Hank Paulson

A Better Bailout Bill

Chris Knight — Fri, 03 Oct 2008 21:13:00 -0400

There is so much fear wrapped up in this financial crisis that government leaders are willing to support anything, even if this means the bailout bill was concocted mostly between Henry Paulson and his former colleagues as Goldman Sachs.

It is true that action is needed to contain the financial crisis. Many of the most gifted economists--Paul Krugman, Lawrence Summers, and Joseph Stiglitz, for instance-are now in favor of a bailout. Stiglitz, a Nobel Laureate, is the pioneer of "moral hazard" theory, so it's hard to argue that this group doesn't understand the dangers of public largesse.

However at the same time many of the smart people who support this bill do so regretfully. Krugman calls it a "stinker". Stiglitz says it's a "very bad bill" that is "critically flawed." Even ex Treasury-Secretary Summers agrees that the "regretful" bailout is far from a complete remedy for our economy's ills.

Both expert opinion and simple intuition suggest the primary flaw with the proposed bailout is that it exposes the government to extreme risk without a guarantee the taxpayers' money will be returned. Instead of copying Warren Buffet and buying preferred stock and warrants in distressed companies at bargain prices, we're buying "toxic assets" no private investor wants.

While the securities the public is about to buy are assets that may appreciate, in the current tumultuous credit market this is far from a certain outcome. By contrast, having actual equity in these troubled firms (the Swedish model) would allow the government to act as far-sighted shareholders and get institutions on the right track.

We need to provide public leadership for these troubled firms, while simultaneously eliminating the regulatory failures that led to this situation. Buying preferred shares in banks gives these institutions the capital they dearly want, but also the leadership they direly need. Meanwhile, the market must be supervised more closely, and the amount of leverage firms are allowed to take on must be curtailed. Under this plan, Wall Street would emerge healthier while Main Street would emerge wealthier.

$700 Billion is Not Play Money

Ellen Seidman — Wed, 24 Sep 2008 14:10:00 -0400

As Congress and others engage in the entirely necessary efforts to get Secretary Paulson and Chairman Bernanke to (i) explain why what they're proposing is necessary--beyond a promise of Armageddon if Congress doesn't follow, quickly, like lemmings; (ii) build some serious accountability and oversight into any program; (iii) ensure the United States taxpayers get significant upside for whatever they spend; and (iv) maximize the likelihood that whatever is done to stabilize markets not only actually accomplishes that result but also stabilizes affected households (both homeowners and renters) and communities, I get the awful feeling that $700 billion is starting to feel like play money. It isn't. No one suddenly gave us $700 billion to spend, no matter how eager the Secretary is to make it sound that way. It will come from new borrowing, which we and our children will have to pay back, with ever more interest.

If we're going to spend $700 billion, that money could be used--and long since should have been--to repair infrastructure, create jobs, fix the health care system, improve education, and to support alternative energy strategies and a host of other critical domestic needs. So, as Congress pursues its course, it should also pause and ask: if we're going to spend this money--even temporarily as an immediate cash outlay to be [perhaps] repaid later--are there other uses that would better serve the economy and the American people, in the long-term as well as the short-run? If the answer is "yes," the core question of "should" as well as "how" deserves far more attention than it has gotten to date.

Regulating Fannie and Freddie

Sam Sherraden — Wed, 10 Sep 2008 13:56:00 -0400

What I said is that they were adequately capitalized. And they were adequately capitalized according to the law on June 30th.
-James Lockhart, Federal Housing Finance Agency Director (September 8, 2008)

This was not the case according to Morgan Stanley, which was pulled in by Treasury Secretary Hank Paulson to analyze the health of Fannie and Freddie in early August.

After the Fannie and Freddie bailout, many law makers will try to create independent oversight over these large Government Sponsored Enterprises (GSEs). But Morgan Stanley reported that a bailout would cost upwards of $50bn, while William Poole estimated it may be as high as $300bn. Furthermore, the bailout will not turn around falling house prices, which are more the result of a massive price correction and not of the price of mortgages.

Given that the tax payer will ultimately foot this bill--and the liklihood that home prices, which represent a significant portion of Americans' savings--will continue to fall, removing Fannie and Freddie from the fray of politics will be extremely difficult.

Snapshot asks, given the large financial drain of Fannie and Freddie, will the government be able to create a body with independent oversight?

Ashraf Laidi - GSE Bailout Good for Confidence Not for Fundamentals
BNP Paribas - Market Implications of Conservatorship - Initial Thoughts
James Lockhart - Nightly Business Report
Henry M. Paulson - Statement Sept 7, 2008
New York Times - New Agency Proposed to Oversee Freddie Mac and Fannie Mae

Fannie and Freddie Bailout

Sam Sherraden — Tue, 15 Jul 2008 17:27:00 -0400

Promises by the U.S. Treasury and Federal Reserve to support Fannie Mae and Freddie Mac have not reassured shareholders. By noon Tuesday, shares of Fannie Mae dropped 23.5% and Freddie Mac plunged 24.9%. Given the loss of investor confidence in these mortgage finance companies, it appears that the promised equity investment by the Treasury may be utilized. In addition, Paulson proposed increasing Fannie and Freddie's $2.25bn credit lines to an undetermined amount to ensure "flexibility" and "minimize taxpayer risk."

Snapshot asks, what is the limit of taxpayer responsibility to maintain Fannie and Freddie's share price and help maintain financial stability?

Wall Street Journal - Bernanke, Paulson Aim for Stability with Fannie, Freddie Proposal
U.S. Treasury - Testimony by Secretary Henry M. Paulson, Jr.
Ben Bernanke - Semiannual Monetary Policy Report to the Congress

Paulson’s Plan

Sam Sherraden — Tue, 01 Apr 2008 03:12:00 -0400

The first proposal to reform the financial system since the subprime crisis was announced yesterday by Treasury Secretary Hank Paulson. The proposal aims to create a regulatory environment in which "capital can seek out its most productive uses in an efficient matter." Before his time as Treasury Secretary he worked as co-chief executive at Goldman Sachs, where he argued for reduced regulation and consolidation of regulatory agencies. Yesterday's proposal sought to combine regulatory agencies and expand the powers of the Fed.

Snapshot asks, what parts of the Paulson plan will survive?

Treasury Department - Paulson's Blueprint
Cumberland Advisors - The Paulson Report: "Something Old, Something New, Something Borrowed..."
Fortune - Fed Up with the FED
Wall Street Journal - Paulson Plan Begins Battle Over How to Police Market
Financial Times - Paulson's Gamble