So, The Bailout Failed And The Stock Market Tanked…
…and the world holds its breath waiting for what tomorrow brings. What we do know is that there will be no action (at least, no floor vote) until Thursday at the earliest, when Congress reconvenes due to the Jewish holiday.
However, there is every reason to question what will change between now and then to cause the vote to pass.
Let’s do a little reconstruction here, though, to demolish some myths so we can talk straight.
(1) John McCain did not torpedo the deal. Nancy Pelosi has stated on many occasions that she would not work to pass the deal with less than 100 Republican votes in the House. The smart count had her at best with 50.
…(4) This whole thing is screwed, and maybe us along with it, if someone doesn’t figure out what can be added the the shell of the Paulson Plan that would bring along 50 more House Republicans. Their proposal won’t fly, and they won’t accept what’s on the table right now. I don’t know the answer, but it’s a grim outcome.
65 Republicans voted for the bill, so all that arm-twisting between Thursday and today only moved about 15 votes. Now, Boehner says that 12 more Republican votes were there, but they changed to nays as a result of Pelosi’s partisan grandstanding to introduce the bill (a notion that I am sympathetic to , but I also agree with Barney Frank’s ridicule of the idea of putting your feelings ahead of your vote).
But the vote failed by 24 (23 more nays than ayes, but it needed 24 to break the tie). 95 Democrats opposed the bill. Had the Democrats ‘held serve’, they wouldn’t have NEEDED a single Republican aye.
Now, I’m not blaming the Democrats. What I’m saying is this – the bailout failed for several reasons:
(1) Conservative House Republicans opposed the ‘socialistic’ government intervention to the tune of $700 billion.
(2) Liberal House Democrats (including my own representative, Lloyd Doggett) opposed a $700 billion bailout of Wall Street fatcats at the expense of Main Street.
(3) The leadership tried to present a united front and rush through the bill, but no one, including the president, has been forthright with the American public on why this bill is so necessary NOW.
As to #3: in case you don’t know (and you wouldn’t, from the almost total silence regarding the REAL reason this is now a priority), a money market fund “broke the buck” on September 16th. This means that in this extremely conservative, safe investment, a dollar invested was worth less than a dollar.
Money market managers faced an impending catastrophe the next morning, when large institutional investors plopped half a trillion dollars in redemption requests on their desks. THIS was the calamity that forced the government into action: essentially, Paulson and Bernanke pleaded with the major players not to redeem with a pledge that a bailout was in the works and would be delivered quickly:
The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.
Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level – a 22 percent decline! – while the clang of the opening bell was still echoing around the cavernous exchange floor.
According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.
The panicked selling was directly linked to the seizing up of the credit markets – including a $52 billion constriction in commercial paper – and the rumors of additional money market funds “breaking the buck,” or dropping below $1 net asset value.
The Fed’s dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.
…The injection of capital into the market was followed up by calls from Treasury Secretary Hank Paulson to major money market players like Bank of New York Mellon and State Street in Boston informing them that federal money was in the market and they should tell their clients the Feds would be back with a plan to stem the constriction in the credit market.
Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.
Hours after Paulson made his round of calls to calm the industry, word leaked out that an added $1 trillion bailout of banks was being readied. Investors cheered. At about 3 p.m., news of the plans was filtering up and down Wall Street, fueling a 700-point advance in the Dow Jones industrial average through 4 p.m. Friday.
Yet no one is mentioning this promise to Wall Street to ‘take care of the problem’. Is it any wonder that some view the urgency of the plan with skepticism? I watched the President’s prime-time address last Wednesday, along with most of you – did you hear any mention of this? I sure as hell didn’t.
There has been a massive failure of leadership, all right – there has been a failure by the Administration, by not speaking straight even to this very moment, and for trying to ram through a horrible bill with authoritarian overtones. The congressional leadership of BOTH parties has also shown itself to be woefully short of ‘command authority’ – I don’t know who thought these votes were ‘whipped’, but they need a new adding machine. And both presidential candidates have been less than forthright about their support of the bill, offering politically safe neutrality during most of the crisis, then very tepid support on the very eve of the vote.
But let’s remember one thing – THE VOTES WERE NEVER THERE. And every congressman who has spoken about this has been unequivocal that their constituents are nearly universally opposed to the bill. If this bill is to pass on Thursday, and I’m very dubious, we need a dose of the old Straight Talk Express from all sides…
UPDATE 9:29 p.m.: Already, we hear the tiresome blame game surrounding us on all sides, but Chris Cillizza is right on the money – the public hates the bailout, and that’s, ultimately, why it failed:
The failure of the financial bailout bill in the House is a classic example of an old adage: all politics is local.
Despite the fact that President George W. Bush and the leadership of both parties lined up behind the bill, the rank and file of both parties — particularly on the Republican side — rebelled in light of polling that showed the American public is deeply skeptical about a planned $700 billion bailout for the financial industry.
With just over one month left before the November election, politicians of both partisan stripes are concerned primarily about one thing: their own political futures.
And, even a cursory glance at polling on the issue, shows why so many politicians voted against the bill.
In a recent USA Today/Gallup, just 22 percent of the sample said they wanted Congress to “pass a plan similar to what the Bush Administration has proposed” while 56 percent wanted Congress to pass something “different” (although what that different plan would be was not made clear) and 11 percent wanted Congress to take no action at all.
The results were slightly more mixed in a New York Times/CBS News poll where 42 percent said they approved of the government’s financial rescue plan while 46 disapproved, and in the Post/ABC poll where 44 percent expressed approval for the plan and 42 percent disapproved.
