Now, on principle, I’m against bailing out any industry that isn’t viable in the marketplace.  I agree with Senator Shelby, who debated the auto bailout with Barney Frank recently on Charlie Rose.  He said the US government should not be in charge of picking winners and losers in the marketplace, essentially.  Shelby stood by his principles and voted against the bank bailout as well.  But this weekend (notice it is always the weekend, while the football games are on) the congress made significant “progress” in the passing the auto bailout.  The details of this story are worth parsing.  For background, considering watching the Richard Shelby-Barney Frank debate on Charlie Rose.

This all has horrible roots in the bank bailout.  The banks were given a blank check by Ben Bernanke and Henry Paulsen with the intention that they would keep the credit pump primed.  Well, the banks responded by either sitting on the cash, or worse, doubling down on credit default swaps.  At least, the big banks are not lending to the auto industry.  So, now the car companies come hat in hand for credit from the government.  The congress already issued $25 Billion in loans to the auto industry earlier this autumn to pay for converting cars to hybrids.  Now, Nancy Pelosi and the San Francisco wing of the democratic party was wanting to take money out of the TARP funds to pay for the auto bailout.  Now, the $700 billion of TARP funds is already a done deal, and the $25 billion for the auto companies is a done deal.  Conservatives like me can only whine and complain at this point.  Marginally, it is a small victory that Pelosi had to take money out of the hybrid fund to pay for viability of the industry it is designed for.  I mean, if there is no one building American vehicles, who will Pelosi and Waxman browbeat into making cheap shoddy cars no one wants?  So, the attempt at taking money out of the TARP fund was a noble one, but as you can see the government must never renegue it’s commitment to those most holy financial institutions…it’s easy to see who holds the cards here, and it ain’t Joe the car-manufacturer and last in line is Joe the Taxpayer.

Another wrinkle in the story is that many, many credit default swaps have been bought on GM in the last year.  Someone is standing to make a big profit if GM goes bankrupt.  Consider this blurb:

The rapid increase in the price of GM CDSs this year, coupled with the decrease in notional amount outstanding, implies that sellers of protection have been buying up protection in the over-the-counter market, presumably to set off against their sales of protection. The AIGs and Citigroups of the world are the sellers of protection, and they’re busy sending money to the buyers of protection, both directly through purchases of gambling CDSs and indirectly through posting collateral for their sins. And we all know where that money is coming from: Henry Paulson and Ben Bernanke. If the bailout comes, and the bankruptcy doesn’t, the prices of GM CDSs will fall quickly. The recent purchasers will be hurt, and maybe that will include AIG and Citi.

So, the average Joe might want to ask if this a fight between automakers and taxpayers or a fight between automakers and banks, and then decide who they will support.

Funny how if you bet on failure enough, it becomes a self-fulfilling prophecy. Former bankers in our treasury and in our federal reserve have sold out our financial sovereignty in order to honor their most important commitments, to pay out on credit default swaps. So many rules have been broken in the last few months in order to “save our economy”. What harm would it do to our economy if all of the individuals and institutions that gambled in an attempt to profit on the failure of the American economy, with no stake in our success, were told, “No, you cannot have it”?

Listen to Nassim Taleb, my friends. Cash out your “moderately risky investments” now and buy gold or real estate, or a safe at your house. Too many people at the top, in charge of printing money and setting interest rates, are too cozy with too many people betting on our failure for this economic problem to end soon, or prettily.

Bold solution proposed by Alan Lammey. His take is that credit default swaps, which is insurance (a type of hedge) against the failure of a business or industry, should only be paid in full to those who have a stake in that industry (i.e. own substantial stock). Ethically and morally, this makes sense. Consider you own beachfront property in the Gulf, and you purchase insurance against hurricanes. You have collateral (a house) and you want to lower your risk. If you lived in the midwest and wanted to buy hurricane insurance on other people’s property in the Gulf Coast, I’m sure there are reasonable laws against that. Apparently if you are rich enough and place a big enough bet, you can profit from such a calamity.

Remember, only a small portion of these positions are actually hedging exposure in the form of the underlying securities, or in other words, CDS’s that are based on REAL HEDGES.

The rest are speculative, in some cases 10, 20 of 30 times the underlying basis. Yet the position taken by Treasury Secretary Paulson and implemented by Tim Geithner (and the Fed Board in Washington, to be fair) is that these leveraged wagers should be paid in full. And folks, that’s the biggest issue. Unless Geithner changes his stance on this, we are doomed financially in this country.

Let me say that again, in case you missed this point — because it’s one of the most important points I’m making here:

Tim Geithner has made it clear that these leveraged wagers should be paid in full. And he is advising this to President-elect Obama.

My answer to this view is that those who participated in the speculative CDS market, needs to be put into bankruptcy. Sounds like a simple solution to a complex problem, but I do believe it would work.

Long but worth a read. I agree with about 90% of the article, and especially the part about letting the speculators get pennies on the dollar on their investment. A lot of rich people will be pissed but the real economy will not be hindered by this outrageous debt, and our sovereignty will remain intact. Hat tip (Conservative Cajun).