We Used To Call It "Trust Busting"

Finally, some rational thought from the Federal Reserve:

"I think the disagreeable but sound thing to do regarding institutions that are TBTF (ed. note. Too Big To Fail) is to dismantle them over time into institutions that can be prudently managed and regulated across borders," he said. "And this should be done before the next financial crisis, because it surely cannot be done in the middle of a crisis."

Adam Smith would roll over in his grave to understand how perverted his elegant economic system, for all its initial flaws, has become, corrupted by the aggregation of money, power, and influence. He intended for small businesses to compete against each other to provide goods and services to consumers.

Indeed, our Founding Fathers had a great and long debate about even opening up a national bank which would serve as a 800 lb gorilla in the banking system to provide leverage against large business combinations attempting to wrest control of the national money supply. Inevitably, businesses of all sizes fail. It's just a question of time.

If a major multinational bank fails, it doesn't just hurt its employees and shareholders as we've seen. It threatens the entire nation, from its financial security right down to its physical security.

And that's not good.

"Too Big To Fail" is, quite simply, too big. Full stop.

We've discussed on this blog the marvels of distributed power generation. Money is power. Banks should be hacked down to manageable sizes that service the communities they are located in, with no direct entanglements in regions where they have no business being in, and I don't just mean geographic. I mean economic sectors, business sectors, even political sectors.

Will this harm the banking system? I don't think so. I think the system will evolve, perhaps parent corporations that can hold smaller banks under an umbrella, with governmental oversight to make sure there isn't as much crossover as there is now will be established.

One thing is certain: the banking system we have now is on the road to yet another collapse. Businesses fail. Industries fail. Banking will fail again unless we address the inherent flaws immediately.

 

Ain't That America?

Or are we living in the time of the plague?

Detroit: Too broke to bury their dead

We can bail out General Motors and big banks, but let a poor person die and we stack 'em like cordwood.

We could have had healthcare for the poor. That might have prevented a lot of this. But no, the economic royalists MUST have their say and way.

Cut The Losses

This headline is perhaps the scariest business headline of the past six months:

May 6 (Bloomberg) -- Regulators have determined that Bank of America Corp. requires about $34 billion in new capital, the largest need among the 19 biggest U.S. banks subjected to stress tests, said a person with knowledge of the matter. Bank of America fell 9 percent in trading before U.S. exchanges opened.

Citigroup Inc.’s shortfall is more limited because the company already plans to convert government preferred shares to common stock, people familiar with the results said. JPMorgan Chase & Co. doesn’t need a deeper reserve against losses, according to people familiar with that company’s result.

The banks may outline their strategies to add capital, or in other cases buy out government stakes, after the Federal Reserve publishes the stress tests results tomorrow. Companies requiring more capital could raise all the funds through conversions of preferred shares if they choose, the people said.

Sources I've spoken to who have some limited knowledge of the results of the stress tests tell me that roughly half the banks tested will need further bailouts, but BofA is the largest eyesore on the horizon.

Mr. President, Chairman Bernanke, Secretary Geithner, the time has come for triage. Bank of America, for example, has already benefitted from bailouts to the tune of $45 billion dollars. It's clear that it cannot possibly raise another $35 billion on its own, it will rely heavily on government help.

And other banks similarly positioned will be chomping at the bit for a handout. It is time to look at a guided bankruptcy, similar to the one Chrysler filed last week and GM will likely file before long.

This will mean, in the case of BofA, writing off the $45 billion dollars. Better to take the hit now, and work out an arrangement with the new owner of Bank of America for an equity stake over a longer term than anticipated.

Bank of America is a singular case in this instance. Had it not been greedy and purchased Merrill Lynch (at the complicit urging of the Bush administration, we should point out), it likely would have survived its earlier greedy decisions to consolidate the purchases of MBNA, Fleet Bank, US Trust, and its most questionable purchase, Countrywide Financial, just ahead of the sub-prime mortgage crisis of which Countrywide was a, if not the, main player.

