In the original version of this article, I was under the impression that the Senate had passed this bill already. It hasn’t; they have only just released the details to the public. A vote will come later.

Over the weekend as I watched the Mets end a frustrating season with a disappointing final series, the details of the Senate’s bill to bail out the financial industry, and presumably the economy, were released to the public. I understand that passing a bill requires compromises to be made, but there is one interesting point that reduces the effectiveness of the bill.

Curbs would be placed on the compensation of executives at companies that sell mortgage assets to Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000. They also will not be allowed to write new contracts that allow for “golden parachutes” for their top 5 executives if they are fired or the company goes belly up. But the executives’ current contracts, which may include golden parachutes, would still stand.

The executives in charge of the bailed-out companies will be replaced if they haven’t been already. Those being replaced will not have to face any penalties for driving their companies into the ground by acquiring risky debt. While fully aware of the risks involved, they did not have to bear any personal financial risk. While these executives should be commended for being able to negotiate ridiculous contracts allowing them to fail and still be paid massive bonuses, this should be eliminated for any company that requires “rescuing” with taxpayer money.

President Bush, Treasury Secretary Paulson, and the Democrats and Republicans in Congress are tied to the financial firms on Wall Street. They don’t want to make enemies now, particularly when some individuals currently in government may look for financial jobs in the private sector in the near future.

Let’s hope that the bill presented by the House of Representatives curbs bonuses for executives who mismanaged their businesses to the point that the government needed to enact the biggest market intervention in the history of market interventions.

Will financial executives refuse to allow their companies to participate in the bailout if they don’t receive their multi-million dollar “golden parachutes?” It would be a dumb, selfish move to put the health of the economy on the line until they receive their bonus for driving their companies into the gutter.

Rescue bill unveiled, Jeanne Sahadi, CNN Money, September 28, 2008

I swear I’m trying to write about topics other than the massive national bailout of the financial industry, but there always seems to be something interesting to say. Yesterday, it was Mark Cuban, owner of the Dallas Mavericks and chairman of HDNet who offered interesting insight. He suggested that the United States Treasury Department list every asset they buy within the $700 billion bailout plan and the price they intend to offer.

When the government sells the assets, perhaps for a profit, it should also list the price received.

In addition, by posting the assets in an eBay like auction/sales environment, it would enable independent buyers to come in and buy the assets using private money rather than government money… By adding liquidity to the process, the government could be responsible for less and sellers could get more. This is the only way I can think of to get true transparency. Without it, I promise you that it will be impossible to account for how much money was spent on the assets and how much cash was generated from the sales process and what the net cost or benefit to taxpayers is.

Without transparency, we wont have any idea how this all played out. None. Which creates the real problem of allowing it to happen again, but with the government needing the bailout.

This suggestion sounds excellent to me. Transparency might stop the Treasury Department from playing favorites, offering more to buy assets than what they are worth or playing favorites.

Mark also mentioned that CEOs of the companies being bailed out should be required to forfeit their severance pay and bonuses that they might otherwise receive. I also agree with this point. It is egregious for the individuals who require help from the government—that is, from the taxpayers—to save their company and industry to be shown the door with parting gifts. There could be a case for any company having the possibility of being worse off if the outgoing CEO had not been there, but that would be a tough case to prove.

$700 Billion Bailout? eBay It!, Blog Maverick, September 22, 2008

Over the weekend, President Bush asked Congress to grant the United States Treasury Department the authority to purchase $700 billion in assets from troubled financial companies. The government would create a corporation, like 1933’s Home Owners’ Loan Corporation, to buy mortgage-backed securities at a discount and sell them later for a profit.

This is by any measure the biggest government intervention in an economy ever. So much for “free market.”

Do these financial companies deserve to be bailed out? They created, marketed, and sold risky mortgages. The market has determined that the bundles that the financial companies created to market these mortgages to investors are worth nothing. That is, the supply of these mortgage securities is high while the demand does not exist. If you can’t sell a product, it is “worth” $0.

Through the bailout, the government is saying that they’ll pay a certain amount for the securities the market has determined are worthless. In addition, the government believes that they will make money throughout this process. That is, in the future, either someone else will buy the securities or the rate of default on the mortgages will improve.

The default rates won’t improve unless conditions improve for homeowners. This plan does not address the homeowners, only the financial industry.

It’s unfortunate that greedy companies and greedy people, as well as homeowners who were led to believe they could afford their mortgages, won’t be forced to suffer the full consequences of the creation and purchase of risky mortgages. This sends the message that corporations and homeowners are encouraged to lie, cheat, and steal: Once the situation gets bad enough, all past sins will be forgiven.

Nevertheless, a bailout of this size is most likely necessary to help stabilize the economy, and without it, the world’s economies might experience a devastating collapse in a manner never experienced before.

