Perhaps this plan will make Art a little happier … but I’d like to read the actual text of the bill before I make any judgments.

Democrats offer alternative ‘no bailouts act’ - CNN.com

WASHINGTON (CNN) — A small group of Democratic House members put together an alternative to the $700 billion financial bailout measure that was defeated in the House on Monday.

Rep. Peter DeFazio, D-Oregon, said they tentatively are calling their options the “no bailouts act,” which would eliminate or reduce the risks to taxpayers in bailing out financial institutions holding bad mortgage assets.

The group introduced its bill after the House on Monday rejected a $700 billion bill that would have authorized Treasury Secretary Henry Paulson to buy bad mortgage-related securities and other assets that have been clogging credit markets worldwide.

DeFazio said he voted against Monday’s bill because taxpayer protection measures were “nonexistent.”

“I have very little confidence in Mr. Paulson,” DeFazio said at a news conference with several other House members, who want Wall Street, not taxpayers, to bear the burden of the bailout.

DeFazio said the crisis can be resolved with market discipline and regulatory functions, which would open up lending opportunities for banks and other institutions.

I did find this story on NPR’s “Marketplace” to be quite interesting as well:

John Dimsdale:The Federal Reserve, Treasury and the FDIC have broad powers to lend money, insure assets and inject cash into the banking system as they’ve already done for the likes of Bear Stearns, AIG and Wachovia … still, in theory, the Fed even has authority to do just what the congressional bailout authorizes — take bad debts off the hands of struggling banks.

• Nigel Gault: I think there is a limit to which the Fed can do that because you’re almost trying through the back door what Congress just said yesterday the government can’t do.

Global Insight economist Nigel Gault.

• Gault: The Fed could offer loans against riskier collateral, of course that is bigger and bigger risks for the taxpayer, because ultimately if the Fed makes losses, then the taxpayer would be liable.

The Fed’s other tool is to cut short-term interest rates. But they’re already so low, there’s not much power left in that tool. And using it creates a risk of inflation, says former Treasury economist Bruce Bartlett.

• Bruce Bartlett: The taxpayer is going to have to pay one way or the other, and voting down this legislation didn’t do anything to protect the taxpayer. It just means he’s going to have to pay in some other way that may be more costly than the $700 billion.

As of the middle of last week, the Fed had issued emergency loans to investment banks and insurance companies worth more than $400 billion.

Without a Bailout Plan, What Will the Cost Be? - TIME

By voting down the proposed $700 billion financial bailout package — and causing a spectacular stock market rout — a majority of members in the House of Representatives made a clear statement that they didn’t want to put taxpayers on the hook for the failures of financial institutions.

But there’s a catch: taxpayers are already on the hook for the failures of financial institutions, and it’s possible that the bill will actually be larger without bailout legislation than with it. That’s because the regulators who mind the financial industry — the Federal Reserve, Treasury and FDIC — will keep doing what they’ve been doing: stepping in to prevent the chaotic failure of banks and other large financial institutions. This means continuing to put hundreds of billions of taxpayer dollars at risk, but in a way that adheres to no clear plan of action and doesn’t require members of Congress to explicitly approve their actions.

The fact is that as much as many of us would like to think so, there’s truly no such thing as a free-market economy; especially not as global as the economy has become over the past 20 years.

On Monday afternoon, Wall Street basically stopped trading to watch TV — mainly CNBC — to see how the House of Representatives would vote on the $700 billion bailout package. When it first started looking like the bill would fail, the Dow plummeted 389 points, or 3.6%, in just seven minutes. If it had continued at that pace for much longer, this would have been perhaps the most harrowing day in stock market history. It didn’t, but things were still really, really bad. The Dow ended the day down 778 points, or 7%, and the S&P 500 — a better measure of the overall market — was down 107 points, or 8.8%, its worst performance since the 1987 market crash. And markets for bonds and short-term loans were, for the most part, nonexistent.

And without a market for commercial paper, there is no short-term financing available for most businesses to conduct their day-to-day business … like rent and payroll. According to a recent Bloomberg article, “a continuation of this trend would be problematic for the economy, as the commercial paper market is where entities go to raise working capital to produce goods and services.”

