Suicide Alert!

Are U.S. Senate Republicans feeling suicidal? Steve Benen's latest report suggests they need some intervention to protect them from themselves: "As of this afternoon, it appears Republicans are prepared to link arms and take their chances, fighting to protect Wall Street from accountability."

Jeff Miller: 'Time for Your Business to Go Away'

There were some very dumb bunnies out on America's astroturf yesterday, like this one in Syracuse. What else would you expect from Fox News watchers?

In the Panhandle, we had more than our share of 'tea bag' idiots, too. Check the reports from the Independent News and PJC's Corsair.

But no one made a fool of himself quite as thoroughly as Northwest Florida's own congressman, Jeff Miller (R-Chucklehead). Sean Dugas reports that while speaking at University Mall, Miller said of government spending--

"We can stop this, but it has to be a grassroots effort... . If your business can't make it, it's time for your business to go away."

A lot of local business owners will remember that the next time Miller is up for reelection. Ironically, some of those small business owners once were located in University Mall -- the very venue Miller chose for kicking dirt on their graves. But as Carleton Proctor reported early last month, all but one of them "have closed their doors." (Google cache here. expired) [Project Vote Smart has the full report.]

updated 11-08-09

Citibust Bank

That idea didn't go so well for the taxpayers, did it?!

Conversion price = $ 3.25 per share. Friday's closing price - $ 1.50 share.

In eight hours U.S. taxpayers lost more than 50 percent of their investment in Citibank. Let's see, now .... $25 billion in preferred shares x .54 loss on the day = $11.5 billion left in preferred value. Zombie!

New Bailout Rules

Bank of America CEO Ken Lewis blatantly refused yesterday to produce information subpoenaed by New York Attorney General Andrew Cuomo.

Cuomo was demanding a listing of "just who got what out of $3.6 billion in bonuses given to Merrill Lynch employees before the banks merged late last year." Those bonuses were rushed out by ex-Merrill Lynch executive John Fain, with considerable help from U.S. taxpayers.

Turns out, however, that Lewis himself -- as Fain's boss -- personally authorized in writing up to $5 billion in bonuses to the Merrill Lynch execs, according to the New York Daily News. Not only that, but he lied to Congress about it earlier this month:

Bank of America CEO Kenneth Lewis told Congress the bank had "no authority" to stop the bonuses, but he didn't reveal that he'd signed a merger document authorizing up to $5 billion in Merrill "incentive payments."

To add insult to perjury, Lewis used one of Bank of America's the taxpayers' private jets -- the very one shown above -- to fly in just so he could obstruct the justice system in person.

All of this inspires us to suggest a few new rules for the bank bailout program:

Rule No. 1: When a duly authorized state or federal law enforcement official who is investigating bank mismanagement asks for information about who personally profited from use of U.S. taxpayer bailout money, the bank CEO must either give it up promptly or he will be fired.

Rule No. 2: When a bank CEO is caught prevaricating, lying, or giving misleading testimony to a congressional committee investigating the misuse of U.S. taxpayer bailout money, he must either resign immediately or be fired.

Rule No. 3: Since the Bank of America "private jet" is so big, the plane will not be allowed to take off if there are any empty seats. Excess seats are to be offered to the general public on a first-come, first serve basis.

Rule No. 4: If it happens that the banker used the jet to get where he perjured himself, he must walk home.

Rule No. 5: In any event, every bank CEOs who seeks bailout money from the federal government must first deposit all of his personal financial holdings with the same bank, to be held in trust during the CEO's term of office. If he screws up, we get it all.

Now, there you have some "job incentives" that are incentives.

Citigroup Stock Swap

Bloomberg has the early news today. Essentially, Investor Uncle Sam is swapping Citgroup stocks.

This resembles turning the taxpayers' somewhat safer investment into a highly risky one, except that when they are both doomed to be worthless investments, Uncle Sam will still wind up with the bank.

Here's a summary:

• Our -- that is, the taxpayers' -- 8% stake of preferred shares in Citogroup will be exchanged for a 40% share in common stock. This really doesn't matter much (see above).
  
