Update on the Bailout

AP provided an interesting update:

John McCain and Barack Obama offered long-distance help from the campaign trail. They announced separately that they support a plan that some House Republicans had pushed earlier: raising the federal deposit insurance limit from $100,000 to $250,000.

I wonder what the cost is. I'll bet it's not too high. How many people keep more than $100k in a bank account anyway?

For his part, President Bush sought to avoid being marginalized. He spoke with both nominees, and made another statement in the White House. "Congress must act," he demanded in front of the cameras.

Avoid being marginalized? I think that boat already sailed. Has there ever been another sitting president kept out of his party's convention?

Another possible change to the bill would modify "mark to market" accounting rules. Such rules require banks and other financial institutions to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years.

And, after all, we can certainly trust the banks to price their holdings properly.

Some lawmakers reported a shift in constituent calls pouring into their offices. Calls and e-mails were overwhelmingly opposed to the rescue plan before Monday's vote, many offices said. But Monday's stock market dive prompted calls Tuesday from Americans furious about Congress's inaction, some said.

Decisive, as ever.

--SCC

The Real Motives for the Bailout

CNBC was kind enough to report the real reason the bailout is needed:

“All our concern about bailing out Wall Street," Cashin said. "It’s really to try to free up Main Street. So the guy with the plumbing-supply business who gets a contract can go to the bank and get some of the money he needs overnight.”

You see, they're really in it for the little guy. It just gives you a warm feeling inside, doesn't it?

--SCC

Failure of the Bailout Vote

Republicans are claiming that the defeat of the Bush/Paulson bailout plan was due to the Democrats' failure to garner enough votes on their side of the aisle. Yet more blame-mongering by the Republicans.

Among the more ridiculous blame games being played by the Republicans is the assertion that they would have passed the bill if only Pelosi hadn't been so mean to them.

So there are a dozen Republicans, who had decided that the package was in the best interests of the country, who changed their minds because of something Pelosi said? I guess we'd better hope that Osama doesn't say the wrong thing.

Don't get me wrong. I previously characterized Pelosi's speech as "partisan bile." But this whole non-issue is a pretty transparent attempt by the Republican leadership to cover up how badly they had mis-counted their caucus.

This isn't a bill that Pelosi or Franks wanted. They had wanted a bill that had a real cap on executive compensation, strict oversight, and bankruptcy court authority to change mortgage T&C. They gave up those elements based on assurances from the Republican leadership. (The executive compensation clause in Monday's bill was toothless.)

Giving that speech was a bad idea, but the failure of the Republican House leadership to deliver on their deal is going to have serious repercussions on a number of areas.

The reason that Clinton negotiated with the Republicans so successfully is because he knew that they would deliver what they promised. If this leadership can't do that, perhaps the caucus should choose leadership that represents them better.

According to Reuters:

Without the bailout plan, which would allow the Treasury to buy toxic mortgage-related assets from banks, credit markets around the world could remain frozen, which could lead to a recession.

I think that Franks had a point last week, that this bailout story is becoming something of a self-fulfilling prophecy. Right now, we're seeing a market rally based on promises that something will pass on Thursday.

Given how low the prices of the mortgage-backed CDOs is, there is probably a killing to be made out there. If only there were more transparency to the underlying loans, there would be more buyers.

A real failure here is in the design of the instruments. If there were better visibility, it is likely that the CDOs based on liar loans would be rated and priced differently, which would have removed the financial incentives for companies to originate them. This sort of design issue is something that regulators should have enforced. This particular problem has been known since the mid-1980s, so there is plenty of blame to be spread over both parties on this one.

According to the AP:

Banks were in miser mode after the House's rejection of the rescue package. The key bank-to-bank lending rate, the London Interbank Offered Rate, or LIBOR, soared to 4.05 percent from 3.88 percent for 3-month dollar loans, and to 6.88 percent for overnight dollar loans — the highest level since tracking began in 2001.

That's especially worrisome because normally, LIBOR is just slightly above the Federal Reserve's target fed funds rates, an interbank lending rate. Now, it is more than 4 percentage points above the target rate of 2 percent. That has troubling implications for other lending rates tied to LIBOR, including homeowners' adjustable rate mortgages.

--SCC

Uncertainty Over the Bailout

Nobody is happy about the bailout, except for the investment bankers whose chestnuts will be rescued from the fire. But, for all the rhetoric about the importance of bi-partisan support for the bailout, some members of the GOP seem to be looking to score political points from opposition to the bailout.

