Saturday, October 4, 2008

The Bailout Bill: Why So Glum?

The Bailout Bill Passed: Why Are People So Glum?

OK. Arms were twisted, some pork was added, the potential ramifications of doing nothing were averted, Main Street was saved (even if Wall Street also benefited), the middle class was rescued and the Bailout Bill was passed in the House after passage earlier in the week in the Senate.

In anticipation of passage, the stock market was up over 200 points early in the day, despite the economic news on jobs that showed a decline for the ninth month in a row. The bill passed with a little room to spare, and the stock market then began a slow and steady decline to end down 150 points, with little movement in the 3 month treasury bill.

Possible Reasons For The Reaction

This lack of market excitement can come from a couple of things which will be discussed below, but the passage does not put an immediate halt to the bleeding in the economy which, contrary to the pundits that say we may be slipping into recession, already seems to be firmly ensconced there. It's kind of along the lines of the old saying that "the only minor surgery is the one that someone else is having" J. Carl Cook. Feels like we've been in one.

Another possible reason is that although this money has been authorized, the final implementation of this plan to utilize this $700 billion, and the concern in some spots that more may be needed, is still a ways off.

From New York Newsday, October 4, 2008 :

WHY SO GLUM?

Why did the stock market decline despite the passage of the economic bailout bill? According to experts:

1 The economy can't recover until home prices hit bottom. And that won't happen until at least midway through next year - with or without a bailout.

2 The magnitude of the financial meltdown far surpasses even what the bailout can do. Investors worry that the rescue plan doesn't solve the underlying problems in both the housing market and the overall economy.

3 Uncertainty. What other chips are yet to fall - what else is out there that will have their own problems - i.e., commercial mortgages or credit cards, or other sectors.

4 Recession - no matter what. Friday's job numbers indicate that the economy is probably in or headed to a recession.


WHAT'S IN THE BAILOUT

HIGHLIGHTS

The money. Treasury will get the full $700 billion, but not right away, as Treasury Secretary Henry Paulson insisted on in the Bush administration's initial plan. Paulson will have access to $250 billion now, and may access an additional $100 billion later with presidential approval. Paulson can access the last $350 billion unless Congress and the president hold it back.

Executive compensation. Caps at $500,000 the amount of chief executive salary affected companies can deduct from their taxes as a business expense, and is designed to limit lucrative "golden parachute" packages for executives who leave companies that get bailout help.

Foreclosure help. For companies in the government program, Paulson will be required to implement a plan to encourage lenders to modify mortgage loans through existing federal home-ownership programs.

Oversight. Legislation creates multiple levels of oversight, including a Financial Stability Oversight Board and a congressional oversight panel. It also requires bimonthly reports to Congress and installs an independent inspector general to audit Treasury's decisions.

Recouping the money. If after five years the Treasury Department has lost money in its program to buy and resell the mortgage-backed securities, Congress and the next president will develop a program to recoup its losses from participating companies.

AMONG SWEETENERS ADDED

Provide business tax breaks, including for production of, investment in, and use of renewable fuels.

Increase personal credits against the alternative minimum tax, shielding more than 20 million taxpayers from it.

Increase, from $100,000 to $250,000, the limit on federal bank deposit insurance.

WHAT DOES IT MEAN?

The Treasury Secretary gets the power to spend up to $700 billion to buy bad debt from banks, credit unions, thrifts and insurance companies. The hope is that by shoring up their books, banks will begin lending again and trust will be restored to the financial system.

What are the bad debts? Many are mortgage-backed securities - loans bundled together and sold to investors. The underlying mortgages include subprime loans now delinquent or in default, partly because of the housing slump.

WHAT'S NEXT

The Treasury will have to determine what price to pay for complex mortgage-backed securities that have plunged in value. The department will hire asset management firms, lawyers, bankers and others. It won't be easy to value the troubled mortgages, but experts said an announcement of auctions and pricing plans could come within a few weeks.

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