• The bank is suspending all dividends to both common and preferred shareholders. This doesn't matter much, either, since everyone knows Citigroup has no money left with which to pay dividends.
  
• The board will be reorganized just as soon as the drunken slumber of the old board can be interrupted.
  
• A "majority" of the new board members will be "independent."Independent of Wall Street thinking? We'll see, but don't count on it.
  
• And, "the U.S. doesn’t immediately intend to inject additional money after channeling $45 billion to the New York- based company last year."

Emphasis on the "immediately." Citigroup is a zombie bank. This latest is merely another half-step in Treasury Secretary Tim Geithner's piquaresque adventure of going through every capitalist contortion to prop up the insolvent mega-bank without nationalizing it. It won't work.

Heck, it hasn't worked. Use whatever word makes you comfortable -- stock swap, nationalization, receivership, insolvency, limbo, purgatory. The fact remains, the U.S. taxpayers now run, and effectively own, Citigroup.

Geithner just can't bring himself to tell the other 60% stockholders that their stock is worthless.

Hell is Freezing Over

Today, Fred Hiatt's right-wing editorial page in the Washington Post comes out four-square in favor of nationalizing troubled banks.

Nationalization Jibber-Jabber

"Citigroup (C) and Bank of America (BAC) won’t live to see May. The government will take them over within the next 60 days. The announcement may come as soon as tomorrow evening."

-- The Motley Fool, Friday, Feb 20

There's been a lot of uninformed, hysterical jibber-jabber on the Tee-Vee and the Internet Pipes about the evils of nationalizing some banks over the last week or two.

It reached a fever pitch today, mostly generated by stock hypsters like Rick Santelli at CNBC. Santelli is not a real economist, by the way. He just plays one on the Tee-Vee.

Paul Krugman, the Nobel Prize winning economist, states the becalming facts in a nutshell:

We are not talking about fears that leftist radicals will expropriate perfectly good private companies. At least since last fall the major banks — certainly Citi and B of A — have only been able to stay in business because their counterparties believe that there’s an implicit federal guarantee on their obligations. The banks are already, in a fundamental sense, wards of the state.

And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders.

What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.

What's more, as Krugman and Nouriel Roubini and James J. Galbraith and just about every other economist, left and right, has said repeatedly, federal "ownership" would be temporary. It would work exactly like an insolvency proceeding, as Atrios (economist Duncan Black) explains. Indeed, it already does. It's been happening to smaller banks, now, and even large ones like Washington Mutual nearly every Friday.

To be sure, when a bank becomes insolvent and is "nationalized" by the FDIC or some other government insurer or court, common shareholders suffer severe dilution in their investment, at best; more frequently, as in any other insolvency proceeding common shareholders are wiped out altogether.

But preferred shares may retain some fractional value, depending on the severity of the insolvency. And, of course, the creditors are by law given priority to recoup as much of the debt possible; most especially, government creditors like the FDIC that guarantee customer deposits.

Creditors usually are only ones who stand a chance of getting something back on the dollar. Just as in corporate bankruptcy proceedings, they are handed the power to take over management and wind up company affairs by paying off customers of the bank and creditors.

As economists Mathew Richardson and Nuriel Roubini explained two days ago in the Wall Street Journal, there is no other rational option when the banks are essentially broke:

Once we face this truth, there really isn't much left to do but nationalize.

We are not talking about the government operating the banks for the long-term. But, as was done in Scandinavia in the early 1990s, we are talking about orderly clean up, then reselling the banks to private investors.

"Clean up" and "receivership" sound so much better, don't they? More orderly, more lawful. So if you're a free market purist, you don't have to use the 'N' word. Use the "R" word for "receivership." It will make you feel better.

Unless, that is, you happen to hold common stock in Citigroup or Bank of America.

Banks Pour Salt Over the Wounded

Christopher Leonard, AP reporter:

For hundreds of thousands of workers losing their jobs during the recession, there's a new twist to their financial pain: Even as they're collecting unemployment benefits, they're paying bank fees just to get access to their money.

