of the University of Chicago, vol. 25, no. 4 (1952), pp. 211-224; It's not flattering, but it does deliver quantitative support.
Perhaps your proposal combines both into a necessarily new type of Treasury or Commerce GSE --an investment bank? That is the function of the new FHFA established in H.R.3221 this July. James Lockhart (formerly OFHEO) is now its director and named conservator of the Fannies.
Preferred Agreements FAQ - 7 Sep 2008 (pdf) GSECF fact sheet - 7 Sep 2008 (pdf) GSE MSB purchase FAQ - 7 Sep 2008 (pdf)
There really is a lot of experience to back a plan that doesn't buy junk assets from firms that are not bankrupt and not depositor insured. Diversity is the key to economic and political evolution.
So unlike the SLC bail-out that you referred to, the institution is not acquired in toto, but rather the low quality assets, with the proportion of equity in public hands determined by how much over the eventual disposal value the public institution pays for the asset.
Obviously $700b that would suffice to allow institutions with 3-month loans from the Fed using repo's of assets of dubious quality to meet their obligations to the Fed and avoid collapse before Christmas, or else acquire Treasuries to use to roll-over the lending, so that if the institution then goes bankrupt the Fed's books do not look so bad. So it would get Paulson off the hook for collaborating in collecting a pile of toxic waste on the asset side of the balance sheet of the Fed. As its speculated that there may be around $600b in toxic waste in the hands of the Fed as the collateral for short term lending, that would explain the $700b figure ... $600b to clean up the Fed balance sheet plus some additional funds to clean up the balance sheets of financial instutitions considered to be strategic in avoiding an immediate collapse.
Sorry about triggering a definition dump. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
The figure $600b was raised by a correspondent of Jerome a Paris that he quoted (but whom probably did not want to be quoted by name), so I don't know how firm it is ... but it sure as heck would make sense of the $700b figure.
Dodd's plan is, go ahead and hide up the mess you have made of the Fed's balance sheet in a series of band-aids to cover an expanding infection, but shareholders in the short term and executives who do not get out in time in the long term shoulder some of the cost of the bail out of Paulson's and Bernanke's incompetence.
I'm not a legislative lawyer, but reading it just now, I got the impression that Dodd's plan allows executives to get out while the getting's good, in that Treasury does not own any shares until the corresponding asset is diposed of or matures, therefore revealing the "true" value, and that the exercise of restraint on executive salaries happens once the Treasury owns shares ... perhaps if Treasury owns a controlling interest.
All of this is why the US needs a growth industry in the productive sector of the economy, since otherwise there's no way for the finance sector to muddle through as it downsizes. As you know, I propose a New Energy Economy crash program to jump start that growth industry. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
In neither instance were firms "acquired" in either form of assets or corporate securities. In fact purchasing an assets does not convey any firm shareholder privileges; it conveys only ownership of the asset.
The definition of an asset is simply a person, process, or thing that produces income. The definition of equity is in itself reciprocal: a firm liability (future expense), a shareholder asset (future income).
In the S&L case, assets not corporate equities were confiscated to repay, to resolve, creditors FDIC, FSLIC, FICO.
In the case of the Banking Act of '34, credit was awarded by purchasing restricted shares with cash not treasuries. Credit did not convey ownership of the firm; it secured a claim to repayment. Then borrowers repurchased the restricted shares.
Dodd can put any price (transaction value) he wants on the assets of these beggars --corporate and derivative securities outstanding and available for sale-- but that "investment" will not be recovered any time soon. Because (1) the assets do not generate income and (2) the assets are not marketable because they do not generate income. They will not generate income because these CMOs, CDOs, and RMBS are dependent on continuous, reliable mortgage payments made by insolvent borrowers, US and UK citizens.
Confront the reality --the US federal government is not an entrepreneurial organization-- or concede your fealty to "Bush doctrine."
As you explain Dodd's "plan" it is the worst business decision ever, barring uncontested abrogation of Article I of th US Constitution to the FRB, agent of the Executive branch. He's advising his colleagues to buy worthless assets now --on margin!-- hoping some day they will produce income for US Treasury, "for the people."
Does anyone have a link to this draft bill? Diversity is the key to economic and political evolution.
I search thomas.gov. Has not introduced any "legislation", a bill. Therefore, I cannot read pp44 of provisions. I cannot comment on any text other than what politico.com --Bush PR organ-- has its writers editorialize.
I locate Dodd's senate URL. The only document is an HTML summary. And I note that Dodd is still pushing HOPE for Homeowners (enrolled), and the "summary" places no, zero, quantitative constraints on Paulson's bailout valuation, $700B.
Perhaps the full draft --which I can't read-- expressly limits expenditures or expressly establishes audit "controls"? (see GAO audit of RTC above. "Automated controls" failures figure prominently in underestimation of expenses and unaudited payments.)
#5 Warrants? "the government took warrants in the companies in exchange for our assistance." No. The government did not take warrants in AIG. But Treasury FHFA seized the Fannies as conservator (Ch.11 measure).
The warrents attached to AIG bonds ("credit facility") permit the FRB to confiscate 79.9% of common shares "to obtain" uncontested voting rights in AIG operations in the event AIG defaults on "convenants." In effect the FRB board and its shareholding member banks would than operate an insurance agent --paid by inflationary US treasuries-- to compete with FDIC --at an extra-legal advantage-- to guarantee and supervise forementioned FRB banks.
