What is Hank Paulson Thinking? 27 comments
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It's only Monday morning and two items have already hit my BS detector:
1. The ability of the SEC to suspend mark-to-market accounting rules on a case-by-base basis. From today's New York Times:
While the bill does not drop the accounting rule that requires banks to report on the market value of their assets — a rule that some banks believe has forced them to report excessive losses — it gives the S.E.C. permission to suspend the rule for any individual company if it thinks that is in the public’s interest. That is likely to lead to intensive lobbying of the commission.
2. Citigroup's (C) acquisition of Wachovia (WB) assets with the FDIC's assistance. From this morning's Wall Street Journal:
"The FDIC has agreed to provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets," Citigroup said in a statement.
The Federal Reserve and Treasury Department were also part of the effort, another sign of how proactive the government has been in preventing ailing financial firms from failing and instead pushing for stronger firms to acquire some assets of the weaker companies.
I am a detailed-oriented transparency junkie who believes that aligned motives are always essential for success. Unfortunately, these three elements of goodness are not present here.
Suspending MTM accounting. I know, let's commit $700 billion to doing the right thing and undermine the entire program by sewing seeds of doubt. There is absolutely no reason, logical or otherwise, for why the Government would fund or buy assets at prices other than at market clearing levels. Because you can't fake solvency. As I've stated, ad nauseum, long-term asset values are meaningless unless you have the capital structure to hold it for the long term. And, sadly, it is all too clear that few institutions have a liability structure that matches their asset duration. If you make your bed you should lie in it, which means moving busted assets off the balance sheet, cheaply, at market value, and filling in the capital gap with a senior convertible instrument that sits above current debt and equity holders. Net net, the same liquidity profile as if Hank bought the assets at carrying value (a fiction, to be sure) but with a shift in economic ownership from current debt and equity holders to the U.S. taxpayer. Seems fair and proper given that it is our money doing the propping up. I am just aghast at the insistence of keeping such a conflict-laden provision in the bailout bill. This isn't a feature of a Splurge - it is out and out theft. For the sake of credibility and integrity of the entire program, this little tidbit has got to go. Otherwise, there will always be questions of who got a sweetheart deal. And Secretary Paulson doesn't want that as part of his legacy, does he?
Helping Citigroup buy Wachovia. So let me get this straight; we (the collective We) and providing a subsidy to Citigroup to better manage the assets of Wachovia than if Wachovia itself were buttressed through the new program? It seems to me that the decision should turn, first and foremost, on the strength and credibility of management. Are we really comfortable that Citigroup's management, which has made perhaps one good decision in the last five years (raising $50 billion - and fast), has the wherewithal to manage this even larger Goliath? What evidence have we seen that this might be the case? Now, if you told me that Wells Fargo was the buyer, I might feel differently. But this seems like the case of consolidating a bunch of crappy assets under a decidedly mediocre management team in order to claim a win for the current Administration and the U.S. taxpayer. Bull*@%^. All we're doing is potentially upping the cost of a subsequent bailout instead of taking care of Wachovia cleanly and in a straight-forward manner - now. Why make the hard choices now when you can punt for another day? It feels like Social Security all over again.
Snatching defeat from the jaws of victory. Nice job, guys. Let's hope there is some more astute decision-making as this bailout takes hold. Because so far, I am anything but impressed.
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This article has 27 comments:
Oh yeah, that was last week. Different rules this week. Never mind.
No wonder people are having a difficult time believing anything that government officials are saying or doing. It's one long parade of BS.
Possible Answers:
A1: I picked a bad time to quit drinking.
A2: I picked a bad time to quit snorting coke.
A3: I picked a bad time to quit sniffing glue.
A4: You can fool all of the people all of the time!
If you shut down the bond market for financial stocks, the UST or the Fed gets to provide all capital for all US banks.
