What Republicans want

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Minority Leader John Boehner appointed a working group headed by Rep. Eric Cantor to craft a set of "economic rescue principles" that should be reflected in any emergency program adopted by Congress. Last night, the working group articulated this set of principles:



Common Sense Plan to Have Wall Street Fund the Recovery, Not Taxpayers



? Rather than providing taxpayer funded purchases of frozen mortgage assets, we should adopt a mortgage insurance approach to solve the problem.



? Currently the federal government insures approximately half of all mortgage backed securities. (MBS) We can insure the rest of current outstanding MBS; however, rather than taxpayers funding insurance, the holders of these assets should pay for it. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance.



Have Private Capital Injection to the Financial Markets, Not Tax Dollars



? Instead of injecting taxpayer capital into the market to produce liquidity, private capital can be drawn into the market by removing regulatory and tax barriers that are currently blocking private capital formation. Too much private capital is sitting on the sidelines during this crisis.



? Temporary tax relief provisions can help companies free up capital to maintain operations, create jobs, and lend to one another. In addition, we should allow for a temporary suspension of dividend payments by financial institutions and other regulatory measures to address the problems surrounding private capital liquidity.



Immediate Transparency, Oversight, and Market Reform



? Increase Transparency. Require participating firms to disclose to Treasury the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report.



? Limit Federal Exposure for High Risk Loans: Mandate that the GSEs no longer securitize any unsound mortgages.



? Call on the SEC to audit reports of failed companies to ensure that the financial standing of these troubled companies was accurately portrayed.



? Wall Street Executives should not benefit from taxpayer funding.



? Call on the SEC to review the performance of the Credit Rating Agencies and their ability to accurately reflect the risks of these failed investment securities.



? Create a blue ribbon panel with representatives of Treasury, SEC, and the Fed to make recommendations to Congress for reforms of the financial sector by January 1, 2009.
 
Point by point:



<strong>? Rather than providing taxpayer funded purchases of frozen mortgage assets, we should adopt a mortgage insurance approach to solve the problem.</strong>

MI on what? RMBS? Is this against future losses or exisiting losses from date of origination?



<strong>? Currently the federal government insures approximately half of all mortgage backed securities. (MBS) We can insure the rest of current outstanding MBS; however, rather than taxpayers funding insurance, the holders of these assets should pay for it. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance.</strong>

Even with premiums paid by the bond holders, taxpayers would be on the hook for any losses not covered by the premium pool, which would most assuredly total more than $700 Billion by the end.



<strong>? Instead of injecting taxpayer capital into the market to produce liquidity, private capital can be drawn into the market by removing regulatory and tax barriers that are currently blocking private capital formation. Too much private capital is sitting on the sidelines during this crisis. </strong>

The money is sitting on the sidelines because they expect a large down move in the markets, either in asset values, bond values, or both. Removing existing regulatory caps and lower Capital Gains taxes will only exacerbate that downward move. No one is going to invest a penny in a financial institution that has unrealized losses on it's balance sheet.



<strong>? Temporary tax relief provisions can help companies free up capital to maintain operations, create jobs, and lend to one another. In addition, we should allow for a temporary suspension of dividend payments by financial institutions and other regulatory measures to address the problems surrounding private capital liquidity.</strong>

Even company- or sector-specific tax relief won't cover the amount of capital required by the firms who need it. While I do think the FedRes should take CP from "Main Street" to keep these markets liquid, reducing their tax payments won't be enough to help most companies. In addition, most small companies don't have a dividend to suspend.



<strong>? Increase Transparency. Require participating firms to disclose to Treasury the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report.</strong>

Forcing the financials to disclose ( and therefore mark to market) their holdings would do a lot to clear the fog, but it would also result in an immediate sell-off of anyone with a bad balance sheet, and also force most into bankruptcy or receivership. Not exactly the goal of a rescue plan.



<strong>? Limit Federal Exposure for High Risk Loans: Mandate that the GSEs no longer securitize any unsound mortgages.</strong>

Yes, let's not securitize any unsound mortgages. Let's just hold onto them. Surely their value will rebound when homes prices finish their decline, right? They'll become sound again, right? Right?



<strong>? Call on the SEC to audit reports of failed companies to ensure that the financial standing of these troubled companies was accurately portrayed.</strong>

Asking the SEC to document exactly when the horse left the barn, and who failed to shut the door, will only lead to an indictment of the SEC. They failed to do their job, end of story.



<strong>? Wall Street Executives should not benefit from taxpayer funding.</strong>

No, they shouldn't. Neither should elected officials, but I notice neither Republicans nor Democrats are returning Wall Street campaign donations.



<strong>? Call on the SEC to review the performance of the Credit Rating Agencies and their ability to accurately reflect the risks of these failed investment securities.</strong>

More finger-pointing, which again leads back to Federal regulators failing to do their jobs.



<strong>? Create a blue ribbon panel with representatives of Treasury, SEC, and the Fed to make recommendations to Congress for reforms of the financial sector by January 1, 2009.</strong>

I'm fine with this, as long as anyone with any prior employment history by any financial company is excluded from the panel. No need to allow them to re-rig the rules in their favor again.