It's one thing when a bank gets its clothes dirty playing in the mud of securitized debt obligations and unhedged risk plays. It's another when a bank goes out of its way to collide with the earth.

Or to put it in a clearer idiom, it's one thing to get behind the wheel when you've had a beer, quite another to get behind the wheel drunk and carrying a six pack to consume on the way.

My sense is that Bank of America needs to be reorganized and then recapitalized with a different charter. Indeed, perhaps we ought to rethink the entire banking industry so that there is some safe place for the average American to put his money.

Here's A Quarter...

....call someone who cares.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country's call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn't defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

[...] I'm not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I'll leave under my own power and will not need to be "shoved out the door."

Point one: Liddy has agreed to take one dollar as compensation, despite the fact that most of this happened off his watch. Thuis writer has, as well.

 

Point two: The writer, Jake DeSantis, is an executive vice president of the Financial Products division of AIG, as "head of business development for commodities", the division that has very nearly, and still may yet, sunk the entire global economy. So I think the question must be asked...

 

Um, dude? WHERE THE FUCK WERE YOU????

 

OK, you had a different responsibility, I get that. But you know something?

 

I am an officer at a firm. My niche is very narrow, and I'm well paid for it. But as a point of order, we officers make it our business to understand what's going on in the rest of the company. Why?

 

You never know when you'll be put in charge of something else. That's the way American corporations work.

 

You ask why your CEO "betrayed" you. WHERE THE FUCK WERE YOU???? when your co-workers were scamming money and making bets on bets on bets?

 

If you want to understand what happened at the Financial Products division of AIG, let me put forth this analogy. It's simplistic and flawed, but it's not completely wrong.

 

I sell you a homeowner's insurance policy. That's a bet that I make that your house won't burn down. If it does, I owe you the agreed amount. If it doesn't, well, I've scored pure profit from you (your premiums, which are pooled and invested in order to cover any losses suffered by policyholders) but you've had the peace of mind of knowing you won't take a loss.

 

The way I make money is not directly from your premiums, but by spreading my risk around by selling more and more policies and trying to diversify who buys them, so that if a big fire hits a neighborhood, it will only affect a percentage of the money I'm holding onto.

 

That's the traditional insurance business. A similar scenario works in the traditional mortgage market. 

 

Now let's move onto the Financial Products division.

 

I take that policy, and in order to score some quick cash, I let people bet that the policy will earn money. Then, in order to make even MORE money, I sell insurance to the gamblers that will cover their losses.

 

Oops. You'll notice what just happened: I've taken what risk I had spread out and consolidated it. Worse, I'm on the hook at both ends in the event the house burns down: I pay the policyholder and now have to pay all the gamblers who bet on the policy!

 

So, Jake, I ask the question again: WHERE THE FUCK WERE YOU???

 

If a simpleton like me, who only has an accounting degree, can understand that you're betting against yourself, why couldn't a high-powered executive vice president figure out from washroom conversations that your entire division was one big-ass house of cards? You're the head of development of business commodities! How could you not be curious about the products your own people are developing????

 

And there, right there, that's the problem. These aren't commodities. We're not talking about pork bellies or corn or oil.

 

We're talking about people's homes. Their lives. Their jobs.

 

So shut up, walk away, and be glad you got out with your skin and dignity.

UPDATE FOR THE GALATICALLY STOOPID It seems there's some discussion that DeSantis was "one of the good guys", brought in to fix the problem.

That's simply not the case, by his own admission. DeSantis has been employed by AIG for eleven years and worked his way up to his current position as EVP in the Financial Products division. Furthermore, former AIG chairman and CEO Hank Greenberg, in 2005, warned on his way out the door (thanks to Eliot Spitzer, who really was ahead of the curve on this) with regards to the mortgage debacle and AIG's exposure issues.

At which point, Cassano, DeSantis' boss, DOUBLED THE EXPOSURE!

