Frankly I am appalled by what I have been hearing at the senate testimony. Considering the facts are pretty clear, I took the liberty of refashioning Paulson's, Bernake's, and Cox's testimony to be more honest ones.
First lets start with their opening statements:
Paulson: We face harrowing times. Although the fed has injected a substantial portion of their liquidity into ailing financial institution without full clarity of their true cost and the FBI is investigating them currently for fraud, I come to you today to implore you to prevent the Fed from spending the last of their liquidity buying distressed assets and falsely creating a market price in which to value these assets similar to the actions Japan embarked on to hide bank losses that dragged their economy down for 20+ years
To explain why a lingering recession is better than the alternative let me highlight the risks to you. Whenever a bank goes bankrupt the cost to clean up the mess goes directly onto the US deficit because we earlier agreed to allow the Federal Government to use all the FDIC payments to pay a mounting deficit. Thus we are trying to prevent hundreds of banks from going down due to the actions of several banks and brokerages that increased their risk so their gearing rose above 40x making the money multiplier expand at an unsustainable rate and placing the entire country at risk when the economy slowed its growth.
Consequently, the US is headed to a recession that I hope won't become a depression. The fundamental problem is a contraction of money supply. Mortgages are the first symptom, however, hopefully I won't be here too long to have to deal with the other symptoms. This is just a stop gap measure to make sure banks are ok to pick up all the distressed assets when the economy collapses like all other contractions in US history. I hope you support this measure because you basically have no choice.
The reason I ask you for approval is of course so I can claim that the public supports this measure even though even I don't know exactly what I will do with all the money you are giving me to shower on the financial institutions. Really, if my former employer Goldman Sachs (GS) goes out of business I think it will be a bad day for America.
Let me tell you why. Goldman was quite happy selling mortgage backed securities while they bought massive sums of CDS' on the market. Unfortunately the CDS market is going down because that market allowed each other to keep playing hot potato with the final insurer who probably will all result in being bankrupt or fraudulent backers who spent all the insurance $ and have no capital to back them.
Also, it is quite hard to find out who owns the mortgages all the bonds that are the basis for the bonds we sold, and the subsequent derivatives that float on top of them. So considering we built a house of cards in which $61 trillion dollars is supported by a shady $7.5 trillion dollar mortgage loan industry, you can imagine how messy it is. In fact the real problem is probably more like $7-20 trillion dollars. Hopefully, no one will ever know how complicit in the industry and how contemptible Goldman played in this. And hopefully no one will stop the CDS market until Goldman gets paid which is my main concern.
Thanks, now here's Bernake:
Hi. Let me explain economics to you. There are 2 types of values for assets. The hold to maturity which continues to drop as more and more homeowners go bankrupt and the fire sale value which is illiquid and sells for a deep discount because no one knows the value. On these rests tons of derivatives which is what we want to artificially price which are written by the worst mortgage offenders (usually those trying to protect their ass or convince others to buy mortgage securities by trying to prove they are safe and liquid). However, we can't get you to obviously bail them out. So I suggest we create another way to value these assets. Since exempting banks from marking to market would mean that banks are essentially black boxes that no one will loan money to, we can't do the following.
My proposal is simple. We buy loans at what may be the loan price plus we pad the loss by marking it up by setting some fictitious default price. Even though the default price goes up as a recession hits us, all banks are now allowed to artificially claim them to be our artificial price. This will allow us not just to mark up all our crazy derivatives and dump CDS liability to others hopefully, including the government, it will also allow us to reverse some of the losses we already had to mark down. Forget the fact that we have socialized the system and halted free market pricing. Also forget the fact that it will be a cold day in hell before we let the government out of the market.
In addition, since the banks are able to sell to us, they can then use the money multiplier to loan to others to buy up all the assets of the public as the taxpayer goes bankrupt. This means mostly the banks and homeowners who will feel the recessionary crunch by job losses and rising defaults. Mind you I actually care utterly nothing about this. Why else would I and all the former Feds supported augmenting false GDP, unemployment, and inflation numbers for decades.
We meaning the Fed only care about the system and our ability to purchase as many undervalued assets as we can when the market goes down. He who holds money when there is less and less of it is the winner. Therefore, we don't want to make profit from this, only not loose money like everyone else is.
