Hank Paulson: Leading Us to the Next Bull, Soon

The financial blame game is in full effect. The US Treasury is getting ripped to pieces in the media by opportunistic politicians. What a joke. I am not on that bandwagon at all. I sit on the opposite end of the spectrum as I think Hank Paulson has been near perfect during this credit crisis. As far as I’m concerned there are only two men to blame for this crisis. The first is Bill Clinton who repealed one of the most important pieces of legislation in this nation’s history, the Glass-Steagall Act of 1933, a move which has caused the breakdown of the entire residential mortgage investment sector. The second man is Alan Greenspan who urged widespread use of zero money down ‘exotic mortgages’ to coax Americans into homes that they could not afford. So if you want to play the blame game, stay away from the current administration and research the source of our problems.

Considering the intense throttling that we have dealt with since the SEC ended their temporary enforcement of naked short selling on August 13th, Mr. Paulson has managed to turn the weakness into a strength almost overnight. There have been casualties. But they were necessary. A crisis of this magnitude could never be resolved without capitulation and I applaud the administration for allowing this process to occur as quickly and as orderly as possible. It’s scary to think where we would be without Hank Paulson. His experience as CEO of Goldman Sachs (GS) gave men like Jamie Dimon of JPMorgan (JPM) and Ken Lewis of Bank of America (BAC) the confidence that he could successfully orchestrate the consolidation of the industry.

There is no doubt that Hank Paulson has too much power to decide which institutions survive and which fail but fortunately for us, he has chosen wisely. Whether this was all part of a master plan or if he has adapted along the way might never be known but I suspect he has had a plan. We all saw where this crisis was headed. We all knew that housing prices weren’t going to bottom until 2009. We all knew who had the weak balance sheets. The consolidation within the financial system was inevitable. What is remarkable is that it’s all happened so fast. Those ruthless short sellers and annoying mark-to-market transparency rules have actually done their job. By resolving the issues of Bear Stearns, Countrywide, Indymac, Fannie Mae, Freddie Mac, Lehman, Merrill Lynch, AIG, and now Washington Mutual there won’t be any more dumping of mortgages or forced asset sales. The weak balance sheets have been firmed up to endure the remaining housing correction. The pain of September has solved our problems.

So why am I bringing all of this up about the Treasury Secretary? Because a clear understanding of what he has done over the last month shows us where this market is headed. On October 1st we’ll all look back and say, what in the world just happened?! And then we’ll start buying up stocks as we realize that our problems are in the rearview mirror.

Lagging indicators like employment won’t matter anymore as the market looks forward to recovery. The record amounts of cash that are sitting on the sidelines will jump into the market. The US dollar will continue to rise as the world applauds the speed at which we worked out our crisis. Foreign investors will jump into US equities as a result. This international money will boost our multiples to levels that we didn’t even see during good economic times because of the prolonged weak dollar.

I know it’s hard to envision such a scenario during a week like this one, but Hank Paulson's deft moves have set the stage for a sustainable market rally; something we haven't had since this mess began over a year ago. Take it from a guy who just last month took on industry titans Boone Pickens and Goldman Sachs for their status quo oil calls (check it out at www.lonepeakportfolios.com). People thought I was crazy for suggesting oil could reach $90 a barrel this year but look what happened on Tuesday. It only took one month.

Now I’m calling for a sustained market rally because of the orderliness and speed of Hank Paulson’s financial consolidation. Take a step back from the consolidation turmoil and you'll realize how much better off we are. Market volatility may continue through the rest of the month as the dirty work gets completed but this bottom is different. Investors should take note of the structural improvements and begin averaging into the market (IVV).

Disclosure: Looking to buy S&P 500 calls

Comments

[DS:]

Jason Schwarz, you are a socialist. You think government must provide people with money because markets are incapable of coming up with money themselves. You falsely believe that governments are able to understand and solve the problems they caused themselves. It is your "nearly perfect" central bankers who artificially lower interest rates below their natural level. All this marginal paper money needs to go somewhere, capital is being misallocated, for example to the housing market. That's why. The entire housing market bubble, and any other bubble, is caused by government. The artificial growth caused by paper money comes at a price you know. Look at gold. Has the scarce metal really changed so much and gained in real value, or is it just the USD that is being diluted and inflated by your government?

2008 Sep 18 09:11 AM

[glassbox:]

I hope you are right!

