Small Biz No Fan of $700B Rescue Plan

Small Biz No Fan of $700B Rescue Plan  – Gee, and to hear the Main Stream Media – you might think Small Business couldn’t wait for the Bailout.

Dunstan Prial FOXBusiness

The anger out in America triggered by Washington’s proposal to rescue the U.S. financial system to the tune of $700 billion is palpable — almost visceral.

That’s hardly surprising, given the broad knowledge that the executives in charge of the giant now-faltering financial institutions that stand to benefit most from the bailout make more money in a year than most Americans will in a lifetime (or two).

Small-business owners, in particular, are having a hard time reconciling the concept that bosses who essentially gambled big and lost will get another opportunity to play in the casino.

“They screwed up with all that money and they’re rewarded by a bailout from the government,” said the owner of Creative Design & Landscape, a Doylestown, Pa., contractor.

“Can you imagine if any one of us screwed up that way? I wish the government would come bail us out,” he quipped.

Talk to just about any small business owner and the response is virtually the same.

“It think it’s ludicrous. They’re taking my money to bail out these people who made major mistakes with their lending, but they can’t help the little guy — they don’t bail out hard working Americans. It’s not fair,” said 64-year-old Larry Peterson, owner of The Dog House restaurant in Bradenton, Fla.

An unfortunate paradox of these difficult times is that these very same business owners, in the same breath used to condemn the bailout proposal, make strong cases for why some form of action to ease clogged credit markets is so necessary.

The Doylestown contractor said his business is off sharply because his potential clients can’t get the home-equity loans and extra cash from mortgage refinancings typically used for the type of home improvements in which his company specializes.

The credit crunch, he said, has had a “direct affect on our jobs. When they’re not able to raise the money, that directly affects us as contractors.”

He’s not alone.

According to the 2008 Small Business Mid-Year Economic Report from the National Small Business Association, a trade group, 67% of small businesses have been impacted by the collapse of global credit markets brought on largely by the bursting of the U.S. housing bubble. That’s up from 55% in February.

A whopping 79% of small business owners, according to the survey, believe the immediate future doesn’t hold much promise, predicting either a flat economy or an outright recession awaiting on the horizon.

Peterson, proprietor of The Dog House, said the lousy economy forced him to close down earlier this week, and he will remain closed unless he can find an investor to help him pay off $300,000 in loans he’s already carrying.

Banks are no longer an option, he said.

“The economy is killing me and our government is not doing a damn thing about it. It’s terrible,” he said.

In fact, the government is trying to do something. But is it the right thing?

Treasury Secretary Henry Paulson, in testimony this week before decidedly skeptical members of Congress, argued repeatedly that, while imperfect, the plan to create a government-run haven of sorts for up to $700 billion in bad assets held by financial institutions is the only way to ward off a complete disaster. Hasty approval is needed, according to Paulson, to prevent tighter credit markets, significant job losses and a sharp rise in home foreclosures.

And Paulson assured elected leaders that he’s sensitive to the visceral concerns of the politicians’ constituents.

Are U.S. taxpayers best served by a $700 billion bailout of arguably mismanaged, for-profit financial companies? “This is all about the American taxpayer. That’s all we care about,” he said.

How about the widespread anger at the missteps that brought us to this point? “I share the outrage that people have. It’s embarrassing to look at this, and I think it’s embarrassing to the United States of America,” Paulson said.

But few small-business owners heard the nationally televised daytime testimony. They were working.

President Bush gave a prime time speech last night to address the widespread anger and confusion surrounding the plan.

It was sorely needed, because even some of the strongest detractors of the Bush Administration’s rescue plan acknowledge that doing nothing might be worse.

On Wednesday, Sen. Charles Schumer, D-N.Y., said there’s a consensus in the Senate that “we need to do something,” and that something will get done perhaps as soon as this weekend.–billion-rescue-plan/

An Argument Against The Bailout – By: Cody Willard

It doesn’t take much to get Cody Willard riled up about the $700 billion Wall Street bailout package recently defeated by the U.S. House of Representatives.

“We’ve had 200 years of private ownership of profits and losses, and somewhere, we came up with the idea that we could never have a down year,” Willard said. “Not every year will be an up year.”

Willard, a Ruidoso native who co-hosts the show “Happy Hour” on the Fox Business Network in New York, was in town Monday and Tuesday, working on a feature on his hometown.