The simplest solution is to let them fail. While I know this will bring about major pain in all areas of the American economy, those firms that survive will be in a stronger position to flourish, we can rewrite the rulebook for all institutions going forward, and the capital that is just sitting on the sidelines now will be put to work filling the needs of the country and make hefty profits in the process. This isn't 1932. We are not an agrarian society on the verge of industrialization, we are an industrial civilization that has all the resources we need to rebuild after any disaster. We can easily rebound from the shock and we will be stronger as a result. If tax dollars are needed after the shock, we can spend them then on projects and industries that make sense and position us to excel for the rest of this century and beyond. But trying to save this system is akin to trying to save the buggy whip industry after Ford rolled out the Model T.
 
Thanks nude for doing such a great break down. I wanted to, but I am just not that into it. I will add one point: There is insurance on RMBS already. It comes in various forms including credit default swaps. When things go to hell in a hand basket with people defaulting, those who wrote the insurance have to start paying up. See AIG for how successful that was and why it wouldn't work in this scenario either. It's also how John Paulson made himself $3bil by betting against subprime with forcing the insurers to pay up. Don't forget that it costs money to insure crap loans, and right now it costs $95 per $1000 dollars of 2007 vintage BBB rated RMBS, plus the 500 BPS upfront monthly fee. It costs way too much to insure anything in 2006, 2007, or 2008. I'm sure you knew that, but I wanted to make sure that doesn't get overlooked by others.
 
[quote author="graphrix" date=1222494428]Thanks nude for doing such a great break down. I wanted to, but I am just not that into it. I will add one point: There is insurance on RMBS already. It comes in various forms including credit default swaps. When things go to hell in a hand basket with people defaulting, those who wrote the insurance have to start paying up. See AIG for how successful that was and why it wouldn't work in this scenario either. It's also how John Paulson made himself $3bil by betting against subprime with forcing the insurers to pay up. Don't forget that it costs money to insure crap loans, and right now it costs $95 per $1000 dollars of 2007 vintage BBB rated RMBS, plus the 500 BPS upfront monthly fee. It costs way too much to insure anything in 2006, 2007, or 2008. I'm sure you knew that, but I wanted to make sure that doesn't get overlooked by others.</blockquote>
Thanks for the info. I couldn't get more specific because Rep. Boehner (who published this proposal in his letter to Pelosi) was intentionally vague. I suspect they think they can supplant the CDS market by making everyone pay into the government pool, making CDS superfluous and forcing the market for them to wind down. But unless you are only insuring against losses from the time the plan begins, you are putting the taxpayers on the hook for trillions. Even with that restriction, the amount paid out will dwarf what Paulson is asking for in the end, it just won't be all at once.
 
[quote author="graphrix" date=1222494428]Thanks nude for doing such a great break down. I wanted to, but I am just not that into it. I will add one point: There is insurance on RMBS already. It comes in various forms including credit default swaps. When things go to hell in a hand basket with people defaulting, those who wrote the insurance have to start paying up. See AIG for how successful that was and why it wouldn't work in this scenario either. It's also how John Paulson made himself $3bil by betting against subprime with forcing the insurers to pay up. Don't forget that it costs money to insure crap loans, and right now it costs $95 per $1000 dollars of 2007 vintage BBB rated RMBS, plus the 500 BPS upfront monthly fee. It costs way too much to insure anything in 2006, 2007, or 2008. I'm sure you knew that, but I wanted to make sure that doesn't get overlooked by others.</blockquote>


Graphrix, when I think about insurance, I think about a product that is priced in a manner that gives the underwriter a high probability of achieving a profit for the risk they undertake. The pricing is based on mathematical models that take into account the range of probabilities of events happening and the range of probabilities of potential payouts for the events, and then they come up with a price that will most likely result in the underwriter being solvent to pay any claims and making a profit in the aggregate.



While there is no question that the ratings agencies did a TERRIBLE job through most of this decade, and that companies like AIG, MBIA, and ABK did a terrible job developing financial models, presumably any insurance offered by the Feds would take current risks into account and come at costs similar to the ones you quoted. Anything less isn't insurance, it's socialism.



So, with the scarcity of details available, what makes you have a feeling that the proposal is for socialism and not insurance? (The alternative proposal is definitely socialism)
 
[quote author="WINEX" date=1222502855]So, with the scarcity of details available, what makes you have a feeling that the proposal is for socialism and not insurance? (The alternative proposal is definitely socialism)</blockquote>
I won't speak for graphrix, but I don't see how you can have insurance priced high enough to make a profit on the underwriting and still low enough to entice a buyer when the item being insured is in the process of a severe devaluation that almost guarantees a payout to the insured. Either you have to subsidize the lower price or subsidize the payout, both of which would be government funded and therefore "socialism".
 
