What We Really Need from a Bailout Bill: 58 Trillion Reasons
Predictably, the bare-boned Treasury proposal for a bailout bill - fraught with Constitutional problems - is receiving backlash on the Hill. Also predictable - given that elections are coming up - many key Republicans have come around to the notion that the bailout bill should include limits on executive pay (see this Washington Post article and NY Times' article).
However, the bailout plan is missing a strategy to fix the problems that caused all the problems that the market faces. Without a going-forward plan, I don't see an end to shoveling money to the bailout. Simply banning short sales ain't gonna do it. Yesterday, SEC Chairman Cox testified about some of these problems before the Senate Banking Committee - here is an excerpt:
The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps - double the amount outstanding in 2006 - is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.
Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can “naked short” the debt of companies without restriction. This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. As the Congress considers fundamental reform of the financial system, I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets.
What Companies are Disclosing: Form 8-Ks Filed in Response to the Crisis
With the market in crisis, it would be expected that some companies would be be filing Form 8-Ks to disclose material developments. Here are just a few of the many Form 8-Ks filed regarding potential fallout due to exposure from Lehman Brothers and/or AIG:
A Classic Cousin of the "Nigerian Loan Scam"
I received this classic email yesterday:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to firstname.lastname@example.org so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
Yours Faithfully Minister of Treasury Paulson
- Broc Romanek