Institutionalized Fraud - Ben Bernanke Style

So now we learn about it, in a Senate hearing:

"Sept. 23 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled that the government should buy devalued assets at above-market values to make its proposed $700 billion rescue package most effective in combating the financial crisis.

``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''"

A benefit to the bank that they are bought from, certainly.

But to the taxpayer?  No.

Here's why.

These "hold to maturity" prices are fictions.  Let's take the "average" $700,000 house in California.  The buyer made perhaps $100,000 a year, or $8,333 gross (before taxes.)  Removing FICA and a 25% marginal tax rate from the gross leaves you with about $5,500; the payment is $4,630.11.

Can you survive with less than $900 a month for car payments, food, utilities, homeowners and car insurance and electricity?  Good luck.

So instead nearly all of these people took Option ARM mortgages and in many cases they also took a "piggyback" second mortgage to get around "maximum LTV" restrictions on the Option ARM.

But the house was overvalued by 150%, selling at nine times average incomes instead of three and a half times.  It has now fallen in value from $700,000 to $500,000, but has another 30-40% to go, and will eventually bottom out in the $300,000 range.

The first mortgage is in fact worth about 70 cents now, but will be worth 40-50 cents in a few years.  The second is a zero, because until the first is paid off, its worth nothing, and the first has no chance of ever being paid off.

This is why the market prices are in fact not wrong.

If Paulson does what Bernanke said he will (and should) the taxpayer will suffer hundreds of billions of dollars in losses - guaranteed.

Of course Bernanke said that if the bailout isn't passed the economy will contract.  What he didn't say, but should have, is that it is going to contract anyway (bailout or not), and in fact already is.  We are in a recession now and this is in fact unavoidable as the bad debt must be defaulted.

Throwing cold water on the "bailout now!" mantra, Berkshire announced it is going to invest $5 billion dollars this evening into Goldman Sachs:

"Berkshire is buying $5 billion of perpetual preferred shares, New York-based Goldman said today in a statement. Goldman, which this week transformed itself from the biggest U.S. securities firm to the fourth-largest bank by assets, also plans to raise at least $2.5 billion by selling common stock in a public offering."

But wait! Didn't Bernanke and Paulson just get done saying a few hours prior that private capital would not invest?

Well Comrade Paulson and Comrade Bernanke?  It appears that indeed private capital will invest, if the terms are good and the company sound.

Heh heh heh, a free market solution!  Warren comes in and sticks a big wad of cash into Goldman Sachs - something that you said wouldn't happen without you offloading all of this bad debt onto the back of the taxpayer.

I love it when one of the most-storied investors of our time turns our Treasury Secretary and Chairman of The Fed into a liar just hours after their "Armageddon Story" is run on national television.

Asking for authority to implement one of my three planks to actually solve the problem, Chris Cox stepped up today:

"Sept. 23 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Christopher Cox said Congress should ``immediately'' grant authority to regulate credit-default swaps amid concern the bets are fueling the global financial crisis. "

Now do the other two things Chris:

1. Rescind the 2004 order that permitted leverage to exceed 12:1.  It took only an administrative action to drop the regulation, so you can put it back in force the same way.
2. Implement the requirement to disclose all Level 3 assets in specificity along with their marking model (in total) every quarter in the corporate 10Qs and 10Ks.  This should be able to be done administratively as well, but if it is not, a one-paragraph bill will fix that problem.

Again - do those three and the market clears.

As we have seen, private capital WILL come in if it understands the risks.

Finally, we learned today that The White House was planning this little piece of financial dictatorship for quite some time:

"Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough."

What a tangled web we weave when we practice to deceive.

If this was being prepared for "some time" then the "emergency" status was manufactured.  Instead of bringing this before Congress "months and weeks" ago for consideration where it could be debated and passed, ready if necessary, The White House and Treasury instead back-pocketed their plan and then sprung it on Congress with an outrageous and ill-advised "bump in the night, Freddy Kreuger style" scare campaign at the last possible minute in an attempt to give Treasury dictatorial power over our entire financial system.

Do not pass the $700 billion "No Wall Street Banker Left Behind" bill that will simply further destabilize the markets and impoverish America, never mind the obvious echoes of "The Enabling Act" in March of 1933 - in Germany.

Instead, solve the problem - at no cost to taxpayers.

Don't wind up like this