As for the original author's comments, what plan? It failed, it is gone. It was too slow anyway, Wachovia was going to die on a time scale of days - rates on its notes hit 230% on Friday and closed at over 90%, with some longer bonds priced at 30 cents on the dollar.
The Fed is now the ball game. They added $630 billion today *before* seeing the plan was going to fail. So now we get to do via the money supply what we should have done through securities markets, except it will take 5 times the size, just to stem the panic from this decision.
People think they have all sorts of options to schuck the cost off on others. They don't. There are only two options - you pay a sizeable chunk willingly, or every drop of blood in you will be squeeze out unwillingly by merciless deflation.
The foreclosed houses are now flooding the market, and that excess inventory will be sold over time, then the normal supply and demand will work within the housing market.
This situation does not justify a $700,000,000,000 bailout for the banking institutions. The banking institutions that invested in these mortgages made a terrible mistake. The American System of capitalism allows people to make mistakes and go out of business. That’s the way the System Works.
If Congress agrees to the $700,000,000,000 bailout, this will bring the total government intervention to approximately one trillion dollars. This is a huge amount of money.
Forget any type of universal Health Care, look for downside adjustments in Social Security, Medicare and veterans benefits. There will now be significantly less money, for things we really need, like university education, infrastructure, dealing with catastrophic climate change, and all of the other things that we depended upon the Federal government to help finance.
Let’s give a thought to what would happen if the United States defaulted on its debt? I personally believe it’s not a question of if, it’s a question of when. Economic experts have predicted that the total cost of the war in Iraq, including long-term care of the seriously disabled veterans, will probably reach three trillion dollars. Plus you add the $700,000,000,000 bailout, to our already enormous debt, over $10,000,000,000,000. And of course we have the baby boomers starting to retire, this huge bubble in our population now starting to retire, will put a huge financial burden on Social Security and Medicare. I think we are in grave danger of not being able to afford even the interest payments on that debt, and default may be the ultimate answer. So if you believe the above scenario, now we are looking at a real financial disruption for the entire world economy.
As far as a lack of liquidity in our economic system, this basically means loans. Making loans to home buyers to and corporations is a profitable and legitimate business. There are many institutions in the world that are in the business of lending, they have sufficient liquidity to make the loans that America needs. We need to think globally in the global marketplace. Like it or not that is the reality of the world today.
Modern economics dictates that when bad decisions are made in business those businesses usually fail, and other businesses will take their place. Some will make it some will not. If there’s profit to be made, and capital available somewhere, capital will come and the job will be done.
Markets will prevail, we really do not need to bail out the rich guys one more time; on the backs of the working people and the taxpayers.
Neil Davis in Rocklin California
ronna_and_Neil @ hotmail.com
It is this kind of thinking that misleads the Main Street America into thinking that this is only a rescue of the Wall Street.
It is this kind of ignorance that calls a collateralized "loan" as a program that will lead to a higher taxes.
The main street America needs to understand that potential turmoil will inflict the most severe economic pain on the average American.
It will create a massive unemployment potentially reaching 30%.
It will wipe out 401Ks and will freeze savings temporarily as the banking system may cease to function.
An average American (Main Street) has negative savings and the highest per capita debt in the history.
If the stabilization program is not passed,the middle class America will be a class of beggars.
The consequences will radiate globally.
Pass this stabilization plan ,and you will provide 5 trillion dollars "economic jolt" that will jump start the economy and the market.
Since the Stabilization "loan" is collateralized ,the cost to the tax payer may be zero or negligiible.
It is a cost effective program especially when compared to the Armageddon alternative.
So who am I to make these claims?
I have predicted these events in June of 2005 in an interview with Mark Gilbert (Boomberg -London).I don't recall any experts supporting that view.
Who am I?
I have predicted the current risks in an Iinterview with Brian Sullivan ( Bloomberg TV) on September 18,2007 during the FED time.
Now ,I will say the following: we are at incredibly important crossroads.
Address the issues by passing the bill (700 billion dollars) and U.SA will enter a new phase of prosperity.
