October 1, 2008

While Washington Wilts, Soros Schemes

Hatched by Dafydd

With the failure of the intricately worked-out compromise bill to rescue the frozen credit market, torpedoed on Monday by House Republicans and many House Democrats -- the former on ideological grounds, the latter because they didn't want to be left holding the baggage -- the hard Left is vulturing down from the trees to muscle into the hand.

George Soros, who I believe needs no introduction, now proposes his own version of a bailout -- a real bailout, not a "buy out" or rescue -- according to an article by Alexander Bolton in the Hill:

Soros has outlined his plan in an opinion editorial in the Financial Times and circulated a concept paper among decision-makers.

Specifically, the liberal philanthropist has proposed that government funds should be used to recapitalize the American banking system by purchasing equity in banks and investment firms.

Let's be clear: What Soros proposes is for Treasury to "recapitalize" the banks by buying about $500 billion of equity in them. From George Soros' opinion piece in the Financial Times:

This is how it would work. The Treasury secretary would rely on bank examiners rather than delegate implementation of Tarp to Wall Street firms. The bank examiners would establish how much additional equity capital each bank needs in order to be properly capitalised according to existing capital requirements. If managements could not raise equity from the private sector they could turn to Tarp.

Tarp would invest in preference shares with warrants attached. The preference shares would carry a low coupon (say 5 per cent) so that banks would find it profitable to continue lending, but shareholders would pay a heavy price because they would be diluted by the warrants; they would be given the right, however, to subscribe on Tarp’s terms. The rights would be tradeable and the secretary of the Treasury would be instructed to set the terms so that the rights would have a positive value.

Private investors, including me, are likely to jump at the opportunity. The recapitalised banks would be allowed to increase their leverage, so they would resume lending. Limits on bank leverage could be imposed later, after the economy has recovered. If the funds were used in this way, the recapitalisation of the banking system could be achieved with less than $500bn of public funds.

This is precisely the breach in the wall of separation between bank and State I most fear -- on steroids. With half a trillion dollars of money to swing, we could probably buy a controlling interest in the top dozen or score financial institutions.

Soros does not say whether this equity interest would include voting rights; but in practice, the 800-pound gorilla doesn't need voting shares to bully the institution. For example, imagine the next Democrat in the White House (Barack H. Obama or someone later) issuing an executive order to divest all equities from banks that do business with Israel, as a way to pressure Israel to sign a suicidal agreement with Hezbollah.

No matter how much of the actual vote the private investors retain, the threat to dump 30% or 40% of the company's stock at fire-sale prices, thus tanking the rest of it, would likely be enough to "encourage" the BoD to obey orders.

I'm not entirely clear what Soros means by "warrants." Does he mean what amount to stock options, so that the Treasury can buy even more stock in the future at the same price, even if by then, the share price has risen? (That's at least one common financial use of the term "warrant.")

If so, this is a license to loot the financial institutions exactly the way that so many top executives do: By bargaining for a huge stock-op package, running the share price up by flakey (but temporary) accounting, and then quickly exercising the options and selling them in the same transaction -- before the funny CPA tricks become known and the stock plummets. After selling the stock ops high, the exec could even turn around and short a bunch more stock, knowing that the financial shenanigans are bound to come to light soon.

Soros made many of his billions in currency exchanges, which are highly manipulable by political lobbying; he is very experienced with pushing prices up when selling long and down when selling short; he is known as "the man who broke the Bank of England." Thus it's hardly surprising that he wants Treasury to implement the equity scheme he advocates; if it's implemented, he himself admits (in this very opinion piece) that he intends to profit massively.

As he put it, "Private investors, including me, are likely to jump at the opportunity." The opportunity to do what? To pull billions of dollars out of the banking industry... which appears to be just what he wants the feds to do, but on a much grander scale.

According to the Hill, he has already presented this scheme to Barack Obama, the man he has long supported for president, and to Rep. Jim Moran (D-VA, 95%), the earmark-loving, Murtha-supporting Democrat who famously blamed the "Jewish community" and the American Israel Public Affairs Committee for our invasion of Iraq:

Democratic Rep. Jim Moran (Va.) scheduled a meeting Tuesday afternoon with Robert Johnson, a former manager of the Soros Fund Management, to discuss the proposal.

Moran compared the proposal to Warren Buffet’s $5 billion investment in the investment firm Goldman Sachs Group in return for preferred stock and warrants to buy common stock at a discount. [There you go; evidently, my guess above is exactly what Soros means by "warrants."]

Soros has also contacted Sen. Barack Obama’s (D-Ill.) presidential campaign to share his views on the financial crisis and the best way to solve it.