Furthermore, the truly quasarly idiotic have downplayed the losses at the FP, comparing them somehow favorably to the losses at the insurance unit.

Utter rubbish. Although the life insurance division earned $6.9 billion, the financial services division lost $40.4 billion, according to the annual report I have looked at.

The other two business units, asset management and general insurance COMBINED lost $1.1 billion dollars.

A Handshake Deal Is Reached Around The Table

Now, I'm against most bailouts, but this industry is in hard times:

WASHINGTON (CNN) — Another major American industry is asking for assistance as the global financial crisis continues: Hustler publisher Larry Flynt and Girls Gone Wild CEO Joe Francis said Wednesday they will request that Congress allocate $5 billion for a bailout of the adult entertainment industry.

“The take here is that everyone and their mother want to be bailed out from the banks to the big three,” said Owen Moogan, spokesman for Larry Flynt. “The porn industry has been hurt by the downturn like everyone else and they are going to ask for the $5 billion. Is it the most serious thing in the world? Is it going to make the lives of Americans better if it happens? It is not for them to determine.”

Francis said in a statement that “the US government should actively support the adult industry's survival and growth, just as it feels the need to support any other industry cherished by the American people."

Look, boob jobs ain't cheap. This is clearly an industry that is desperate for assistance. It needs to be firmed up and a hard injection of capital is probably just what the doctor ordered after his examination.

Sales reports do seem to indicate that things are sagging in porn. Market penetration is way off, and their assets simply aren't what they used to be. Of course, prior years' results could have been artificially inflated, but my suspicion is we're just seeing the tip of the iceberg.

The hole is deep, my friends. I've studied reams of data which suggest that at least half the adult stars blew their chances to sock away a little for retirement and will have to press their noses to the grindstones in order to make ends meat.

In the true spirit of American capitalism, these pioneers of prurience have opened wide and bared their assets for the shot, just the shot, at a peak market.

But as we all know, markets have their ups and downs, and no doubt right now, porn is at its bottom. However, with a brief respite, and this stimulus package, I have no doubt that as interest rises, this market too shall begin to swell and grow.

Vote for Simply Left Behind in the Weblog Awards

(showing Memeorandum the luv)

A Real Bailout

OK, I've given this at least as much thought as McCain did to skipping Letterman last week, and I have a bailout plan. It's not simple, it won't be easy, and it will take a few months to work itself through the system. Please consider this as part of the "NotPresident" Campaign Platform ©.

Here goes:

1) End the invasion of Iraq, immediately. In totality, this has cost us nearly $700 billion over the past five years. I don't think this is a coincidence. I sometimes wonder, late at night after that cup of cocoa that's supposed to make me sleepy for three days, if indeed we aren't paying extortion money to Al Qaeda, instead of bailing out the banks.

2) Take that $700 billion bailout and pay it to every man, woman, and child in the country. It seems to me that this is a no-brainer. It's roughly $3,300 per person. People who need it for their mortgages will help bailout their local bank. People who don't need it will either spend it or invest it, which will raise both economic activity and available investable capital. More on this in a later post. And this way, accountability is directly to the American people.

3) Cut out the middle man. There ought to be a truth-in-lending law that traces who your specific mortgage is sold to. If you need to bargain for a refinance or a repackaging, that's the person who you ought to be speaking to. They have the skin in the game (by buying the mortgage, they take the risk out of your bank's balance sheet), plus this forces them to personalize their policies regarding refinances/repackagings. Right now, they can be bloodless, heartless bastards. Let's force them back into the pool.

4) Raise taxes on the rich. Obama has already said he would do this, but he needs to be clearer, much clearer about it. If I was debating McCain, and was challenged on this, I would look straight into the camera and say the following: "My fellow Americans, Senator McCain would like you to believe that I will raise your taxes. Well, I won't, and this is a promise you can take to the bank: I will not raise your taxes. I am going to raise theirs, and that terrifies them."