2008 Sep 18 09:11 AM

[tl:]

I agree with much of what you say, but your belief that the housing market will bottom as quickly as 2009 is unlikely, in my opinion. Past housing slumps lasted at least 4 years, and our latest housing boom is on an order of magnitude much higher than anything we've ever seen. What makes you believe that housing could bottom so quickly, relative to historical peaks/bottoms?

2008 Sep 18 09:22 AM

[Moses:]

Wow you're a complete tool and I hope you buy those S&P 500 calls. You will lose your money and hopefully stop posting fairy tales.

2008 Sep 18 09:26 AM

[harveywallb...:]

Bush was screaming that every dope out there should own a home as well ... especially the illiterate who deserve in some measure their own demise in terms of not being able to keep up with mortgages.

The best years in past administrations has been between the two Bushes, though I'm certain you think present admin is doing peachy.

One of the things that annoys me @ conservatives presently is their entire disavowal of an economy that they proclaim should be free market. It's no longer a free mkt when the fed is in the act of bailing out.

Yeah sure, what else are they supposed to do? Can't sit on their hands, right.

Whatever!

2008 Sep 18 09:27 AM

[icandoitdon:]

sorry, jason, your contention that this administration is blameless for the collapse of the mortgage business and credit freeze just doesnt' wash.

who was one of the biggest cheerleaders of deregulation of industry? the bush administration?

who publicly claimed that "deficits don't matter?" dick cheny.

who has repeatedly argued (until now of course) that speculation played no role during the run up in oil prices while pointing the finger of blame at speculators for the collapse in the stock prices of the investment banks? the bush administration.

and who repealed the rule that required short sales occur only on upticks? the bush administration.

who encouraged people to spend like drunken sailors in the aftermath of 9/11? george bush.

the administration's fingerprints are all over this mess and to contend they are blameless renders you clueless.

2008 Sep 18 09:29 AM

[John Pseudonym:]

Dow to 10,000.

We will dip below 10,000.

We will rally off that sub 10,000 low.

That will be a short term bull run.

Get in below 10,000 and be ready to get out at a moments notice.

2008 Sep 18 09:36 AM

[TheOneoneone:]

They're printing money, and this guy is blaming Clinton. I'd laugh if I didn't feel sick.

2008 Sep 18 09:45 AM

[H-Bomb:]

I'm hostile. Like "I want to eat your children" hostile and I'm not the only one. Read the comments to any article here. Some comments wish life ruining fates on people that have a differing viewpoint. I feel that way towards most of the idiotic posts here. But why? Is it because the sense of powerlessness? The tone here is so decidedly negative I am convinced that some of you are a threat to yourselves and others. You're certainly a threat to my mental health.

Why do we want to destroy, not only each other, but ourselves and this nation? Why run everything down? Why so bitter? Things are bad, and they may get worse. Armageddon is not at hand.

2008 Sep 18 10:02 AM

[H-Bomb:]

I should have written: "Things are bad, and they may get worse but Armageddon is not at hand."

2008 Sep 18 10:03 AM

[jmkeynes:]

Lower oil prices will help kill off investments in alternative energy infrastructure. Why build windmills when oil is cheap, right?

Wouldn't it be much better to re-inflate the housing bubble. That way, instead of building windmills and solar energy farms, we can go back to "investing" in big houses, summer homes, etc. The bigger the better!

As long as the Chinese and Saudis are willing to lend us money, why just buy a house that fits your needs. Wouldn't it be much better to buy one with extra bedrooms, even if you never use the rooms. That way you can make more money when you sell the house. Right!

Better yet, why not buy a vacation home or two as well. Even if you don't have time to use them and they stand empty, you can make money on them with - especially with all the tax breaks congress has for home owners.

So, let's keep the American dream alive by investing more and more money on big houses (even if we never get around to visiting all the rooms) and vacation homes (even if we never take vacations).

Why invest in wind energy and solar energy when investing in housing is so much more fun an profitable! Let someone else worry about about global warming, we just want to make as much money as we can now.

So, three cheers for the Arab oil states and cheap oil. And three cheers for housing bubbles that never have to burst.

Go America. You are going to deserve what you're going to get. Unfortunately, you may just take the rest of the world with you.

2008 Sep 18 10:27 AM

[H-Bomb:]

As if the rest of the world matters.