Thirty states have struck such deals with banks that include Citigroup Inc., Bank of America Corp., JP Morgan Chase and US Bancorp, an Associated Press review of the agreements found. All the programs carry fees, and in several states the unemployed have no choice but to use the debit cards.
* * *
"It's a racket. It's a scam," said Rachel Davis, a 38-year-old dental technician from St. Louis who was laid off in October. Davis was given a MasterCard issued through Central Bank of Jefferson City and recently paid $6 to make two $40 withdrawals.
* * *
The fees are raising questions from lawmakers who just recently voted to infuse banks with taxpayer money to keep them afloat.
* * *
Another 10 states — including the unemployment hot spots of California, Florida and South Carolina — are considering such programs or have signed contracts. The remainder still use traditional checks or direct deposit.

Can't really blame the bankers. They just can't help it. They think they own everyone's money, anyway.

Stimulating a Bank Brain Drain

According to the New York Times, U.S. Senator Chris Dodd (D-CT) embedded a provision in the Economic Stimulus bill, which passed both houses of Congress last night, that "would impose restrictions on executive bonuses at financial institutions that are much tougher than those proposed 10 days ago by the Treasury Department."

The restriction with the most bite would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full.
* * *
“The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence,” Mr. Dodd said Friday. “These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.”
* * *
In addition, the Congressional rules would affect not just a bank’s top management, but also star traders, investment bankers, fund managers and commission-based sales representatives. They have traditionally received multimillion-dollar payouts based on their year-end results.

Good for Dodd.

But the restrictions were opposed by the Obama White House. Why? The Times claims:

Top economic advisers to President Obama adamantly opposed the pay restrictions, according to Congressional officials, warning lawmakers behind closed doors that they went too far and would cause a brain drain in the financial industry during an acute crisis. Another worry is the tougher restrictions may encourage executives to more quickly pay back the government’s investments.

Or, as more succinctly stated by an "independent compensation consultant"who talked to the Times, the pay restrictions "won't work." He claims:

"Any smart executive will (a) pay back TARP money ASAP or (b) get another job.”

There may be a potential legal problem with the Dodd salary restriction; most notably, if true, that it applies retroactively to executives who took TARP money from the Bush administration when the governing rule was "anything goes" for Wall Street miscreants and nincompoops. Whether that part survives court review heavily depends on the exact wording of the retroactivity provision.

But the suggestion that pay restrictions are bad because CEOs will pay back taxpayer money early is hardly persuasive. If anything, that's devoutly to be desired. The earlier Wall Street bankers get off the TARP money train, the better. Out here in the rest of America, normal people would see the prospect of lifting the bonus restriction as an incentive to speed the clean-up of balance sheets.

As for 'getting another job' -- who in his right mind could complain about that? Any Wall Street exec or trader who quits because he can't soak the taxpayers for a bonus "exceeding one-third" of annual pay should go into another line of work -- one more suitable to their character, like robbing banks.

Bank of America Parties With $10 Million Bailout Money

Just weeks after nicking $45 billion in taxpayer bailout money, Bank of American blew $10 million of our money on "a five day carnival-like affair just outside the Super Bowl stadium," ABC News is reporting.

The bank's extravaganza for Super Bowl Week involved 850,000 square feet of "sports games" and "interactive entertainment" for football fans. The tents alone -- tents!, mind you, not houses with mortgages or the emergency shelters where some former homeowners are living -- cost over $800,000.

Willie Sutton ("That's where the money is") must be rolling in his grave.

Citi Field?

Naming the Mets new stadium Citi Field is a slap in the taxpayers' face. Twice slapped, in fact. Better it be named Taxpayers' Field....

Or Marx Field, after Karl Marx. Marx did work for a New York newspaper, after all. And, unlike Citigroup, he paid his own way.

Citigroup Didn't Sleep...

... just as promised in those national advertisements.

Instead, it stayed awake "in tense, round-the-clock negotiations that stretched until almost midnight on Sunday" to get its hands deep into the taxpayers' pockets:

Under the agreement, Citigroup and regulators will back up to $306 billion of largely residential and commercial real estate loans and certain other assets, which will remain on the bank’s balance sheet. Citigroup will shoulder losses on the first $29 billion of that portfolio.