It is true making false prices for assets, in this case loans does not actually remove the bad loans. It just allows us to pretend they have a certain value as banks try to use the interest payments by paying individuals to eventually write off the deluge of bad loans. Already we are doing well making the fed funds rate and the bank loan spread as wide as we can.
On the hidden side, all the derivatives we bankers made can resume allowing us to make the future crisis even bigger since we now the government is complicit in our scams and we can't be blamed for falsely valuing our bonds. Then we can all desperately try to unwind our liability or if all else fails, start making some other derivative to ramp up to trillions of dollars to claim we have covered our liability when we know we actually haven't (CDS like instruments). Hopefully, you will allow these to be unregulated or else it won't work without breaking laws.
Now to Mr. Cox:
Thanks for hearing us. In all my years of business I have been a big supporter of deregulation. I still am. I am against stopping shorts, but essentially had to, just to artificially pump up the market each time it looks weak. Soon you won't be able to short anything except mortgages with CDS since Goldman loves shorting mortgages and we wouldn't want Goldman to go bankrupt would we?
I feel 0% guilty that I enforced no regulations and did not require adequate risk disclosure to any financial institution in all my years of being the head of the SEC. I also feel no remorse for failing to enforce any bank regulation or call for any regulation of insurance, loan, or other instrument while I watched banks, insurance companies, and brokers concoct things I don't even know about.
That being said, to require banks to disclose their gambling, would be disaster. Simply because not only were they gambling, they were also ripping off other people. In essence, when a bank can make a bad mortgage they now insure the bad mortgage making it a good one, then they can use a broker to sell it to another dumb fool. Then they can sell them insurance on the insured mortgage since they suddenly realize they may not be insured. Then they can make a market for their bonds where they can horse trade their bonds to show them how liquid they are when they actually aren't that liquid at all. Then, they can ask the government to lie about it all when no one believes them anymore.
So you see, I have not been presiding over a casino for these years. This casino was rigged to make the customers win because we can just steal their wallets as they leave. Is that gambling, I think not. It's business. And now since I'm the head of the SEC, I can blame short sellers as the crooks rather than having the banks and brokerages admit anything.
And thanks to this bill, banks and brokers are off the hook in the future because it's not them falsifying prices to pad their asses. It's the government. And it is approved by legislators elected by the people. So the taxpayers are complicit in this. Which is the public will. Democracy in action.
Little do they know, that a vast amount of money is going to disappear. This would normally cause deflation but by dumping $700 billion into the market and allow it to circulate although it will multiply into about $7 trillion dollars giving the financial institutions enough cash to finance their mansions for a few more years as the US goes into a recession. Hopefully, it won't cause too much inflation and a depreciate the dollar, because it would be hard to get other nations to finance our bonds for too much longer.
I would assume that Paulson said $700 billion because it can multiply to $7 trillion with ease which equals close to all of the housing market's mortgage debt. Thus he can insure that there will be a bank buying out every foreclosed mortgage even if it happens to be 100% of the mortgages. Isn't it wonderful. Capitalism at it's best.
Now we are ready to take questions from a banking committee that we sincerely hope is denser than any high schooler who took basic economics.
In essence, we know that this crisis is an economic crisis caused by a money supply contraction. This contraction causes recessions and depressions. We also know the mortgage crises is mainly a $61 trillion dollar CDS and mortgage derivatives crisis. It has nothing to do with defaults except the fact that falsifying them will prop up this house of cards for a while longer. To clean up the CDS market $700 billion is a paltry amount (under 2%). To think it will help is laughable. Also to think that giving banks equity to loan will stop the economic downturn is also a joke. The downturn will come from consumers and businesses choosing not to borrow, not due to banks refusing to loan out to customers that can pay off the loan.
The only way it helps is if banks loan to those they can't pay thus flooding the market with cheap money and causing inflation with no real increase in productivity. This equals stimulus in the short run as demand goes up but inflation eventually as no productivity offsets it. Do you really want to have a recession with inflation? The bankers apparently do since they will be some of the ones with more money and no increase in productivity.