The data suggest that this bill was far from a political winner for members of Congress set to face voters in 36 days.
And, for vulnerable Republicans who believe that the free-spending attitude of Congress and the Bush Administration was either partially or primarily responsible for their ouster from majorities in the House and the Senate in 2006, the idea of floating the federal government another $700 billion was simply unpalatable.
It’s no coincidence then that of the 205 Members who voted in support of the bill today, there are only two — Reps. Chris Shays (R-Conn.) and Jon Porter (R-Nev.) — who find themselves in difficult reelection races this fall. The list of the 228 “nays” reads like a virtual target list for the two parties.
[...] …and the world holds its breath waiting for what tomorrow brings. What we do know is that there will be no action (at least, no floor vote) until Thursday at the earliest, when Congress reconvenes due to the Jewish holiday. …[Continue Reading] [...]
The weird thing is I think the public would be substantially more supportive of even a bad bill if Congress were displaying some serenity and calmness. If they had just taken their time, spent fewer TV minutes bleating about the sky falling, and put forth a reasonable public face, I’m guessing this would have been pretty easy for them. It’s hardly the biggest, or most expensive, power-grab we’ve ever seen. It’s definitely the way they’ve run around yelling “OHGODWE’REALLGOINGTODIE” that has left everyone feeling a bit cold.
Yes, Ryan, I agree, and as I said elsewhere, there were some very paternalistic “oh, it’s necessary, trust me” overtones. Had they explained the money market collapse properly, and as you say, calmly, maybe they could have also counted on people to understand the rush…
I admit it — I am an economics weakling. I’m even less knowledgable about economic law. Can someone explain why the Treasury/Fed can’t just inject $700b into the system? ($105b was no problem.) Is Paulson limited to a certain amount by Congress? Are there only certain reserves that the US Govt has? How will bailing out companies (instead of injecting $$$) help? Bear Stearns and others have been bailed out. Again, why is Congressional approval necessary?
I’m not an expert on all the facets, either – but I think the difference is that another capital injection would only work if liquidity was the problem (this was a matter of much debate -whether the essential problem was liquidity or solvency – i.e., are you just having a hard time raising cash, or are you bankrupt for all intents and purposes?).
A capital injection helps liquidity, but it doesn’t dispose of the ‘toxic assets’ (i.e., the mortgage related debt instruments) that are causing people to question the solvency of many lending institutions.
But the Treasury needed Congressional approval to actually purchase these assets, thus removing them from the balance sheets of troubled institutions.
Anyone else? Did I get close?…
This discussion from Kevin Drum is probably helpful here:
http://www.motherjones.com/kevin-drum/2008/09/solvency_vs_liquidity.html
Thanks. One point of confusion is how “bailout” is used. The term seems to be overloaded: sometimes it refers to injecting liquidity, and other times it refers to buying toxic securities. An example of the later is the bailout in discussion in Congress now. An example of the former is AIG (in the form of a loan). Correct?
The Treasury seems to be authorized to inject liquidity into the financial system, but not authorized to buy toxic securities (especially when their value is unknown). Am I getting close?
[...] surprisingly, the stock market tanked on the news that the bailout failed to pass. Right now the market is behaving like a spoiled brat [...]
[...] …and the world holds its breath waiting for what tomorrow brings. What we do know is that there will be no action (at least, no floor vote) until Thursday at the earliest, when Congress reconvenes due to the Jewish holiday. …[Continue Reading] [...]
I’m no economics expert either so I’m trying to figure this out. Here is what I think I know:
a. mortgage holders are required to state the asset value of these mortgages based on today’s market price (mark to market, i think?).
b. the resulting decline in value of mortgage backed securities has led to falling portfolio values, illiquidity, and the need for cash & credit.
If we were to change the accounting such that the mortgage value was based on their ‘real’ long-term value (whatever that is and assuming it is different and more than today’s market value), how much of the crisis would pass?
Steve is correct: mortgage holders are required to mark their assets to current market values, and each quarter they are required to take write-offs which reflect the deterioration of their value (if they are banks – other financial institutions which hold debt, such as GE, have different requirements).
This decline in value has led to the need for cash because banks are required to maintain specified levels of capital. Hence they have been required to raise cash (by selling assets, issuing stock, or floating bonds or preferred stock) to meet these requirements.
If accounting rules were changed to reflect values other than current market prices, then there would be a lot of stress taken off the financial system. However, the risk in that approach was exemplified by Japan, whose banks carried inflated values of their underlying assets, which prolonged a recession which lasted over a decade.
One approach which has been suggested is to let the Fed or some other government agency determine what the assets are worth based on a comparison between current asset prices and a projection of long term value.
[...] …and the world holds its breath waiting for what tomorrow brings. What we do know is that there will be no action (at least, no floor vote) until Thursday at the earliest, when Congress reconvenes due to the Jewish holiday. …[Continue Reading] [...]
Maverick – well, typically it’s the Fed rather than Treasury (although Treasury was given special authority to inject capital into Fannie and Freddie)…but again, although my B.A. is in Economics, that’s not the area I work in, and I don’t claim special expertise..
http://www.msnbc.msn.com/id/20218020/
Good article, Mark, and from over a year ago. The Government’s been trying to avert this for a while.
Here’s a link that talks about the powers of the Fed, Treasury, and FDIC:
http://marketplace.publicradio.org/display/web/2008/09/30/feds_toolkit/
“Still, in theory, the Fed even has authority to do just what the congressional bailout authorizes — take bad debts off the hands of struggling banks.”