The Path Out of the Credit Crisis - Obama's Influence Or Foresight? Equity Share In Banks Idea

[Median Democrat]

Barack Obama is not John McCain. He has not made a show of suspending his campaign. Indeed, despite the fact that he has been on the phone constantly and met with the Paulson and Bernanke, Obama has not thumped his chest the way McCain has. Thus, the MSM has portrayed Obama as sitting on the sidelines. However, for those who pay attention, Obama has quietly advocated that certain steps be taken, and it is clear that Obama either has influence or tremendous foresight with respect to the steps that need to be taken to alleviate the credit crisis.

Remember way back in September when Obama was talking about how the US should gain an equity interest in the banks it is bailout, so that taxpayers can get a share of the upside? The original bailout plan did not have any such provision, and the final plan gave the Treasury Secretary this power. This plan was undoubtedly developed by Obama's economic team, which has some of the most experienced minds out there with respect to dealing with a financial crisis. So, what has happened?

1. On September 25th, Obama announced four principles he wanted included in any bailout.

http://network.nationalpost.com/np/blogs/francis/archive/2008/09/25/obama-s-bailout-plan-smartest-and-fairest.aspx

/snip

Within a day or wo, I think it's highly likely there will be the announced adoption of the four smart and fair conditions as have been suggested by Barack Obama:
1. Taxpayers should have equity, not just debt. This means they will have an upside as well as a downside.
2. Oversight will be bipartisan and without conflicts of interest.
3. Homeowners must be helped as well as their lenders in this mess. This means a moratorium on foreclosures involving principal residences. This could be done without infusion, but with non-cash backstopping and would help stop the property price crash.
4. Caps on salaries and other compensation will be strictly imposed on any institution that receives tax dollars.

In other words, taxpayers should own, not merely bail out, America’s financial institutions. And borrowers as well as lenders should be given breathing space. Equity with strings attached and an upside or downside is what happened in 1994 when Mexico hit the proverbial wall after terrorists attacked in Chiapas and after years of terrible fiscal and financial sector management by former President Carlos Salinas.
An overnight rescue of $60 billion was cobbled together in a matter of hours by then-President Bill Clinton and his team of advisors in partnership with Canada and the European Union stopped a financial panic in Mexican debts and equities and the money was repaid in half the time allotted, netting rescuers a tidy profit.

/snip

2. On October 10, Paulson finally decides to purchase equity in banks, and Obama quiely endorses the move

http://www.reuters.com/article/politicsNews/idUSTRE49A0EQ20081011

/snip

Candidate Barack Obama on Friday welcomed a plan by Treasury Secretary Henry Paulson to buy equity in financial institutions if necessary to halt market turmoil.

"There are many causes of this economic crisis, and it's critical that we respond using all the tools that we currently have," Obama said in a statement.

"That's why I support Secretary Paulson's latest initiative to use the authority we gave him in the financial rescue plan to provide more capital to our financial institutions so that they have money to lend to families and businesses," the Illinois Democratic senator added.

/snip

3. This weekend, European banks follow the United Kingdom's lead in going forward with a similar plan to recapitalize banks by taking an ownership share

http://www.nytimes.com/2008/10/13/opinion/13krugman.html

/snip

But when Henry Paulson, the U.S. Treasury secretary, announced his plan for a $700 billion financial bailout, he rejected this obvious path, saying, “That’s what you do when you have failure.” Instead, he called for government purchases of toxic mortgage-backed securities, based on the theory that ... actually, it never was clear what his theory was.

Meanwhile, the British government went straight to the heart of the problem — and moved to address it with stunning speed. On Wednesday, Mr. Brown’s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday — five days after the plan’s announcement.

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson — after arguably wasting several precious weeks — has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

/snip

Credit should be given to Obama's economic advisors, and to Obama for taking a political risk and trusting their ideas. The question is whether McCain tries to piss all over the deal, which Europe has already embarked on, or will he try to take credit for something he played no role in?

It will be interesting to see how markets react to all this news on Monday.

[dkf]

1. Nice job.

If this indeed had his full backing he accomplished it without a lot of grandstanding and hoopla.

I remember commenting that this sounded like a good idea early on especially because it can be done really fast.

