Bailout Nation? Senator asks, "Where do you stop?"

The federal government's unprecedented run of huge bailouts may be just beginning -- the auto industry is lobbying for up to $50 billion in federal loans, and talk swirled in Washington Tuesday of yet another massive bailout, this one to create a new federal agency to unburden banks of hundreds of billions of dollars' worth of toxic mortgage securities.

The New York Times reports the new agency -- loosely modeled after the Resolution Trust Corp. formed after the Savings & Loan crisis -- would put taxpayers at risk for "hundreds of billions of dollars" in bad assets:  "The issue is whether Congress, after the election, should create a more formal and accountable mechanism, such as a federal agency, that would provide a relief valve for the troubled assets now causing havoc on Wall Street."

And there may be more. The Los Angeles Times reports tonight that the next president "is likely to face further demands for assistance from mortgage lenders, home builders, automakers and other struggling industries." Writing in the Wall Street Journal in opposition to the loan program for Detroit, Paul Ingrassia wrote, "If we bail out Detroit, where do we stop? The newspaper industry is in financial trouble because more readers and advertisers are turning to the Internet."

Bailout backlash, a staple of housing blogs for over a year -- even before the bailouts actually began -- appears to be spreading. One of the first in Washington to leak word of the coming AIG bailout Tuesday was Sen. Richard Shelby of Alabama, who made clear that he opposed the move. "Where do you stop?" Shelby asked. "Where do you draw the line?""

The McCain and Obama presidential campaigns both argued against a bailout for AIG Tuesday morning, even before the Bush administration reversed course and came to the company's rescue. "No, I do not believe that the American taxpayer should be on the hook for AIG, and I'm glad that Secretary Paulson is apparently taking the same line," Sen. John McCain said. "We cannot have the taxpayers bail out AIG or anybody else."

Still, both McCain and Sen. Barack Obama have supported the Detroit automaker's campaign for $25 billion in low-interest federal loans.

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Comments

[amir]

"Still, both McCain and Sen. Barack Obama have supported the Detroit automaker's campaign for $25 billion in low-interest federal loans."

Did I mention that Michigan is a deciding state in this election?

[Tyler]

Its taken years of mismanagement for these corporations to get where they are today. They deserve what they've got coming to them, most of all, the auto industry. Had the big 3 manufactured alternative fuel vehicles when we clearly had the technology to do so over 10 years ago, even as cost prohibitive as they would have been, they would currently be in a much better position than they are now. Same thing with the insurance companies. By not charging people a premium for not living in disaster resistant housing, they cut their own throats. Let these companies collapse. Their failures wil teach the lessons that future generations need to learn to ensure that our american resilience and innovation takes over, and creates newer, stronger, and more viable companies. It is the nature of all things for the weak and un-adaptable to die out. Look at the dinosaurs and several other species that no longer exist if you need any more proof..

[Laker]

Do you guys realize that today's $85 billion loan to AIG is like every tax payer has just given AIG $600-1000.
What happened to that stimulus check from May....i guess it bounced back with insufficient funds fee....(from WAMU)

[Willie]

Where do we stop? I am completely against bailing out anybody for that matter. There are a lot things that are fundamentally wrong with the way companies, in the age deregulation, have taken the taxpayers for a ride.

Let us begin with the deregulation of the airline industry, there were many legacy carriers that went belly up. Now, it is a gamble to fly not knowing what the immediate future will bring for those holding contracts for travel. Now we are faced with less choices, less services, paying for bags (even though the barrel of oil cost almost 60.00 dollars less than what it was a few weeks ago. United recently announcing a $50.00 per bag surcharge for your second bag! Regulate the airline industry!

Then we let the oil get out hand, paying googa money for gas,while the price of oil has come down, the price of gas still is at the highest levels, recently showing modest price spikes over hurrican Ike concerns. Regulate the oil industry!

REGULATE the mortgage industry!

