The Bailout: The Myth, The Legend, The BestSeller

If enough people talk about it, it must be important, right ? Well the Bailout is important. It can provide needed liquidity into financial markets.

Unfortunately, it is now more important than it ever should have been because THE BAILOUT has passed from being a financial response by the Treasury, which it would have been had it been passed and played in 2 days to a completely different level. THE BAILOUT has now become THE BAILOUT: THE MYTH, THE LEGEND, THE BESTSELLER.

When The Most Powerful Man in the World Hank Paulson requested 700B to quickly reflate our banking system, it was merely a news story that Wall Street was following closely but Main Street had not begun to focus on. Way back then, Wall Street was willing to recognize that although they didn’t fully understand the scope of the problem, they could suspend belief and let the Fed do its thing. Wall Street trusted The Most Powerful Man in the World, and understood that this was the only chance that their business had to get back to normal.

Then politics happened. Regardless of why politics happened, the deal has  not gotten done. The delay gave MainStreet, now known as every taxpayer in America, the opportunity to realize that 700B was coming out of their pockets, again. That recognition caused all  of us taxpayers  to actually pay attention and read about or watch highlights of the hearings, at which point it became painfully clear that more than a few  of our esteemed politicians were fundamentally financial illiterate and had absolutely no idea what was going on.  Some of the questions were as painful for anyone with a mortgage or oustanding loan to listen to or read as it was for the Most Powerful Man in the World to respond to.

That led to the blowing up of the phones, inboxs and fax machines of every member of Congress. Instead of this being done quickly and turned over to the spindoctors, the Bailout became the number one story in the country. I have no doubt everyone in this country with a bank account asked someone whether or not their money was safe, including me. It was at this point the BailOut went from being a financial issue to being The Myth, The Legend, The BestSeller, The Bailout.

That is not good news. Forget the timing aspect of the Bailout and whatever fiscal costs may result from delays. The Bailout: The Myth, The Legend, The BestSeller has now become part of each us.

EVERY SINGLE AMERICAN with a bank account, savings account and/or retirement account has become fundamentally more conservative about their finances. We all inherently trust the entire system less today than we did last week. Our own individual Volatility Indexs have hit 51pct, and could go much higher. There is a growing amount of uncertainty among businesses and individuals and that is a very bad thing.

When uncertaintly levels get this high, businesses and individuals do the same thing: We hoard. Like the approaching bad storm, our survival instincts take over. Instead of bread and water, we hoard our savings.Our propensity to take chances declines dramatically.  We don’t spend. We save. We also try to gather as much cash as we can. That might be through selling assets. It might also be through asking for money from whatever sources of cash we can find, including banks.

None of which are good for the economy.

The BIGGEST PROBLEM is that now that the Bailout has become the Myth, The Legend, The BestSeller, even when the Bailout is passed and the money introduced into the system, it will be too little too late to get us back to “normal” anytime soon.

The people who run Banks will treat their banking assets much like they treat their personal assets. They will hoard. Yes, they will make some loans where they need to make their best customers happy and to keep their biggest customers afloat, but I doubt that much of that money will be loaned to MainStreet.

Why ? Because of uncertainty. The bankers who got us into this mess, those that still have jobs and those who used to work at Investment Banking Companies and took over or became banks, will be afraid to loan out much money for fear of running into liquidity problems again. They don’t want to go through this again anymore than you or I do.

On the flipside, once the Bailout happens, every John and Sally on MainStreet is going to run to the bank to first make sure their money is there and 2nd, to see if they can get a loan. After all, their taxmoney paid for the Bailout, they should be able fix their problems or improve their situation. From each according to their ability, to each according to their ability to ask for something. That is becoming the new American way , isnt it ?

The combination of lack of lending and an increase in asking will lead to a lot of disappointment and further uncertainty.  Which probably means that it wont be a good Christmas season for retailers and who knows what will happen in the financial markets.

Then the phones, inboxes and fax machines will blow up again as we hopefully are only in a slightly extended recession as the new President takes over and the discussion begins  about the next Bailout.

