Paulson: Dracula or Uncle Sam?

If anyone else has expressed a similar thought after having spied this week's cover of The Economist, I've not heard of it.

Therefore, full credit is being taken for being the first to notice the disturbing resemblance of Treasury Secretary Hank Paulson to Count Dracula, rather than to Uncle Sam, as the magazine obviously intended.

But, the Dracula connection makes a lot of sense when you think about it - the Paulson-crafted, soon-to-be-passed financial market bailout may well suck the life out of the American taxpayer as vampires have sucked blood from their victims for thousands of years.

On a related note, is anyone warming up to the new HBO series, "True Blood". It's from Alan Ball of "Six Feet Under" fame and, after having seen just a couple episodes, it seems quite good, despite the occasional gore that requires squeamish viewers to avert their gaze from time to time.

Anyway, here's what The Economist has to say about the latest U.S. bailout:

Spending a sum of money that could buy you a war in Iraq should not come easily; and the notion of any bail-out is deeply troubling to any self-respecting capitalist. Against that stand two overriding arguments. First this is a plan that could work (see article). And, second, the potential costs of producing nothing, or too little too slowly, include a financial collapse and a deep recession spilling across the world: those far outweigh any plausible estimate of the bail-out’s cost.
...
The economics behind this is sound. Government support to the banking system can break the cycle of panic and pessimism that threatens to suck the economy into deep recession.
...
Mr Paulson’s plan is not perfect. But it is good enough and it is the plan on offer. The prospect of its failure sent credit markets once again veering towards the abyss. Congress should pass it—and soon.

Clearly, in the image provided by The Economist, the removal of the distinguishing Uncle Sam hat had the unintended side-effect of drawing attention down to the high black collar rather than to either the red bow-tie or the finger pointed menacingly at the viewer.

Perhaps a more menacing photo of the Treasury Secretary would have helped avoid this confusion.

It took me a more than a few seconds to figure out that it was indeed Uncle Sam's clothes he was wearing and not those of some silly vampire.


Then again, my view of things could have been unduly affected by the new HBO series.

Comments

[Gojijoan:]

I actually think Hank Paulson looks more like a taller, more slender, Uncle Fester from the Adam's Family. Don't you think so ?

2008 Sep 29 10:45 AM

[MichaelZZ:]

FINANCIAL “CRISIS”

One cannot resolve a problem unless one understands the problem.

PROBLEM: Financial institutions have reduced their lending.
The problem results from the impaired equity portion of the balance sheets of these institutions, with the impairment caused by write-downs of their assets (loans).

Due to the losses they have taken, these institutions, by law, have had their maximum potential lending amounts reduced.
The amount they are able to lend is contingent upon the amount of their equity capital (EC), e.g., if an institution has an equity capital of one billion dollars and is able to lend up to 20 times its equity capital, it could lend up to 20 billion dollars.
After taking loan write-downs (losses) of two hundred million dollars, its EC would now be 800 million dollars, thus it would have its maximum lending authority limited to 16 billion dollars, i.e., a constriction of its legal authorization to lend.
This is the crux of the problem.

The institutions have funds, i.e., liquidity. But, without the legal authority to increase lending, they are sitting in stagnant water.
Those who say that one going to one’s ATM for a withdrawal may find a closed sign are, absolutely, lying or ignorant.
If one is a Representative or Senator and is lying, he or she should be Impeached and removed from Office.
Likewise, if that Representative or Senator is ignorant, he or she, apparently, is not, adequately, accepting his or her fiduciary responsibility of understanding a subject prior to advocating or voting for it, thus he or she should also be Impeached and removed from Office.

PAULSON PLAN: Purchase impaired mortgages from financial institutions with taxpayer funds.

Indeed, this would positively affect an institution’s EC, because the impairment (loss) would have been transferred to the taxpayers. This reversal of loss would be achieved by paying face price rather than market price, since if the market price were paid, there would be no effect upon EC.
This contemplated action is anti-capitalistic, immoral, and a method of stealing from taxpayers.
The taxpayers did not cause the capital impairment (this IS the problem, i.e., “It’s the balance sheet, stupid”).