There back to my old self. That feels better.

2008 Sep 18 10:47 AM

[DougM:]

Unreasonable to blame Clinton. The GOP congress passed that bill after all. Plus G-S was irrelevant by that point anyway. The unregulated swaps market was already a growing problem even without the G-S repeal. Fact is, the real source of the systemic risk we now face is the swaps. Without that, many institutions could and would have been allowed to fail as they should, including Bear Stearns and AIG. While the swaps are the systemic risk, it needed a trigger, and for that, we need look no further than Alan Greenspan, who ignored shoddy lending practices and who held short-term interest rates too low for too long.

2008 Sep 18 10:55 AM

[bpkpa:]

Two ideas for your consideration and discussion:

First:
AN APPROACH TO US RESOLVING HOUSING/CREDIT MARKET ISSUES:

Note: New Home Sales 2006-2008 Approx. 2,000,000 (Aggregate)
Existing Home Sales 2006-2008 Approx 15,000,000 ( “ ”)
Current Inventory of Unsold Homes: Approx;. 4,000,000

1. HOMEOWNERSHIP SUPPORT PROGRAM FOR 4 MILLION HOUSES:
( 4,000,000 x 25,000 =$ 100,000,000,000- ONE HUNDRED BILLION DOLLARS

A. US FUNDS 100 BILLION DOLLARS, TO BE USED AS FOLLOWS:
US TO PAY DOWN PRINCIPAL ON OWNER OCCUPIED HOUSING UNITS PURCHASED SINCE 2005, WHETHER CURRENTLY IN FORECLOSURE OR SIMPLY NON-PERFORMING, UP TO $ 25,000/UNIT, PROVIDED THAT
1. LENDER WRITES DOWN THE SAME AMOUNT
2. LENDER MODIFIES MORTGAGE TO 30 YR FIXED AT PREVAILING RATE FOR A++ CREDITS
3. NEWLY WRITTEN DOWN LOAN IS NOT MORE THAN 90% LTV

B. US (FNMA/ FREDDY) GUARANTEES MODIFIED LOAN AT PAR;

C. LOAN SOLD IN MARKET AS US GUARANTEED LOAN. LENDER GETS CASH FOR MODIFIED LOAN, PLUS CASH FROM US. LENDER CAN SELL LOAN FOR MORE THAN WRITTEN DOWN VALUE OF “SUBPRIME’ LOAN IT NOW OWNS, WHICH IS NOT SALABLE, OR WHICH IS MARKED TO MARKET AT SIGNIFICANTLY BELOW PAR. MAY ALSO PERMIT LENDER TO REVERSE PRIOR WRITEDOWNS FROM PREVIOUS MARK TO MARKET., THUS INCREASING ITS CAPITAL POSITION.

D. HOMEOWNER HAS OBLIGATION TO REPAY TO US FROM SALE OF HOME (BECOMES 2D LIEN, BUT NO DEBT SERVICE DUE). SO, HOMEOWNER
1) INCREASES EQUITY BY THE AMOUNT OF THE BANK WRITE DOWN OF FIRST MORTGAGE.
2) HAS 10 YEARS TO LET MARKET VALUE PAY OFF 2D LIEN TO US WITH NO CARRYING COSTS
3) HAS REDUCED PAYMENTS TO ALLOW TO STAY IN HOME AND SERVICE DEBT. THIS REDUCES CHANCE OF DEFAULT ON LOAN NOW OWNED/GUARANTEED BY FNMA.


E. COSTS/ BENEFIT ANALYSIS:
WITH HOUSING MARKET STABILIZED, NORMAL DEFAULT RATES AND APPRECIATION SHOULD AGAIN APPLY. AFTER 10 YEARS, THE MONEY ADVANCED BY US WILL BE REPAID, IN WHOLE OR IN PART. EVEN IF 30% OF HOMEOWNERS ADVANCES ARE NOT REPAID—IF US RECOUPS ONLY 70% OF PROGRAM IN 10 YEARS, ( $70 BILLION), IT WILL HAVE COST THE US GOVT. THE COST OF FINANCING THE $100B (SAY $5B/YR X 10 YRS, OR 50B, PLUS THE 30B NOT REPAID, OR $80B, OVER 10 YRS, WHICH IS 8B/ YR. QUITE A SMALL PRICE TO PAY FOR STABILIZING THE HOUSING MARKET AND RE-CAPITALIZING/RE-LIQ... THE LENDERS.