Is a $700 billion bailout the right course of action? Should failing companies and defaulting homeowners be saved? What is needed for the global economy to move in the right direction?

Photo: epicharmus

When I heard the news that the Federal Reserve Bank of New York is making $85 billion available to American International Group in the form of loans, one of my first questions was about the source of the money. Does the Federal Reserve keep an emergency fund available to bail out companies during financial crises or does it just create the money out of thin air?

My question was answered on last night’s episode of Marketplace. Since the private sector refused to help AIG, the government stepped in to prevent financial meltdown. The $85 billion is taxpayers’ money, but it’s not funded by taxes we’ve paid. The U.S. Treasury Department sells securities to the public in order to raise the funds used for this bail-out. Yesterday, the Treasury Department auctioned short-term investments. The 35-Day Treasury Bill issued yesterday raised $40 billion in one day.

This auction process allows the investor to name their interest rates, and the Treasury picks the best offers. Many people were willing to lend the government money at a 0% interest rate. The median interest rate for all bids was 0.05%. The Federal Reserve, in turn, is lending money to AIG at a variable rate currently above 11%. If AIG is able to sell its assets and pay back the loans to the Federal Reserve over the next two years, the government stands to make a lot of money thanks to the wide spread in interest rates between the Federal Reserve’s borrowing and lending.

Even if AIG does not pay back the loan, the Treasury Department will still be able to pay back its investors. The government will use whatever means necessary in order to pay the investors as agreed, possibly printing money if necessary.

The fact that the government was able to raise a large amount of money at very low interest rates shows that investors are nervous. They’re willing to invest their money at a very low rate in return for a very safe investment.

Where does bailout money come from?, Marketplace, September 17, 2008
Treasury Auction Results (PDF), U.S. Treasury Department, September 17, 2008

Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) are companies that buy mortgages from lenders. Those lenders, by selling loans to the companies, have more cash on hand to lend to other individuals. Fannie Mae and Freddie Mac then “repackage” the mortgages and sell them as securities to other investors. These are guaranteed investments. Investors will receive the returns promised regardless of the quality of the underlying mortgages.

Those promises have been in danger lately, as news traveled that without intervention, Fannie Mae and Freddie Mac might fail. The companies were having trouble making their obligations to investors.

Backed by the government or not?

While Fannie Mae and Freddie Mac are government sponsored enterprises, the government until recently did not back the companies and guarantee that investors would be paid in the event the companies failed. That was changed recently when the Federal Housing Finance Agency, a government organization, took the two organizations under conservatorship. Shareholders in the two companies will find that their shares will be devalued even beyond the recent declines in order to help the companies pay their obligations. The U.S. Treasury now has the ability to provide funds directly to these companies to ensure their stability.

Interestingly, Herb Allison will be the new CEO of Fannie Mae. Astute Consumerism Commentary readers recognize this name as the former CEO of TIAA-Cref. Many reports from current and former TIAA-Cref employees tend to agree that Mr. Allison did not do such a great job of cleaning up the mess left by his predecessor at that company.

The possible effects of the takeover

Dean Baker, an economist with the Center for Economic and Policy Research, a think tank in Washington, D.C., says, “I think that the immediate impact will be somewhat positive. You’ll see some drop in mortgage rates because it’ll decrease the uncertainty” that had pushed mortgage rates up this summer.

Baker says he can imagine a drop in mortgage rates of around a quarter of a percentage point, give or take about 5 basis points. A basis point is one-hundredth of a percentage point. “It’s something,” he says. “It’s not going to make a huge difference.”

Why aren’t people buying homes right now? It’s not because interest rates are too high and it’s not because the majority can’t qualify for loans (though I’m sure many people in fact cannot). House prices are still too high. Well, a buyer perceives prices to be too high for what he or she believes to be the real value of the house, but perception is reality. If they believe the price to be too high, they won’t buy, regardless of the mortgage interest rate.

I’m not an economist, but I think in general prices need to fall farther before the housing market picks up and people start believing there is a “buyer’s market.” I don’t think a drop in rates of a quarter of a percentage point will make that big of a difference.

If this takeover amounts to not much of a difference in the lives of Americans, is it really worthwhile for the government to seize these semi-private, semi-public corporations? Remember that now that they are backed by the government, taxpayers are footing the bill for rescuing investors in Fannie Mae and Freddie Mac (that is, the lenders). Perhaps, if you consider that the alternative—letting the companies fail—might have a more devastating effect on the economy.

Photo: respres
How the Fannie and Freddie takeover affects you, Bankrate.com via MSN MoneyCentral

When the Environmental Protection Agency decides which regulations to create and enforce, just like any business deciding to pursue a project, it runs a cost-benefit analysis. While typical businesses might compare the costs of obtaining equipment and paying salaries with the anticipated income from the project, the EPA has to consider grander variables.