The assignment will give him a chance to show off the village he called home until his high school graduation in 1991, but he’s made a name for himself in the concrete canyons of New York City, both as a financial analyst for Fox and as the founder of an investment management company.

As such, when Willard speaks about the state of the national economy – and the government’s attempt to bail out some major investment firms – his word stands to carry some weight.

“If the Depression taught us anything, it’s that government socialism only exacerbates the problem,” Willard said. “This would be the greatest redistribution of wealth upward in the country’s history. There’s nothing beneficial to anyone but the big firms on Wall Street.”

Unsurprisingly, Willard isn’t in favor of the proposal, which was voted down by lawmakers in Washing-ton on Monday, but is likely to be re-introduced soon with significant changes.

“I don’t think we’ll be able to stop it this time,” Willard said. “It will be tough to beat, but then I thought the first bill wouldn’t be defeated, either.”

Willard has written several articles on the proposed bill on the Web site, and has reported about 99 percent of all comments are in agreement with him against the bailout package.

His most recent post was written while in Ruidoso, in which he reported a majority of the locals are against the bill as well.

“I don’t know a single person here who is for the bailout,” Willard writes. “A well-off elderly couple even laughed today when I asked if they thought they’d have trouble getting a loan from the local bank if Wall Street isn’t bailed out.

“I said, ‘what’s funny?’ They said their local bank hasn’t overextended itself and has prepared itself for the just-started local real estate downturn and that they’ve got capital to put down if they wanted to.”

That comment illustrates what Willard believes about the national economy – that it runs not on the backs of major investment firms in New York, but on the hard work and ingenuity of small businesses and small investors throughout the country.

“The small businesses that are the lifeblood of small communities like this are also the life blood of the country,” Willard said. “Taxing them to bail out big banks and investment firms can’t help anybody.”

09/29/08 -Wall Street Bail Out Bill of 2008 Fails: A Victory for Freedom…and the Stock Market Too


Wall Street Bail Out Bill of 2008 Fails: A Victory for Freedom…and the Stock Market Too

By Cody Willard

I am shocked that our democracy might work after all.  Capitalism and private ownership (in this case of losses) still matter in this country after all.

As I wrote last week – 

“We probably hit DJIA 10,000 in a heart beat if we don’t pass this bill. We probably spike 500 or 1000 points in the near term if we do pass this bill….and then we’ll eventually see DJIA 9,000 or lower because central allocation of capital is always politically-driven and not profit-driven…and only profits make stocks go up. These guys who think this destruction of capitalism and the right to profits is a bullish thing are dead wrong.”

And the market is indeed crashing on the news that this Wall Street Bail Out Bill of 2008 isn’t looking like it’s going to pass.   Which means I’m going to be getting bullish again, because in the long run, the only thing that matters to the stock market and this economy is how much profits are running through the system…and we just ensured that our profit-driven system (that does indeed cycle and create both booms and busts as it has always done, but that over time has created the most wealthy nation in the history of the planet) remains intact.  

I’m sure not going to be in any rush, because the bad times that were coming because the virtuous cycles had turned to vicious cycles anyway and no matter what we’re going to be in for some more pain in the near-term in this economy (and therefore also likely in the markets)…

But I’m going to be getting much more bullish (and probably start buying stocks again) much sooner than I would have if this bill had passed.

Want to Know What “Mark To Market” Is – Elizabeth MacDonald Will Tell You

By Elizabeth MacDonald – Fox Business

October 1, 2008 12:28PM

A New Rule Change That Could Hurt Taxpayers

A little understood but very important accounting rule being blamed for the $523 bn in losses and writedowns at financial companies around the globe is now being retooled by market and accounting regulators, in a last-ditch attempt to stop the steam pipes bursting and to get banks lending again.

However, the move matters greatly to taxpayers, because analysts now say that banks who own severely damaged mortgage-backed bonds may be able to use the changed rule to get higher prices for these securities if they auction them off to the government as now planned in the $700 bn rescue bill.

The rule change comes just at the end of the third quarter, which means companies may be spared the pain of big third-quarter losses and writedowns.

And it comes as the Federal Bureau of Investigation is probing Wall Street firms to search for criminal securities fraud in the valuation of these bonds.

How it Works

Here’s how it works.

When borrowers get loans, the banks typically sell these loans to Wall Street firms, who then repackage them as bonds backed by the value of a house or property. Wall Street then sells these bonds to mutual funds, pension funds and all sorts of investors around the globe.