[Median Democrat]

2. Obama Understands That "loose talk by politicians just makes things worse"

Unlike McCain, Obama has resisted the urge to use the economic crisis as a prop. The following Newsweek article describes how Obama responded to the credit crisis. His reliance on a talented team, as well as his insistance on trying to understand the issues himself, rather than simply reading slogans is clear:

http://www.newsweek.com/id/163456

/snip

Barack Obama was in "governing mode," says one of his aides. In a small room next to A basketball arena at the University of Miami, Fla., the Democratic nominee had convened an emergency session of his new economic brain trust. It was a remarkable gathering for a candidate who, during the primaries, had relied largely on an obscure, baby-faced University of Chicago economist named Austan Goolsbee. With Obama in the room were Bob Rubin and Larry Summers, both Clinton-era Treasury secretaries credited with lifting global financial markets out of the "Asian contagion" of 1997; Paul Volcker, former chairman of the Federal Reserve; Laura Tyson, Clinton's Council of Economic Advisers chair; Gene Sperling, Clinton's national economic adviser; and Dan Tarullo, also a key Clinton go-to man on trade and G8 issues.

Piped in on a conference phone were legendary investor Warren Buffett, Nobel Prize-winning economist Joe Stiglitz and Obama's would-be veep, Joe Biden. The topic at hand: what to make of Treasury Secretary Hank Paulson's $700 billion rescue plan, which was to be announced later that day (Sept. 19). "There's a comfort level in having someone able to say, 'This is a little like what we faced 10 years ago'," says the aide, who would divulge details about the session only on condition of anonymity. "But Obama was running the show. Twice he cut some people off when they started to talk about what message he should deliver . He said, 'Hold it, we'll do that later. You guys are here to help me figure out what we should be doing' " to solve the crisis.

In a phone call that day, Paulson had pleaded for time to sell his plan. Obama obliged by saying only that he supported giving Treasury and the Fed broad authority. Even though, behind closed doors, he was going into detail about his own possible solutions—mulling the virtues of the Depression-era Home Owners Loan Corporation and the response to the S&L crisis of the '80s—Obama supplied few specifics on his thinking. Nor has he revealed much more three weeks later, other than to talk about "protecting the taxpayer." While no one at the meeting would confirm they had advised the candidate to keep to generalities, Obama's approach did conform to the old Rubin-Summers philosophy from the '90s: loose talk by politicians just makes things worse, aggravating markets and upsetting negotiations. "The way McCain has made a fool of himself shows why," says another aide, who asked not to be named discussing campaign strategy. What the adviser didn't say is that this approach also gives Obama political cover: it allows him to avoid being too closely linked to a GOP-led bail-out while not appearing to undermine it.

/snip

[onetwo]

5. With Obama at the helm come 1/20/09, we'll all be in good hands.

[dkf]

7. Great article. I'm surprised I haven't seen it posted earlier.

I love the way Obama conducts business. And I find it hilarious that McCain funnels everything through Holtz-Eagin or whatever his name is. I find it telling that McCain seems to need so much more assistance than Obama even though he supposedly has experience in this area.

It makes you wonder how in the world McCain chaired the commerce committee.

[TexasObserver]

3. There is a logic to the notion of the US buying bank stock.

I do like the fact that the US would get an equity position, and that the likely result would be a significant uptick in value of those purchased stocks, and that such purchases might attract additional capital to the targeted banks.

I also like the fact that such an action, if funded by $700 billion, would produce an additional $7.5 trillion or so in loan funds to US customers.

I'm going to have to think about it, but this approach may be one that shores up the lending markets quickly, and doesn't require wading through all the bad paper out there. This approach will not help those who have already had their houses foreclosed, but it could help those trying to keep their homes. However, that's no guarantee.

[dkf]

9. Yes, speed is of the essence.

And we are buying at bargain basement prices. This could be huge for the American taxpayer, but like a post below states, this is not about turning a profit.

[TexasObserver]

11. I want to see the US buy value, not simply piss the money away on bad debt.

Buying stock does that.

It also allows the US to benefit from the upswing in values created, and allows the US to get out of the markets when they are sound.

While it's not about turning a profit, it is about avoiding a loss and getting the US a return on its money. We have to pay for that money which is being committed by the government, pay for the interest which allows us to borrow. We need a return of the money, and at least a small return on the money, to cover those interest payments the government must make on the debt instruments it issues to fund the bailout.

[amborin]

4. McCain will apparently float yet another 'help the wealty' economic fix:

new tax cuts

Adviser Says McCain Has Tax Cuts in Mind

By LAURA MECKLER

"One of John McCain's closest advisers said Sunday that the Republican presidential candidate is considering new tax cuts to spur economic investment.

"It will be a very comprehensive approach to jump-start the economy by allowing capital to be formed easier in America by lowering taxes," Sen. Lindsey Graham (R., S.C.) said on CBS's "Face the Nation." "Now is the time to lower tax rates for investors -- capital-gains tax, dividend tax rates -- to make sure that we can get the economy jump-started."

<snip>

"John McCain is being diligent about considering a host of different courses of action in response to a changing economic situation," said spokesman Tucker Bounds.