The BailOut could have worked well if it had happened quickly. Now, because its taken on mythological proportions,when it does happen, it probably won’t be big enough. And thats before we take into consideration the possibility of Oil prices running up again.

You never want to ask how hot dogs or Bailouts are made.

The good news is that we Americans are resiliant. We have an entrepreneurial spirit that has  overcome worse, and we will take on this challenge and beat it

What happens when the

and what happens re Oil, that problem has not gone away. if oil prices hit 140 again or higher ?

38 thoughts on “The Bailout: The Myth, The Legend, The BestSeller

  1. Pingback: Rock’n'Fella » Blog Archive » The Bailout: The Myth, The Legend, The BestSeller

  2. How does one contact Mr. Cuban for a business proposal?

    Comment by Neal Howard -

  3. The Wall Street/ Main Street thing is an oversimplification and about as applicable to reality as Democrats/ Republicans or Capitalism/ Socialism. Complex issues are brought about by a confluence of factors and require more than child-like binary thought to understand. Economics and public policy are in that domain.
    I’m sorry to single out this particular blog post and do not mean anything personal. Overall, this blog is relatively insightful and contains much less “child-like binary thought” than I see on ALL of the cable news shows.

    Comment by prfx -

  4. I am glad that the bailout did not pass. Why should I, as a taxpayer, bail out these companies? They should just do what the rest of the U.S. does and file bankruptcy. Someone will buy them. Citigroup has now bought Wachovia. I also believe that the upper level managers of these companies should be investigated for fraud, placed in prison and fined a high sum of money. They abused their power. I feel bad for the innocent people caught up in this scandel. However, some were aware they could not pay for the homes they bought. Those I do not feel sorry. Why should we as American taxpayers be forced to pay for other peoples “bad decisions”. I’m currently paying two mortgages plus rent on a condo in Chicago. I am living and working over 600 miles from my Family in order to pay their bills. Americans will survive this problem. We may not like it, but it is better than rewarding the mistake makers with a bailout.

    Comment by Gina -

  5. Here is another view about the Paulson’s Proposal from university economists.

    http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

    Also the Concord Coalition has written about the plan:

    What we know for certain is that the government will incur a huge upfront cost, immediately adding to the debt and immediately incurring compounding interest payments. All of this will be layered on top of a deficit expected to exceed $500 billion next year, and an overall fiscal policy that is unsustainable.”

    More here: http://www.concordcoalition.org/press-releases/2008/0926/concord-coalition-urges-policymakers-budget-bailout

    Comment by Terry -

  6. Hi All,

    I’m for talking the problem out and working toward a better
    solution.

    The one time Americans on Main Street ask “what the hell is
    going on” and we get lectured to stay out of and let the
    experts make the decisions.

    Well the heck with that. For once, let the experts take a
    few days to discuss and get it right.

    Yes, I understand that the markets are as much about confidence
    as they are about economic fundamentals. But I haven’t seen
    Americans stampeding to their banks yet, so let’s take some time
    to consider all our options before making a decision about
    how to finally address the problem.

    Best I can understand, not one person “knows the answer” to this
    crisis. But collectively maybe we can work something out.

    Comment by Terry -

  7. Hey Mark,

    Throwing 700B at the problem, and sending spin doctors out to Main St. to sell it does not sound like the solution. I know I wouldn’t fall for for it, and I live on Main St.The only positive I heard last night, coming from Washington, was the request for input from the economist at schools like Harvard and the University of Chicago (and many others). This “bailout” is going to cause an economic hangover for years. Why should the next president rubber stamp something handed to him from the Bush White House and have to begin their term with this enormous debt. I think we need to look at this very carefully and let leaders with a voice of reason, who are not concerned with partisanship but rather the well being, and future of America. As for McCain wanting to “suspend” his campaign to help with bailout plan….stop it!….whatever happened to multi-tasking? Of course after listening to his running mates interview with Katie Couric, especially the part about her foreign relationship comments concerning Russia I would suspend my capaign too…PERMANETLY! Stop with the excuses Senator, and let’s hear what you have to say.

