Can Paulson Add $700B Worth of Value to the Mortgage Market?

Treasury Secretary Paulson is asking Congress for another go at unlimited authority - only this time he has acquiesced to a budget of $700B. Paulson claims that the financial system is facing Armageddon if he and his puppet Federal Reserve Chairman Bernanke don’t get their way. They need $700B to liquefy the toxic mortgage market and calm the financial markets.

Let’s look at the dynamic duo’s track record. Instead of calming the markets, their version of moral hazard created such a fright that banks and other financial institutions are virtually shut out of the capital markets. The initial $2 merger stock price Bear Stearns got from JP Morgan (JPM), and the 79.9% solution for American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE) were absolute failures in building confidence. The government got $0 worth of investor confidence for the taxpayer money spent.

The Paulson proposal allows him to hire and fire personnel, enter contracts, designate financial institutions as “agents of the Government”, establish vehicles to purchase assets, and issue regulations at will. Paulson would also be able manage the purchase process, portfolio, and asset sales without restriction. It is simply ridiculous to give this bazooka to someone with such a poor track record.

Hopefully Congress learned something from bazooka round 1. I am sure Congress had no idea that the Administration would stress moral hazard to the detriment of confidence building. The only positive I can say is that Paulson is not trying to stick this toxic waste in my Fannie and Freddie.

The political sticking points appear to be the Democrats insisting that this effort be used to stem the tide of foreclosures, and the Republicans insisting the sanctity of contracts be maintained. Paulson wants to just trade whole mortgages, MBSs and CDOs without any encumbrances.

Beyond liquidity, Paulson doesn’t appear to be adding any value to the mortgage market. He needs to be able to break open the MBS and CDOs to modify delinquent mortgages and make them current. Paulson should follow the lead of Bob Steel, CEO of Wachovia (WB). Steel is aggressively refinancing or modifying Golden West Financial’s Pick-a-Pay (option ARM) mortgages to prepare them for sales. Steel is adding value; Paulson needs to do the same with the toxic waste he acquires.

The clause that I fail to understand is Sec. 8. Review: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Does this clause allow Paulson to crack open MBSs and CDOs to modify mortgages without judicial challenge? Do the Republicans lose their sanctity of contracts or does this simply indemnify and hold Paulson harmless?

If Paulson does not intend to modify mortgages, then he is nothing more than a market maker with the ability hold assets. If the Administration truly wants to add value to the mortgage market, why are they dragging their feet on implementing the $300B FHA guarantee plan? Barney Frank’s FHA mortgage refinance plan was included in Paulson’s bazooka 1.

Disclosure: Author is long AIG, FNM, FRE, JPM and WB.

Comments

[blondino:]

www.businesspundit.com.../

2008 Sep 22 05:25 AM

[blondino:]

i think paulson is bin laden! ;-)))

2008 Sep 22 05:28 AM

[Kiwi_Envoy:]

Paulson would be better of quitting before he destroys what is left of the US economy.

I now firmly believe that all he is doing is bailing out his fat cat buddies on Wall Street at the expense of putting a huge yoke on the rest of the US citizens.

Why he could be trusted without any oversight committee is beyond me. For all we know he will us the taxpayer funds to short the gold and silver market to make the US dollar look better once he incinerates the US dollar with this massive bailout.

The Democrats will surely not let this proceed?

If this never ending bailout does proceed kiss the dollar good bye and say hello to gold and silver.

Kiwi

2008 Sep 22 05:30 AM

[Moon Kil Woong:]

You are right on. Paulson is proposing the complete socialization of America. All financial institutions are to be socialized, he can control any loan, and can do anything to the employees as "agents of the government". And if you don't like what he does (like yelling at the people removing all the money from the vault), I guess he can charge you with some crime. This is not only a banking bill folks. It cedes all financial wealth and control to the Fed and Treasury because they know best. They can delete the we want $700 billion when in fact they raise the debt limit buy over 2 trillion (noted). Why, because they essentially own all money with section 2, #3 and all people in finance who claim it's wrong can't since they now take orders from the Fed. and are legally mandated to do what he wants. Fortunately, I am not working for a bank or I could not say this starting whenever this bill passes.

2008 Sep 22 05:43 AM

[David Martin:]

This is not socialism. It is corporate fascism. All assets will be subject to the Fuhrer's confiscation should he deem it necessary, and no Court or other review is to be permitted.
This is a raw power grab, with one man to be in charge of the US.
And that man is not Obama or McCain.

2008 Sep 22 09:09 AM

[investment ...:]

...the liquidity will be provided at basement prices, after purchased & owned, the congress will change laws impacting the assets (tax, downpayments on distressed assets, etc...) and viola, gov't wins, aka the taxpayer wins... a really big 800 pound gorilla is about to go into market..

2008 Sep 22 11:03 AM

[Diyg:]

Giving such power to one man is insanity! And he comes to us from none other than Goldman Sachs! Ultimately, whose side do you think he will be on?

2008 Sep 22 11:44 AM

[madasiwannabe:]

The answer to the question at the bottom of your article is the law itself. It doesn't come into effect till 1 October. That's why Uncle Hank hasn't spent a nickle on the GSE's yet. Now that Hank owns the GSE's, he will use them to clean the books of the financials. Whatever can't be absorbed by the new bailout plan will be stuffed into Fannie and Freddie before anyone can check the books.

The only monkey wrench in the bailout plan is congress wanting warrants against the companies that use the plan. That would make Hank's free money plan expensive for Wall St. If it's as bad as Hank says, they will take the deal to save themselves. It will be interesting to see if things are really as bad as Hank says or if he's just crying wolf to help his buddies before he leaves office.

2008 Sep 22 09:08 PM