The USA is just like a little kid that need to have a curfew to ensure good behavior. Right now the USA is acting like a teenager with newly found indepence, but hasn't reach the maturity to act like adults. When they mess up, then they will come to Daddy to bail them out, but in the meantime is constantly rebellious everytime Daddy try to impose limits.

Good grief. Get these BOZOS out!!!! NO MORE BAILOUTS, NO MORE. I am fed up. If I mess up, the government would not come to bail me out citing PERSONAL RESPONSIBILITY, but the bailouts are not for the little guys like me, they are for the big interests of this nation. GET THEM REPUBLICANS OUT OF TOWN! We don't learn our lessons, we voted George Bush, Sr because of the economy, we made the mistake of voting George Bush, Jr twice, and now, we are at risk of having four years of the same with McCain (Nice ring to it!) and ta pig with lipstick!

OMG! I am soooooo mad about this!!!! Am I rambling? This is insanity!

[Doug in Toronto]

So when will the first lawsuit be filed by a company that didn't get a handout from the Feds when it asked for free money? I have the over/under at Oct. 15.

[Steve]

If you want more of this vote for McCain, it is hard to beleive he is slower then the Texan. Both of these ikiots need a public speaking course. Watch the printing presses will start right after Bush is out, they have to. We will have inflation that will exceed the 70s for those who remember. I was once told everyone from TX is an idiot, now I believe them.

[Keith]

George Bush is the president who destroyed America. Like Nero before him, he may be credited for thousands of years with the total destruction of one of the world's great empires. Thank god we've got Stupid Sarah stepping up to the plate next.

[Tony]

To heck with Detroit. They know NOTHING about making alternative powered cars. The Chevy Volt gets 40 miles on electric. Big deal. Still not enough for most commuters out here. There are many better choices, such as the Phoenix Truck which gets 120 miles on a charge and can be recharged in under 10 minutes (at a charging station).

California should be the center for auto manufacturing as many of the companies are right here in our very own state!

[areader]

I wonder who I can talk to about getting bailed out.

[mike]

the fact is that we all were partying when house prices were skyrocketing and blowing money(weather you were worth $10,000 or $10m) now it is time for us all to take our punishment. we paid super high taxes when times were good and property values were escalating not to mention all the sales taxes we paid and now all that money is shedding back into the system. the fact of the matter is that if huge companies collapse we will all feel it. end of story.

[dclogang]

"Do you guys realize that today's $85 billion loan to AIG is like every tax payer has just given AIG $600-1000.
What happened to that stimulus check from May....i guess it bounced back with insufficient funds fee....(from WAMU)"

No it didn't bounce back to Wamu...The Stimulus checks were given to the oil companies by everyone who owns a car ealier this summer.
I know I've given quite a bit of that stimulus check to the oil companies to fill up my mivivan. (which I need for my small business).

What a deceptive little piece of crumb the government has give us.

[CompaJD]

Where can the backlash nation gather to protest all this nonsense.

[TakeFive]

What irks me the most is that there will be a bunch employees running around AIG, still pulling down 6-7 figures, now funded by those of use working for peanuts.

This business FAILED. It's owners and employees should face the same consequences as the local dry cleaner when it fails. Simplistic, yes I know.

But thanks to all the demagoging over Katrina, we're all trained to expect a bailout for our unique hardship.

[Michael Snyder]

Aren't "derivatives" wonderful? AIG's woes are but a part of a much larger systemic failure brought on by a decade of joyously trading "paper". When some "smart fellow" decided to insure the corporate and municipal debt and not show the risk as a liability on their reserves they thought they had a no-brainer on their hands. After all these entities were well qualified, had deep reserves and what's wrong with skimming off a point or two as all of this money goes by? For an answer to that question you might try a call to Lehman or AIG but I'm betting you'll have a time getting through.