Any remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The Treasury Department will use its bailout fund to assume up to $5 billion of losses. If necessary, the Federal Deposit Insurance Corporation will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses.

In exchange, Citigroup will issue $7 billion of preferred stock to government regulators. In addition, the government is buying $20 billion of preferred stock in Citigroup. The preferred shares will pay an 8 percent dividend and will slightly erode the value of shares held by investors.

Riddle us this: if the CEOs of these failing banks deserve tens upon tens of millions of dollars in annual compensation and bonuses, how big a bonus do the taxpayers deserve for saving their sorry asses?

UPDATE
11-24 am

We thought it was a terrible deal. Now, it seems Nobel prize winning economist Paul Krugman agrees: "This bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more."

In the waning days of the Bush administration, Wall Street is robbing the nation's treasury. It's that simple.

What? There's No Free Lunch?

Citibank's imminent rescue will cost the American taxpayer dearly. So will the executive bonuses that Citigroup still, after all of this, plans to pay -- just as soon as they lay off another fifty-three thousand lower-level workers.

Funny how this "bailout" is working out, isn't it? Bad managers for lousy corporations walk away with tens upon tens of millions while the average Joe and Jane who work there in the trenches get shoved out the door with pink slips.

Below is a quote showing how others see our problem... from the decided advantage of Australia, where the Citigroup's full-page promotional ads have not yet begun to run in the daily newspapers and ex-Goldman Sachs executives feel they can speak freely.

There is no free lunch:

The problems of Citibank mean that even if it is saved – and I am sure it will be – it will further contract the amount of credit available to keep American business and consumers active. In the process, it will increase the likelihood of the triggering of trillions of dollars of liabilities in synthetic CDO’s.

All the US politicians are talking about bigger and bigger spending to overcome their problems. The next problem comes when the rest of the world, led by China and Japan, tells the Americans that there is not enough money in the world to fund these rescues, so Americans will have to increase taxes. At a recent Reuters Global Finance Summit, former Goldman Sachs chairman John Whitehead said America's problems will take years to solve and will burn trillions of dollars.

Whitehead points out that at this stage the only proposals on the table involve increasing the US deficit.

Whitehead said: "Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of US government bonds.

"The public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favoured a number of new programs, all very costly and all done by the government."

Whitehead said that he is concerned that no lawmakers are against these new spending programs, yet none will stand up and call for higher taxes.

“'I just want to get people thinking about this, and to realise this is a road to disaster,” he said.

It will be a disaster if the Bush Treasury Department hands over more tens of billions of our increasingly shaky money to Citigroup and then lets the Citigroup board of directors and executives stay in place while running the show as if nothing had happened.

We say, treat Citigroup no better and no worse than General Motors. Let 'em go bankrupt or fork over the reins of ownership and control to Uncle Sam. Period. The public -- that is, present and future taxpayers -- deserve a lot more for their money than self-serving promotional ads and a worthless promise from a corporate liar to pay it all back some day.

Citigroup: Always Awake to Take Your Money

Via Atrios and the New York Times, we learn that the Citigroup banking conglomerate, which already has gobbled up $25 billion of your tax dollars and now wants more, has begun running expensive full-page self-promotional ads in newspaper across the nation. Here's the Times' explanation (boldface ours):

In a series of ads set to run in major metropolitan markets on Sunday, Citi plans to tell its customers that its business is fundamentally sound. It acknowledges that “our financial markets have been tested in unprecedented ways,” but argued that it has the diversity and experience to pull through. It throws out a few numbers, in particular 100 (the number of countries it’s in) and 200 (its years of experience and the number of its customers).

The ad concludes: “That’s why now, more than ever, you can feel confident that Citi never sleeps.”

In case you were wondering, the CEO of that "sound" banking mega-corporation, Charles O. Prince, altogether last year took home $25,520,621 in salary, bonuses (for doing such a great job, don'cha know) and stock options.