5) Create government work jobs, make work if necessary. $3,300 is a good start to jump starting the economy, but our workforce will be suffering layoffs. We will need a program to absorb as much of these folks and utilize them for the good of the nation. We have infrastructure problems, we have security issues, and we can create grand programs to modernize such things as Internet access in rural communities (yes, they still have dial up in large swaths of the country!) and bring green energy technologies to everyone.

6) Impose an excess profits tax on oil companies. 40% ought to do it, above and beyond the profit earned at the $50 a barrel level. Hey, we gave them a price support when oil was hovering around $15 a barrel, they ought to be *grateful* to pay.

7) Strong incentives to communities to develop mass transit. Transportation uses about two thirds of US energy consumption each year. That's ridiculous. This could be part of my public works program. Our economic freedom will never be assured until we can get people out of their cars and into work.

8) Treat corporations as second class citizens. Finally, I would nullify the 1979 Supreme Court decision that expanded the "civil" rights of corporations to actually make them more free than you or I. It's about time to acknowledge that in this nation, speech is not free, but is priced at what the market can bear and that corporations have an enormous advantage over true human citizens. If I had to pack the SCOTUS to do this, I would, but I would simply have Congress pass new legislation, and hold a figurative gun to the head of any Congresscritter who felt even the slightest temptation to vote his re-election coffers.

There should be more done, but this is the barebones outline (as I said, I've given this only a little thought) for a bailout plan that rewards human beings for surviving this far, and not faceless corporate entities.

False Truths

My good friend, Britisher, makes a very cogent observation in comments from yesterday's post:

Im a technical ignoramus when it comes to high finance but...isn't this while mess ALL about debt? Debt incurred by gambling on future profits based not on tangibles but on "prospects"?.

It seems to me that for years now trade has not been based on identifiable tangible need ( barter as it were) so much as on desire.

I mean a lot of the money at stake is surely imaginary. A lot of the wealth accumulated was imaginary. Investments were made without any supporting collateral and then more investments were made on those investments that weren't supported by anything so everyone shuffling money got rich by pure accumulation.

In short investment banks started 'printing' money and trading that money for other money and more money which was also 'printed'.

This mess is actually a market adjustment.

Am I right? Or partly right?

Yes, Virginia, there was a Santa Claus.

I'm going to get financially technical for a moment, but bear with me. I think I can make it understandable.

All investments are speculations. When you purchase an investment, any investment, from your house to a 1952 Mickey Mantle baseball card to a diamond ring, you are placing a bet.

See, factored into the price you pay for your house/card/diamond/stock is what are called "future cash flows". These can either be income, like a dividend or an interest payment, or capital gains, meaning your purchase is going to go up in value.

This future income or profit is discounted and added to the cost of the investment (what it physically costs to create). In most investments, that cost is minimal (it is not in the purchase of a house).

As Michael Kinsley points out in Time:

How is the country any richer if the exact same stock of existing housing is suddenly worth, say, 20% more? Other markets produce things. They sell what they produce. When prices go up, they produce more. Not so with real estate, for the most part. This market consists primarily of trading the same thing again and again. And you know the old saw about land: They're not making any more of it. Real estate is the only major consumer market in which how much you'll pay someone depends on your belief about how much someone else will pay you. In this market, prices go up when people believe they will continue to go up. To restore confidence would mean restoring belief in the greater fool.

And he's right, of course. Land is a fixed commodity, but there is plenty of land in the country, believe it or not, since half the population lives within 150 miles of a coastline. Yes, you want to be close to your job, but on the other hand, the way the economy is trending and the way workforces are being distributed and outsourced, you might want to live away from a city and telecommute now.

Land prices should probably fall back further, based on this alone.

But I digress. Kinsley's larger point, that buying a home is betting that you can get a sucker to pay even more for it after you've lived in it and aged it, is valid. Not only valid, but has been the basis of real estate sales since postwar America in the 50s.

