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September 23, 2008

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» The final bill takes shape. from The Volokh Conspiracy
Here’s a recap. Paulson sought to give Treasury the power to buy mortgage-related assets. A power grab!, said the critics. So congressional Democrats sought to give Treasury the power to buy mortgage-related assets, non-mort... [Read More]

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Roach

1) Why not just let them fail? Chapter 11 and 7 exist precisely for these kind of situations?

2) Paulson still seems confused this is a liquidity crisis. It's a insolvency crisis, with huge amplified insolvency threatened by deleveraging and related CDS exposure. Let this entire risky game of exessive leverage, non-involved CDS, etc. tumble. Unfortuantely for those reasons, this is much bigger than a mere housing value crisis.

3) Paulson is doing what government's always do in a crunch: inflate, inflate, inflate. They inflated in good times, indifferent times, and now bad times. Eventually the malinvestment must be liquidated. Why not do it all on the cheap? Commercial banks still have depositers and access to the discount window.

4) There is nothing in place to prevent this from happening going forward other than investor fears of additional crashes, but so long as the managers have all the upside and little downside risk capped by bankruptcy, this will continue. Since huge risks are being taken with third parties with nearly unlimited upside, compensation packages based on winning bets, and a capped downside because of finite resources and bankruptcy, some kind of regulation would be appropriate considering the third party risk.

That all said, if we're going to do this, your proposal to make it painful to participants is a sound one. It seems at times Bernanke and Paulson don't know how bankruptcy works and that earmarked assets held in trust--like commodities or stocks for investors--don't go up in smoke, unlike equity in the bankrupt entity itself.

LAK

Why not let them fail? Because we'd all suffer greatly, if you beleive whatthey are saying. Credit markets will run dry. The flow of money will cease. Jobs will be lost. Like usual, the little guy will probably suffer the most.

Why not adequately regulate them ex ante is the real question. Securitizing mortgage debt never should have happened in the first place. Divorcing the risk of loaning money from any particular mortgage and spreading the risk throughout the system caused teh bubble. Allowing AIG to insure the value of these securities was downright negligent. The very nature of these bundled debt securities is such that they're only going to lose value when they ALL are losing value. A bubble and a popping was pretty much the only possible outcoem for such a system (which was fed by greed and fees - it's funny now to hear the stories of mortgage brokers telling people to lie about their income and to sign up for ARMs)

I'm all for claw backs of suspect payments made. It seem incredibly important from the F word perspective. Dividends and bonuses and salaries should be disgorged as well.

So much for the efficient outcomes of the free market huh? An ounce of regulation...

A. Daniel lFeldman

I posted a claw back proposal as a comment to Eric Posner's blog on the new bill. I think it tracks your idea. I'm writing to disclaim plagerism; I hadn't yet read yours.

A virtual bankruptcy act to claw back payments made to officers or employees (maybe only that who got more than &1 a year) is a really good use of the preference power and it can be coupled with a clause that says if you don't dump your bad paper, and then become insolvent, your officer salaries and options can be recovered if the refusal to dump was imprudent. Wouldn't juries have fun with that; lots of people who've been forclosed will be on the juror list.

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