Here's the ad they doubtless want you to pay for, too:

Warren Buffett Credit Crisis Primer

Whatever your opinion about the $700 billion bailout bill that became law yesterday, it's useful to know what knowledgeable proponents think about it. Few know as much or can communicate their views as clearly as the charming "Oracle of Omaha," Warren Buffett.

Buffett, of course, is chairman of Berkshire Hathway Inc. and one of the richest men in the world. He predicted the credit crisis in his 2002 annual letter to stockholders (starting at pdf page 12 and print page 13) -- well before most others:

[T]he parties to derivatives also have enormous incentives to cheat in accounting for them. Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.

Four days ago, Buffett spent an hour with PBS' Charlie Rose discussing the then-pending bailout bill. The full video of their lengthy conversation can be seen here. It is engaging but long, in no small part because of Charlie Rose's annoying verbosity.

Happily for you, that nearly one-hour video has been edited down to a little over 17 minutes (see below) that captures the essential dozen major points that Buffett wanted to make.

He favors the bailout bill but has no illusions that it is a panacea. He warns, however, that to work at all well, the Treasury Department must use its new authority not to "bail out" banks but to "invest" in them by paying mark-to-market prices for their toxic mortgage derivative portfolios.

Despite Buffett's sunny disposition and irrepressible optimism about the future of the country, he also warns that what lies ahead even if the bill works are more bank failures, rising unemployment, a falling dollar, severe inflation -- and, even now, the "possibility" of a depression.

Here's a choice for you. To understand what's going on you could choose, if you wish, to search the internet for the invariably insipid remarks of Northwest Florida's feeble congressman Jeff Miller, who voted against the bill; or, you could learn something by listening to the Oracle of Omaha:

Bailout Bill: Just the Beginning

Few are talking about it. Among the professional economists, however, a broad consensus seems to be emerging that the Paulson-Bush bailout plan -- which likely goes to the House floor today for final passage -- just won't work.

At best, in the words of Pulitzer Prize winning economist Joseph Stiglitz ("Why We Aren't Done Yet"), "it’s neither the most efficient nor the fairest way of addressing the problem." It is essentially a feel-good tickle for Wall Street's feet, not a serious solution to the nation's very serious economic emergency.

There are three critical flaws in the proposal. The first is that it relies—once again—on trickle down economics: somehow, throwing enough money at Wall Street will trickle down to the benefit of Main Street, helping ordinary workers and homeowners. (The irony is that Wall Street was itself destroyed in an act of trickle up economics — in its rush to make sure that the money it had discovered at the bottom of the pyramid was moved to the top.) Trickle down economics almost never works, and it is no more likely to work at this time than at any other.
* * *
The second is that it sees the fundamental problem as a crisis of confidence. That no doubt is part of the problem; but the failure of confidence is because the financial markets made some very bad loans. That’s not just a matter of imagination or perception. It’s reality.
* * *
The third is that real contractionary dynamics are already in play, and this proposal does nothing about that. Even if the proposal were implemented quickly, there would be some credit contraction. But beyond that, states and localities are hurting, and are cutting back expenditures. Household balance sheets are weaker, and we can expect consumers to contract expenditure — or at least not expand it at a pace to sustain growth. The U.S. economy has been sustained by a consumption boom fueled by excessive borrowing, and that will be curtailed. But an economic slowdown will exacerbate all our financial problems.

Ironically, just as the academic journal with Stiglitz' warnings was hitting the desks of his fellow economists, the Terminator was telling Treasury Secretary Paulson that the State of California "might need an emergency loan of as much as $7 billion from the federal government within weeks."

The warning comes as California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.

The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch. If the state is unable to access the cash, administration officials say, payments to schools and other government entities could quickly be suspended and state employees could be laid off.

If California is begging for money, can other state and local governments be far behind?

Is there, even at this last moment, a better or cheaper alternative for solving the financial crisis? Stiglitz, as we have noted so many of his colleagues are saying, urges that we learn from Sweden's credit crisis experience of nearly two decades ago:

What should have been done is simple. The hole in the balance sheet of financial institutions should be filled in a transparent way. The Scandinavian countries showed the way, almost two decades ago. Warren Buffett showed another way, in providing equity to Goldman Sachs. By issuing preferred shares with warrants (options), one reduces the public’s downside risk, and insures that they participate in some of the up-side potential. This approach is not only proven, it provides both the incentives and wherewithal to resume lending. It also avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the “lemons” problem—the government getting stuck with the worst or most overpriced assets. Finally, it can be done far more quickly.