Bolton in the Hill notes that Soros is determined to shift the House debate from the Paulson-Bernanke plan to the Soros scheme:

Soros, who is widely regarded as a financial wizard, could jumpstart congressional negotiations in a new direction, especially now that some strategists believe the Paulson-based plan that failed Monday will be difficult to revive.

One banking industry lobbyist said it would be very difficult politically for Republicans who voted against the package Monday to change their minds and vote for it a few days later. More than two thirds of the House Republican conference voted against the plan, which failed by a vote of 228-205.

Soros is also "widely regarded" as a leftist crank who has consistently predicted the collapse of Capitalism (even while he reaps billions from legal but morally questionable currency and stock manipulation). Besides his overt political support for the left, Soros created and heavily funds the Open Society Institute, a screamingly leftist grant-dispurser with more than $850 million; it funnels millions of dollars each year to such "nonpartisan" groups as NARAL, ACORN, La Raza, MoveOn.org, the Lynne Stewart Defense Committee, the Death Penalty Mobilization Fund, and the Death with Dignity National Center. (Evidently, Soros supports the death of the innocent, but never the guilty.) You can read a somewhat more complete list of groups funded by the OSI, thus by Soros, here.

Anything he proposes is going to be designed not only to push more socialism and Statism -- both of which directly benefit his personal financial portfolio -- but also designed to improve his future business prospects by electing a much more left-liberal Congress in November.

So now we have a race: The Senate may be about to vote for the Paulson-Bernanke bill with a couple of sweeteners -- some minor and temporary tax relief to pique the interest of a handful of Republicans, and even more low-cost housing mortgages for the poor, to drag in those liberal House Democrats who rejected the bill because it retains our generally capitalist economy.

But at the same time, the Soros scheme for the federal government to buy the banks (unadulterated liberal fascism, in case you missed the point) is making the rounds of influential Democrats, such as Jim Moran -- who has the ear, and perhaps the earmarks, of Squeaker of the House Nancy Pelosi (D-Haight-Ashbury, 93%).

Which side wins? I suppose it must depend upon whether Democrats want to run on fiscal responsibility -- say, by nominating Hillary Clinton -- or on a platform of massive but unspecified and decidedly liberal "change;" to more and more Statism; to curtailing freedom of speech; to criminally prosecuting political differences; to enact huge tax increases and even more gargantuan spending hikes; and to deprivatize and nationalize as much of the economy as possible. The party might signal the latter by nominating an anti-Hillary... say, somebody who has argued in favor of all these OSI-type ideas; somebody who has a background in street-level leftist organizing, deep friendships with anti-American revolutionaries and radicals, and a voting record to match.

The Democratic House has the power to pass whatever it wants, if Pelosi makes the vote a "party discipline vote" this time. It's entirely in her hands, though anything really bad probably wouldn't get through the Senate. Again, everything hinges on whether House Dems are more interested in solving the problem or exploiting it in the election.

Neither of these indicators comforts me.

Hatched by Dafydd on this day, October 1, 2008, at the time of 5:03 PM

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Back in the precambrian era -- in fall of 2008, I of course mean -- we warned in several posts that when the federal government takes an "equity interest" (ownership in whole or in significant part) in private companies, it... [Read More]

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The following hissed in response by: hunter

I am no friend of Soros at all. I think he is one of the worst people behind our problems. I can only imagine the billions he has made off this volatility.
But I think his idea is not all bad.
It worked really well in Sweden. The gov bailed out the banks, and then made money selling back the shares.

The above hissed in response by: hunter [TypeKey Profile Page] at October 1, 2008 8:26 PM

The following hissed in response by: BlueNight

Soros is an Ayn Rand villain, but more terrifying because he is a smart, smart man, and is not a work of fiction.

He will be the power behind the throne of the glorious People's Democracy of America.

I wish communism was just a red herring.

The above hissed in response by: BlueNight [TypeKey Profile Page] at October 1, 2008 9:54 PM

The following hissed in response by: DrMalaka

Soros is a jerk to say the least, but his plan has considerably more to offer than the current one. Under Soros' plan the government would own most of the banks that own these CDOs, under the current plan the government would only own the CDOs. Which one do you think is better for the taxpayer?

The problem with the current plan is the risk. We have no upside currently, that is why getting equity (preferred or warrants) is so important. If the bank survives the taxpayer must profit, it was his money that made the profit possible. However, we can not profit by owning the CDOs.

The problem is your assumption that these CDOs are backed by real property and can go up in value is flawed. It is because CDOs are not mortgages, they are exotic debt instruments that work in a way nowhere like you assume.