Sen. McCain has been trailing in the polls as Election Day nears. He will face Democratic rival Barack Obama in a third and final debate on Wednesday. Referring to Sen. Obama, Sen. McCain told volunteers at his Arlington, Va., office Sunday that he would "whip his you-know-what in this debate."

"I'd like to give you a little straight talk. We're a couple points down, OK, nationally, but we're right in this game," he said, after spending nearly four hours with advisers. "The economy has hurt us a little bit in the last week or two, but in the last few days, we've seen it come back up because they want experience, and they want knowledge and they want vision and we'll give that to America."

The McCain campaign has sought to portray the Arizona senator as an experienced leader who can take on any problem. Polls show that voters tend to view him more favorably in terms of leadership generally, but have more confidence in Sen. Obama's ability to lead when it comes to economic issues.

Sen. McCain's top economic adviser has prepared a variety of policy options in response to the financial crisis, though they weren't the focus of a strategy session Sunday at which the campaign laid out plans for the three weeks before Election Day, one adviser said.

Sen. McCain has proposed several measures aimed at helping the economy. In last week's presidential debate, he proposed a $300 billion program for the government to buy distressed mortgages and renegotiate affordable terms with homeowners who might otherwise default on their loans. Friday, he called for suspending a requirement that retirees begin liquidating their retirement accounts when they reach age 70½."

<http://online.wsj.com/article/SB122385969780027561.html>

[Median Democrat]

10. I Keep Heaing Him Push For Another Capital Gains Tax Cut

Watching the market, it does not appear that anyone is having a problem liquidating their stock holdings. Also, given how far the market has fallen, where are the gains that would be taxed? The S&P 500 is below where it was back in 1997, so unless someone has been fully invested in a stock for over 10 years, most folks could sell and realize a tax loss. So, instead of offering something constructive, McCain just panders to the Grover Norquist types who got us in this mess in the first place.

[amborin]

6. Mexico bought shares of its banks during its 1994/95 meltdown and

the US has been conferencing with its former finance minister, Ortiz, about this

Ortiz recommended buying stakes in the banks, as Mexico did back then:

"MEXICO CITY -- Talk about your role reversals. In the past few weeks, officials at the Federal Reserve have discussed the unfolding crisis with at least one central banker from a developing nation who witnessed his own country's financial system implode: Mexico's Guillermo Ortiz.


Guillermo Ortiz, president of Mexico's Central Bank, listens during a news conference in Mexico City.
The Stanford graduate was Mexico's finance minister during the country's 1994-95 peso collapse, which led to a massive government bank bailout and Mexico's biggest economic slump since the Great Depression. The so-called Tequila Crisis, named after Mexico's national drink, is today seen as the first financial crisis of the globalized economy. The U.S. put together a massive credit line that helped Mexico emerge from the crisis and grow prosperous in its wake.

Last week, before the start of the International Monetary Fund's annual meeting, the Mexican central banker, who steered his nation to recovery in those dark days, met with Fed Chairman Ben Bernanke. Mr. Ortiz had previously met with some Fed officials in mid-September.

Mr. Ortiz declined to discuss details of the discussions, but the fact that officials in Washington are talking to foreign officials such as Mr. Ortiz suggests they are open to learning from other countries' experiences -- even as the current crisis roils those very nations. Mexico, for its part, has had to spend about a tenth of its foreign exchange reserves defending the peso, and the cost of credit is soaring for Mexican companies, as it is for so many others.

Nonetheless, many of the lessons of the Tequila Crisis and others like it apply to the U.S.

Among the most important: Don't be ruled by ideology -- stay flexible and act decisively. Help those with mortgages they can't pay. Take stakes in troubled banks. Don't expect to turn a profit on government investment."

etc....

from WSJ

[dkf]

8. "Don't be ruled by ideology"

That is key. I'm glad this is being pointed out.

[vaberella]

12. The European market is looking fantastic. Went up 200 points. American hasn't started, Asian down

300 or so. Once America opens it's doors and starts trading Asia will go up. Asia and america are conversely related while America/Europe at times tends to be inversely. Europe reacts positively before the US and if the US reacts badly it reacts badly after the US.

[depakid]

13. I don't know what Asian indexes you're looking at

Damn near everyone has posted healthy gains. Over 9% on the Hang Seng.

Aussie stocks up 5.5%

[vaberella]

14. I'm looking at bloomberg.com----which I just checked to be wrong.

The date on bloomberg.com is actually Oct. 10. I guess BB is still a sleep. I thought they were on the right path. ~sigh~ Pardon me.

[Median Democrat]

15. DOW Is Up 500 - Maybe Obama Knows How To Pick and Listen To Good People