Wednesday, September 24, 2008

Bailout: We DO need a deal: Let Donald Trump run the negotiations as an episode of "The Apprentice"

I recall an early episode of “The Apprentice” where Donald Trump started his talk with the word “NEGOTIATION”. The particular episode turned out to have some silly gimmicks and head trips (especially for Troy McClain), but the one business N-word stuck with me. (There’s more to life than selling lemonade.)

That’s what we need today on Capitol Hill, and very quickly.

I write this post having, late last night, watched a Netflix copy of the crisp 1948 film noir from (Lions Gate, Artisan, Republic, and MGM)"Force of Evil" (based on Ira Wolfert's "Tucker's People"), which makes a clever analogy between "numbers banks" and today's "investment banks" and bookies or "collection agents" and today's brokers; money goes in, but cannot be drawn back out (hence, the "credit crisis).

Congress is angry at the proposal from Treasury Secretary Paulson, probably partly because Paulson himself is “one of them” and made $160 million when he left Goldman Sachs.

Yes, we have to “get it right” and yes, we have to “get it done” pretty quickly. And, yes, it’s reasonable to want to help Main Street, particularly give the taxpayer ownership rights in some form over the securities that the government would purchase or guarantee somehow. It’s reasonable to want to cap CEO compensation.

There is a good summary of the “alternatives” by Anthony Faiola and David Cho, “Alternative Solutions Diverge From Administration’s Approach,” link here. There are concepts like “government as lender” and “government as hedge fund”.

All of these in someway present a potential slippery slope. If the government owns parts of these companies in proportion to the $700 billion (that’s almost $3000 per taxpayer), that hints at European-style public ownership of many businesses, although, when it comes to the trains and the utilities, that isn’t all bad. In this country, most transit systems are publicly owned. And we’re having a national debate on whether the health insurance industry should somehow be publicly owned (single payer); Medicare already is. Here, we’re talking about financial institutions becoming partly publicly owned. But in the housing area, that’s already true (as of a week before), and government (through FHA, VA, etc) has had its fingers in the mortgage business for decades.

Furthermore, chopping at CEO pay, as I suggested yesterday, sounds frankly “Red”. It conveys the idea that government should reign in on individuals in other ways later (especially in Internet business, a possibility that gravely concerns me).

Paulson’s claim is that, with these strings attached (it’s not clear that Obama would attach that many more seaman’s knots than McCain now), bankers and businesspersons simply won’t take the deal or give credit. Lending will stop, huge job losses will occur, and maybe even my Bank of America ATM won’t always work. It could become viral.

Personally, I find it incredible that a whole economy – it’s existence as we know it – could evaporate because of one kind of instrument – credit default swaps. Maybe that’s what happens when we allow investors to violate the “insurable interest” rule. The money went somewhere and has to live under someone’s mattress. It sounds like it went to builders who got $500000 a piece for homes in Florida, Las Vegas or Colorado, or central California when they should have gotten only $300000. Note that condominiums in Trump Country still command millions per unit. Maybe the builders should help bail this thing out. They took the bad money. This seems to have happened all over the world, not just in the United States. Spain (particularly), Britain, Russia and Germany all apparently share our mortgage crisis now. That’s one reason why the dollar (and therefore oil prices) may not be hit as hard by a bailout as Congress fears.

And it’s crazy, isn’t it. Three or four years ago, around major cities, tenants were being forced out of high rises to be converted to condos for people with more money. Then, well, it wasn’t more money, it was subprime loans. To have a place to live, you were urged to sign up for a bad mortgage, practically blackmailed into it. This sounds like soap opera, and kind of throws ideas about “personal responsibility” back into the world of patriarchal competition.

I often write about mathematics education on this blog, and for anyone with a formal math background, it's amazing that people don't see that Ponzi schemes reach tipping points, as a matter of logic. Maybe it's more than math: you can't continue to obligate consumers to hold more debt to live reasonably without allowing their wages to rise comparably. That's economics, and politics.

Thomas Friedman (“Hot, Flat and Crowded”) explained the problem this morning as the inability of creditors now to make actuarial computations. No one knows what anything is worth. You can’t calculate the present value of anything without a reliable base number. But I’ve seen this problem in other areas. Insurance companies don’t want to offer media perils to amateur bloggers because they can’t estimate the risk. That’s a hint to why I fear the urge to regulate could spread quickly.

And then, ABC News keeps saying that Senate support depends on what John McCain does. That’s obviously political. McCain and Obama need to meet (they’re both active United States Senators), set aside politics, and agree to something publicly. People’s lives are at stake, and they have no business playing with them just to win an election.

One must add, The Wall Street Journal this morning, in a lead editorial, makes an additional constructive suggestion, that the administration invoke an "FDICIA Waiver" (refers to the Federal Deposit Insurance Corporation Improvement Act) to allow the Treasury to inject capital into banks, without Congress, in a piece called "The Paulson Sale", link here. The WSJ makes it sounds like such a measure could buy some time for Congress to consider a better thought-out plan.

All this said, we need a deal, and we need it quickly, or at least to establish some kind of investor confidence quickly, preferably before Congress goes home for a rest. (I thought they were all in Martha’s Vineyard in August with Bill Clinton.)

So, what’s the good word, drill sergeant? NEGOTIATE. I don’t think Congress can do this on its own. So here’s the deal. Invite a few business leaders to meet with Congress and get a feel for what terms businessmen will accept and start giving credit. I don’t know. I rather think that the Obama-like plan is more reasonable to them than Paulson thinks. Let Trump run the negotiating session (he doesn’t get to use his trademarked “you’re fired”) but, from all public figures in business, he seems to make a case for his ability to get two sides together. (And he can fly to Washington in his own jet.) You need to invite people from other industries that really make things. Include the media executives. Yup, hedge funds finance a lot of movie making, and I want to get my own movie made, and I’m concerned. Invite Dr. Phil, Oprah and even Nate and Suze if you like. But Congress needs some outside feedback, in a negotiating session. And it needs to get started on this TODAY.

What we need, then, is one more episode of “The Apprentice.” For real.

Update: Sept 25.

Right now it's still in tatters. Dr. Phil panned the bailout on TV, here is AOL's link, "I just think it's bizarre". He says it will cost every taxpayer up to $400 a month. How about garnishing wages to pay for it?

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