    Comment by Jerry -

  8. Would this be a good time to claim bankruptcy if you have a lot of debt on your shoulders?

    Comment by Chris -

  9. You are right again. I don’t think the bailout ever had a chance of preventing disaster, just softening the blow. With all this delay, and what appears the inability to take steps to prevent another such instance (repeal sarbanes oxley, or better yet, take your approach to mark to market, lower/suspend capital gains taxes, etc)I fear its not even going to soften the blow. I’ve been willing to look past the idealogical and concede that in this case, just relaying on political or economic philosophy to determine the role the government should play, doesn’t work, the situation is too unique. However, that doesn’t mean a bailout is a good thing. It just means its not as bad as not doing a bailout. The longer we delay, the more we allow panic to set in, and the less willing we are too take additional steps to prevent this from happening again, the more I think that the consequences of no bailout would be the better way to go.

    What favorite part about the bailout proposals is that 65% of any profit the government might make goes into a housing trust fund. Isn’t the fact that the government pushed banks to give loans to people that could not afford them how we got in this mess to begin with? Why are we going to then take the profits (if there are any) and put them towards a program to help people get houses when they can not afford them?

    Comment by chase peeler -

  10. The WSJ reports:
    “One cause of the delay: opposition from House Republicans who have tried to fashion an alternative plan that, instead of relying heavily on taxpayer money, could let banks buy insurance for the troubled assets weighing down their books.

    The snafu spawned a round of political finger-pointing, with most Democrats blaming Sen. John McCain, whose decision to return to Washington and meet with congressional Republicans appears to have complicated days of negotiations.

    Sen. McCain “goes to a meeting and all of a sudden, we lose all the Republicans who have been working with us for the last five days,” said Rep. Ellen Tauscher, a California Democrat. “This has to be a bipartisan deal. Unfortunately Republicans walked off the field.”

    Here’s a Financial Times quote from Barney Frank, Chairman of the House Financial Committee.
    “All of a sudden, now that we’re on the verge of making a deal, John McCain drops himself in to make a deal,” said Barney Frank, chairman of the House financial service committee. “I really worry about this politicisation of it.”

    NYT
    “Mr. McCain was at one end of the long conference table, Mr. Obama at the other, with the president and senior Congressional leaders between them. Participants said Mr. Obama peppered Mr. Paulson with questions, while Mr. McCain said little.”

    Comment by Frank Vu -

  11. How is it a bad thing that there is less trust in banks because of this? It was blind trust that got us in this mess to begin with. People should learn from this and become more conservative with their money. That means the system is working.

    A bailout adds artificial confidence to the system, which will only compound the problem in the long term. If we know the government will always come in to save the banks, why worry about money at all, ever? Why be careful about whom you do business with? It’s a dangerous road.

    Any kind of government (“taxpayer”) ownership is a mistake. Politics will get in the way every single time.

    Comment by de -

  12. The sun will come out tomorrow…

    Due to the stringent credit standards that have been in place for the past 18 to 24 months, the current securitizations are the safest credit instruments since the 90’s and probably ever. The biggest risk will be in the risk of the loss of value underwritten because the market is correcting itself. The intent of the securitizations to be built with sound credit practices is a sensible financial instrument. Building credit instruments with poor lending standards is what got us here today.

    The credit pendulum has swung from too loose to tight. Without a lending market these credit instruments will decrease to a value in which cash is the only buyer, instead of using cash as leverage to borrow. Paulson and Bernanke are trying to swing it back a little looser to keep money circulating so as these risky credit instruments unwind, there will be a lending market in which to refinance these assets.

    The banks will not be sufficiently liquid to create new loans unless something happens. Allowing the government to underwrite the “Investments held to maturity” on the banks books is one method in an extremely complicated situation. I think this is why Paulson is calling it an investment instead of a bailout.