If the EPA is considering whether to adopt a regulation that would require all office buildings in the United States to reduce hazardous air particles, as an example, the organization would compare the cost of implementing and enforcing the regulation with the lives that would be “saved” by the regulation’s implementation.

The only way to do a direct comparison between an amount of money and a number of human lives is by giving each life a “value.” So how does the organization decide how much a statistical human life is worth? According to the EPA, the value of a human life has nothing to do with wealth or ability to earn income, so what you might receive in a wrongful death suit or insurance settlement is not related to this figure. The EPA chooses to value the human life by building an average figure based on two different studies with survey questions like, “How much more money would you expect to see in your salary if you took a job where your life is in danger?”

It’s interesting to note that this calculation values all human life equally. The value of a hedge fund manager, a CEO of a huge corporation, or a humanitarian doctor curing children from diseases in depressed countries is no more and no less than the value of a bum on the street. A newborn baby with almost a century of possibilities is worth no more and no less than the 105-year-old on life support in the hospital, nearing his last breath.

If all life is worth the same amount, what is that dollar figure? As a result of the latest calculation, the EPA’s valuation of a statistical life dropped significantly. Previously, the value of a human life was $7.8 million and the revised value is now $6.9 million. Here’s how the Associated Press describes a hypothetical result of this change:

Consider, for example, a hypothetical regulation that costs $18 billion to enforce but will prevent 2,500 deaths. At $7.8 million per person (the old figure), the lifesaving benefits outweigh the costs. But at $6.9 million per person, the rule costs more than the lives it saves, so it may not be adopted.

A lower value placed on an individual’s life for the purpose of statistics will result in fewer regulations passing. Additionally, the decreasing value of the dollar in comparison with the rest of the world currencies implies that human life is also decreasing value.

The $6.9 million is not a real figure. You cannot replace a person with this value of money or any other. So the calculation is arbitrary. The EPA can choose which studies it wants to include in its calculation. In fact, the EPA’s water division refuses to accept the larger organization’s most recent two decreases, using the earlier calculation of $8.7 million per person in today’s dollars.

One final note: This calculation is only valid for “American” lives, which I presume would mean anyone living in the United States. There is no indication of whether “foreign” lives would be worth more or worth less.

Do you think the change in valuation is necessary or fair? Is the Environmental Protection Agency serving a political agenda? Does this sort of valuation, where all American lives are valued the same, even make sense?

AP IMPACT: An American life worth less today, Associated Press

For those of you still concerned about receiving your economic stimulus payment, don’t give up hope. Last week, I received a letter from the United States Treasury informing me my wait would soon be over. The letter indicated that I can expect my payment of $600 (which was accurately predicted by the stimulus payment calculator) by May 23. I also knew that I would be receiving a check rather than a direct deposit because I had tax due when filing my return earlier this year.

May 23 came and went. I didn’t receive the check in the mail. While the government did send 1,500 payments to the wrong accounts via direct deposit, I maintained hope that my check would arrive safely, if a little late.

When I arrived home today, my payment was waiting for me in the mailbox. Here is the proof.

Now I need to decide what to do with the money. Paying down my student loan debt is probably the most prudent option, but I have been eying a new telephoto zoom lens. This check would get me halfway there.

Has anyone put their stimulus payment to good use yet?

Welcome to Consumerism Commentary. If you are new here, consider subscribing to our RSS feed (more info here). Consumerism Commentary always has the latest information about the economic stimulus payment.

Several disappointed people contacted me today. They expected to receive their economic stimulus payment deposited into their bank account today but they have not seen the deposit posted online yet. According to the payment schedule, individuals whose Social Security numbers end with two digits between 00 and 20 and who have direct deposit banking information on file with the IRS should have received their deposit by today.

If you’re looking for your money, check the schedule first to ensure you’re not jumping the gun. Keep in mind that this schedule is only “accurate” for those who filed their taxes by the usual deadline.

After you’ve verified that the government expected you to receive your payment already, you can fill in a form online to ask the IRS about the status of your payment. This form will apparently only work for those who filed their tax returns over 6 weeks ago, so it sounds like the government may be late with some payments depending on when you filed.

Don’t confuse the “where’s my stimulus payment?” form with the “where’s my refund?” form.

Important clarification! It’s important to consider that if you filed your taxes through a third party like H&R Block or Turbotax, you may have opted for an accelerated refund in the form of a refund anticipation check, refund anticipation loan, or similar product. If you received an accelerated refund, you will receive your stimulus rebate (if you qualify) via paper check, not direct deposit. Also, if your tax preparer deducted any fees from your tax refund, your stimulus payment will arrive via paper check, not direct deposit. Furthermore, if you filed through a third party and owed taxes, the IRS will not have your direct deposit information, so if you qualify for a stimulus payment you will receive it via paper check.