NY Times, September 29, 2008, 3:30 pm
September Surprise
By Floyd Norris
The House has voted down the bailout bill, to everyone’s surprise.
So much for party discipline. This bill was supported by John McCain and
Barack Obama, the presidential candidates who, between them, have the
support of nearly every member of the House.
But a majority of the House voted along with Bob Barr, the Libertarian
who said, “We need to make Wall Street take the hit for its
irresponsible investment decisions, and Ralph Nader, the independent
candidate who described the bill as “a bailout for Wall Street crooks.”
I had assumed the House leadership could assure that enough members of
both parties held their noses and voted yes to gain a narrow margin for
passage. But what we have here is a rejection of what Mr. Nader calls
the two “corporate candidates.”
The vote came just as I finished the preceding post, called October
Surprise. Let’s hope the banking industry gets that far.
The banking industry is in trouble with or without this bailout. Its
efforts to change accounting rules to hide its problems are sad and
appalling. The defeated bill would have authorized the Securities and
Exchange Commission to suspend the mark-to-market rule, which forced the
banks to admit how badly they had gambled and lost. The S.E.C. has
already yielded to political pressure and barred short-selling in
financial stocks, so it is possible it would yield to the accounting
pressure as well.
“Truth is the first casualty,” is an old line to describe war reporting.
It could also apply financial reporting at a time of crisis.
Economists tell us that markets where short-selling is barred are less
likely to be efficient, and more likely to be overpriced. So we present
investors with companies that are probably overpriced and doing their
best to hide the low current value of their assets. For some reason, few
want to buy.
Yesterday, on “This Week” on ABC, Newt Gingrich argued for suspending
the mark-to-market accounting rule, on the ground that market values now
are unreasonably low. To support that thesis, he pointed out that both
the secretary of the Treasury and the chairman of the Federal Reserve
think prices are lower than they should be. They make that claim in
arguing that the government can pay above-market prices for dodgy assets
and eventually make a profit.
Did you ever think you would hear a leading conservative say government
officials are better judges of value than the market?
Absent the defeated bailout, the government is picking off weak banks
one by one, arranging takeovers (takeunders might be a better term) when
they can. In both the Washington Mutual and Wachovia deals, the
depositors are doing fine, while shareholders suffer. That discourages
bank runs by depositors, which is good, but encourages what we will call
“stock market runs” by shareholders of any bank that might be in the
same league as those banks. (If your bank ever bragged about its
mortgage lending, look out.)
I still think Congress will salvage something — presumably by coming up
with changes that assuage enough dissenters — but with the Jewish
holidays starting this evening, it could be a while before that happens.
The risk of a big bailout always was that it would make investors think
the banks were in even worse trouble than they appeared to be. Henry M.
Paulson Jr., the Treasury secretary, tried to structure this bailout as
a purchase of assets, so that banks taking the money would not be
tarnished by doing so. But the decision to force those banks to turn
over equity may have killed that move, and the changes to be made in the
bill now could well make it more punitive. That could be good for a
sense of justice, but bad for containing the crisis.
This is looking like a very interesting week in the markets, which were
doing none too well before the September Surprise.
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