If you are interested please ask and I can reply fully as to how these CDOs were created out of thin air and entire portions of them can be worth zero while other portions of the same CDO can be worth 100%. Understanding what the securities we are going to buy is critical in understanding whether a plan will work or not.

The above hissed in response by: DrMalaka [TypeKey Profile Page] at October 2, 2008 7:25 AM

The following hissed in response by: David M

The Thunder Run has linked to this post in the - Web Reconnaissance for 10/02/2008 A short recon of what’s out there that might draw your attention, updated throughout the day...so check back often.

The above hissed in response by: David M [TypeKey Profile Page] at October 2, 2008 10:32 AM

The following hissed in response by: Dafydd ab Hugh


Under Soros' plan the government would own most of the banks that own these CDOs, under the current plan the government would only own the CDOs. Which one do you think is better for the taxpayer?

You don't see any "risk" in us following the fascist lead of Oogo Chavez?


The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at October 2, 2008 12:40 PM

The following hissed in response by: LarryD

The government will own, Congress will control, and the corruption that is just coming to light in the GSEs will be repeated, on a larger scale, with the banks.

It's a scheme to raid the American financial system, transfering billions to Soros and co. and members of Congress.

The above hissed in response by: LarryD [TypeKey Profile Page] at October 2, 2008 2:14 PM

The following hissed in response by: DrMalaka

Dafydd, my preference is to do nothing. The problem is that the current bill will not accomplish anything and cost us over a trillion bucks. The reason all of Congress does not understand or care are twofold. First, some want to expand their power or just look like they are doing something, second, and more importantly, our representatives (and public) have no clue what a CDO is or the risks involved.

You stated the other day there is a good chance that we make money as the assets increase in value. That is a pipe dream. Maybe with a mortgage but not a CDO. It just does not work that way. A CDO is a legal creation, it has no claim to specific real estate assets. The problem is that the claim is not based on a percentage of the assets but rather is based as a percentage of losses.

CDOs are broken into tranches and each tranche has a claim to a set amount of losses. The worst rated tranche might have the claim to the first 10% of losses, so if the asset pool loses 10% then only that CDO tranche gets that loss and it is now worth zero. The other nine tranches are worth 100%. The banks hold only the lower tranches, most of which will be completely wiped out.

The problem is we can not value those tranches correctly until real estate bottoms and we know what the total loss is going to be in the asset pool. What we do know is that once the actual asset pool takes a loss it can never make it back, it's not like a house whose value can go back up. If the asset pool drops to 90% it can never go higher than that.

Furthermore, banks have not marked to market these assets as people want you to believe. Merrill sold some of these tranches recently at 22 cents on the dollar (it was actually 5 cents cash and 17 cents debt so Merrill can still lose another 17 cents) Lehman had similar assets on its books at 70 cents. The banks can not take write downs now so they will not sell theses tranches for less then they are on their books for and if we pay what they are on the books for then we are grossly overpaying.

Because of this, if a plan has to happen then yes, I would rather that the taxpayer receive equity as opposed to nothing. Preferred stockholders do not control a company or you issue warrants which never have voting power. You can force the government to sell the asset once the stock value has doubled the investment. Who knows, put restrictions on this pig, but give us something.

Furthermore, this method would punish the equity and debt holders of the current mess. They must take the first losses, we need to have a market that is built on confidence and it is impossible to have confidence in a market when rules are arbitrary. Risk takers must actually take the risk, not just the profits. That is what happened with Fannie and Freddie bondholders. They took a risk to get a higher return, when the risk blew up they had the government cover it. Such a system has no future. I personally have moved more into cash and feel like what I am investing is like a casino. I woke up and could not short stocks one morning!

This market is locked up partially because of government action. No one wants to make a move because they don't know what the government is going to do. Who wants to short a bank stock when tomorrow the government might gift them $700 billion? Who wants to give credit today when tomorrow's market is completely arbitrary?

With all that said, I do understand that the definition of fascism includes government controlling industry and Marx was adamant about the government controlling banking. The Dems know this, believe this and are pushing this bill because of it.

We're screwed.

The above hissed in response by: DrMalaka [TypeKey Profile Page] at October 2, 2008 7:30 PM

The following hissed in response by: BlueNight

More and more I am simply appalled. I would prefer the original Paulson/Bernanke plan, because at least that would be focused on one thing, and we'd most likely make back the money.

This bill is a hundred billion dollars of pork atop a neutered Paulson/Bernanke plan, and that's money we're certain never to recover. That's the cost of 500 summer blockbusters, folks.

The above hissed in response by: BlueNight [TypeKey Profile Page] at October 2, 2008 9:34 PM

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