Saturday, September 20, 2008

Our representatives should be hearing from us

Our government is set to bail out dozens of companies that acted with reckless, stupid, and wild abandon. An entire legion of drunken sailors armed with limitless credit cards could not have kept up. Taxpayers are being asked, more like told, to pony up $700 billion to pay for this bender and keep the irresponsible companies afloat. This goes beyond stupid.

I am rarely at a loss for words or a crazy metaphor. Some how, I feel like this is the metaphor that I'll be using to describe some Darwin Award attempt somewhere down the line. "Welding a seat to a JATO rocket and going for a ride with nothing but a Barbie helmet and a leather jacket? That's like the $700 billion dollar bailout of the financial sector, only without the collateral damage."

Here's the letter I'm sending to all of my elected representatives. Write to yours. Copy and past mine if you want. If you're silly enough to want them to vote for this bailout, go get your Barbie helmet.

The Honorable Tom Davis

2348 Rayburn House Office Building

Washington, DC 20515-4611

Dear Mr. Davis:

I am writing you regarding the “LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS.” I believe this bill is both a serious moral hazard and a fundamentally unfair transfer of wealth from taxpayers to financial institutions. I urge you to vote against it.

Unlike the Savings and Loan bailout, the “assets” this plan proposes to purchase are not tangible property. Rather, taxpayer dollars would be used to purchase securitized debt instruments. The highly dubious value of these “assets” is in no small part to blame for the trouble many financial companies are in today. The taxpayers did not force these companies to buy these, and therefore have precisely zero obligation to take them off the hands of the businesses that foolishly bought them.

Even if our government were not $9.6 trillion dollars in debt, it would have no place using tax dollars to bail out irresponsible businesses. As it stands, you are being asked to spend money you do not have. Just because you have a checkbook doesn’t mean you still have money. I will be watching this vote with great interest.

Thank you for taking the time to read my letter.


Shannon said...

Scott, my sense is that the Paulson and Bernanke told Congress about some consequence of not doing the bailout that we (the public) haven't been told yet.

The reports of congress's reaction to the briefings seem to be more than just about that amount of $$.

So, my question is, what are the real consequences if they don't do this or someother bailout?


Scott Wimer said...

The impact of not buying these "assets" for something near what their holders have marked their value would be very large and quite bad. If this happens, it's quite likely to trigger a storm of Credit Default Swap activity since many of these things are insured. That would absolutely pound the people issuing the insurance or counting on the insurance (since the insurers would likely tank). That means pension funds, money markets, municipal bonds, corporate bonds, etc. all getting a serious drubbing.

It would be bad. Really bad.

The people and corporations involved all freely entered into these contracts. For the past several years, they have enjoyed outsized gains as a result of these overly risky investment decisions.

Corporations that exercised proper judgment did not do as well over this same period.

It strikes me as fundamentally wrong to protect those who made poor decisions at the expense of everybody else.

If the bailout goes forward, I guarantee that the American people will not learn from this. We will have privatized the gains and socialized the losses, moving wealth from the many to the few with the rule of law.

However, if we are allowed to suffer the impact of our own bad choices and decisions, there is the hope that we will learn from it. We will at least have been given the chance.

I think my view is a simple extension of my belief in a right to fail. If you take away the ability to fail or to suffer the natural consequences of that failure, you make it substantially harder for people to learn.

Companies basically went to Vegas, bet millions, and are now telling Paulson that unless he ponies up a huge bucket of cash the whole economy will tank. Even if they are right about the consequences, the cash shouldn't be forthcoming.

Shannon said...

Interestingly, most people I've talked with are very very concerned about this and generally don't like the idea.

But, Congress seems to be going full speed ahead. If this goes forward, incumbents are going to get hit very hard at the election.

I repeat, something doesn't add up. If there are 5+ trillion in swaps out there, what good is 700B going to do?


C3 said...

I used your letter for all the good it will do. Both Senators and my Congressman....

Scott Wimer said...


My understanding of the swaps isn't what I would call great. But, as I understand it, if you can keep the insured securities from getting marked to market or their issuers from going bankrupt then the various swaps won't get called in.

The goal isn't to make good on the insurance, it's to artificially make it unnecessary.