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Bloomberg Analyst: $700 Billion Bailout Could Balloon to $5 Trillion

Conservative House Republicans and economists warn about the toll a $700 billion federal bailout of the financial sector would have on the taxpayers footing the bill. But according to Bloomberg TV analyst Marc Faber, the actual cost could be closer to $5 trillion.

Faber, author of the “Gloom Boom Doom” report, appeared on Bloomberg TV’s Sept. 26 broadcast of “Bloomberg Today” and noted just how small the proposed $700 billion bailout is compared to the overall U.S. credit market.

“So now they try to solve the problem by having this credit bubble actually extended and I think the $700 billion will be like a drop in the bucket because the total credit market in the U.S. is something close to $60 trillion, then you have the CDS market – credit default swap – of around $62 trillion. Then you have the whole derivatives worldwide worth about a notional $1,300 trillion. So the $700 billion is really nothing and the Treasury is just giving out this figure when actually the end figure may be $5 trillion.”

Faber, managing director of Marc Faber Ltd., is known for predicting the October 1987 stock market crash one week before it happened.

In his Bloomberg TV analysis of the financial bailout, Faber noted the inconsistencies of government intervention to date, but not without taking a swipe at the compensation of Wall Street executives.

“The reaction to that is inconsistent,” Faber said. “You let essentially Lehman Brothers go bankrupt but you save AIG and you save other brokers by merging them with banks and then you come with a bailout plan that should be paid by the taxpayer, when Wall Street last year in total received a compensation of $69 billion - $38-39 billion of which were bonuses paid to the executives essentially of Wall Street.”

Faber told “Bloomberg Today” host Jeremy Naylor the solution isn’t government intervention through a bailout, but to figure out how to eliminate the excessive leveraging in U.S. financial markets.

“Well first of all, I think the decline of home prices of 20 percent is a relatively minor decline so far,” Faber said. “And it’s created so many problems. It’s not the problem that home prices have gone down. The problem is excessive leverage. And somewhere, somehow, the U.S. has to try to bring down the excess leverage that exists in the system – that incidentally was built over the last seven to 15 years under Fed chairman Mr. Greenspan and then also under Mr. Bernanke.”

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In sociology and biology a population is the collection of inter-breeding organisms of a particular species.

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Banking System Will Need Another $500 Billion: Gross

The banking system needs another $500 billion to survive beyond the $700 billion rescue plan being contemplated by Congress, said Pimco founder Bill Gross.

Gross said on CNBC that the government bailout plan will help free up bank balance sheets so they can start lending again, but will provide only about $50 billion in real capital to the system.

"The plan goes far but it doesn't go far enough in terms of recapitalization," he said. "The banking system and the investment banking system in total really requires about $500 billion more. Where that comes from is still up in the air."

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The big cheap and easy
John Gray
Canadian Business Online,

If the spam filter on your email account is working properly, you may have missed the funniest satire floating around the Internet these days. The email was sent in the wake of U.S. Treasury Secretary Henry Paulson’s announcement of a plan to set aside at least US$700 billion to buy the toxic mortgage loans at the heart of the current Wall Street financial crisis. It says: “I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of US$800 billion dollars. If you would assist me in this transfer, it would be most profitable to you.”

The email mimics the familiar format of fraudulent Nigerian scam emails and goes on to offer suckers a generous commission for assistance in getting the billions out of the U.S. Treasury — all you have to do is send your banking information to the email address provided. The email would be funny if it weren’t so close to the truth.

Under Paulson’s rescue plan, U.S. taxpayers will buy the imperiled mortgage loans that are threatening to destroy the balance sheets of some of Wall Street’s largest and best-known financial institutions. The plan, which could easily become the largest financial bailout in American history, has already been dubbed “the mother of all bailouts.” But critics have another name for the proposal: “Cash for trash.”

The only way the plan will work is if the banks are able to sell their distressed assets at far above their current market value and not their current “fire sale prices,” said Ben Bernake, the U.S. Federal Reserve Board chairman earlier today in testimony before the U.S. Senate Banking Committee. Under the current proposal, Paulson would have absolute power to negotiate the terms of those sales, and the execution of the plan would not be subject to review by either the courts or U.S. lawmakers.

Everybody seems to agree that something has to be done to bring U.S. financial markets back from the abyss. However, this plan allows financial institutions that ignored the most basic rules of lending and risk management the opportunity to saddle U.S. taxpayers with hundreds of billions of dollars in worthless loans that may never recover.

But shouldn’t U.S. taxpayers get something in return for the billions of dollars they are going to end up forking over to Wall Street? An equity stake in the banks they are saving seems like a fair trade for saving the companies from their own mistakes. There are precedents for that. When the U.S. government bailed out Chrysler Corp. in 1979, the government got warrants to purchase Chrysler stock. And warrants were issued to the U.S. government earlier this month as part of an US$85 billion plan to rescue American International Group Inc., the troubled U.S. insurance company.

The inclusion of ownership equity as part of the rescue plan is one of the amendments currently being debated by U.S. lawmakers. The other is proposed restrictions on executive compensation at the troubled banks. Paulson argues that compensation should not be part of the package because it may make the plan more difficult to sell to the troubled banks. If that’s the case, then the banks' boards of directors should step up and give the CEOs an ultimatum: accept the deal with restrictions on your pay or we’ll fire you for imperiling the future of the bank. Some would argue that the boards should have done that a long time ago when many financial executives collected tens of millions in bonuses while loading up their balance sheets with the toxic debt.

Allowing taxpayers to take a stake in the banks may seem like the end of free-market capitalism as we know it, but it may be better than the alternatives. Take the proposal laid out in a recent paper from Independent Strategy, a London-based investment bank. Its solution? Rather than open up the government troughs to Wall Street, the U.S. government should buy the damaged loans but at current market prices — just like they did during the Savings and Loan disaster of the late ’80s.

Of course, that will cause the balance sheets of some banks to collapse under the weight of those worthless loans making them insolvent. At that point the government could step in and guarantee the salvageable debts of the bank and help it to recapitalize, restructure or liquidate. The prospect of watching some incompetent, greedy or just plan stupid bankers lose their shirts may be tantalizing, but that’s not the reason the U.S. government should let some of the banks fail, Independent Strategy argues. “However satisfying their come-uppance might be, this is not why we apply such principles in policies to deal with the credit crisis. It is because any course other than classic restructuring results in a dysfunctional capital allocation that is against the interest of all investors.”

That’s pretty harsh. Let’s hope a flurry of major bank failures isn’t the only way out of this situation. Then again, if it was cheap and easy credit that got Wall Street into this mess in the first place, is it reasonable to think that cheaper and easier credit will get them out? If you believe that then maybe I can forward you an email I just received from a Nigerian prince who has a very interesting proposal that he promises could be very profitable for you.

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