Too, the perception that, by mortgaging nearly 100% of the cost to purchase you are in effect playing with house money, feeds into this conceit. You are gambling with money you have little responsibility for, because if you walk away from the mortgage, hey, the bank will foreclose, sell your house, pay off your mortgage and you still have a little left over, if the system works "the way its supposed to".

That's not to trivialize foreclosures: they are painful processes and usually occur because of some other trauma to the family/owner: job loss, medical expenses, or divorce. But if you know the bank will be "taken care of", you have one less worry on your plate while dealing with the primary problem in your life.

The trouble is, as Brit points out, it's all a fucking illusion. All of it. Rather explicity, I might also point out.

When you purchase a house, you should be paying what you think it is worth now to you, to live in, to spend some time in, to establish a domicile. We're not talking about buying a stock. Stocks are like going to a casino: you shouldn't do it unless and until you can afford to lose all of the money you invest.

This is why brokers are formally referred to as "broker-dealers" because they're dealing cards at a blackjack table, and they hold all the aces. The investment game is rigged in their favor and so any bets you might make have to be carefully picked for you to beat the house.

A house is different. A house is real money for a real necessity. If it goes up in value, then that's a bonus. But that shouldn't be the reason you go out and buy a house. You should buy a house because you need a house.

Now, you're sitting there thinking I'm kicking the American homeowner while he's down. I am, but I'm also not, because I don't blame people for wanting to believe what they want to believe, or for believing that house prices would always go up.

That's what we've all been told. And there's where the blame lies. Who told us? The bankers, brokers and developers who right now stand to be bailed out. The people who marketed "zero money down, interest only loans" without warning us that in five years, you'd have to start paying down principal AND that interest rates would like double or even triple! There is no way in the world your income can triple in five years, unless you are extremely fortunate.

The difference here is, while those banks and you gambled that you might earn enough money in five years to actually pay down your loan, or that your house might accumulate enough new value to pay off the mortgage on a sale, you couldn't have known better, while they should have!

They are financially savvy and you are not. Or at least they are supposed to be, which is why they are supposed to be licensed mortgage broker-dealers. But past history dictates that even the "experts" are not expert when things get complicated enough.

Hell, even I couldn't have foreseen the depth of this crisis, altho I had an inkling and indeed let my "inner pessimist" run amok on this blog about the coming collapse of the American economy.

There's a bitter lesson to be learned from all this: nothing, no part of your life, is without risk, is not a gamble of one sort or other. Houses were supposed to be the safest investment you could make. Indeed, they were the single largest investment you could make.

You have to start thinking about what you buy and how much you pay for it in terms of purchasing a car (the second largest purchase most people will make in their lifetimes, and an object lesson): what can the actually asset you are buying do for you?

See, cars only lose value when you drive them off the lot, at least for the first twenty years, and even then, you have to have taken immaculate care of them for them to earn back your original purchase price, even. The rational decision with a car is to buy one you can drive into the ground, making it cost as little as possible for the value attained from it (hauling groceries, taking vacations, commuting). You want to drive the car so much that the cost to own per mile is as small as possible.

So it should be with your house. You ought to buy a house that means something to you in twenty years, that makes it worth the purchase price, and forget that it *might* increase in value enough for you to retire on.

And screw the economic royalists and their attempts to shove down your throat some illusion. You're better than that!

Gravity Sucks

As anybody who's ever ridden a bicycle or even stood up knows, what goes up must come down.

This is as true for the stock market as it is for anything else. Granted, it's a whole lot harder for the market to fall back to sea level, something about retained earnings and asset values underpinning stock prices, but trust me on this: it is not impossible.

Enter Paul Krugman:

...The bailout plan released yesterday is a lot better than the proposal Henry Paulson first put out — sufficiently so to be worth passing. But it’s not what you’d actually call a good plan, and it won’t end the crisis. The odds are that the next president will have to deal with some major financial emergencies.

Absolutely.

