It's A Rescue, Not a Bailout

It now appears the Senate will take up the EESA 2008 Rescue (it's not a bailout) Wednesday, with the increased FDIC limits to $250m and they will add in AMT tax relief, hurricane disaster relief and nearly $80 billion in renewable energy incentives and extensions of some expiring tax breaks, all of which are popular items in the Senate.

With likely passage in the Senate Wednesday night, this will jam EESA back to the House where, ironically, many Representatives who voted against the measure on Monday noted constituent correspondence and calls 99-1 against the Act before the vote, but 99-1 complaining the measure failed after the vote.

Again, intense pressure on Representatives, especially Republicans, in closely contested re-election races will be the key to swinging the dozen or so votes necessary to achieve passage, and this time the margin of passage could be more like 250-184, if not greater.

Another key measure may include a temporary suspension of mark-to-market accounting rules, although that issue effectively will be moot once the Treasury begins buying the worst paper at "near-maturity" prices as suggested by Ben Bernanke, which, effectively sets a "market" price (a willing buyer) which all other holders of similar paper will use as a price to re-value their already-written-down securities.

Accountants will be ''encouraged" to allow this, although, in a sense suspension of mark to market, even temporary, is a move toward less strict regulation, not more strict. But, since the Treasury will be setting prices, everyone will go along with it, at least for two or three years.

Additionally, there could be some relief for banks which saw the values of their Fannie/Freddie preferred stock decimated by the manner in which the GSEs were placed into conservatorship in early September.

One issue critical to normalization of interbank markets is to require the Federal Reserve to act as a counterparty for all interbank lending, giving assurance of repayment at all times. Perhaps we will see some form of this, but unfortunately not as part of EESA 2008.

In essence, as of this morning we now are at the point where "Doing Something" is taking precedence over "Doing Something That Actually May Work," and passage of EESA will be a "start," but not a panacea, to recapitalizing the banking system.

The piecemeal manner, $250 billion + $100 billion, with the additional $350 billion upon approval from Congress (likely a new Congress), assures us the when the second tranche is requested, it will be approved only with the addition of many other provisions, both business- and populist-oriented (and, possibly, an increase to the proposed overall $700 billion TARP limit.)

One of the future criticisms of EESA 2008, looking back some years from now, will be the issue of making big institutions bigger, even more "systemically important," at the expense of regional and community banks which will be acquisition targets of newly designated bank holding companies Goldman Sachs and Morgan Stanley.

If this was baseball, passage of EESA 2008 this week will mark the end of the Third Inning...in a game that likely may go into extra innings. The July Case-Schiller Home Price Index released yesterday again shows continuing deterioration of home prices in most markets, with the 20-city composite declining 16.3% year-over-year and 19.5% from its peak, but Dallas, Denver and Minneapolis now for several months have been registering minute gains, perhaps the beginning of some stabilization in the major-market heartland.

However, it is entirely possible that 3rd Q 2008 Personal Consumption Expenditures (PCE) will point to a decline in consumer spending July-September, which would be the first quarterly decline since 4thQ 1991. If so, it all but assures, at some point next year, NBER will look back and pronounce a recession which began in early 1stQ 2008.

And finally, the national debt likely will reach a milestone tomorrow: $10 trillion, following yesterday's and today's Treasury sale of Bills totalling nearly $100 billion (and another $45 billion Thursday. (Hat tip Calculated Risk) Add in GSE direct and guaranteed obligations, and total national debt begins to approach U.S. GDP of $14.2 trillion. And Hank Paulson's TARP hasn't even begun to cover the mess.