As of this posting www.bloomberg.com reports the DJIA off by almost 300 points and plummeting as investors flee to Treasury Bonds and gold. the title of the article by Lynn Thomasson and Elizabeth Stanton pretty much sums it up: " U.S. Stocks Drop as Lending Freezes Up Following AIG Takeover " Sept. 17 (Bloomberg) -- U.S. stocks tumbled as bank lending seized up in the wake of the government's takeover of American International Group Inc. and investors fled to the relative safety of Treasuries.

Goldman Sachs Group Inc. and Morgan Stanley, the two largest U.S. securities firms, plunged more than 14 percent after Oppenheimer & Co. analyst Meredith Whitney cut profit estimates. General Electric Co., the world's third-biggest company, fell 7.7 percent and U.S. Steel Corp. slid 11 percent. Yields on three-month bills sank to a 54-year low and a measure of corporate borrowing costs surged to the highest since the crash of 1987.

``It's ugly,'' said Michael Mullaney, a Boston-based money manager for Fiduciary Trust Co., which oversees $10 billion in stocks and bonds. ``It's about the worst I've seen it in 25 years. You have to have free-flowing credit to lubricate the system. That's not happening right now.''

This is the proof of the "crisis of confidence" I've been talking about for the past year. There is sufficient capital in the system for these entities to fund themselves. The problem is nobody believes it. The gross lack of transparency within the financial sector and in particular in the trillion dollar plus unregulated derivatives market has brought the world's economic engine to a standstill.

The engine I'm referring to is credit. More accurately; trust as expressed by the extension of credit. Anyone who's been in business for a week knows a contract is only as good as the person who signs it. Sure you can "enforce" a contract. You can go to court, get a judgment, and then try to collect it. Eventually you'll either come out with pennies on the dollar or just walk away from the trouble. Or you can restrict your dealings to people you feel you can trust. Then your contract becomes a tool for codifying your agreements as it should be.

Because of the completely unregulated nature of the derivatives markets; not only have "the best in the business" gotten in over their heads, no one really has any clue as just how the chains of liability work in any of these contracts. AIG was essentially writing unregulated insurance policies in the form of CDSs that they could keep off the books when comparing capital reserves against their liabilities. The folly of such actions have reverberated around the globe as "Bloomberg" continues: " About $2.8 trillion of market value was erased from global stocks this week, triggered by Lehman Brothers Holdings Inc.'s bankruptcy. Russia halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the worst financial crisis in a decade."

What we're seeing here is what some folks might call a "market correction". Subprime lending has been the scapegoat for this crisis and as usual the politicos have got it wrong. It's the subprime packaging of not only mortgage backed securities, but every piece of corporate paper issued for years. When the "chain of possession" was broken; that's to say when the specific loans/properties/persons were eliminated from mortgage backed securities the door was opened for manipulation of value on a massive scale. It's that inflation of the securities value that's brought the markets to a standstill. It's the break in the chain that makes trillions of dollars in corporate bonds imposable to value, and it's that break in the chain that's destroyed the essential element of trust that must be present for business to succeed.

The harsh reality of "trickle down economics" is proving to be the losses that wipe out the common shareholder even as the top managers who engineered this mess continue to receive lotto sized severance cheques. What scares me more isn't only the demonstrated lack of clues on the economy demonstrated by both major political parties, (I don't think the Republicans know there's a crime scene yet) but the even deeper lack of understanding on the part of the American public. We're staring down a world wide depression brought on by unbridled greed and corruption at the highest levels of both government and corporate management and we're arguing about lipstick on a pig! It's a shame men like Ron Paul stand no statistical chance of winning the Presidency. It's past time for the Electoral College to go so a real pool of qualified candidates can be offered to the American people.

[Bryan Morris]

Last year I bought a house. I bought it for less than the appraised value with a 30 year fixed loan and a 10% down payment. I make more than enough money to pay my mortgage, taxes, insurance and living expenses for myself and my daughter even after having to make monthly extorsion payments to my completely irresponsible ex-wife who tried to take me for everything I'm worth. I was and am responsible.