Next Idea:
AN APPROACH TO US RESOLVING THE DERIVATIVE/CREDIT DEFAULT SWAPS GENERATED CRISIS IN REAL ESTATE MORTGAGE CAPITAL MARKETS.

COST- 250 BILLION


US GOVERNMENT AGREES TO ACQUIRE MORTGAGE PAPER SUBJECT TO CREDIT DEFAULT SWAPS FROM CURRENT HOLDERS FOR 60/100, PROVIDED THAT ALL COUNTERPARTIES ARE RELEASED FROM OBLIGATIONS UNDER CDS CONTRACTS ASSOCIATED WITH THE PAPER BEING BOUGHT.

COUNTERPARTIES AGREE TO PAY US 40/100 TO SETTLE CDS COUNTERPARTY OBLIGATIONS. THIS REDUCES AMOUNT PAID BY US TO 20/100.

250 BILLION WILL BUY 1.25 TRILLION WORTH OF PAPER PURCHASED FOR 20/100.

COUNTERPARTY LOSSES RELIEVED= 60% OF 1.25 TRILLION THIS SHOULD CALM MARKETS WAITING FOR OTHER SHOE TO DROP.

HOLDERS RECOVERY- 60% OF 1.25 TRILLION—THIS SHOULD PERMIT HOLDERS TO RE-LIQUIFY AND SHORE UP BALANCE SHEET, AND MAY PERMIT HOLDER TO REVERSE EARLIER MARK TO MARKET LOSSES TO THE EXTEND PAPER WRITTEN DOWN UNDER 60

NET COST TO US- 20% OF 1.25 TRILLION, LESS AMOUNTS RECOVERED WHEN MORTGAGES ARE PAID EITHER IN WHOLE OR IN PART- OR SOLD (SEE BELOW)

ANY RECEIPTS IN EXCESS OF 250 BILLION FROM PAYDOWNS/ PAYOFFS WILL BE SHARED WITH HOLDERS’ CREDITORS IF HOLDERS LEVERAGED THEIR ACQUISITION OF THE PAPER BEING BOUGHT, UP TO 20% OF THE PAPER, SO THOSE CREDITORS WILL RECEIVE THE 60c FROM HOLDERS, AND POTENTIAL FUTURE STREAM OF INCOME UP TO AN ADDITIONAL 20c. OR…
US COULD SELL PAPER FOR 40c WITH TAX CODE PROVISION ELIMINATING TAX ON PAYMENTS/GAIN, AND SPLIT EXCESS OVER COST WITH CREDITORS.


THIS PROGRAM DOES NOT ADDRESS OR FORECLOSE POSSIBILITY OF REGULATORY CHANGES REGARDING LIMITING/PROHIBITING CDS PRACTICES; LEVERAGING; CURRENTLY UNREGULATED ORGANIZATIONS AND MARKETS; ETC. THIS PROGRAM SEEKS TO SPREAD LOSSES ACROSS THE PLAYERS THAT INCURRED THEM, PUNISH TO SOME DEGREE

2008 Sep 18 05:50 PM

[bbowen7:]

There is enough blame to go around - particularly for those invested in the 2008 elections. My perspective is that McCain has been trying to talk about addressing the problems, Obama has been trying to figure out how to make the most political gain from it.
But more to the author's point, we are fortunate to have had Hank Paulson as Secretary of the Treasury at this point. Bernanke has helped and Cox has been a bust, but Paulson has been a star. He has acted forcefully with a deep knowledge of the financial system and the players, with creativity, and with much more pragmatism than ideology about "moral hazard".

2008 Sep 19 12:08 PM

[icandoitdon:]

hahaha!! good grief. what would you expect paulson to do? he's a creature of wall street. it made him wealthy beyond his wildest dreams. he and every one of his cronys turned a blind eye while they all raped the system. now he gets credit for saving it? get a clue.

as for your contention that "mccainhas been trying to talk about addressing the problems" and "obama has been trying to ...make the most politcal gain from it...." it sounds like you're one of those heavily invested in the 2008 elections.

2008 Sep 19 10:30 PM

[jetsby10:]

rofl, read this guy's bio. He claims he's had triple digit returns in the past 2 years.

2008 Sep 29 11:31 AM