    Having to sell a complex solution to a financially illiterate politician in a few days is a task in itself. I hope something happens today.

    Comment by EG -

  13. Mark,

    Are you an Ayn Rand/Atlas Shrugged fan?

    “From each according to their ability, to each according to their
    ability to ask for something. ”

    That quote is almost identical to the tenet in Atlas Shrugged (change “their
    ability to ask for something” to “need,” which of course became ability to
    ask for so I assume so. I am about 800 pages into it after just finishing
    The Fountainhead.

    Comment by seanb724 -

  14. The confidence by consumers in the financial sector is indeed shot. But would the confidence be this bad if McCain hadn’t canceled his campaign? By dropping everything and essentially declaring a federal emergency, McCain increased the amount of panic in consumers. He also shined the spotlight of the campaign on the negotiations. Both candidates were fielding questions about it, but he turned the meetings into photo-ops and then didn’t say a word. Obama it least asked Paulson if the alternative plan would work. This isn’t how a Presidential candidate should act.

    Comment by Derek -

  15. This bailout doesn’t seem to target the root cause and therefore seems like a bandaid over a bullet wound.

    http://www.hussmanfunds.com/wmc/wmc080922.htm

    http://www.fpafunds.com/news_09252008_elephant.asp

    Comment by Jay -

  16. “You never want to ask how hot dogs or Bailouts are made.” Classic.

    Comment by LB -

  17. ha! thats pretty good

    Comment by Graham -

  18. Mark here is an advice for an average American. Sell your TV, car and
    everythign else which you’ve taken a loan to finance. Go back to
    college and learn something which will move economy forward.
    I am freaking tired of armies of deal makers, salesmem, paper pushers.
    I am tired that Wall Street recruits the best talllent in America,
    for purposes described above. I am tired that 25% of students in Ivy
    League universities do Economics and finance related majors just
    to get recruited by big financial firms.
    Confidence in financial markets is extremely important, but confidence
    should be based on facts and not on fuzzy feeling that everything should
    be fine. I know our economy is credit depended, but it means that
    our american businesses have very low margins and that in order to
    generate earnings they have to have a lot of debt on their hands.
    Also the income of workers is not growing, but availability of credit
    did. I don’t think 700 bil is going to fix anything.
    The government should prioritize and save the dollar and its debt rating
    first and protect the savings. Also they have to chagne tax structure
    so small and medium businesse can operate, especially local taxes,
    which is just redicoulous and administer supply side solutions.

    Comment by Tim -

  19. Main street doesn’t need more loans. We need to learn to live within our means. The bailout merely keeps the credit/”asset” bubble inflated a little while longer, leading to an even bigger collapse of our economy and currency when Paulson and Bernanke finally run out of tricks to prop up the pyramid scheme. The bailout does nothing to address–and in fact–enhances the main structural problems of our economy, including the fact that our economy is increasingly one that produces lawsuits, financial instruments, and social networking companies rather than useful goods and services. Even if the bailout were to magically fix our economy (which it won’t), I would oppose it on principle, because the consumers who borrowed beyond their means and the bankers who loaned capriciously don’t deserve to be rewarded by those who acted prudently and responsibly.

    Comment by David -

  20. Pingback: $700 Billion: Absolutely Necessary | curtis schweitzer (dot) net

  21. Mark,

    I have quite a few assets tied up with BofA, and I am curious on your thoughts about diversifying through other banks? Are we getting to the point where we liquify everything now and hide it under the mattress?

    I for one greatly appreciate your insight’s (this issue and many others).

    Regards,

    Wayne

    Comment by Wayne -

  22. I don’t think anyone is discovering the bailout now (unless they lived under a rock in the last couple of years). I read all kinds of articles/opinions about an eventual bailout for the astronomical housing bubble for well over a year now. There were tons of discussions as to whether it should be done or not. Smaller bailouts have happened before, so it’s not really a new concept.