[quote author="WINEX" date=1222502855][quote author="graphrix" date=1222494428]Thanks nude for doing such a great break down. I wanted to, but I am just not that into it. I will add one point: There is insurance on RMBS already. It comes in various forms including credit default swaps. When things go to hell in a hand basket with people defaulting, those who wrote the insurance have to start paying up. See AIG for how successful that was and why it wouldn't work in this scenario either. It's also how John Paulson made himself $3bil by betting against subprime with forcing the insurers to pay up. Don't forget that it costs money to insure crap loans, and right now it costs $95 per $1000 dollars of 2007 vintage BBB rated RMBS, plus the 500 BPS upfront monthly fee. It costs way too much to insure anything in 2006, 2007, or 2008. I'm sure you knew that, but I wanted to make sure that doesn't get overlooked by others.</blockquote>


Graphrix, when I think about insurance, I think about a product that is priced in a manner that gives the underwriter a high probability of achieving a profit for the risk they undertake. The pricing is based on mathematical models that take into account the range of probabilities of events happening and the range of probabilities of potential payouts for the events, and then they come up with a price that will most likely result in the underwriter being solvent to pay any claims and making a profit in the aggregate.



While there is no question that the ratings agencies did a TERRIBLE job through most of this decade, and that companies like AIG, MBIA, and ABK did a terrible job developing financial models, presumably any insurance offered by the Feds would take current risks into account and come at costs similar to the ones you quoted. Anything less isn't insurance, it's socialism.



So, with the scarcity of details available, what makes you have a feeling that the proposal is for socialism and not insurance? (The alternative proposal is definitely socialism)</blockquote>


Please show me where I mention socialism in this proposed plan. I really would like to have a debate with you, but you always, and I mean always, assume and conjure up something that is, well... completely off topic and insinuates that because someone doesn't agree with a plan that wasn't even your own idea in the first place is on the opposite side of the political spectrum. It's annoying and makes you appear very ignorant. I wish for once you could have a debate that doesn't involve the politics of it but the actual subject matter. I also wish it were possible for you to have your own ideas for once rather than something you get off some political blog. I mean that in a sincere way, you look like a complete follower.



Now, if you want to talk about how insurance products work on MBS and why this won't work because of the way they work and not whether it is Socialism or Capitalism, then fine. But shut it on the politics part.



The reason why this won't work: <em>Currently the federal government insures approximately half of all mortgage backed securities. (MBS) We can insure the rest of current outstanding MBS; however, rather than taxpayers funding insurance, <strong>the holders of these assets should pay for it</strong>. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance. </em>



The holders already pay insurance on these "assets". That is what CDSs, the ABX, and the like are for. So please tell me why a holder like Morgan Stanley or Goldman will want to pay insurance on these products from the government? In my first post did you understand how the pricing is currently for insurance on MBS? This insurance assumes an extremely high risk assessment. So even if the government assumed the same risk it would have the same cost. What would change with that? Nothing! It doesn't get the "assets" off their books, it still costs them to insure it, and it changes nothing. Do you really want the government paying claims on the defaults like AIG did? That is what they are proposing. See Goldman, MS, and Lehman etc. paid AIG a spread for the CDS insurance they had written on the MBS products, then when they went to complete crap AIG had to make good on that insurance Goldman, MS, and Lehman etc. were paying for. The way you think insurance works is the same way it works for MBSs, and it is the way it is working now and it is priced accordingly to the high amount of risk.



This idea was clearly thought out by someone who is completely and totally clueless on how the secondary/credit markets work. This has to be the dumbest and most costly ideas I have seen yet. Just because it comes from the Republicans and their free market capitalist mindset doesn't mean that it is a smart idea and that it won't cost a boatload of money. And if this came from the Democrats, I would have said the same thing. It doesn't matter to me, if the idea is dumb and won't work at all, then I will tell it like it is, dumb.



<a href="http://online.wsj.com/article/SB122238667352477103.html">The best idea I thought was good, and what the number one hedge fund manager in the world thought, is to invest the money in senior preferred stock of these financial institutions</a>. That way we could get paid back, the IBs get the capital they need, and only shareholders would be the ones being diluted until they were able to return to profitability.
 
[quote author="graphrix" date=1222512901][<a href="http://online.wsj.com/article/SB122238667352477103.html">The best idea I thought was good, and what the number one hedge fund manager in the world thought, is to invest the money in senior preferred stock of these financial institutions</a>. That way we could get paid back, the IBs get the capital they need, and only shareholders would be the ones being diluted until they were able to return to profitability.</blockquote>


Geez Graph, I know you think I'm a nutter, but didn't I basically say that back on the 21st. :-)



Okay, seriously, the bailout (oh oh, bad word), er rescue plan whatever they want to call it. The taxpayers need to be first in line to get their money back.



If you need the money, shutup, you're bankrupt, take the deal to become solvent again and buy the warrants back out when you're back on top and be thankyou somebody loaned you the money to still be in business. If you don't like the deal because you can get by without the money, quite whining and sleep in the bed you sh*t in.



I'm really tired of the posturing and the posing and the whining and the fear mongering.



The problem is debt. The problem is too much easy money. More money isn't the solution.



Now, can someone please point me to the congressional plunger?
 
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