I'm not arguing that this is the mother of all financial crises. I am arguing, however, that the MOAFC stands a better chance of happening now, when the market is weakened and the solutions ineffectual, just like an opportunistic flu is more likely to incubate when the body's defenses are weakened.

The trouble with this bailout package is, it's like giving a bandage to a patient who's suffered a heart attack because he got a papercut filling in his admittance forms.

The real trouble is, well, ask a hundred pundits the cause of this problem, and you'll get a hundred different answers, all of them wrong.

Ask a hundred different economic pundits and you'll get a hundred different answers, of which 95% are incomplete.

Make no mistake about this: this crisis is pervasive and infiltrates the coziest sectors of our economy, and the world's economy. There was no single simple cause and there will not be a single answer, although the ultimate solution may end up being enormously simple. I think. I'll post more on my solution later this week.

We were worried about avian flu? This is an economic avian flu.

Curiously and coincidentally, this flu, like the avian one, has its roots in Asia. America exports debt. Period. We're good at it. We export roughly $700 billion annually (there's a reason that the bailout was pegged at that figure, and that's the reason right there).

Asian nations, flush with cash as their economies have overheated, have invested heavily in American debt, first in Treasuries bill and notes, and then when the purchase of those became unprofitable (for the same reason mortgages became attractive) in mortgage backed securities.

The gamble everyone made was that housing prices could only keep going up. Remember the title of this column?

As housing prices peaked and slid down a little, banks stopped lending money, forcing Fannie Mae and Freddie Mac to step in to keep the supply of mortgages consistent with the (overmarketed) demand.

How many Ditech.com and Countrywide commercials were there each hour just a few years ago? Five? Ten? Twenty? It's no surprise that these companies were the canary in the flu mine. They had the riskiest loans with the least capitalization, and needed to borrow the money they were lending.

And banks were only too happy to lend to them. Why? Because banks knew that the Fed and Treasury would step in when things got hairy. After all, the Fed helped arrange the bailout Long Term Capital Management. They'd have to step in where people's homes were at risk!

This is not the only cause of the current crisis and books will be written about them all, until eventually a comprehensive picture is put together, but I think this is a reasonable timeline of this crisis and how it unfolded. Call it the tree on which to hang the ornaments.

But like a Christmas tree, what goes up eventually must come down...

Politics Stops At The Border, Right?

Then explain this:

US intelligence analysts are putting the final touches on a secret National Intelligence Estimate (NIE) on Afghanistan that reportedly describes the situation as "grim", but there are "no plans to declassify" any of it before the election, according to one US official familiar with the process.

Officials say a draft of the classified NIE, representing the key judgments of the US intelligence community's 17 agencies and departments, is being circulated in Washington and a final "coordination meeting" of the agencies involved, under the direction of the Office of the Director of National Intelligence, is scheduled in the next few weeks.

According to people who have been briefed, the NIE will paint a "grim" picture of the situation in Afghanistan, seven years after the US invaded in an effort to dismantle the al Qaeda network and its Taliban protectors.

Lemme think, now...what happens in the next few weeks...*koffkoff* electionisonlyfiveweeksaway*koffkoff*

Ah, yes, and a grim picture of Afghanistan would play against the public image of John McCain on national security.

Or maybe not. If I'm the McCain campaign, I want this report released to make people understand that the past eight years have been a boondoggled blunderfest, that has to be fixed.

This issue plays to Obama, too, to be sure: the agent of change trope is tailormade for the case I made for the "Maverick". In other words, the declassification of this report would neither hurt nor really help either candidate.

Which is why it will likely remain conveniently classified until November 5, when miraculously it will be leaked to the Washington Post.

After all, it's important that the American people hear confirmation of what Admiral Michael Mullen said last week to Congress we're running out of time. "I'm not convinced we're winning it in Afghanistan," were his exact words.

Couple that with the story about the deteriorating situation Pakistan in last week's Time Magazine, and you have a now-regional fuck up on the part of the Bush administration.