Anyone involved with designing this scheme and voting for it should be incarcerated as co-conspirators to steal from the citizenry.
The scheme’s authors and those who advocate for it would be precipitating an admission that capitalism doesn't work, which is a lie.
Capitalism is the best economic tool ever devised, but as with any tool, it can be and has been abused.
Congress should accept most of the responsibility for creating the economic atmospheric conditions that enabled the abuse.
Further, any resolution of this financial phenomenon will not abate the underlying problems of the economy.
It is not the lack of lending that has damaged the economy. It is the economy, affected by greed, that has damaged the lending, but, of course, if appropriate corrective actions are not taken in regards to this financial phenomenon, our weak economics will be adversely affected.

If the Paulson plan were adopted, it would be the most massive SPE by multiples, the dollar would weaken, interest rates would go up, thus the decline in home prices would be exacerbated, and the EC would require further resuscitations.


BEST PLAN:
1) Allow some institutions to go the route of Countrywide, Bear Stearns, IndyMac, and Washington Mutual. I, also, like the AIG model.

2) Most rational institutions will do what UBS, Merrill Lynch, Goldman Sachs (just recently with Warren Buffett) have done, i.e., they have raised additional EC, usually by selling preferred stocks.

Months ago, when Merrill sold 6 billion (as I recall the amount) dollars of preferreds paying 9%, I knew they were desperate, and that this was just an early domino.
Goldman Sachs, from what I have heard, is paying Buffett 10% for the preferreds. Keep in mind; this is after-tax money. The only reason for Goldman Sachs to take a desperate (GS also gave Mr. Buffett 43,000,000 warrants to purchases GS common @ $115 per share) action was because it knew it was experiencing an EC impairment and needed to raise additional EC.

Please keep in mind that pain is not all bad. It is a signal that something is wrong and indicates that the source of the pain (problem) must be determined, analyzed, understood, and finally the best alternative action must be taken.
We are experiencing pain regarding this financial phenomenon.

3) As a last resort, it would be appropriate for the government to establish a fund (call it the RTC 2.0 AKA Peoples' Financial Fund) and use those funds to purchase (just as have Mr. Buffett and others) preferred stock from institutions. The fund should follow Mr. Buffett’s lead and demand additional potential remuneration in the form of long-term warrants.
The stock would receive dividends and would have a convertible feature to convert to common stock, at the option of the fund.
Further, until certain parameters were met, the preferred ownership would assume voting control, thus the matter of executive compensation would be moot.
We either believe in capitalism or we don’t.

We will have displayed a pragmatic solution well within the parameters of capitalism.
The U.S. dollar will strengthen.
The next step would be to address the underlying economics with the basic problem being unbridled greed.
We should not have a "shot" stimulant as we did earlier.
We need to eliminate the largess given to the very wealthy, in error, by the Bush tax cuts, and to reduce taxes on the middle-class on a permanent basis.
This will have an immediate positive effect upon our economics and we will be on the path to a rational economy.

I will appreciate all comments regarding the foregoing.



Michael Z
Sherman Oaks, Ca.

2008 Sep 29 10:49 AM

[Liverdiefree:]

A good post, MichaelZZ but, of course, impossible.

"Congress should accept most of the responsibility for creating the economic atmospheric conditions that enabled the abuse." Good one. Have you read what these goats have been saying? For almost all, the only reality is "what will get me reelected" and accepting responsibility, i.e. blame, for ANYTHING is not on their radar. Sell the necessity of pain to an electorate that perceives nothing wrong with hanging the financial tsunami of the national debt on succeeding generations? They're more likely to vote to spend a bunch on powerball tickets.

In short, any plan that does not take the multitudinous shortcomings of those serving in congress into account is a non-starter. But thanks for the post. Liver

2008 Sep 29 11:26 AM

[henarl:]

MichaelZZ: The reason the EC is impaired is a "mark to market" rule imposed when there is no real market. This results in "mark to zero" and a reduction of EC far below it's real value. The solution is for Congress to mandate a market value somewhere between "fire sale" and "hold to maturity". This would raise the current ECs of the financial institutions holding these assets and allow them to return to lending.

2008 Sep 29 03:11 PM