As for the root problem of escalating home foreclosures, what Stiglitz effectively says is that we should learn from our own experience, too. In this case, FDR's New Deal:

Let’s be clear about one thing: the Administration’s view that the $700 billion bail-out will ensure that the mortgages the market views as bad aren’t really so bad is a fantasy. The fact is that loans were made on the basis of inflated prices, and real estate prices are falling. No amount of talking up the market is going to change that. But direct aid to homeowners can make a difference.
* * *
There are three things we could do easily and quickly, and for a fraction of the price of the Wall Street bail-out. First, we can make housing more affordable for poor and middle income Americans, by converting our mortgage deduction into a cashable tax credit. The government pays in effect [through current tax laws] 50% of mortgage interest and real estate taxes for upper income Americans, yet for poor Americans it does nothing. This reform is, in any case, long overdue.

Secondly, we need bankruptcy reform allowing for homeowners to write down the value of their homes and stay in their houses, in addition to the help that the current legislation proposes.

Thirdly, government could assume part of the mortgage, taking advantage of the lower interest rate at which it has access to funds and its greater ability to demand repayment. In return for the lower interest rate — which would make housing more affordable — it could demand from the homeowner the conversion of the loan into a recourse loan (reducing the likelihood of default), and from the original holders of the mortgage, a write down of the value of the mortgage to say 90% of the current market price.

If Stiglitz is right -- and it seems the greater weight of economic thinking is on his side -- then even if the House of Representatives passes the Paulson-Bush plan, at best it's only the beginning of the financial crisis -- not the end. We are likely to look back on these days of a $700 billion bailout as "the good old days."

Start thinking in multiple trillions of dollars.

The Kucinich Credit Crisis Plan...

... because whatever Lola wants, Lola gets:

Bailout Bill 3.0

We are shocked and awed at all the gyrations, machinations, glittering mark-up baubles, and down-right stupid provisions the Senate apparently feels compelled to add to the bipartisan credit crisis bill in order to overcome objections from House free market ideologues in both parties.

The original 2 1/2 page $700 billion no-strings-attached plan of Secretary Paulson was terrible, of course. Chris Dodd's 110-page re-write was substantially better, though far from perfect.

The latest draft bill -- Bailout Bill 3.0, we might call it -- has grown to a bloated 451 pages in length and starts us backsliding into the abyss.

What's behind a bill that grows worse even as it grows longer? Ideologues (and a few idiots like Northwest Florida's own Jeff Miller who does not trouble to read the legislation) in the House of Representatives killed Dodd's bipartisan effort. That left both houses of Congress, as of yesterday, with only one political option: bribe the ideologues.

This is done by --

• Adding a bunch of earmarks giving favored tax treatment to various interest groups from Hollywood to children's toy manufacturers
  
• Throwing in a few more capital gains tax cuts for the wealthy
  
• Including pointless free-market "feel-good" provisions like a U.S. sponsored "insurance" policy covering losses from buying toxic assets, but at a premium priced at 100% of the true risk (which no shaky bank would buy as long as they can unload their bad assets on taxpayers at less than the premiums would cost); and
• Under-girding the whole rescue plan with a dangerous green light exemption from "mark to market" accounting rules for all of Wall Street -- the very same exemption that led to the Enron debacle.

George Soros' proposed solution looks infinitely better to us. Soros writes in today's London's Times:

Instead of just purchasing troubled assets the bulk of the funds ought to be used to recapitalise the banking system. Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of twelve - effectively giving the government $8,400bn to re-ignite the flow of credit. In practice, the effect would be even greater because the injection of government funds would also attract private capital. The result would be more economic recovery and the chance for taxpayers to profit from the recovery.
* * *
A revised emergency legislation could also provide more help to homeowners. It could require the Treasury to provide cheap financing for mortgage securities whose terms have been renegotiated, based on the Treasury’s cost of borrowing. Mortgage service companies could be prohibited from charging fees on foreclosures, but they could expect the owners of the securities to provide incentives for renegotiation as Fannie Mae and Freddie Mac are already doing.

