2 bad bailout deals out and what is next at bat?

The bailout deal that was rejected on Monday by the House of Representatives was a bad deal. And the result was a Congress divided, a media blitz, polispeak galore, finger pointing, and a 777 point drop in the Dow Jones Index.

Most focus on the drop in the Dow Jones. The media love to play that up. I even heard the number increasing as the night went on. Some newscasters call the drop “a nearly 800 point drop”, or “nearly a 1000 point fall”. Talk about exploiting the facts to gain viewership.

The fact is that nothing that happens will stop the drop in the market. The second that short-sales are allowed back into the market, bigger drops will occur. All that stopping these trades has done is increase the power of the drop. Because while the numbers look big right now, the actual affect is not nearly as big. That’s because of the current value of the Dow Jones Index. But as the Dow drops, these big sell-offs become more meaningful and powerful. And they feed a bear market like honey.

But the bailout, now trying to be spun into a “loan” by pundits and politicians, is horrible. Because it fails to answer 2 simple questions. How much is being assumed in bad debt, and how do taxpayers get repaid?

The first problem goes like this. Under the deal laid out on Sunday, at least 3 separate payments would be given to Treasury Secretary Paulson to buy bad loans. The value of what he pays for the loan is unknown. Would he pay the original price of the loan, the current value, the real absolute value? No idea, nor was one required by the legislation. Thus he could buy all the bad debt at the top price, ensuring taxpayers could never break even or be repaid.

The second problem is that there has been nothing said on how taxpayers get the money back. The money is coming out of our pockets. We know that. To the tune of about $10,000 per person. And it will likely be collected from higher taxes for EVERYBODY. But how are we to be repaid. Will we get tax credits in the future? Or a check? Or guaranteed lower taxes (though how much lower and lower than what level is yet another question)? If you can’t say how we will get repaid how can we believe we ever will.

To deal with these 2 major issues the politicians that were trying to rush this version of the bailout proposed this bit of eyecandy. Executives would no longer get ‘golden parachutes’. Yea! It’s nice that the Government is in effect starting on the path to regulate how much money anyone should be paid. It’s very socialist of them. Still I can agree that paying someone that bankrupts or severely damages a company millions is folly. Though I see no problem paying them is they create a bigger stronger more profitable company than they took charge of. But the legislation is unclear if a great executive doing a great job is free of the same stipulations and restrictions.

And all of this says nothing to the power suddenly endowed to the offices of Secretary of the Treasury and Fed Chairman. They get control of more money than 1/3 the countries of the world make combined. And if you think that Congress can watch over those positions and keep them in check remember that it was the brilliant and attentive eyes of Banking Committee leader Barney Frank that said in July of 2008 that Fannie Mae and Freddie Mac could not fail, and that he saw no problems in the financial markets.

And another unseen problem of the bailout deal that was thrown out is its effect on the nation. This deal would have effectively kicked out the last leg holding New York as the financial center of the world. And it still might happen. And with that loss of status means tens of millions of dollars lost to the nation and New York State.

This is not a game with obvious consequences. Some things have to be thought about. And because some of those most responsible for this mess don’t want the blame, they are insisting on the most speed in passing the buck and a deal.

The bailout will cost over $1 trillion by the time it’s all said and done. The stock market will fall as the dust settles and every industry with debtors lines up to be next to be paid. And eventually things will improve. Such is the nature of markets and trade.

But if the main questions I have asked are not answered in future bailout proposals, because of the rewording of what the deal is called, or political favor to a Presidential candidate, or rushing to soften the ultimate downturn of the bear market, or just because no one was smart enough to ask, then the real cost will be far worse than just the money thrown away.