I don't see the Democrats going along with even a modified version of the administration proposal unless the President and McCain can pull significant Republican congressional support behind the plan. Why should they go out on a limb while the Republican lawmakers play it safe?

It is time for McCain to play a leadership role in this battle. He needs to pick a side and support it publicly. Instead, we're getting a sort of mealy-mouthed attempt to placate the far right of his own party. From the AP story:

At one point in the White House meeting, according to two officials, McCain voiced support for Ryan's criticisms of the administration's proposal. Frank, a gruff Massachusetts liberal, angrily demanded to know what plan McCain favored.

These officials also said that as tempers flared, Bush struggled at times to maintain control.

At one point, several minutes into the session, Obama said it was time to hear from McCain. According to a Republican who was there, "all he said was, 'I support the principles that House Republicans are fighting for.'"

The modifications proposed by the Democrats all seem to me to be reasonable:

To be sure, Democrats demanded a number of changes in his $700 billion bailout plan, but administration insiders signaled they probably were acceptable. They included greater oversight, more protections for taxpayers, efforts to head off home foreclosures and piecemeal allocations of the federal money to buy toxic mortgage securities.

I also like the idea of limits on executive pay for participating companies, though I don't see that one passing in any substantive way. Everyone knows that investment bankers have taken home outlandish bonuses based on inflated valuations of these same CDOs that underlie the crisis in the first place. I don't see that it is unreasonable to ask them to take a pay cut to make up for their excesses.

--SCC

McCain's Temper

McClatchy has an interesting story describing McCain's temper. Even many of his fans agree that he tends to be too impulsive.

"Yeah, he has a temper," said Delaware Sen. Joseph Biden , the Democratic vice-presidential nominee and Senate Foreign Relations Committee chairman. "It's obvious. You've seen it.

"But is John whatever his opposition painted him to be, this unstable guy who came out of a prisoner or war camp not capable of (acting rationally)? I don't buy that at all."

I think that Biden's take is probably correct. I do think that McCain sometimes acts impulsively, and that it is very difficult to get him to recognize an error and reverse course.

On the other hand, when he recognizes an error, I can't think of another prominent politician who issues a more gracious apology. (His apology after the Keating 5 affair should be in a textbook, and he became as passionate an advocate of campaign finance reform as there is in the Senate.)

--SCC

Let Sarah Speak

Politico is reporting that Governor Palin has not made herself available to political reporters for in-depth interviews about her positions. This is not the sort of story that the Republicans want to have run about their candidate, since it will reinforce stereotypes about her.

Less than two months before voters hit the polls, Palin has yet to sit down for or even schedule an issues-oriented interview with any newspaper, magazine or television network.

She's tough, pretty, a good speaker, and she has a handle on the Republican "message." She would make a good showing. (I wouldn't characterize her as a "deep thinker," but she is very telegenic, and the Sunday morning shows aren't really good at evaluating how much depth a person has.)

In the meantime, the media will be thrilled to report on qvetching from issues-oriented reporters:

"We know now that Sarah Palin can give one hell of a speech," Carney said. "She's a natural. And that's no mean feat. We don't know yet and we won't know until you guys allow her to take questions, you know, can she answer tough questions about domestic policy, foreign policy?"

"But I mean, like from who?” Wallace asked. "From you?”

When Carney answered "Yes," Wallace followed up with, "Who cares?

"I think the American people want to see her," Wallace continued. "Who cares if she can talk to Time magazine?"

Later that day, Carney — who last week had a much-buzzed about interview with McCain in which the candidate became testy, and refused to answer some questions — told Politico that the McCain campaign is acting "condescending and smug" toward the press.

Palin is tough, pretty, a good speaker, and she has a handle on the Republican "message." The Republicans should let her speak to reporters. Maybe they don't want to start with Time, since their reporter seems to be particularly ticked off right now. Maybe they start with the Wall St Journal or the Washington Times.

Or maybe they put her back on TV, on the Sunday morning shows. She is a very telegenic candidate, and her depth of experience is much less important in a setting like television.

--SCC

Fact Check on the Republican Convention

AP provides an interesting fact check for claims made during Republican convention speeches.

I'm sure that everyone is shocked, simply shocked to discover that politicians sometimes stretch the truth to make a rhetorical point.