So what happens now? On Capitol Hill, House leaders said they’ll try again soon. Treasury Secretary Henry Paulson practically begged for a revised deal in his brief appearance after the market carnage. “Our tool kit is substantial but insufficient,” he said. The market’s traumatized reaction today may change some minds and some votes.

In asking Congress 11 days ago for the authority to spend up to $700 billion to buy troubled assets, Paulson and Fed Chairman Ben Bernanke were hoping to share some of the responsibility and the blame — and get the freedom to boost companies that weren’t already on the brink of failure. Instead, they’re back to being crisis managers for the moment — and maybe for the duration of the crisis.

That’s not all bad, especially now that most of the endangered financial institutions are commercial banks. The Federal Government has clearly defined that authorities take them over, merge them out of existence or shut them down — whereas it had to make things up as it went along with investment banks Bear Stearns and Lehman Brothers and insurer AIG. That’s why the demise of giant banks Washington Mutual and Wachovia, arranged over the past week by the FDIC, occurred in a far more orderly fashion than the non-bank meltdowns.

But orderly isn’t the same as cheap. To get Citigroup to absorb Wachovia, the FDIC agreed to share the risk on a $312 billion portfolio of loans (Citi has to eat the first $42 billion in potential losses; anything above that hits the FDIC fund).

According to a Bloomberg story last week: “It won’t take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year.” And that was BEFORE the FDIC became exposed to another $280 billion … so now the FDIC may be in need of its own $430 billion “bailout”.

Also, the fact that every big FDIC deal so far in this crisis has been different — IndyMac was allowed to fail, with only insured deposits safe; WaMu was seized, but all depositors were protected; and Wachovia was sold in a deal that protected both depositors and owners of the company’s bonds but left shareholders with very little — has left investors guessing about the fate of the rest of the banking world. Hardest hit in today’s market sell-off were regional banks like Sovereign Bancorp and National City, perhaps because they seem too small to get special FDIC treatment.

Federal authorities are going to keep doing whatever they can to keep the financial system from collapsing. Taxpayers will bear the risks and the costs of that, whether Congress votes to put them there or not. And it’s possible — although nobody can know for sure — that this ad hoc approach will end up costing more than an up-front $700 billion bailout.

So … is it better to have a imperfect plan, but a plan nonetheless? Or is it better to simply keep floating along as if the market will take care of itself, and have the government step-in again, and again, and again, with no real rhyme or reason as to which companies they help and which they don’t?

Bush to address nation to push bailout - CNN.com

NEW YORK (CNN) — President Bush will deliver a prime-time televised speech Wednesday night to pressure Congress to pass a $700 billion plan to bail out Wall Street, the White House announced.

Bush’s speech is set to begin at 9:01 p.m. ET and will take just less than 15 minutes.

Federal Reserve chief Ben Bernanke warned Wednesday that the Wall Street crisis is the worst the nation has faced since the end of World War II and urged Congress to take action on a proposed bailout package.

Congress is considering whether to allow Treasury Secretary Henry Paulson to use federal funds to buy up to $700 billion in mortgage-related securities and other assets that have caused turbulence on Wall Street and have undermined credit markets worldwide.

But Paulson and Bernanke faced deeply skeptical lawmakers, including members of Bush’s own party, when they pitched the plan before congressional committees Tuesday and Wednesday.

This will be interesting … it’s time that someone attempted to explain the plan to the average American citizen.

I’m hardly an expert, but I’ve been reading everything I can get my hands on over the past few days to try to find out what’s going on, even going so far as to contact one of my company’s economists to try to get a better explanation.

I believe the effect will be short-term pain and eventual recovery, versus what I think will be the long-term pain if we don’t do anything.

The economy is not healthy. It’s not going to heal itself, no matter how much Art and Julie want it to.

I also question Barack Obama’s decision not to step back from the campaign, at least for a few days, as did John McCain. I think that Obama needs to do the same thing ASAP; for appearances sake, if nothing else.

This is not a time for campaign bickering, but for the parties to come together and hammer out some sort of agreeable plan. The economy is sick, and unfortunately some intervention is necessary. It needs more controls than in the original proposal, but those compromises should be fairly easy to come by if both sides stop thinking in a partisan manner, and start thinking about Americans.