All this is happening while the clown car that is the White House has distracted you with handwringing and bickering over the $700 billion bailout as proposed by Treasury Secretary Henry Paulson.

Fingerpointing seems to be the order of the day on the Hill. All eyes focused on McCain's support or lack thereof of Paulson's deeply flawed package, while Nancy Pelosi has demanded strong Republican backing in the House.

Give Pelosi credit. She's at least taking a stand. Harry Reid has all but dissappeared here. Can you say "Senate Majority Leader Clinton"? I knew that you could. So now we uncover the bargain Hillary and Barack came to.

Things are so bad in the House that even the Dark Lord of the Shits, Dick Cheney, can't keep his stormtroopers quiet, probably because they've deliberately kept their minions in the dark.

That's not to minimize the bailout or underlying economic troubles of the country. Bush and company have managed to do what Osama bin Laden, 19 terrorists and four airplanes could not: bring America to its knees.

What it does point out is, yet again, the Bush administration is deliberately paying lip service to an unfolding foreign crisis in order to let it fester to the point where the US is, once again, forced to go to war.

Only this time, it will be for the good of the economy, and not just the oil barons. You think jingoism was the order of the day in the early Aughts, wait till you seen what happens next!

It ain't gonna be pretty, folks.

Buy My Shit Pile

Well, I suppose it had to happen...a website has sprung up today offering to sell your shitpile to the Federal Government just like the banks and brokerages have been able to.

Me, I posted my issue #1 of She-Hulk...I only want ten million dollars for it!

Risky Business

George Will, not a man I either admire or whose bromides and harangues I pretend to really even listen to, once said one of the smartest points about American government policy.

Unintentionally, of course. He's not that bright. He originally had been speaking of the tax code when he said that businesses tend to privatize profits but socialize losses.

In other words, a business can deduct its losses from the IRS (and by extension, the government) but will work like the dickens to retain as many earnings as possible and avoid as much tax as possible, even to the point of tax evasion.

Unfortunately, as Paul Krugman points out today, this policy is not limited to the tax code:

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

In other words, ladies and gentlemen, we've co-signed a home loan for a friend, without any access to his income, and now the bill is due, he can't afford to sell enough of his crap on eBay and the mortgage is due.

If this was the first or only bailout we had endured, that might be OK. After all, it would be an experiment, and experiments are allowed to go bad.

But this is neither the first time we've had to bailout out bad loans (Krugman correctly refers to the S&L crisis of the 80s), or even companies in deep fiscal trouble.

We've been down this road before, and will sadly travel it many times into the future unless we change the paradigm. More on that later, perhaps next week.

We are in essence buying $700 billion dollars of near-worthless paper...after all, if it had value, the banks could package and sell it...in the hopes that some miracle, mirabile dictu!, and they gain value again.

Some will, many will not. While I find it hard to believe that these so-called "adults" of the Bush administration haven't calculated a generous breakeven point for the bailout where we stand to make back our $700 billion, I can pretty much guaran-damn-tee you that point is highly, perhaps even exuberantly, overoptimistic.

I haven't run the numbers, but I'd be willing to bet Paulson's gamble will show us losing a few hudnred million, maybe we recapture $400 billion. Maybe. Not likely.

Meanwhile, these banks, the WaMus and Wachovias and Wells Fargoes, all get to line up at this big pig trough for their slop of Fed money, in the hopes that somehow, banks that managed to keep their books in order privately, like Citibank, who ended up with a saudi bailout will begin lending them good money after bad.

With no penalty to the banks who got Federal money. No management changes. No seizure of assets to offset even a small portion of the bailout. No censure of the board of directors for failing their fiduciary oversight, and all golden parachutes intact.

Meanwhile, if you owe a mortgage and you have trouble paying it off, you lose your house, even if the Fed somehow steps in and finds you a shelter, but then again, the Republicans have cut those unnecessary social services because, you know, it inflates the deficit...

George Will is correct: Our priorities are all screwed up.