OK, I haven't been posting my correspondence to Congress here, mostly because I think that they discount the level of sentiment when they receive duplicate correspondence from multiple sources (as in form letters or petitions). However, things are getting dire, and if my letter could be used by someone who might otherwise remain silent, so much the better. It was written in a hurry this afternoon, and it's nowher near perfect, so feel free to modify, adapt, plagiarize, or use in toto. (Sorry, some of the formatting didn't come across very well; clean it up as you see fit)

(EDIT: Thanks to those whose observations I shamelessly poached for use in this letter - there are too many to list, but I gratefully acknowlege everyone's unwitting input.)

Quote:

28 September, 2008

The Honorable (Firstname Lastname)
U.S. Senate
Washington, D.C.

Dear (Mr. Lastname),

Your office has heard from me on numerous occasions over the past months, and particularly in the past few days, as the abomination being touted as an "economic rescue bill" has come closer to fruition. In succinct terms, let me summarize the remainder of this letter: (1) the "rescue bill," as it has been described in the various drafts that Congress has put online, addresses none of the underlying causes of the problem, (2) any similar bill which puts taxpayers "on the hook" for investment losses is unacceptable, and (3) if you vote for any such bill, you will not only lose my vote, but I will actively work toward your defeat from office.

The "rescue bill" does not address any of the causes of this problem, and as such will provide at most temporary relief. There are three primary causes of our current predicament, each of them easily understood, and each with a clear solution:

• Problem 1: Excessive leverage. Since 2004, financial institutions have been allowed to use extreme leverage (up to 80:1 in some cases), meaning that even a small market move is capable of great financial damage. Every firm that has failed was levered at 24:1 or more. Solution: limit leverage to no greater than 12:1, as was the rule prior to 2004. This can be scaled in over a period of 90-180 days.
  
  
• Problem 2: Opaque accounting. Financial institutions have been allowed, and in some cases encouraged, to keep disadvantageous transactions "off the books" as so-called "Level 3" assets (also known by other names), making an accurate evaluation of the company's financial strength quite impossible. Solution: require all of a public company's assets and liabilities to be fully disclosed, along with any formulas used to provide valuations of illiquid assets. This should be enacted immediately.
  
  
• Problem 3: Unregulated derivatives. The market for Credit Default Swaps (CDS) and other OTC derivatives is dangerously chaotic. These are effectively insurance policies, yet they do not conform to the regulations in the CFR, nor do they conform to the SEC rules for securities - including enforceable margin requirements. Solution: force OTC derivatives onto a regulated exchange with margin requirements, similar to existing security and option exchanges. This can be scaled in over a 90 day period.

I understand that the "rescue bill" is in flux right now, and that the various drafts that Congress has placed online are incomplete or inaccurate in certain areas. However, let me point out a number of problems found therein, so that you might watch for them in future revisions:

• The bill's definition of what can be bought is worded very broadly, allowing the Treasury Secretary to purchase "any security he deems necessary, not just those related to mortgage-backed securities" (paraphrase). This gives the Secretary carte blanche to meddle in the markets.
• The bill accelerates Section 202 of the Financial Services Regulatory Relief Act of 2006, which allows the Federal Reserve to decrease bank reserve requirements to zero. Aside from the horrific implication that this provides banks with infinite leverage and infinite losses, it also makes it impossible for anyone to determine whether or not a bank is insolvent.
• The bill's "limit," whether it is $250B, $350B, or $700B, is simply a temporary cap on a revolving credit line. This is simply a temporal "credit limit," not unlike what's on your credit card. If you have a Visa card with a $10,000 limit, how much can you charge during the lifetime of the card? That number is infinite, so long as you don't charge more than $10,000 during any single billing period. This bill allows the Secretary to buy securities at inflated prices, sell them at more realistic market prices (i.e. at a significant loss to the taxpayer), then repeat the cycle until all the losses from all of the toxic waste have been handed to the US taxpayer.
• The bill allows the Secretary to pay "full price" for securities, when their true value is closer to 0.30-0.50 on the dollar. While some have touted the bill's ability to be a "money maker" for taxpayers over the long run, it will instead be an immediate loser, since the Secretary will be unable to inflate the prices across the entire market for any significant length of time. And given that this is a revolving line of credit, it is in the Secretary's interest not to hold onto these assets, but to recycle them to the market - which will pay lower prices than the Secretary did when he acquired them.
• The bill's "unjust enrichment" section does not prevent the whole world's financial "toxic waste" from flowing into U.S. institutions for resale to the Federal Government, even at par (e.g. Goldman Sachs buys some junk from China at 0.10 on the dollar, then resells it to the Secretary at 0.10 on the dollar - no "unjust enrichment" occurred, but China was able to offload some of their "toxic waste" onto U.S. taxpayers).
• The bill mentions "designating financial institutions as agents of the Federal Government" - this has wide-ranging effects and consequences that should not be taken lightly.
• Some versions of the bill contain language intended to limit debate to ten hours. Are you kidding? This issue seems to be far too complex for most Congresspeople to fully grasp, and this intricate bill is in excess of 100 pages long. How can you expect to work through all of the details in a mere ten hours?
• The bill contains nothing about forcing companies to take marks on their holdings, nothing about penalties for wrongdoing, nothing about disclosure of "Level 3" assets, nothing about reducing leverage, nothing about regulating the financial derivatives that were a major cause of this debacle, and nothing about putting the ratings agencies at arms-length from those that they rate.

Sir, I implore you to consider what you are doing. I understand that we are facing a crisis, and I understand the pressure that Congress feels to do something to solve the problem. However, the versions of the bill that have been posted online do not solve this problem because they do not address any of the underlying causes. The bill as drafted online places the United States taxpayers directly on the hook for untold losses from Wall Street, and this is utterly unacceptable. The financial markets are a robust creature, and given the simple solutions noted earlier in this letter, the markets will "fix" themselves - without any money being provided by U.S. taxpayers. Please remember who you work for.

History will judge you in the coming years based on how you vote in the coming days. Your constituents will judge you at the ballot box in the coming weeks. The financial crisis is the single most important issue - not only of this election cycle, but perhaps of our generation. Your vote against this legislation is essential. My vote this November will be driven by your vote regarding this bill - and if you support any version of this bill which places U.S. taxpayers at risk, I will actively work to bring about your defeat and removal from office.

Please work to defeat this awful bill, enact some sensible solutions to the problem, and let the markets work the way they should.


Sincerely,

(me)

Great letter Foxy...