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Following the Bailout Bills – And Their Costs

When Congress gets a head of steam with something like the financial services bailout proposals, its procedures can get really hard to follow. So here’s a quick look at what’s going on.

In the House last Sunday, the bailout language was copied into H.R. 3997, which used to be a bill dealing with tax relief for members of the uniformed services, volunteer firefighters, and Peace Corps volunteers.

In the Senate yesterday, the bailout language (and more) was copied into H.R. 1424, which used to be a bill dealing with whether mental health and substance-related disorder benefits would be covered under group health insurance plans.

These two bills have been updated in our database to reflect their new status as bailout proposals. (Summaries of the bills in their wiki articles still reflect their old content. These will be updated automaticaly when the Congressional Research Service issues new summaries, or when an intrepid wiki editor takes over.)

Now, as to cost: On Sunday, a cost estimate (of sorts) for the House bill came out of the Congressional Budget Office. It said:

Under the [Troubled Assets Relief Program], the Secretary would have the authority—if deemed necessary to promote stability in the financial markets—to purchase any financial asset at any price and to sell that asset for any price at any future date. That lack of specificity regarding how the authority would be implemented and even what types of assets would be purchased makes it impossible at this point to provide a meaningful estimate of the ultimate impact on the federal budget from enacting this legislation. Although it is not currently possible to quantify the net budget impact given the lack of details about how the program would be implemented, CBO has concluded that enacting the bill would likely entail some net budget cost—which would, however, be substantially smaller than $700 billion.

This is far from a precise estimate, obviously. I have assumed that it concludes that the plan will cost $350 billion – half the total spending authority – and that the costs will be incurred over the next two years. Based on other language in the estimate, I added $3 billion per year in administrative costs over ten years. This results in an estimate on both bills of a little over $3,700 per family, or about $1,200 per person.

[Update: There is now a CBO estimate for the Senate bailout bill. It lacks specificity like the estimate for the House bill, but the additional provisions added to the bill would generally lower revenues (taxes), so the estimate comes to about $2,800 per family, or $900 per person.]

This is quite a bit lower than my estimate of the cost, and I think it is more likely for costs to be higher, but the effort here is to faithfully report what the government estimates.

The House comes in at noon Eastern today – and the hijinx continue!

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Mike Zarin

FINANCIAL RESCUE PLAN PROVISION CAN SAVE $700,000,000,000, END THE CREDIT CRUNCH, HELP HOMEOWNERS AND REDUCE INTEREST RATES

The financial rescue package contains a provision that permits troubled financial institutions to apply for insurance (federal guarantees) and could prevent an outlay of $700,000,000. Furthermore, it can cut interest rates substantially, keep troubled homeowners in their homes, and certainly end the credit crunch.

The purchase assets provisions of the bill, buying paper at much less than its face value, will not put the financial institutions in enough funds to mitigate the credit crunch.

In fact the guarantee provision could even go too far in that direction. Administered sensibly by the Treasury Department it could be just right – if they would do it.

How?

If I’m a banker holding 13% sub prime mortgage paper now worth 40 on my books instead of 100, and I get a US Government full faith and credit pledge (insurance, really a guarantee) behind that debt, my lousy paper is worth way more than 100 right now. Maybe 120 or more. No one wants that. Inflation.
Big time.

So, when the banker comes in to get his insurance, he should pay a fee and, most important, agree that the interest rate on his paper will drop to, say, 3.5. He has to agree, because the US government can’t change his contract unilaterally.

In that way, his paper is worth 100. He sells it. He’s back in cash and the credit crunch is over. Regulations should cut back on the permission that sunk Lehman – ability to leverage cash 30 times. Twenty times does it nicely enough.

If you want to punish him because he was a bad boy, cut the interest a little so he only gets 90 cents on the dollar instead of 100. Less than that. No good. Because he won’t be able to do enough business and end the credit crunch.

New point. The homeowner who is paying 13% or whatever on the sub prime debt, a victim or a risk take or whatever (we’re at saving the economy not punishing him, his family and us now) should have his mortgage rate reduced to 5% so that he can pay his monthly charges. A sub prime mortgagor (interest rate, say 7and 1/2% or more) who has enough household income to do that should be part of the program. See below for the others.*

The difference between what the banker gets, say, 3.5%, to bring the paper to 100, and 5% ,what the homeowner pays, should go to the federal government to pay the costs of the program and any anticipated defaults.

That’s a program that works and benefits the economy, the taxpayer who lays out no money now, the financial sector and the homeowner.

*For another program, are we, as taxpayers better off if the guy who can’t pay all of his mortgage is thrown into the street, or do we really pay more to keep him in other housing, welfare and so forth. Maybe he should be subsidized some to keep him in his home. As I say, that’s another program.

The program outlined above works. Secretary Paulson has given no assurance that his plan works.

Mike Zarin

Michael S. Zarin
President
Wellfleet Investments LLC
P.O. Box 222142
Great Neck, NY 11022-2142
Direct Delivery:
40 Cutter Mill Road – Suite 200
Great Neck, NY 11021
Tel: 516-487-7450
Fax: 516-487-7480
msz@wellfleetinvestments.com

Jody

It’s a mess. Now that the plan has passed, I’m hoping for the best. Whatever that is. In the meantime, I found this hilarious song about the bailout. Anything to lighten up a grim topic: Bailout song

Jody

Here’s a youtube video of that Bailout song: http://www.youtube.com/watch?v=uZUXXSxZPhw Even funnier and boy do I need a laugh.

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