Re: Ben Stein: Maybe the bailout should not be of the banks at all, but of homeowners themselves.

Florida wrote:
The New York Times September 28, 2008

Everybody’s Business
In Financial Food Chains, Little Guys Can’t Win

By BEN STEIN

IMAGINE, if you will, that a man who had much to do with creating the
present credit crisis now says he is the man to fix this giant
problem, and that his work is so important that he will need a
trillion dollars or so of your money. Then add that this man thinks he
is so indispensable that he wants Congress to forbid any judicial or
administrative questioning of anything he does with your dollars.

You might think of a latter-day Lenin or Fidel Castro, but you would
be far afield. Instead, you should be thinking of Treasury Secretary
Henry M. Paulson Jr. and the rapidly disintegrating United States of
America, right here and now.

But I am getting ahead of myself. First, I am furious at what the
traders, speculators, hedge funds and the government have done to
everyone who is saving and investing for retirement and future
security. Millions of us did nothing wrong, according to the accepted
wisdom of the age. We saved. We put a large part of our money into the
stock market, as we were urged to do. Because the market wasn’t at
ridiculously high levels, it seemed prudent to invest in broad
indexes, foreign indexes and small- and large-cap indexes.

Now we have had the rug pulled out from under us. Our retirements have
been put into severe jeopardy. The “earnings” part of those price-to-
earnings ratios turns out to have been fiction for some financial
companies, which normally account for a big part of total corporate
earnings. In fact, earnings of giant finance players were often wildly
negative, creating a situation rarely seen since the Great Depression,
when the aggregate earnings of the Dow 30 were negative.

The current negativity occurred because of wild, casino-type
operations of big finance players, creating liabilities way beyond
anything we could have reasonably expected. This looks a lot like
theft on a spectacular scale — of our wallets, our peace of mind, our
futures.

Second, according to what I hear from my betters in the world of
finance, the most serious problems are not with the bundles of
subprime mortgages themselves — a large but not lethal quantum as far
as I can tell — but with derivatives contracts tied to subprime and
other dicey debt. These contracts are superficially an attempt to
“insure” against risks of default, hence the name “credit-default
swaps.” In fact, they are an immense wager — which anyone with lots of
money or borrowing ability can enter — about how mortgage-backed
bonds, leveraged loan bonds, student loan bonds, credit card bonds and
the like will perform.

These wagers entail amounts many times larger than the total of
subprime loans. In fact, there are roughly $62 trillion in credit-
default swap derivatives out there, compared with about $1 trillion of
subprime mortgages. These derivatives are “weapons of financial mass
destruction,” in the prophetic words of Warren E. Buffett. (Apparently
believing that the worst is over, at least for one big investment
bank, Mr. Buffett is now investing in Goldman Sachs.)

The swaps market has been unregulated. It has been just a lot of
people making bets with one another. Some of them made incredibly
fortunate payoff wagers against the mortgage bonds, using credit-
default swaps as their wagering vehicle. I am not sure who the big
winners are, but they are out there, and the gains were big enough to
cripple the part of Wall Street on the losing side of the bets.

Almost no one (except Mr. Buffett) saw this coming, at least not on
this scale. But let’s get back to the man of the hour. Why didn’t Mr.
Paulson, the Treasury secretary, see it? He was once the head of
Goldman Sachs, an immense player in the swaps world. Didn’t people at
Treasury have a clue? If they didn’t, what was going on in their
heads? If they did, why didn’t they do something about it a year ago,
when saving the world would have been a lot cheaper?

If Mr. Paulson and Ben S. Bernanke, the chairman of the Federal
Reserve, didn’t see this train coming, what else have they missed?
What other freight train is barreling down the track at us?

All of this would be bad enough. But by far the most terrifying item I
read in my morning paper last week was this: Mr. Paulson demanded that
Congress forbid judicial review of his decisions on use of the money
in the mortgage bailout. This would amount to an abrogation of the
Constitution. Not only would his decisions be sacrosanct and above the
law, but so would the actions of his pals in the banking world in
connection with this bailout.

The people whose conduct got us into this catastrophe have not only
taken our money, hopes and peace of mind, but they apparently also
want a trillion or so more dollars to put into their Wall Street Buddy
System Fund. This may be the most dangerous attack on the law in my
lifetime. What anarchists even dared consider this plan? Thank heaven
that minds more devoted to the Constitution on Capitol Hill are
questioning this shocking request.

By the way, if we are actually thinking about tossing the Constitution
out the window, why not simply annul these credit-default swap
contracts? With that done, the incomprehensibly large liability of the
banks would cease, and we wouldn’t need this staggering bailout.
Shouldn’t we consider making the speculators pay some of the price?

WE have survived housing-price corrections before. Why is this one
causing so much anguish? It must be the side bets, the credit-default
swap bets, multiplying the effect of the housing downturn many times
over. Maybe we should just get rid of these exotic bets and start
again without them. “Insurance” on market moves is always a bad idea,
because it does not tamp down market disruptions but instead greatly
magnifies them — as in the disastrous effect of “portfolio insurance”
in the 1987 crash.

Then there was Mr. Paulson’s insistence that there be no compensation
caps for executives of companies being bailed out by the factory
workers, the farmers, the schoolteachers and the medical doctors. He
told a skeptical Congress on Tuesday that if these caps were put into
place, bank executives simply wouldn’t participate in the bailout or
sell us suckers their debts. Fine with me. If the banks are in good
enough shape so that petulant executives can simply opt out rather
than live on a few million a year, maybe we don’t need the bailout at
all. Maybe we would be better off if those executives simply bailed
out and were replaced by people with more sense and more patriotism.

One final little thought bubbles into my mind: Maybe the bailout
should not be of the banks at all, but of homeowners themselves. Maybe
if we make the government the buyer of last resort of homes, we will
stabilize the markets, stabilize the debt associated with the markets
and take the gain out of the credit-default swaps for the speculators.
Yes, price would be a huge issue, but so it is for Mr. Paulson’s plan
for buying debt from banks.

Why not? We do it for farmers. Why not for the individual homeowner?
Oh, right. Because Treasury secretaries don’t know any of those
people.

Ben Stein is a lawyer, writer, actor and economist. E-mail:
ebiz@xxxxxxxxxxxx

Good post. I sure get a sense of someone fiddling while Rome burns.

--
Civis Romanus Sum
.

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