This year, thanks to the irresponsiblity of others, my house is worth less than I still owe on it. I now demand that that the federal government either send me a check or pay down my mortgage to make up for the difference. I'm not asking for much here. There would be no "moral hazard" involved. I'm certainly more deserving than all the financial institutions and CEOs that they are bailing out. And I'm on the hook as a taxpayer for all those bailouts. I'm only demanding what should be my fair share.

[The original RZ]

As much as I'm against bailing out the banks and anyone involved in the housing industry, I am even more adamantly opposed to bailing out the auto industry. The big 3 had years to innovate and come up with models that Americans would buy. Instead, they pandered to the then-current demand for SUVs rather than thinking ahead. Now that gas prices are high and being green is the in thing, they can't compete with Toyota, whose Prius sales have taken off. A bailout reward their lack of forward-thinking rather than create an incentive for them to innovate and become more competitive - which will result in calls for bailouts the subsequent time the economy is in recession.

[socalinvestor]

I agree with everyone on here that bailouts are not the answer.

But lets play Devil's Adovocate for a minute....

From the SJMN "if AIG had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of billions of dollars in debt securities, which in turn would have reduced their own capital and the value of their own debt. "It would have been a chain reaction," said Uwe Reinhardt, a professor of economics at Princeton University. "The spillover effects could have been incredible."

Capitalism in its truest form eventually leads to crushing failures that ripple across the economy with potentially depression-like consequences. If we and the govt do not find this acceptable, the only answer is regulation from the outset. That is the choice we have to make.

[anonymous]

I am seeing red. I'm voting against every incumbent on the ballot. Obama, we are so ready for your kind of change.

[TakeFive]

You folks that bash the auto industry for not "being able" to build high milage compact cars need to do a little more reading:

The 65 mpg Ford the U.S. Can't Have

Ford's Fiesta ECOnetic gets an astonishing 65 mpg, but the carmaker can't afford to sell it in the U.S.

Know why? Even though it's a clean desiel, environmental regs won't allow it.

http://www.businessweek.com/magazine/content/08_37/b4099060491065.htm?chan=autos_autos+--+lifestyle
+subindex+page_top+stories

Call your congressman and demand a 65 mpg Ford instead of a bailout for the auto industry.

[356man]

As someone with a background in economics (no banking employment) I totally agree with Michael Snyder's assessments. The ablity to trade in zero sum derivatives should be outlawed. Isn't that how that wonderful genius in France tanked $7 billion out of his bank a few months back?

[The original RZ]

"the fact is that we all were partying when house prices were skyrocketing and blowing money(weather you were worth $10,000 or $10m) now it is time for us all to take our punishment."

Mike, I for one was certainly NOT partying when house prices were skyrocketing. Instead, I was watching in horror at how quickly my saved up 20% down payment became a 5% downpayment (even though I kept adding to it), questioning how so many people could afford to buy such expensive homes, and wondering how many more years it would take for me to finally be able to afford one. And I should be punished for this???

[jb]

It is unbelievable to me that they think they can sack the CEO's of these companies and then hand the taxpayers the bill. I propose a maximum 100k salary for any position of a company taken over and the future gains for these companies taken to pay off the bill

maybe even a public losses, public gains tax? (all corps that make $ can pay for this, not the taxpayers). We refuse private gains public losses.

[The Original RZ]

TakeFive, fair point, but the Prius is allowed to be sold in the U.S. So maybe Ford can't sell their Fiesta, but they certainly could have come up with something else.

[MyLessThanPrimeBeef]

Senate: from the same Latin root as senile, i.e. old.

So, apparently these old, senile people have been asleep for a while and are just waking up to ask questions.

Perhaps the hippies were right. Don't trust anyone over 30. I know I don't trust myself.

[Ron Jones]

Can someone bail me out. I only need $4000.00