After initial euphoria, the stock exchanges took back all of Friday’s gains as more details were released and Congressional wrangling began, regarding the Paulson bailout plan.
Paulson is proposing a $700B plan to take all of the “bad loans” off of banks books and manage the disposition of those loans over a 2 to 4 year period.
Several articles have described the Paulson’s plan as “letting those responsible for this debacle, off the hook.” In a sense that may be true, to the extent that companies holding these bad loans survive and avoid bankruptcy. In another sense, it’s hard to say that companies who have written off up to 80% of assets that surely have greater value than that, have been “let off the hook.” (Don’t get me started on the mark to market requirements!)
It’s hard to tell if Paulson’s plan, in any form, will make it through Congress. While there was a large sigh of relief last week when the plan was rumored and initially announced, several factions have inserted themselves in the process or the lobbying and may ultimately kill any chance for a bill.
The Dems are trying to ensure that they get a piece of flesh by adding a provision that any institution who sells these loans to Paulson (I’ll use that term as generic for his plan because I don’t know what else to call it) or buys them, has to provide stock warrants to Paulson that would allow Paulson to cash them in and benefit from any gain that the companies may later have. As an aside, this ain’t going to fly. Can you imagine anyone willing to buy distressed assets if they have to also give stock warrants? They also want to control salaries and bonuses of senior executives of the impacted companies…Oh yeah, that will get a lot of folks lining up at Paulson’s door! While Dems may possibly cause derailing from the inside of the process, some Republicans, especially those who would brand themselves “hard core conservatives” are trying to derail the bill from outside.
HotAir.com has an article outlining opposition to Paulson’s plan by Rep. Mike Spence and William Kristol. Over at Redstate.com a conservative blog site, some readers are lining up their opposition to the bill.
I honestly don’t know whether the Paulson plan is the right one or not. You could say it’s above my pay grade. While I’m not big on bailouts, I do believe the Bear Stearns move was the right one. AIG, I’m just not familiar enough with the issues. Here’s what I do know. In the current discussion, the Dems are playing politics and some of the Conservatives, blasting this plan with as little information as the rest of us have, are ideologues.
I saw this article today in US News and World Report. In it, the author makes a swag at the possible implication if the Paulson plan is derailed. His numbers are staggering! According to his swag, the impact on the US economy could be north of $30 trillion. Remember, the US economy is about $12 Trillion. Can you imagine an impact that is 2.5X today’s economy. Is he right? Again, I don’t know. But, even if you cut his numbers in half, the potential is beyond significant. At the very least, those who are working hard to flush this plan without serious discussion, ought to spend some time considering the articles arguments.
What’s the tie to Roman History?
In 280 B.C. and again in 279 B.C. King Pyrrhus of Epirus took on the Roman army. The good news is that Pyrrhus won both battles against the larger Roman army and the Roman losses were more significant than those of Pyrrhus. The bad news is that Pyrrhus lost so many men relative to his army, that he was unable to maintain an army after the large number of casualties in the two battles, and he ultimately lost the war to the Romans who had a much larger reserve of men to back fill their losses. A victory accomplished at a huge loss has been known ever since as a Pyrrhic Victory.
As I said, I’m not sure what the right answer is but the same can be said for the Dems who are politicizing and some of the Conservatives who are ideologues. I do know that this issue needs to be given much more serious consideration and analysis than I’ve seen given it thus far. Should the Dems or the ideologues win, I trust that their success will not be remembered as a 21st century Pyrrhic victory.
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