Henry Paulson Could Have Done Better

I expected US Treasury Secretary Henry Paulson, being the ex-head of Goldman Sachs (GS), to be more effective at deploying the $700 billion financial bail-out package handed to him by Congress. I expected him to manage what is essentially one of the world's largest hedge fund with the acumen of a shrewd trader.

I did not expect him to openly declare his change in policy of using the funds to purchase shares in banks directly instead of buying up their toxic assets. He changed his mind too early, and tipped his hand too clearly, that not only does he appear he does not know what he is doing, he also exacerbated a crisis in confidence that has unintended cascading effect on the rest of the system. What he should have done instead was to keep his options opened.

His explicit switch of focus from the toxic ABS to bank shares removed the floor from ABS prices, which made the balance sheets of the major banks deteriorate further, pushing behemoths like Citigroup (C) to the brink of collapse.

He should have made the entire range of policy options available instead of tying one hand behind his back by explicitly limiting the type of assets he can buy. His policy should simply be this: starting with a profit motive from the tax payers' perspective, he will buy any distressed financial assets that become cheap enough that we can reasonably expect to turn a profit in the long run.

In this confidence game, his mere mention of buying up cheap financial assets would prevent them from getting too cheap, thus preventing further deterioration of the balance sheets of the banks that hold these assets. A policy that keeps his options open would have been a force multiplier that puts a floor on the prices of assets all across the system instead of the distortion we have now.

Another side-effect of a profit motive would be that he would have to focus the funds on helping competent organizations or purchasing assets that can reasonably recover in the future and turn a profit, but are only hurt in the short term due to collateral damage from the crisis.

I had expected the best of Goldman Sachs to be better than this.

Disclosure: no positions

Comments

[James Wilson:]

The idea is to support housing prices and save the banks all at the same time. Where was everyone when Country Wide was creating this mess ?

At the HOG TROUGH ?

Feed well did you ?

2008 Nov 24 12:28 PM

[CM in MA:]

We've gone through the looking glass..."A policy that keeps his options open would have been a force multiplier that puts a floor on the prices of assets all across the system instead of the distortion we have now."

How is putting an artificial floor under asset prices not a distortion? Are there any capitalists left?

2008 Nov 24 12:32 PM

[Jason Rines...:]

Here's the problem the way I see it: Fiscal policy attempts should have been conducted alongside monetary policy attempts. 70% of the U.S. economy is the consumer, more specifically Small Business that drives 51% of the U.S. GDP. When those pillars are crumbling, the platform of banking tips over. I believe you may have a point about all or nothing style guidance but I believe Mr. Paulson's recent decision making is from pressure from the President to address and include fiscal policy. If all the assets are purchased now in anticipation of a recovery, the recovery itself through fiscal policy, specifically skilled job creation and the ability for America to pay down debt must be addressed.

2008 Nov 24 12:35 PM

[jimmy46:]

YOU don't understand the problem.

How do YOU expect to have an answer????????????????

2008 Nov 24 12:46 PM

[Gene Chan:]

"Are there any capitalists left?"

Well, I wish we didn't have to go down this path of the bail-out. But given the predicament we're in, and that they've already decided to do it, might as well do it right and make it count.

2008 Nov 24 02:23 PM

[CM in MA:]

"Predicament we're in" We? Do you have a mouse in your pocket? This predicament, touted by the same people who created the mess, belongs to those who took on credit when they couldn't afford to (addicts), those who sold them that credit (street dealers), those who encouraged sub-prime borrowing (ring leaders), and those who failed to set and enforce regulations and standards (feds). Now they pass along the bill for their collective malfeasance to others while simultaneously destroying any remaining confidence in the markets. And all this for the very worst of reasons--because they can.

I am not in any predicament, except for the one being foisted on me by Wall St and Washington. Like many others, I pay my mortgage on time (in fact, I prepay on the principal). I pay my credit card bill in full every month. I save and invest (ha!) for retirement. Who are the fools in this game? All the folks like me, and our kids and grandkids, who will have to foot the bill for those who took on too much risk while pretending they didn't know.

So what's the answer. Quit claiming that those who made the mess can clean it up. The need to just stop and leave the scene of the crime. Let the market sort out the winners and losers. And let the losers take their losses. Capitalism, plain and simple is what will purge the system. All we're doing now is prolonging the pain.


On Nov 24 02:23 PM Gene Chan wrote:

> "Are there any capitalists left?"
>
> Well, I wish we didn't have to go down this path of the bail-out.
> But given the predicament we're in, and that they've already decided
> to do it, might as well do it right and make it count.

2008 Nov 24 03:41 PM

[Gene Chan:]

I guess I wasn't clear... I totally agree with you that the world would be a better place if a bail-out wasn't needed in the first place. But there is nothing we can do about that now - the bail-out package is there, it was already voted through Congress and everything, we have no power to change that. The only thing we can hope for now is that they don't squander that money.

2008 Nov 24 04:20 PM

[CM in MA:]

Gene-

We are total disagreement--the bailout wasn't needed and isn't necessary. The capitalist system has self-correcting and healing mechanisms. These have been short-circuited by the the same people who were the architects of the abuses the system. They proclaim that they couldn't foresee the folly of their policies and practices, but now are the only ones with wisdom, foresight, and ability to save us from them. Paulson, Bernanke, et al, are only making things worse. This chapter in U.S. and world financial history will go down as one marked by hubris and failure. These people, including those about to take office, are the problem not the solution.


On Nov 24 04:20 PM Gene Chan wrote:

> I guess I wasn't clear... I totally agree with you that the world
> would be a better place if a bail-out wasn't needed in the first
> place. But there is nothing we can do about that now - the bail-out
> package is there, it was already voted through Congress and everything,
> we have no power to change that. The only thing we can hope for now
> is that they don't squander that money.

2008 Nov 24 04:33 PM

[Gene Chan:]

I still don't see the disagreement. Like I said, I agree with your agrument, it's just that we have no power to change it now that it has passed. You and I don't control Congress.

The best we can hope for at this point is that they don't mess it up further.

2008 Nov 24 04:38 PM

[CM in MA:]

Gene-

About my last post. I misread your reply, putting incorrect emphasis on some of your words--sorry about that. Sure, we agree that the world would be better without the bailout. Where we disagree is that the philosophy behind the bailout, and any government action that stems from it, are so fundamentally flawed that what actually gets done is irrelevant. The bailout(s) are poison to our system. The distortions introduced by the TARP, etc. are worse than the disease. The patient would recover if just left alone.


On Nov 24 04:20 PM Gene Chan wrote:

> I guess I wasn't clear... I totally agree with you that the world
> would be a better place if a bail-out wasn't needed in the first
> place. But there is nothing we can do about that now - the bail-out
> package is there, it was already voted through Congress and everything,
> we have no power to change that. The only thing we can hope for now
> is that they don't squander that money.

2008 Nov 24 04:41 PM

[xsuddensam:]

What are you talkin' about; Paulson could have done better?

He's doing just fine for his banking buddies.

2008 Nov 25 09:46 AM

[happysoul77777:]

Paulson and Bernanke just hit a home run!

The model they used to save Citi is fantastic. It's better than purchasing the troubled assets. The strategy used very little money. In the purchasing strategy, there is a problem that sellers do not want to sell assets that are still generating good cash flows, even though the assets have bad marks.

The market should understand the logic.

2008 Nov 25 08:57 PM