Wednesday, September 24, 2008

Bailout! Bailout! The USS Wall Street is sinking!

I was pretty much trying to avoid this topic, as I admittedly am not a financial genius - reference my empty wallet for evidence. However, this is the big story out there, and I've discovered that most people are just as, if not more confused by this whole thing than I am. Most of us can go to Wikipedia and look up what a hedge fund is, and after reading the definition, still ask, "ok, but what is a hedge fund?". Thankfully, for both of us, I'll try to steer clear of the quagmire of financial terms.

So, what we're potentially looking at is a $700 billion dollar bailout for these 'investment banks' and insurance agencies, and other corporate fat cats that pretty much are getting exactly what they were asking for. Following years of deregulation from our federal government, we set these financial gurus free to monitor themselves. This experiment is similar to leaving your teenager home alone for a couple weeks with a house full of booze, and seeing what happens. In both cases, it was fairly predictable that it wasn't going to end well...and now after years of being left alone, we've found that wall street has puked all over the carpet and burned down the garage. And who gets left to clean up the mess? If you answered, "me" stand up, because you're the big winner!

After months of saying that there wasn't a problem, Bush and friends finally had to step out into the cold, unloving light of day and admit, "ok, I guess we've got ourselves a little problem". And his solution to saving our economy was brilliant. Let's give Secretary of the Treasury, and former Goldman Sachs executive, Henry Paulson a $700 billion dollar bailout slush-fund of tax-payer money, not monitor what he's doing, and hope everything turns out all roses, and butterflies and happy horse shit like that. Brilliant! So the solution to the problem caused by lack of regulation and monitoring can be solved by further lack of regulation and monitoring , and 4% of our GDP...that makes so much sense...why didn't I think of that?

This is such a great proposal, I don't even know where to start. I like paying for other people's greed. I sleep better at night knowing that the CEO of Morgan Stanly got his 30 million dollar bonus this year. And I really take comfort in knowing that under the Bush/Paulson proposal, those same CEO's who made tens of millions of dollars a year for running their companies into the ground will still be getting paid millions, while you and I shop at the 99 Cent Store and watch Henry Paulson play, "Who wants this worthless stock?".

While both John McCain and Barak Obama have offered outlines for the changes they think need to be made to make Bush's proposal more fair for 'main street', neither was brought up the bailout concept of, "Bail yourself out!" And the crazy thing about all of this is that there is already a good, and fair plan out there to do this. All it takes is putting back in place a tiny little tax, that we actually used for decades until it was cut in 1966. Don't know what this is? Well, put on your detective hat Scooby-Doo, we're going to investigate.

The tax I'm referring to is a Stock Transfer Tax, which basically puts a very small tax on every purchase or sale of a share of stock. This same type of tax previously existed as part of the Revenue Act of 1932, and stayed in place up until 1966 when it was dismantled in a government effort to streamline the tax system. In its previous life, this tax proved to have two great strengths: 1) It's ability to generate funds. And 2) The manner in which it curbed dangerous speculation in the market place.

Ok, great, but what does this have to due with the $700 billion dollar bailout? We're getting there, so stop being impatient or I'll send you to time-out. Alright, back to business.

This concept was actually brought up by respected economist (who looks strangely like my father-in-law) Dean Baker, way back on March 15, 2008. In an article entitled, A Stock Transfer Tax: The Right Medicine for Wall Street, Dean talks about reinstating the stock transfer tax as a way to generate funds for a universal Health Care system, better education, or a movement towards a more Green economy.

In the article, Baker notes the .25% stock transfer tax that is currently in place in the United Kingdom and the London Stock Exchange. Here's where this gets interesting.

If this same tax was placed on all the sales and purchases of shares of stock on Wall Street, the tax would generate an estimated $150 - 200 billion dollars annually. That means that, rather than dig into the pockets of Joe Taxpayer, the government can bailout Wall Street with their own money, and do so within 4 or 5 years. It also would likely pull in the reigns on the absurd speculative money shuffling that's been plaguing Wall Street for years. You have to be a little more careful going all in on the longshot if it will cost you millions in tax, win or lose. Wall Street would probably be more inclined to pick Pretty Little Pony to place and settle for a lesser but more reliable profit.

The tax would mean little to your average investor, and would draw most of it's rewards from the very companies and agencies that got us into this mess. Go ahead and do the Math. Let's say you, as an individual have $20,000 in stocks...now lets say that you that you buy or sell a full $20,000 in shares each month, because you know, you're a mover and a shaker...now lets pull out our calculator. So, even if you had this nice portfolio and handled it as recklessly as I just did...your cost for buying and selling of $240,000 in stocks over the course of the year would only cost you $600 in tax. Since most of us investors aren't going this crazy with our 401K's and other financial goodies, it's more likely that the average middle class investor would be paying only a couple bucks annually to ride the Wall Street crazy train. Compare that to the approximately $6000 per taxpayer price tag Bush and Paulson's plan would saddle us with.

Of course Henry Paulson, when presented with this idea, was not a big fan. My theory is that it has something to do with the fact that Paulson owns 4.58 million shares of stock in now 'former' investment bank, Goldman Sachs. This means his stocks in Goldman Sachs alone are worth about $700 million. I think you can do the math for yourself on this one. $700,000,000 multiplied by .25% - carry the two - and yes sir, we have a conflict of interest on our hands.

Obviously this is just the basics of the situation, but don't you think some of our warriors up on the hill might want to take a little closer look at Dean Baker's proposal? Let's bring back that little thing known as a system of checks and balances along with a plan to make those most responsible for this mess to be the most accountable. Privatized profits, and socialized losses hardly seems like a fair deal, does it? But then again, I'm just a guy with an empty wallet. What do I know?

1 comment:

Anonymous said...

Looks like the Dems and Bush have agreed on a rescue plan. The "Stock Transfer Tax" is a horrible idea. How will this curb dangerous speculation or risk-taking? This is not a problem caused by wick short sellers or excessive equity trading by investment banks. I absolutely agree de-regulation is at the root of the problem (look to Donaldson's decision in 2004 to be lax about capital ratios for the big 5 investment banks), but you are missing the problem. It is a problem of overt leverage (30 to 60 times in some cases!) and insolvency. Banks just can not raise any capital. They believe counter-party risk to be so high they will not lend to each other, the TED spread jumped to over 375 bps this morning. Waiting more than two weeks to inject capital into the system could potentially lead to a catastrophe! Waiting four to five years?!