    The only novelty is the astronomical amount requested, and the sudden urgency (Paulson was very confident in the economy a few months ago, then demands an astronomical sum now…). Without oversight (and perhaps even with oversight, if done poorly), this turns out to be like a potential “heist of the millenium”.

    Also, what’s up with the “most powerful man in the world” nonsense?

    That, and haven’t you watched “Prison Break” or “24”?
    One can’t help but wonder “what if these guys are trying to play us”, you know🙂

    Comment by Joe -

  23. I guess that means you’re acting on it then🙂
    I see lots of Ellsworth Tooheys here

    Comment by Clayton Williams -

  24. Imagine if 700 billion were put directly toward alternate energy sources…

    Kill 2 birds with 1 stone! I believe it would fuel the economy (700b is enough to fund a new industry, and capitalism would take it even further) plus solve our oil dependency problems.

    We wan’t the rest of the world coming to us for answers to their (inevitible) energy problems. Even the middle east will eventually run out of oil and if we’ve got the lead in alternative energy, then we’ve got the lead in the world’s economy.

    It’s too bad that the money is likely to be squandered on lobbyists and overpaid CEOs and government inneficiencies. Who am I kidding though, 700b toward alternative energy is a great idea, but if the government is leading the effort then we’d just be where we are right now.

    Comment by Nate -

  25. This all points back to Franklin Raines, Jamie Goerlick, and Jim Johnson and their inability to manage an entity they knew nothing about.

    Comment by Tom Bro-KAW -

  26. Wow, I really didn’t see that side of that. I just realized I had been conversing about the buyout a bunch in the last week or so. Even you blogging about it helped it feed it. And I doubt that Washington saw this side of it either, until just recently; now they’re prolly regreting it not getting done quickly… I mean, things you listed that could happen in the future are real possibilities.

    But I know that if I am able to obtain extra capital for investment, I’ll still be doing careful investing and I trust that the economy will go back up, just like it always has in thepast.

    By the way, I just bought the book The Number by Berenson. He can thank your entry on investing for causing me to buy it. So far I am finding it interesting, and very truth-telling.

    Comment by James Stevens -

  27. I, personally, place the blame for this mortgage loan mess at the
    feet of Rep. Barney Franks, Chairman of the Congressional Financial
    Services Committee.
    He re-wrote the rules to allow banks to lend mortgages to
    “anyone who has a pulse, and to some who didn’t”.
    He should be ashamed.

    Comment by Neil in Irving -

  28. Darn autocorrect changed voilà to viola. Anyhow, the point is that it’s all about using the right buzzword. No one likes the word “bailout”.

    Comment by Jeff Mitchell -

  29. Change the operative word “bailout” to “investment” and, viola, problem solved. As in: “We, the government, and by extension, you, the taxpayers, now have a $700B equity stake in these companies. Because this is an investment, we plan to make money on the deal. When we do, the profits will be given back to you, the investors, as tax credits.” Now if we can just solve the oversight issue.

    Comment by Jeff Mitchell -

  30. I mean, I guess you have some good points. It’s just more
    complicated than that, though. However…

    1) “You never want to ask how hot dogs or Bailouts are made.” That’s
    very true indeed!

    2) “…and what happens re Oil, that problem has not gone away. if
    oil prices hit 140 again or higher ?…” Cuban, I think we need to
    stop asking these hypotheticals. 140/barrel is not necessarily bad.

    If we have a good enough electric/natural gas infrastructure, invest
    more in R&D, and use less energy AND use energy more efficiently
    (THE TWO ARE TIED, since doing only one is pointless), then we can
    laugh off the 140 price, and it could affect us the same way 80 and
    100 used to affect us.

    High gas prices aren’t necessarily bad; we need to be in a position
    where they don’t hurt us that badly. And being in that position in
    itself, ironically, will probably lower demand so much, as well as
    alter speculation to such an extent, that 140 probably won’t happen.
    BUT even if it did, it wouldn’t be because of us, i.e., maybe because
    of India or China, but we’ll be prepared.

    Don’t get me wrong, all economies affect the others, but when this
    problem occurs again, WE are going to be the winners.

