Monday, October 15, 2007

Banks to Fund Bailout of...Themselves

Maybe I'm just a simple country boy, but this seems like the dumbest idea I've seen since....well I'm not sure when, but certainly a long time:

NEW YORK (AP) -- The nation's three largest banks said Monday they will team up to buy tens of billions of dollars in investments that lost value after global credit markets seized up.
The plan is designed to inject more confidence into the market, and increase investor appetite for the short-term debt known as commercial paper. The market for commercial paper, which is crucial for companies to fund short-term borrowing needs, locked up this summer.

The major banks all have off balance sheet investment vehicles called SIVs which issue commercial paper and use the proceeds to buy lower rated, higher yielding securities like low rated mortgage securities. Why are they off balance sheet? The easy answer is that they don't want this toxic crap on their balance sheet, but how they get away with it is not something I've spent a lot of time pondering. Anyway, the banks are now putting together a bigger version of an SIV to buy the crap that the old SIVs can't get funding for anymore. The obvious goal is to keep this stuff off the balance sheet because if they have to claim it, the balance sheet might actually be a true reflection of their current financial condition and of course we can't have that.

In another twist, the new super massive SIV will only buy the highest rated of the crap in the current SIVs:

By buying SIVs' distressed investments, the new fund would inject enough liquidity into the market to make investors more confident in buying commercial paper.

The funds' backers said they will shy away from risky instruments and buy only highly rated, asset-backed debt -- a market that is already beginning to show signs of life.

I'm not sure how this will help the current SIVs when they will be left with only the crappiest of the crap, but then logic has never been the strong suit at places like Citigroup. The goal seems to be to appear to be doing something rather than actually accomplishing anything and this vehicle seems perfectly designed to accomplish just that.

Thursday, October 04, 2007

A Path to Socialized Medicine?

Congress recently passed a bipartisan bill with a goal of providing subsidized healthcare to millions of uninsured children in the US. The bill would fund the hugely successful State Children's Health Insurance Program, a joint state-federal effort covering 6.6 million people. The program is designed for families that earn too much to qualify for Medicare, but not enough to afford their own coverage. The bill would provide the program with $35 billion over five years to allow an additional 4 million children, under the age of 18 and under these circumstances, into the program.

President Bush had hinted that he was leaning towards vetoing the bill, and, on October 3rd, he did just that. The administration's argument consisted of claims that the bill was too costly, and that it took the program too far from its original purpose. I might be mistaken, but wasn't its purpose to provide health insurance to the needy children of the United States?

And as far as the cost, that's no big deal. We could always just borrow and borrow, until we are forced to raise the national debt limit, and then we can borrow some more. Right? Well, that seems to be the precedent being used by the government. Congress did just that last week, raising the debt cap by $850 billion to an astounding $9.815 trillion, in order to fund the ongoing war in Iraq. Can we really not afford $35 billion for our children, our future?

The administration also argued that the bill would be a move towards socialized medicine. They believe that expanding the program to higher income families would have ramifications. They believe the bill would entice families covered by private insurers to switch to the government-funded program, putting greater strain of the program.

But the bill was designed to counter that, by providing incentives for states to cover their poorest children first. And as far as it being the first step towards socialized medicine, it is way too early to know if we are indeed headed in that path. It is a fallacy to think that we would be in the midst of socialized medicine if that particular bill became a law. It may be a little less capitalistic, but it gives a lot of children the helping hand they have been hoping for.