As house prices drop in value, so, too, do the value of these bonds, which vary in type as mortgage-backed securities, collateralized debt obligations (CDOs), even CDOs of credit default swaps or exotic bonds called CDO-squareds.

The accounting rule says that companies that own these bonds must value these bonds each quarter as if they were going to be sold immediately. That process is called “mark to market.”

But since these bonds have dropped in value, they are regarded as Kryptonite because no one wants them.

Companies must then book these losses on these bonds even if they did not sell them. “Mark to market” has since been jokingly called “mark to mayhem” and “mark to madness.”

Relaxing the Rules

The Securities and Exchange Commission and the Financial Accounting Standards Board have now “clarified” existing mark to market accounting rules saying companies have leeway in assessing value, and do not have to use the current market price, which is of course way down.

The SEC and the FASB basically say that companies are not required to book fire sale prices when valuing these illiquid assets, including mortgage-backed bonds. Instead, management can use their own internal assumptions to measure fair value.

Specifically, the accounting regulators said that companies were initially supposed to use fair values based on an “orderly transaction” between willing market participants. However, “distressed or forced liquidation sales are not orderly transactions,” the SEC said in a statement. 

Don’t Blame the Rule

It’s important to remember here that no one really knows the value of these bonds and whether they are worth more or less than what the market says they are worth because the cash flow is or is not really there.

It’s important, too, to remember that it’s not just an accounting rule that can be held to blame for record losses, but the fact that banks got themselves into trouble by recklessly giving too many loans to borrowers who either were irresponsible or could not afford them.

It is no small irony that the government’s plan essentially is an attempt to put a floor under these bad securities that were written down according to a governmental accounting body’s rules.

The question now is whether this accounting rule change will reflect the true value of these assets and whether doing so will force Congress to dole out the full $700 bn–or more–to rescue these assets.

Record Losses

The losses have caused banks to be in violation of their statutory capital requirements, forcing them to raise capital to plug balance sheet holes. The losses are also the reason why a growing number of financial companies have shut down, been forced into mergers, or been nationalized.

And the losses are behind the reason why the Federal Reserve and central banks around the world have pumped record amounts of liquidity into markets, and have pushed the US central bank and the US Treasury to let banks dump their illiquid mortgage-backed bonds for more liquid Treasuries.

The decision by the Securities and Exchange Commission and the Financial Accounting Standards comes as the London interbank offered rate, or LIBOR, hits record highs. Many adjustable rate mortgages–including dodgy no income verification loans and interest only loans–in the US are due to reset to higher interest rates because they are tied to LIBOR, which is the rate that banks in Europe charge each other for such loans.

As more loans go belly up due to the higher rates, that means more losses for banks and financial companies.

The financial-services industry has been lobbying the SEC and FASB for months now to alter the rules, a lobbying that picked up speed in the wake of the new $700 bn Congressional rescue bill that would set up a reverse auction mechanism to let banks unload these damaged bonds onto the government. Congress may include the change in its new version of the rescue plan.

The American Bankers Association had complained to the SEC that auditors were forcing banks to value these bonds at unrealistically low “fire sale” prices, rather than at the higher values the banks believe these bonds should be worth in an orderly market.

There is also some talk in Congress of a temporary or permanent repeal of the mark to market rules to allow for more long-term valuation of assets and loans.

The Problem with the Rule

The problem with this accounting has always been what critics say is its punitive effect.

Companies have to record resulting losses from this mark-to-market exercise, which some say is the equivalent of sticking a finger in the wind, as if they actually lost cash even if they did not actually sell the bonds at all, and even if the cash flows are still coming in higher than what the market says the assets are worth (Fannie Mae and Freddie Mac have said that they are solvent on a cash-flow basis, notes economist Brian Wesbury).

The writedowns taken by some firms have triggered a cascade of writedowns at other companies, as prices are seen to be set in the marketplace. For example, E*Trade last year priced some mortgage-backed bonds at 27 cents on the dollar, triggering writedowns at other firms. Merrill Lynch (MER: 26.24, +0.94, +3.71%) sold assets to the vulture fund Lone Star at 22 cents on the dollar (really 6 cents if you consider that Merrill financed 75% of this sale), also causing other writedowns.