    What then? Then we will have to figure out how to make ALL countries
    winners at the same time. Is it possible? I’m not sure; but one
    step at a time. The U.S. first, then the rest.

    Comment by the-cuban-responder -

  31. Mark, I like your blog, but your bad judgment on this one really gets to me. I guess you’ve got more to lose, so you want that last uptick of Wall Street to cash out.
    The Bailout as proposed only dumps more money and control down the same hole. The biggest part of the problem is globalized banks blindly buying “bad paper.” It starts with your average consumer: You’ve got frontline guys getting people into financing deals to buy something they all know they can’t afford just so this salesman gets his commission. (Bad ethics phase 1). Then you have larger finance companies buying up groups of this stuff to make money on the interest. Little do they know how poor the quality of the loans and chances for repayment are. (Bad ethics phase 2). Then, realizing the loans aren’t that good, they get bundled up with more bad dept and sold to a bigger fish (starting to get the picture). Now you have these really big fish making top $$$$ with bad judgment. They finally can’t make ends meet, but have so many smaller fish within their ecosystem, the government (at least the officials whose elections have been successful from their donations) feel the need to bail them out. Sorry! Stop the bleeding already.
    Joe consumer needs to turn off the tv and start living within his means, not where Madison Ave wants him to be. Be responsible. Bank in your own community. Don’t buy it if you can’t pay it off next month.
    We’ve got hard times ahead. Oil’s running out (worldwide). Our kids are inheriting a collapsing environment. There are too many people on the planet to feed. For god sakes, wake up, grow up, and take responsibility. Make sure your elected officials do too!

    Comment by Kevin -

  32. Mark…the problem isn’t that the people overreacted to the news, the problem is that the Bush administration, as ever, is incapable of looking beyond the interests of the privleged few that are their inner circle and patrons. Having been lied to about Iraq and WMD, having been fleeced by Enronand KBR/Halliburton, having lived under an autocratic regime for the last eight years, the American people are saying ENOUGH. These people want to live by the ‘free market,’ let them die by the free market. In my home town, the 5th largest city in the state of California, we are watching as the doors to our libraries are shuttered on Sundays and Mondays because of the economy, and some prick millionaire is going to have trouble keeping his fleet of Cadillacs intact? Boo-fing-hoo.

    Now, to calm down a minute: I understand some government intervention is probably needed. But a blank check to the tune of 700b, with no government oversight, no recourse to the courts. no cap on CEO payouts and no equity stake for the taxpayer? I don’t bloody think so. If Paulson and his junior partners Bush and Bernanke had begun at a reasonable starting point–again, no court can review their decisions????–maybe the whole discussion would be different. As it is, the changes the congress has made to the package to address the above concerns means that the debate can now start for real. But to suggest people are overreacting at the prospect of such an egregious giveaway to the people who created this mess in the first place is to miss the whole point.

    Comment by ted -

  33. “You never want to ask how hot dogs or Bailouts are made.”

    Nice! I think I hurt myself on that one.

    Comment by Shawn Shepherd -

  34. Oh well… Go Gophers beat Ohio State.

    Comment by Scott W -

  35. Mark:

    You seem to have about as good a handle on this as anybody right now.

    Can you describe in detail what the world would look like if a bailout doesn’t happen?

    Will my money in the bank/money market/stock market be lost?

    Will my reasonably profitable business suddenly have to close?

    Will NBA revenues be affected?

    Comment by Tom Kelly -

  36. Pingback: “You never want to ask how hot dogs or Bailouts are made.” - Mark Cuban « Poststop

  37. Right again Mark . Spending – good! Saving – bad.

    You are smarter than this.

    Comment by Trip -

  38. No offense Mark but it is Main Street’s 700B if the government is spending it. Unless someone can explain where the first 700B is so we can get it back, it’s throwing money down a rat hole. Of course, if they’ll pay my mortgage then I’m all for it; but since I can afford my house that won’t happen.

    Comment by Andyhb5 -

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