Seeking Alpha
Long/short equity, special situations, momentum, research analyst
Profile| Send Message|
( followers)  

This bill can only get passed in between quarters and Hank Paulson knows it.  US markets have been dominated by panic at the end of each quarter this year.  In March, the S&P 500 went down 5.6%, in June it went down 8.6%, and now in September the index is down 14.1%.  Within these earnings/economic report dead zones, investors forget about the fundamentals and assume worst case scenarios. 

Do you think Hank Paulson factored this cycle of fear into his plan to get this $700 billion bill passed?  Absolutely.  Will a bill still get passed?  Absolutely.  Hank has known that we needed a trillion dollar Superfund since October of 2007 when he tried bringing the three largest banks Bank of America (BAC), Citigroup (C), and JP Morgan Chase (JPM) together to form an SIV Superfund to stimulate the frozen mortgage market.  He initially tried to raise $75 billion but quickly realized a much larger pool of money was needed to bring stability to the $14 trillion mortgage security market. The only alternative was to orchestrate a dramatic yet contained unwind of the financial system to spook Congress into passing a Superfund bill.  

The time to create a capitulation of fear was pre planned to take place this September.  Naked short selling wasn’t banned and neither was mark-to-market accounting.   These two policies allowed the market to structurally de leverage the system seemingly overnight.  Hank could have stopped the process but he didn’t.  He needed something to take everyones focus off the fact that economic conditions really aren't that bad.  He needed to orchestrate fear.   Wall Street has gotten into a dangerous habit during these quarterly dead zones of acting like the sky is falling.  The real data shows that:

  • Unemployment is little more than 6% today compared with 25% during a real depression.
  • Yearly GDP growth is over 3% compared with a 25% contraction during a real depression.
  • Consumer prices are still rising compared with a 30% fall during a real depression. 
  • Only 4% of mortgages are delinquent today compared with 40% during a real depression.   
  • Fewer than 20 banks have failed over the past couple of years compared with 9,000 during a real depression.

Hank knew that the ‘sky is falling’ mentality would return this September and he was intent on turning the panic into a long term solution for the mortgage market.  This proposed bailout plan isn’t a bailout at all.  The only reason that term has been used is to add to the panic.  It’s really a Superfund that will act as a mortgage security specialist to provide confidence and liquidity during housing cycles.  Its ability to hold these beaten down assets and turn a profit over time  will cause the legislation to become a permanent solution. 

Sometimes you have to sacrifice a Lehman, a Wachovia, a Merrill Lynch, or a Washington Mutual in order to structurally improve the system for the long haul.  The history books will ask how Hank orchestrated such a massive de leveraging of the financial system without lines outside of banks or deposit failures.  The answer is that Hank planned the whole thing.  He knew September 08 was his moment to stave off a severe recession if he could cause a capitulation of fear to get his Superfund.  That’s what this week is all about.  Don't get caught up in the ugliness of the legislative process.  It's part of the game.  The next bull market is right around the corner thanks to Hank.  Hank Paulson is the smartest man in the room. 

Disclosure: None

Source: Hank Paulson: Smartest Man in the Room