Economist Paul Krugman echoes the same idea in fewer words:

My view, which I think is now shared by many economists, is that Paulson grabbed hold of the wrong end of the stick — he should have been seeking to expand bank capital, taking an ownership share in compensation, rather than trying to push up the value of toxic paper.

In other words, the most sensible bailout bill would use taxpayer dollars to recapitalize banks by having the Treasury Department buy preferred shares in those banks.

Everybody wins. The banks get new money. Main street business and individual borrowers get their credit lines restored. Taxpayers get made whole with profits made from the eventual resale of preferred stock once the banks have recovered.

This is essentially the Swedish solution we have mentioned before, one that already has proved that it works in similar circumstances.

So, what's the problem? Basically, it makes too much sense to have a chance with this Congress.

GOP "Nilhilists" Sink Bailout Bill

We spent some time tracking down first-hand reports from anyone who could bear witness to what really happened on the floor of the House of Representatives yesterday when the bipartisan credit crisis bailout bill failed. Democrats delivered on their promise to hold their collective noses and deliver more than one-half of the total votes necessary; Republicans broke their promise to deliver the rest from their own members.

C-Span isn't permitted, by House rules, to show anything except blowhard congress-persons making wind for the camera. Most of the cable Tee-Vee political reporters, who have to travel with camera crews, customarily are kept off the House floor and had to hang around the cloakrooms. So, they could share only second- and third-hand spin stories.

But on Jim Lehrer's News Hour, the New York Times' John Shaw saw it with his own eyes:

Well, it was very interesting, because it's hard to know really how each party does their whipping operations, getting votes, but the Democratic side was much more active.

The speaker was right in the middle of it. There were swarms of people around her. They were feeding her notes. She was carefully monitoring the vote. She was sending emissaries over to the Republican side.

On the Republican side -- and, again, they may do it differently -- but the minority leader, John Boehner, was pretty much alone. It didn't seem like many people wanted to talk to him. Roy Blunt, the whip, was pretty much standing off by himself. His deputy, Mr. Cantor, was also pretty quiet.

So visually it looked like the Democrats were working harder. And at one point, Pelosi looked over and saw that not a lot of movement was going on that side. And she just said, in a very loud voice, "We're finished," which signaled that she was done trying to get more Democrats to vote for the package.

Boehner's peculiar quiescence inspired Rachel Maddow of MSNBC to ask a follow-up question -- "Who leads the Republican Party right now?" She came up with a surprising answer: the aforesaid "pretty quiet" Eric Cantor (R-Va), who is Assistant Minority Whip in charge of rounding up votes for the 'lonely' John Boehner.

Even conservative columnist David Brooks is disgusted by the Republicans' behavior:

House Republicans led the way and will get most of the blame. It has been interesting to watch them on their single-minded mission to destroy the Republican Party. Not long ago, they led an anti-immigration crusade that drove away Hispanic support. Then, too, they listened to the loudest and angriest voices in their party, oblivious to the complicated anxieties that lurk in most American minds.

Now they have once again confused talk radio with reality. If this economy slides, they will go down in history as the Smoot-Hawleys of the 21st century. With this vote, they’ve taken responsibility for this economy, and they will be held accountable. The short-term blows will fall on John McCain, the long-term stress on the existence of the Republican Party.

Brooks holds out hope that some cosmetic changes might make the bill more palatable to Republicans on a second go-around to pass the bill, probably on Thursday. Possibly so, but it seems to us it will be even more difficult to talk anyone who voted "no" yesterday into voting "yes" tomorrow.

How much more embarrassing, and difficult for constituents to swallow, would it be for a congressman -- say, like the hapless Jeff Miller -- to vote for the bailout bill after voting against it? Inescapably, such a vote would mean the congressman voted at least once this week against the national interest.