19 Sep Item 1.01. Entry into a Material Definitive Agreement. On September 18, 2008, American International Group, Inc. ("AIG") made a filing on Form 8-K with respect to a revolving credit facility with the Federal Reserve Bank of New York ("NY Fed"). This Form 8-K/A filing corrects certain errors in, and supersedes, yesterday's filing. The summary of terms of the revolving credit facility provides that AIG may borrow up to $85 billion from the NY Fed. AIG's borrowings under the revolving credit facility will bear interest, for each day, at a rate per annum equal to three-month Libor plus 8.50%. The revolving credit facility will have a 24-month term and will be secured by a pledge of assets of AIG and various subsidiaries. The revolving credit facility will contain affirmative and negative covenants, including a covenant to pay down the facility with the proceeds of asset sales. The summary of terms also provides for a 79.9% equity interest in AIG. The corporate approvals and formalities necessary to create this equity interest will depend upon its form. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K/A and is incorporated by reference herein.
On September 18, 2008, American International Group, Inc. ("AIG") made a filing on Form 8-K with respect to a revolving credit facility with the Federal Reserve Bank of New York ("NY Fed").
This Form 8-K/A filing corrects certain errors in, and supersedes, yesterday's filing.
The summary of terms of the revolving credit facility provides that AIG may borrow up to $85 billion from the NY Fed. AIG's borrowings under the revolving credit facility will bear interest, for each day, at a rate per annum equal to three-month Libor plus 8.50%. The revolving credit facility will have a 24-month term and will be secured by a pledge of assets of AIG and various subsidiaries. The revolving credit facility will contain affirmative and negative covenants, including a covenant to pay down the facility with the proceeds of asset sales.
The summary of terms also provides for a 79.9% equity interest in AIG. The corporate approvals and formalities necessary to create this equity interest will depend upon its form.
A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K/A and is incorporated by reference herein.
Never, ever underestimate Harvard-educated attys.
18 Sep Item 1.01. Entry into a Material Definitive Agreement. On September 16, 2008, American International Group, Inc. ("AIG") issued a press release announcing it has entered into a revolving credit facility with the Federal Reserve Bank of New York ("NY Reserve Bank"). Under the terms of the revolving credit facility, AIG may borrow up to $85 billion from the NY Reserve Bank. AIG's borrowings under the revolving credit facility bear interest, for each day, at a rate per annum equal to three-month Libor plus 8.50%. The revolving credit facility has a 24-month term and is secured by a pledge of all of the assets of AIG and its Material Subsidiaries. The revolving credit facility contains affirmative and negative covenants, including a covenant to pay down the facility with the proceeds of asset sales by AIG. In connection with the revolving credit facility, AIG issued a warrant to the Board of Governors of the Federal Reserve ("Federal Reserve") that permits the Federal Reserve, subject to shareholder approval, to obtain up to 79.9% of the outstanding common stock of AIG (after taking into account the exercise of the warrant). AIG anticipates calling a special meeting for such purpose as promptly as practicable. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference herein.
On September 16, 2008, American International Group, Inc. ("AIG") issued a press release announcing it has entered into a revolving credit facility with the Federal Reserve Bank of New York ("NY Reserve Bank").
Under the terms of the revolving credit facility, AIG may borrow up to $85 billion from the NY Reserve Bank. AIG's borrowings under the revolving credit facility bear interest, for each day, at a rate per annum equal to three-month Libor plus 8.50%. The revolving credit facility has a 24-month term and is secured by a pledge of all of the assets of AIG and its Material Subsidiaries. The revolving credit facility contains affirmative and negative covenants, including a covenant to pay down the facility with the proceeds of asset sales by AIG.
In connection with the revolving credit facility, AIG issued a warrant to the Board of Governors of the Federal Reserve ("Federal Reserve") that permits the Federal Reserve, subject to shareholder approval, to obtain up to 79.9% of the outstanding common stock of AIG (after taking into account the exercise of the warrant). AIG anticipates calling a special meeting for such purpose as promptly as practicable.
A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference herein.
Dodd is extending US DEBT --in exchange for limits on borrowers'CEO's compensation-- to finance the "modernization" of FRB regulatory structure, according to this model.
NOTE: (1) AIG must default, fail, bankrupt in order for FRB to exercise its option, or "warrant," for common shares; and (2) terms of the bond --extortionary LIBOR plus 8pts, greater than TED by any measure-- imply huge risk for AIG debt service if LIBOR panelists cannot reset among themselves.
Say, buh bye to legitimate, "reformed" competition among depository and investment institutions for US consumer "savings." Diversity is the key to economic and political evolution.
I downloaded PPM41_ayo08b28.pdf on Monday when you published. It transmitted to a blank pp44 doc.
Sorry I can't help you any further. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
If not, I can wait for it to be introduced on the floor and text submitted to the clerk. Neither Frank nor Dodd have introduced anything this week. Perhaps someone else will. Diversity is the key to economic and political evolution.
Millions of people on the internet have machines with different capabilities -- packaged software such as MSFT Office of different vintage/versions or operating systems which do not execute. They may use browser that are not "supported" by certain internet publishers, e.g. politico.com, for one or more released. Similarly, corporate IT standards require conformation of all machine capabilities to communications permissions, according to internal and external license.
Further, certain www publishers manufacture interactive, web-based applications and static products using custom software or customized versions of packaged software. In that case, the "portability" of documents and run-time of applications is not reliable across all operating systems. Transmittal failure could be determined by XML checks of OS.v*, browser.v*, or pdfReader.v* from server-side.
open source file formats are solutions to facilitate cross-platform transmitals of data. A *.pdf is puportedly an open source file format as is ASCII. Let us assume either (1) politico.com published the draft bill using custom *.pdf print format or (2) my browser was unable to reconcile the politico.com digital coding of the pdf.
I've rarely retrieved a blank *.pdf document, believe it or not, in 20 years of internet access --despite the fact none of machines have ever been WINbox and none of my package software is "current" version. Diversity is the key to economic and political evolution.
I'll email the document and if the .pdf can be read, its some bug in the active .html page at politico. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
