Post by 76chevy on Sept 30, 2008 13:41:38 GMT -5
norris.blogs.nytimes.com/2008/09/29/september-surprise/?pagemode=print
September 29, 2008, 3:30 pm
September Surprise
By Floyd Norris
The House has voted down the bailout bill, to everyone’s surprise.
So much for party discipline. This bill was supported by John McCain and Barack Obama, the presidential candidates who, between them, have the support of nearly every member of the House.
But a majority of the House voted along with Bob Barr, the Libertarian who said, “We need to make Wall Street take the hit for its irresponsible investment decisions,” and Ralph Nader, the independent candidate who described the bill as “a bailout for Wall Street crooks.”
I had assumed the House leadership could assure that enough members of both parties held their noses and voted yes to gain a narrow margin for passage. But what we have here is a rejection of what Mr. Nader calls the two “corporate candidates.”
The vote came just as I finished the preceding post, called October Surprise. Let’s hope the banking industry gets that far.
The banking industry is in trouble with or without this bailout. Its efforts to change accounting rules to hide its problems are sad and appalling. The defeated bill would have authorized the Securities and Exchange Commission to suspend the mark-to-market rule, which forced the banks to admit how badly they had gambled and lost. The S.E.C. has already yielded to political pressure and barred short-selling in financial stocks, so it is possible it would yield to the accounting pressure as well.
“Truth is the first casualty,” is an old line to describe war reporting. It could also apply financial reporting at a time of crisis.
Economists tell us that markets where short-selling is barred are less likely to be efficient, and more likely to be overpriced. So we present investors with companies that are probably overpriced and doing their best to hide the low current value of their assets. For some reason, few want to buy.
Yesterday, on “This Week” on ABC, Newt Gingrich argued for suspending the mark-to-market accounting rule, on the ground that market values now are unreasonably low. To support that thesis, he pointed out that both the secretary of the Treasury and the chairman of the Federal Reserve think prices are lower than they should be. They make that claim in arguing that the government can pay above-market prices for dodgy assets and eventually make a profit.
Did you ever think you would hear a leading conservative say government officials are better judges of value than the market?
Absent the defeated bailout, the government is picking off weak banks one by one, arranging takeovers (takeunders might be a better term) when they can. In both the Washington Mutual and Wachovia deals, the depositors are doing fine, while shareholders suffer. That discourages bank runs by depositors, which is good, but encourages what we will call “stock market runs” by shareholders of any bank that might be in the same league as those banks. (If your bank ever bragged about its mortgage lending, look out.)
I still think Congress will salvage something — presumably by coming up with changes that assuage enough dissenters — but with the Jewish holidays starting this evening, it could be a while before that happens.
The risk of a big bailout always was that it would make investors think the banks were in even worse trouble than they appeared to be. Henry M. Paulson Jr., the Treasury secretary, tried to structure this bailout as a purchase of assets, so that banks taking the money would not be tarnished by doing so. But the decision to force those banks to turn over equity may have killed that move, and the changes to be made in the bill now could well make it more punitive. That could be good for a sense of justice, but bad for containing the crisis.
This is looking like a very interesting week in the markets, which were doing none too well before the September Surprise.
September 29, 2008, 3:30 pm
September Surprise
By Floyd Norris
The House has voted down the bailout bill, to everyone’s surprise.
So much for party discipline. This bill was supported by John McCain and Barack Obama, the presidential candidates who, between them, have the support of nearly every member of the House.
But a majority of the House voted along with Bob Barr, the Libertarian who said, “We need to make Wall Street take the hit for its irresponsible investment decisions,” and Ralph Nader, the independent candidate who described the bill as “a bailout for Wall Street crooks.”
I had assumed the House leadership could assure that enough members of both parties held their noses and voted yes to gain a narrow margin for passage. But what we have here is a rejection of what Mr. Nader calls the two “corporate candidates.”
The vote came just as I finished the preceding post, called October Surprise. Let’s hope the banking industry gets that far.
The banking industry is in trouble with or without this bailout. Its efforts to change accounting rules to hide its problems are sad and appalling. The defeated bill would have authorized the Securities and Exchange Commission to suspend the mark-to-market rule, which forced the banks to admit how badly they had gambled and lost. The S.E.C. has already yielded to political pressure and barred short-selling in financial stocks, so it is possible it would yield to the accounting pressure as well.
“Truth is the first casualty,” is an old line to describe war reporting. It could also apply financial reporting at a time of crisis.
Economists tell us that markets where short-selling is barred are less likely to be efficient, and more likely to be overpriced. So we present investors with companies that are probably overpriced and doing their best to hide the low current value of their assets. For some reason, few want to buy.
Yesterday, on “This Week” on ABC, Newt Gingrich argued for suspending the mark-to-market accounting rule, on the ground that market values now are unreasonably low. To support that thesis, he pointed out that both the secretary of the Treasury and the chairman of the Federal Reserve think prices are lower than they should be. They make that claim in arguing that the government can pay above-market prices for dodgy assets and eventually make a profit.
Did you ever think you would hear a leading conservative say government officials are better judges of value than the market?
Absent the defeated bailout, the government is picking off weak banks one by one, arranging takeovers (takeunders might be a better term) when they can. In both the Washington Mutual and Wachovia deals, the depositors are doing fine, while shareholders suffer. That discourages bank runs by depositors, which is good, but encourages what we will call “stock market runs” by shareholders of any bank that might be in the same league as those banks. (If your bank ever bragged about its mortgage lending, look out.)
I still think Congress will salvage something — presumably by coming up with changes that assuage enough dissenters — but with the Jewish holidays starting this evening, it could be a while before that happens.
The risk of a big bailout always was that it would make investors think the banks were in even worse trouble than they appeared to be. Henry M. Paulson Jr., the Treasury secretary, tried to structure this bailout as a purchase of assets, so that banks taking the money would not be tarnished by doing so. But the decision to force those banks to turn over equity may have killed that move, and the changes to be made in the bill now could well make it more punitive. That could be good for a sense of justice, but bad for containing the crisis.
This is looking like a very interesting week in the markets, which were doing none too well before the September Surprise.
