Horizon, Host: Ted Simons

October 1, 2008

Host: Ted Simons

Financial Bailout

  • ASU finance professor, Herbert Kaufmann talks about the revised plan for rescuing U.S. financial markets.
  • Herbert Kaufman - Professor of Finance, W.P. Carey School of Business, Arizona State University
Category: Business/Economy

View Transcript
>>Ted Simons:
Hello and welcome to "Horizon." I'm Ted Simons. As we tape this program, the US Senate is preparing to vote on a revised Financial Bailout plan. It still gives the Treasury Department access to about $700 billion to buy and re-sell troubled securities. What's new is a tax relief package and a higher limit on Federally Insured Bank deposits. Joining me to talk about the plan is Herbert Kaufman, a former economist for Fannie Mae, who is now a professor of Finance for Arizona State University's WP Carey School of Business. Good to have you back on the program. Thanks for joining us.

>>Herbert Kaufmann:
Thank you, Ted. Nice to be here.

>>Ted Simons:
The underlying concept of what will be voted on. And, again, as we are taping this, they are getting ready to do this. The underlying concept, pretty much the same as what they turned down before?

>>Herbert Kaufmann:
Pretty much. It’s still the purchase of bad or questionable assets off of financial institution balance sheets. There are more insurance provisions, and the use of insurance, and the purchase of insurance from the treasury to guarantee bad assets as well. The core function of this is really to remove assets that currently are not saleable to free up funds to financial institutions such that they could start the credit process going again. I think when we talked last time, I expressed some concern about the hang-up in the credit and lending process that's taking place. That has only gotten worse as the House failed to pass the legislation, and as markets continued to deteriorate. That is a major issue. And this is designed to help that primarily.

>>Ted Simons:
I was going to ask you that. What was lost by Congress not acting a couple of days ago, and even if they act now, what was lost?

>>Herbert Kaufmann:
Well, I’m not sure there was a loss if the bill comes out in some improved state. There was no question that the negotiations that took place surrounding the House bill will probably pause with regard to oversight, with regard to spreading authority and so forth. I think, though, at that point in time, the markets were looking for a kick that the Treasury, the Congress, the Executive understood the dimensions of the problem, and would help to free up the financial markets. I think at this point in time, we need to pursue this. I think that one of the issues that has kind of been lost in all of this is that this is designed to help the economy from falling over in an abyss. Although it's been sold, and terribly from a Public Relations point of view, as a Wall Street bailout for fat cats. This simply is not the case. The fact that some folks on Wall Street may benefit, although a lot have already suffered, and people maybe feel justifiably. I’m not going to get into that, perhaps so. But the fact is that what we are trying to do is prevent the economy from losing its lifeblood, which is the financial system. We already see signs of that.

>>Ted Simons:
Was it a mistake to call it -- I don't know who first called it this, but it seems it be stuck here, a “bailout” as opposed to a “rescue plan”.

>>Herbert Kaufmann:
Especially the Wall Street Bailout. It should have been called, in my view, an “Economic Recovery Plan”, and that would have been more effective not just as a marketing ploy, but actually in describing what was necessary to be done. When credit dries up—and we already have evidence of this. Car dealers that have closed already, and the idea that more will. Other institutions, companies that employ workers that are having difficulties securing credit, all this is as a result of the financial system being restricted and freezing up and people not being willing to offer loans and credit freely and availably.

>>Ted Simons:
This latest plan, higher Federal guarantees, higher Federal insurance for bank deposits, good idea?

>>Herbert Kaufmann:
I think it's an excellent idea. For most people, it's symbolic. I don't know a lot of people, and I suspect you don't, that have more than $100,000 in a bank account, or more than $250,000 in Ira that is at a bank. They may have other accounts as well. However, raising it to 250,000 suggests that the government is confident that the banking system will be maintained. I think Federal Deposit Insurance, afterall, came in in the Great Depression. It stabilized the banking system. We have not had a really significant destabilization of the banking system since that time with FDIC insurance. The last time it was raised to $100,000 was 30 years ago. I don't know if anybody knows anything that is still price it was 30 years ago.

>>Ted Simons:
OK. Another aspect of the plan is tax reliefs, in a variety of forms. Make sense to put tax relief to the bill and add to the burden of the government?

>>Herbert Kaufmann:
Well, I don't think so at this point, and I have to say that they are talking about the Alternative Minimum Tax, some Business Tax relief. I think that's purely designed to give cover to some people in the House. I think Senate's going to pass this, but some people in the House that will be able to latch on to one thing or another. I don't think in any case that those belong in this bill, nor do a number of other things that tend to make their ways into bills of these kinds. The major thing to keep our focus on is that can't be dealt with independently or necessary to secure the votes. But the main focus is this relief that will come forward.

>>Ted Simons:
Last question. We hear a lot about “mark to market”, and SEC perhaps relaxing the rules that came into effect because of abuses by Enron and others. First of all, very quick priner, if you could. “Mark to Market” means?

>>Herbert Kaufmann:
“Mark to Market” means what is it is actually worth now in a sale. The problem we have right now is a lot of these assets are not saleable. So that banks are keeping them on their Books at what they paid for them or what they can argue is a fair value. Fair Value Accounting has been around for quite awhile, and is still existing. Presumably when you “Mark to Market”, you mark to a fair price. The dispute comes in about what a fair price actually is. What you can sell it for is not the question, because you can’t sell many of these things now. So, the question is is it 60 cents on the dollar, or 10 cents on the dollar? That makes an enormous difference with respect to the value of bank balance sheet.

>>Ted Simons:
Open the door for abuse?

>>Herbert Kaufmann:
Potentially. It sure does. As a finance person, I have to argue--although I’m not an accountant--that I feel very comfortable with Mark to Market” accounting. I do understand some of the exigencies of the situation. And I think what has to happen is that reason has to prevail such that when the assets are valued, they are valued at fair value, which is part of what the standards really are.

>>Ted Simons:
I lied. Last question is this. We were tiptoeing around a recession before all this blew up. What does this do to the economy in general? It was bad before all this. How bad is it now?

>>Herbert Kaufmann:
I think it’s getting worse. And I think that we're not sure yet if this will even work in enough time. My guess is, and it's only a guess, we're in for an additional slow down, additional recession as we go forth. The question is: are we in a recession deeply and very long period of time, or less deeply or in a shorter period of time? In either case, it's not a great situation. but I’d rather will be in the shorter recession and a less deep recession than the other, and requires the financial system to be unclogged. There’s no question.

>>Ted Simons:
Very good. Thanks again for joining us. We appreciate it.

>>Herbert Kaufmann:
My pleasure.

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