My Open Letter to Congress

Here is what my friend wrote about the American financial meltdown:

Dear Congress:

Chances are most if not all of the major commercial and investment banks are insolvent. Not one of them is opting out of the do-not-short list, and they don’t seem to have the confidence in their survival to opt out of the Level 3 asset swap program Secretary Paulson is proposing.

It is also very likely that acutely dangerous systemic risk already exists, not merely from direct lines of credit among the banks, but especially from credit default swaps, which if activated by more than one large bank default would probably bring down many others. Remember, though, that this systemic risk is highly concentrated in the top 25 or so banks in the world, and does not jeopardize the 6,000 other community banks in the U.S.

Third, it is also highly probable that as this recession worsens, and as housing values continue to sink, forcing more foreclosures, the large banks will be even closer to collapse. Having worked for several years as a derivatives trader as well as having an MBA in Finance, I can tell you that it looks like catastrophe is already here.

What Sec. Paulson wants you to believe is that catastrophe is approaching, but it can be averted if only Congress acts urgently to give him the extraordinary authority he is requesting. The implication is if you don’t give him $700 billion in borrowing authority within a week, markets will collapse and it will be all your fault.

We’ve seen this drill before, with the Patriot Act and with the Iraq War authorization. The scare tactics, the urgency, the implied threat of blame for any failure – this is what the administration does.

If insolvency is here now for the big banks, the last thing you want to do is throw $700 billion of money that is not yours at bailing out the banks who created this disaster. You’ll need every bit of that money to protect the taxpayers and their deposits in these banks when these financial companies are thrown into the bankruptcy courts. You’ll need that money to make sure consumer deposits are protected with insurance.

And forget about comparing Paulson’s plan to the RTC. These Level 3 assets aren’t homes, condos, or commercial real estate that can be easily sold at the right price. They are bits of paper giving the bond holder the right to some small portion of thousands of mortgages, a right that is shared with all the other investors, who are required to agree on what is done with foreclosed properties in the pool. This is one of the reasons no one wants to buy this stuff, and no one will for many years until it is crystal clear what the final losses will be.

Paulson is basically scaring you and the rest of Congress into giving him unprecedented power to protect his friends on Wall Street. This decision you are making is probably as momentous as the Iraq War resolution. Don’t fall for this bailout disguised as the only way to prevent Armageddon. Armageddon is already here – at least for the big banks – and it needs an entirely different solution. Spend our money protecting us, by ensuring the FDIC is properly funded, by throwing these too-big-to-fail banks into bankruptcy if they truly are insolvent, by preserving the healthy parts of these banks while in bankruptcy, and bringing them back out again so they function under much better safety and sound regulations. We’ve had airlines functioning properly and safely for years while in bankruptcy, and there is no reason we can’t do the same with banks.

Please do not fall for some useless compromise or bipartisan agreement that gives the administration what it wants in the end. Kill this proposal here and now, protect us from this bailout, and deal with the real problem – the insolvency of the major banks, not the paper that is supposedly blocking their lending capabilities.

Please feel free to contact me anytime, regardless of hour. I will fly to D.C. if I have to in order to lay this out in front of you and your economic team. It means that much to me that you are fully educated as to the ramifications of this bill before you are allowed to saddle the taxpayer with the systemic risk inherent in our current financial system.

Sincerely,

J. Clay Waliski
(501) 454-4967
(870) 552-1047

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