Do nothing ,and Armagedden will sound like Nirvana.
You don't have to accept my conviction ,but I will be right.
as for Paulson(bernanke as well) and BS for a year and a half he calls the coming meltdown a "housing problem" -On the day the financial world is about to collapse he and bernie come out with 1 option for congress and it wont even work according to most economists -total irresponsibility on their part and to only give one option when there are many to be found on every financial site - thats BS
a) We continue to see a mish-mash of bank buyouts on some occasions, and prop-ups on others...with no consistency, and with the appearance that there are a few "favored" entities. No doubt the Paulson to G.S. connections are not helpful here.
b) Much of this mess was *created* by government, not just Wall Street, in the form of making housing more universally available...enter Fannie and Freddie, lower lending standards, no-downpayment loans, etc., etc. Barney Frank (among others) was a big part of that push, and is trying to gloss over it and now claim the mantle of the salvator of the markets and the working class.
c) You mentioned Social Security. SS and Medicare have been under discussion for years, and for years, Congress has failed to fix them. Why? The source of the problem is also what still stands in the way of the solution: a top-heavy population with the boomers entering retirement. Dig deeper, though: socialism. These programs, and much of the rest of our entitlement-focused government, are *pyramid* schemes! They are *not* sustainable given the current demographics. Sorry to those of retirement age, but it's not fair to drive the younger generations into the ground!! Socialism doesn't work, and we are beginning to pay the piper for all the programs that we have set up and cannot afford.
d) The real answer to all of the above problems is not more government spending, ala a new agency to administer the bad assets for Paulson...nor more spending in general. But less. And not a little less. But *drastically* less. The average American is over-burdened by the tax structure. I see over 40% of my gross lopped off the top every pay period before I get a dime...how can that *possibly* be conducive to a healthy economy??
I think we all owe the House Republicans a tremendous debt of gratitude for FINALLY drawing a line in the sand!!!
"I've just been called on my all-in bluff... shit."
Wrong: the middle class is who has already gotten screwed. By paying excessive taxes for years...nay, decades, now. The middle class has already gotten screwed by having to resort to credit-based living, instead of being able to work a few years, then buy their homes outright, as my grandparents did. They were not even mid-middle class. So their home was small. But they owned it outright. And now, at least in my area, between 1/3 and 1/4th of a mortgage payment is for property taxes! It's precisely this tax burden that is UNTENABLE. What you and a good chunk of Wall Street and Washington still does not get, is that the cause and solution to this are one and the same: a massive reduction of government and of taxation is needed NOW.
The American people have spoken to this...and thankfully the GOP House (at least) heard them loud and clear!! If what we need is a damn good economic plummet to clean house...then SO FRIGGIN' BE IT. Enough is enough. We want back what is ours: both our money and our freedom. The system as it is today is siphoning both from us at ever-faster pace. Today we have drawn a line in the sand.
We can whine and lament 'till we are blue in the face. We can curse the thieves and liars and play the blame game (I, too, can see a lot of malfeasance and corruption, and don't mind calling a spade a spade). But, at the end of the day (most likely this one!) we have to roll up our sleeves, do what we ought to do as Americans, and start bailing out this sinking boat.
It is not going to be fun and it is not going to be pleasant. It is going to be anything but fair and neither is it going to be easy. But unless we get our priorities straight (salvation instead of damnation) we are headed for economic meltdown and possibly anarchy.
Markets need to be as free as possible, but a little oversight is a good thing. It’s like the US doctrine during the cold war: Trust! (But verify). Our markets over the last decade could have benefitted by some appropriate oversight. But they had little, and now we are in a crisis.
I have been a republican all of my life (borderline libertarian!) but I also realize that the undeniable and inescapable consequence of absolute libertarianism is anarchy. At this juncture I'm not ready to face that, and I am betting that, nihilists notwithstanding, I am in the majority.