JPMorgan Chase (JPM: 49.19, +2.49, +5.33%) bought Washington Mutual (WM: 0.16, +0.00, +0.00%) at a garage sale price, triggering fresh new prices for assets on its books that triggered anew mark-downs on the assets at Wachovia, which was shephered by the Federal Deposit Insurance Corp. into the arms of Citigroup (C: 22.84, +2.33, +11.36%). 

Risk to Taxpayers

But the $700 bn rescue plan makes the change potentially more damaging to taxpayers because the relaxation of the accounting rule means banks may be able to keep higher prices on these bonds and then unload them at higher prices at auction to the Treasury. 

“It is not in the interests of U.S. citizens and taxpayers to abandon mark-to-market accounting for a proposal in which taxpayer funds are being used,” says Janet Tavakoli, founder and president of Tavakoli Structured Finance and one of the best market analysts on the dangers of credit derivatives.

Tavakoli adds: “If we would have to sell the assets at a loss due to downward moves in market prices, we have a right to know that. If the assets have permanent losses so that even if we hold to maturity we would have losses, we have a right to know that too. At any given time, we have a right to know what our ‘investment’ is worth.”

Tavakoli adds that the danger is that the government’s new portfolio managers “can claim they are making money” while “the assets are declining in value due to defaults or permanent value destruction of collateral. This situation can continue for a long time to create the false appearance of profitability.

Tavakoli notes that “in other words, U.S. taxpayers can be told they are making money on their $700 bn investment, when in reality they are losing money. I would rather know the market price, even if the news is bad news.”

Loophole Dangerous to Taxpayers in the Rescue Bill

And check out this sentence I’ve highlighted in italics in section 101 of the new bill, entitled “purchases of troubled assets”–it could also mean even higher costs to taxpayers:   

(e) PREVENTING UNJUST ENRICHMENT. In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. This subsection does not apply to troubled assets acquired in a merger or acquisition, or a purchase of assets from a financial institution in Conservatorship or receivership, or that has initiated bankruptcy proceedings under title 11, United States Code.

This section “probably indicates that JPMorgan Chase can sell the troubled assets of WaMu to the US government and make windfall profits,” notes market analyst Richard Suttmeier. “Same for Citigroup with regard to Wachovia’s troubled assets. Other future deals as well. That is a direct bailout of Wall Street on the back of taxpayers.”

A Better Way

Check out what Tavakoli says is a better way than the $700 bn bailout plan:

“Rather than adopt any form of the Paulson Plan, which uses billions of taxpayer dollars and forces risk and potential losses on taxpayers–instead of those who enjoyed the gains–I advocate an alternative.”

“Instead of the Paulson Plan, we can force creditors to accept a restructuring plan (this was done during the Great Depression). Creditors (debt holders) including credit default swap counterparties would be compelled to accept a restructuring plan. That requires partial forgiveness of debt in many cases and/or a debt for equity swap (in which the government takes equity stakes in these companies).”

“If we are determined to violate personal property rights, I prefer it be done through a forced debt forgiveness and a forced capital restructuring (debt for equity swaps), rather than through a massive bailout (any of the various forms of the Paulson Plan).”

“The Paulson Plan destroys capitalism (those who stood to gain–and already made off with large gains–should bear the risk) and violates the spirit of democracy established by the Founding Fathers of the United States.”

VIDEO: Why Fannie Mae Reform Failed – THE MOVIE


VIDEO: Breaking Trust With The People – The Crisis & The People

Dave Ramsey’s Common Sense Fix For The Bailout

While I’m still opposed to a “Bailout” – I’d like to see the following items added to any “Bailout Package” presented for a vote:

1) Suspend the operation of the Community Reinvestment Act (CRA). The Act that fostered the development of the NINJA and LIAR Loans. No more NINJA or LIAR Loans.

2). Remove the Boston Federal Reserve Manual from use. Reverse the changes made in mortgage  underwriting standards by this Manual. This is the manual that was used to coerce Banks into making the worst of the sub-prime loans.

3). Implement the proposed 2003-2004 Accounting and Oversight Provisions for Fannie & Freddie that were blocked. Are there Congresspeople who would stand up today and say – “There is no problem with Fannie or Freddie” ?

These suggestions do not require an outlay of taxpayor cash.

Lets correct the problem before we try to clean up the mess.


Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer.

As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:

Common Sense Plan.


A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction of the current proposal.


A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.


A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy.

This will enable all Americans to have more stable jobs and retirement investments that go up instead of down.

This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to stand up, speak out, and fix this mess.

Read Ramsey’s Article Here:

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