The rambling thoughts of a Modern Orthodox Chassid (whatever that means). Contact me at emansouth @

Sunday, October 05, 2008

MoC on The Bailout

1. The revised bailout plan is essentially the old bailout plan with an extra 250 pages of pork.

2. The increase in FDIC insurance limits, from $100K to $250K, has the potential to be very expensive to taxpayers yet people aren't focusing on it.

3. Despite all the maneuvering, Paulson essentially got what he wanted. Discretion to buy whatever he wants, whenever he wants it and at whatever price he decides. All the built in oversight is a joke. It will just be congressional posturing with no real-time impact.

4. {Boring Warning...Skip to Next Point if You Have No Interest In Technical Points}Another little noticed provision in the legislation is the ability of financial institutions to suspend adherence to FAS 157 which requires them to value their assets based on where they could actually sell them in the market. Arguably, this mark-to-market valuation has been one of the major drivers of the downward spiral of financial institutions but I am not sure that moving away from FAS 157 will help. Investors are likely to think that institutions are hiding bad losses if they suspend this type of accounting.

5. All the talk about de-regulation causing this crisis is mainly off the mark. What initially caused this crisis was an oversupply of housing caused by cheap money (thanks to the Fed's loose monetary policy) and banks making ridiculous sub prime mortgages and securitizing them, driven in large part by Fannie and Freddie, who were willing to buy most of this toxic waste. Fannie and Freddie, in turn, were let loose by congressmen and senators from both sides of the aisle (including more than most, Barney and Chris), who were taking millions of dollars in bribes contributions from Fan and Fred and encouraging them to expand and get sloppy.

And, as I've said before, until you pay regulators more than investment bankers, the bankers will always be one step ahead. Regulators literally live at most of the big banks full time. The crisis did not happen for lack of regulation; it happened for lack of effective regulation.

Having said that, it is almost certain that the market for credit derivatives will become subject to direct regulation and that may nor be a bad thing. (Did anyone see the hatchet job that "60 Minutes" did on the credit default swap market tonight? You have to admire their skill at taking a very complex issue and simplifying it to "the banks were stupid, greedy pigs").

6. In retrospect, letting Lehman fail caused the crisis to accelerate and almost get out of control. (In his defense, it's a fact that Paulson had engineered a sale to Barclays over the weekend (which included his having beaten up on a consortium of US banks until they agreed to participate in the bailout). Unfortunately, the FSA, England's securities and banking regulator, did not allow Barclays to pull the trigger and Lehman was forced to file). It is hard to describe how negatively Lehman's failure has paralyzed the credit markets. On the Wednesday after Lehman's filing, the credit markets essentially broke down. Morgan Stanley, which had largely avoided the subprime mess and reported outstanding earnings (relatively speaking) was pushed to the brink, saved only by its conversion to a bank and an infusion of $10B from a Japanese bank. The LIBOR (the rate at which banks lend money to one another) has skyrocketed. The T Bill rate is almost zero (meaning people are willing to give the government money for no return just to insure that their principal is safe). My market, one of the most traditionally stable, is experiencing unprecedented volatility and had its worst day ever last Thursday.

7. Notwithstanding the bailout, I think things are going to continue to get very ugly. There are massive hedge fund redemptions on the way and huge margin calls as prices of securities continue to plummet, both of which continue to put even more downward pressure on prices. I am not sure how we get out of this death spiral.

8. The negative impact on the frum Jewish community and Jewish organizations is likely to be devastating. Hundreds of millions, if not billions, of dollars of value in the Jewish philanthropic community has gone up in smoke. Many people have lost their jobs. Many others who were very well paid will be significantly less well paid. People who were scholarship donors may become scholarship takers. The needs of charitable organizations are likely to grow while their resources shrink.

I am not usually this pessimistic but I believe it will not be pretty for the next couple of years.

Fasten your seat belts. It's going to be a wild ride.



  • At 12:12 AM, Anonymous Anonymous said…

    Accounting student at Syms here -

    Isn't the suspension of FAS 157 (fair-value clause) just setting up the market for more problems as "healthy" financial institutions could easily fail if they start to overvalue assets and conversly hide assets that have lost their value?

  • At 8:45 AM, Blogger MoChassid said…


  • At 11:25 AM, Blogger Ezzie said…

    The idea of suspending SAS 157 is one of the most incredibly dumb ideas I've ever seen. Who put that in there?!

  • At 11:52 AM, Blogger rescue37 said…

    It was lobbied for by the corporations. They didn't like the losses they now have to pick up instead of showing at cost. They only like 157 when values go up.
    I guess we are going to have a lot of reports with GAAP departures coming up. If FASB wants to push the issue, they'll make it a requirement to report the decline in the audit opinion and congress can't do anything about it.

  • At 1:10 AM, Anonymous Jordan Hirsch said…

    The House Republicans made a big play for that one.
    One thing is clear, this failure has many authors.
    Your warning about raising the FDIC cap is interesting, since it does seem that the $100,000 limit has been around for a while and it does seem it was due for an increase.
    What are your thoughts on that?


Post a Comment

<< Home