Secretary Paulson Does the Right Thing, Again

As much as it scared the stock market on Wednesday, U.S. Treasury Secretary Hank Paulson was right to renege on the proposed acquisition of “toxic” assets from U.S. banks. When the TARP proposal was passed by Congress, it was clear that the repercussions of what was to come had not been entirely factored into the battle plan.

Much like the war in Iraq, more thought went into the planning of the mission to save Wall Street than the actual rebuilding program that would have to follow Congressional approval of the $750 billion. As pointed out here last month, Secretary Paulson’s original plan could have brought about at least $50 billion of additional writedowns at Citibank (C), Bank of America (BAC), etc., etc. (see prior post “TARP passes, but brace yourself for the second shoe to drop” October 3-08).

Secretary Paulson clearly realized that to do well by the taxpayers he’d be killing the balance sheets of the banks he was trying to help, much like the leeching technique of old-time medical doctors. The only obvious move was to follow in the footsteps of the British government and begin to slowly acquire increasing stakes in the U.S. banks.

It might have taken awhile, but he’s landed at the right place. To date, the only misstep was not bailing out Lehman; or was it bailing out Bear Stearns and not bailing out Lehman? Or was the mistake bailing out Bear Stearns in the first place?

Regardless, Secretary Paulson is doing the right thing.

Disclosure: None

Comments

[bosun.j:]

Apparently this Bankster is in line to profit form Paulson's Grand Theft Taxpayer!

2008 Nov 14 07:02 AM

[R. Richard ...:]

Consider: If Treasury [T] were to buy (through some complex "auction" system - with its delays and snags) from a bank 100 mil of unpriceable assets (paper), the T would then have the entire risk of further loss on that paper. If the paper is left in the bank and T becomes an equity participant, then the risk of further loss (or write down/off) will be spread over the entire equity base of which T's share is only part, not entire.

Also, a $ of added equity, will have more effect on viable credit extensions by a bank (subject to further reductions in assets values by write down/off) than a $ of bad asset removal.

What was the rationale for removing "toxic" assets and replace them with auction derived prices. To increase the viable equity, of course. Direct investment does that.

The next step in "pricing" consumer debt, will provide a benchmark (really a surveyor's monument) for valuing a major segment of bank and financial organizations' holdings. Consider how "credit card balances" have come to equal the "demand deposits" (checking accounts) in monetary measurements. Checking accounts are now largely used as "clearing accounts" for credit transactions and settlements, not for holding "money" balances. People no longer hold cash balances to the previous extents.

2008 Nov 14 08:49 AM

[Tony Rand:]

Right or wrong, Paulson mislead the country and is himself adding to the growing problem of fiscal irresponsibility. One purpose TARP had was to allow for modifications of legitimate mortgages. ABS and other SIV instruments contain prohibitive restrictions that prevent modifications from taking place - at least to the extent needed to prevent unnecessary foreclosures. Taking ownership of those assets would have removed the restrictions. Shoving $125 billion down the throat of BofA (and eight other large financial institutions) is not going to resolve the foreclosure or credit crises.

2008 Nov 14 09:59 AM

[Robert Nabloid:]

Is that a game we can play?


On Nov 14 07:02 AM bosun.j wrote:

> Apparently this Bankster is in line to profit form Paulson's Grand
> Theft Taxpayer!

2008 Nov 14 04:35 PM

[My Wallet:]

I dunno, but my wallet is a little light and the retirement plan is on hold(cause the underlying assets are down 50%). All this messing around with toxins and keeping Paulson's commune buddies in business reeks of "faulty intelligence" similiar to going to war in Iraq.

2008 Nov 14 07:16 PM

[Kunst:]

So the first half of the money is mostly gone and oops, we made a mistake! I hate it when that happens. I'm sure the second half will be better used. And the third half, and the fourth, and .....

2008 Nov 14 09:56 PM

[Kunst:]

It sounds like the banks have money but aren't very interested in lending it out. How about the government guarantees say 95% of the principal of any new loans the banks make? Appropriate rules and limits, of course. That way, the banks have less to fear in terms of default risk, but the government doesn't have to fork out a ton of money up front.

2008 Nov 14 09:59 PM