Regardless of McCain’s motivations, if Obama doesn’t step back as well, I know the Republicans will use his decision for political fodder … “see, we put ‘Country First’, while Obama put Obama first” …

We don’t need that.

The most important thing is to put some sort of review/oversight over Paulson’s actions once the bill is hammered out and passed.

The former Section 8 (the “32 dirty little words”), which is now section 12 in the 9/21 draft proposal (and now “39 dirty little words”) needs to be addressed. There is no way that Paulson’s decisions under the act should not be subject to review …

The speech just started. More thoughts later.

Here’s a thought.

A $700-billion cost to the American taxpayer would come only if every single one of the mortgages that the government buys up defaults … that’s a lot of defaults.

There’s a lot of people out there that will do whatever they can to keep their homes, which means a good chunk of those mortgages will get paid off.

Isn’t it possible that the Treasury is making one of the most astute business decisions it has ever done, by buying troubled securities at a deep discount, holding onto them, collecting principal and interest, and then, when they have a better idea of which ones are good, and which are truly toxic, selling off the good ones at a profit?

After all, the biggest issue with them is that they are now illiquid … their market value is based on the fact that no one wants to buy them, considering that there may be a large number of defaults; but what is the actual risk that $700-billion worth of mortgages are going to go into default?

Buried deep in the Campaign Wrap-up for 9/22:

Obama blames lobbyists, politicians for financial crisis - CNN.com

The Bush administration’s proposal to bail out the financial system is the centerpiece of what would be the most sweeping economic intervention by the government since the Great Depression.

The plan would allow the Treasury to buy up mortgage-related assets from American-based companies and foreign firms with a big exposure to these illiquid assets.

The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit.

Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash - WSJ.com

Fed Will Expand Its Lending Arsenal in a Bid to Calm Markets; Moves Cap a Momentous Weekend for American Finance

NEW YORK — The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. said it would file for bankruptcy protection, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.

The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers. Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. Barclays said Monday it pulled out of the potential deal after deciding it wasn’t in the best interest of shareholders.

Early Monday morning, Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.

On Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion.

And:

Bank of America to Buy Merrill - WSJ.com

The futures of both Morgan Stanley and Goldman Sachs will be front and center Monday morning, as Wall Street wakes up to a world where the independent broker-dealers are increasingly few in number. They would be the last of the big five independent firms, with Merrill and Bear Stearns Cos. having been sold and Lehman likely to close down.

This tumultuous year has made it clear that investment banks like Lehman and Bear Stearns face vulnerabilities that commercial banks such as J.P. Morgan and Bank of America are less prone to. The investment banks must constantly depend on short- and medium-term money markets to fund their operations. Commercial banks, meanwhile, can count on more stable consumer deposit bases.

Knowing how anxiety affects me physically, I wonder what my day is going to be like today.

Yeah, sure, I work for Morgan Stanley, one of the survivors (according to the article in the previous post). It’s still going to be a painfully stressful time for anyone working for an investment bank for awhile.

I wonder how the hedgies are doing …

The financial system | What went wrong | Economist.com

“A COMPANY for carrying out an undertaking of great advantage, but nobody to know what it is.” This lure for the South Sea Company, published in 1720, has a whiff of the 21st century about it. Modern finance has promised miracles, seduced the brilliant and the greedy—and wrought destruction. Alan Greenspan, formerly chairman of the Federal Reserve, said in 2005 that “increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago.” Tell that to Bear Stearns, Wall Street’s fifth-largest investment bank, the most spectacular corporate casualty so far of the credit crisis.

It seems like whenever there’s a a major disaster in one of the markets, the comparison to the South Sea Bubble inevitably gets trotted out … but rather than bore you all with a history lesson, I’m going to recommend a wonderful novel by David Liss, entitled A Conspiracy of Paper, a historical mystery set during the the world’s first stock market crash, which will give some insight into what happened nearly 300 years ago, wrapped up in a story of pugilism and prostitution.

And then, once you’ve finished A Conspiracy of Paper, you can read The Coffee Trader (the introduction of coffee to the commodities exchanges in Amsterdam in the mid 17th Century) and A Spectacle of Corruption (about the machinations involved in an early 18th Century British national election) … all are timely novels to read in the current political and economic climate … a little history to put current events into perspective.