Complaints are dime a dozen and totally worthless unless they engender a motivation to fix the problem. Discontent is a natural human reaction to dire circumstance, but discontent without a commitment to action and sacrifice is useless at best, and cowardly at worst.
The America I grew up in and the America I love was created out of discontent, but was built by courageous men of action, not whiners.
I'm not suggesting that the many bright people who have offered intelligent rebuttals to Paulson' plan are in that latter category. Quite the contrary. The more well-reasoned alternatives to the Paulson bailout that can be proffered to congress, the better our chances at avoiding catastrophe.
We truly are at a watershed moment in American history. We can rise to the challenge and work at salvation of our economic system. Or we can degenerate into whining malcontents and work toward the damnation of the perpetrators. That latter course would certainly be morally satisfying. But the satisfaction would be short-lived as we find ourselves rushing into economic destruction and the mother of all depressions.
America, we are about to see what you are made of. Will you whimper and whine, shrinking away from hard choices into self-destruction? Or will you dig down deep into the inner core of commitment and fortitude that has been our hallmark at every critical juncture up until now?
I am optimistic.
Its important to save main street instead of wall street brokerage houses...the supply and demand for the toxic paper will eventually reach a equilibrium without a bailout....what the country needs now is to get M1 on the move upward and that requires a return to fundamentals...reduce taxes, lower energy prices, adequate jobs for whoever wants to work. This is the Main Street Bailout that will answer all questions going forward.
tough row to hoe. more inflation won't improve our standard of living without pay raises which aren't probably going to happen.
look out for back doors. The comment regarding the FDIC...i saw somewhere how the FDIC was terribly under capitalized, and less than 1/10th or so (if i'm remembering correctly) of current deposits under 100k were even really insurable.
The Fed could give the FDIC cash and then the FDIC pass it to companies without a bill or a vote....The Fed has given money directly to Mexico without a Congressional vote...
I'm hesitant to believe that something good could actually come out of this "democracy" (really republic) at the federal level... If the bill is defeated...stay vigilant for backdoor attempts to disperse that money...
I hope i'm wrong
Get rid of 'em.
Wall Street is only a game that has a side benefit of allocating capital.
Do not reward bad judgement. Not on wall street, in Congress, or individual homeowners.
Where could the money come from besides the taxpayers, lets think hmmm, I have a few suggestions.
We could stop (or at least cut back) on giving money to other countries who hate our guts.
We could ask other countries to pay us back.
Congress and The House could cut back on their jet set lives and special priviledges, for instance the guy I saw on tv who kept opening the door for them, they cant open their own door?
They could cut jobs in the senate and the house. There are too many people in the senate and house who never get anything done anyway.
They could ask our allies in the middle east to hook us up with oil since we're fighting their battles.
We could cap ceo bonuses and salaries. These people arent worth all that money anyway. Im sure some people in the company would agree while some are being paid not enough to make ends meet.
We could regulate wall st. better.
We could get the people who have diplomatic immunity who abused the system to pay up.
We could generate jobs in this country and export our products instead of mostly importing. It feels like products are mostly coming in.
We could get rid of people who dont belong here which cost us zillions in healthcare alone. Clean up crime at the same time.
These are just a few examples on how we could generate money to get out of this mess without taxing the rest of us who had nothing to do with this and from what I hear taxing babies that arent even born yet. Uncle Sam wants your child. Anyway these people who wrote the bill have ulterior motives. They keep saying how we need this urgently, maybe we do, and how we the taxpayers have to pay. I dont like that talk, they have to push something through fast. It sounds like bad news down the road to me.
However, I'd like to know why Warren Buffet eg in the Goldman purchase, prefers to use 10% preferred stock and warrants.
Why didn't he use 10% convertible preferred stock, or better yet, 10% senior convertible debt. In the case of severe problems, the debt would have a high claim than his preferred, while his warrants could be worthless.
Just an idea, because I would like to see the government use something more like a Buffet approach than the Paulson approach.
Ron
Good Luck