Wednesday, September 24, 2008

The Paulson Bernanke Proposal 

I find it interesting and illuminating that two brilliant investors - one equity oriented and one fixed income oriented - have voiced strenuous support for the $700 billion investment proposal from the Treasury Department. I find it especially so because both Warren Buffett and Bill Gross are noted supporters of the Democratic Party, and have generally been very critical of the current administration.

I hope the Congressional Leadership is listening.


By Blogger Gordon Smith, at Wed Sep 24, 10:22:00 AM:

Out of curiosity, CP and loyal Tigerhawk readers, how do y'all feel about the No Oversight clause in the proposal? Why is it there, and do you find it appropriate?

I'm also confused because Paulson said we ought not have punitive measures in the Epic Bail because it might dissuade some from participating. If they're solvent enough not to participate, what are we doing in the first place?

I'm no economist, but there's an air of utter b.s. in all this. Part of me wonders if it isn't just the greatest bank heist in the history of the world.  

By Blogger Cardinalpark, at Wed Sep 24, 10:44:00 AM:

You know, I have the benefit of having had some direct exposure to Paulson. I promise you, it's no heist.

I don't know all the details, and if you mean by punitive measures the ocmp limitations, etc, I think imposing those things is just silly. You can't attract the best people to work in comp-legislated environments. Let's not even discuss whether legislating compensation is a form of socialism, which it is. Let's just focus on the key item, which is wanting to attract talent to these highly levered, complex, large, public institutions.

If you want to attract the John Thains, Lloyd Blankfeins etc to work in a god forsaken place like those institutions (and trust me, you do, because the laternative is ghastly), you can't legislate comp or otherwise turn the job into government work. It's just common sense.  

By Anonymous Anonymous, at Wed Sep 24, 11:32:00 AM:

CP ... so are you saying that you think the 39 billion in bonuses paid last year across the top five banks was reasonable? I don't believe any reasonable person thinks the best brains on the street should work for government drone dollars, but the huge reward for running the market into the ground is just unjustified.  

By Anonymous Anonymous, at Wed Sep 24, 12:09:00 PM:

Gee, do you think Buffet might want a taxpayer bailout of Wall St to defend the price of his stocks? Out here on the Great American Desert people feel like we a being fed a load of BS and scare tactics. How about showing the peasants some empirical evidence for the bailout instead of conjecture and speculation? So far, all we seem to have is, 'We are smarter than you and we know what we are doing. Trust us.' Anybody out there trust politicians and bureaucrats to do the right thing?  

By Blogger Gordon Smith, at Wed Sep 24, 12:20:00 PM:


The No Oversight clause reads thusly:

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Say what? This is, of course, deeply disturbing to the 81% of Americans who think George Bush isn't doing a very good job.  

By Anonymous Anonymous, at Wed Sep 24, 12:41:00 PM:

Every time someone mentions "oversight", I always wonder which definition they mean.

It's probably safe to say that this mess is really the result of some form of Congressional oversight.

1. an omission or error due to carelessness: My bank statement is full of oversights.
2. unintentional failure to notice or consider; lack of proper attention: Owing to my oversight, the letter was sent unsigned.
3. supervision; watchful care: a person responsible for the oversight of the organization.

[Origin: 1300–50; ME; see over-, sight]

—Synonyms 1, 2. mistake, blunder, slip. 2. lapse, neglect, inattention. 3. management, direction, control; surveillance.
Dictionary.com Unabridged (v 1.1)
Based on the Random House Unabridged Dictionary, © Random House, Inc. 2006.  

By Blogger Cardinalpark, at Wed Sep 24, 01:30:00 PM:

John -

regarding the compensation of Wall Street professionals, my observation would be that my opinion of its reasonableness is irrelevant. The board, ceo and comp committee of Goldman Sachs is perfectly capable of making those decisions and allocating comp is their business. It's a privately owned company. For a very long time, typical Wall Street comp has averaged 50-60% of revenues.

Like it or not, Wall Street compensation in the end is largely a one way option for those who receive it. That is, they risk capital of the firm and get paid for that year's return on it, even if that return in subsequent periods reverses itself.

In fact, Wall Street has done an improving job by turning more of its comp into shares than cash, thereby trying to have a portion of comp become "reversible."

For that reason, lots of Bear Stearns and Lehman employees have been wiped out.

To speak of John Thain's comp at Merrill, I would tell you he earned it. I am a client of Merrill. Thank god they got him.

As for giving the Treasury Secretary broad discretion to execute on the financial rescue plan, frankly I would prefer that than allowing for congressional gerrymandering. $700bn is a lot of money to be throwing around. And I would trust the Treasury Secretary to exercise his or her fiduciary duty to me the taxpayer a lot more than the President or Congress. Let's remember where Fannie and Freddie came from in the first place.  

By Blogger Cardinalpark, at Wed Sep 24, 01:31:00 PM:

one clarification about a comment about Goldman - it is a publicly traded company (I said privately owned, bt by that meant not by the government).  

By Anonymous Anonymous, at Wed Sep 24, 01:51:00 PM:

I'd bet that PIMCO has significant exposure in its bond positions, which is why Gross wants to be bailed out. One or more of Buffet's insurance companies probably has credit default swap exposure, which would explain his position. Besides, Buffet is a socialist.  

By Blogger Link, at Wed Sep 24, 03:12:00 PM:

That sound you've been hearing is the ice starting to crack under us. Bad as last week was, we were close to an even bigger panic and meltdown. We need to get a bailout done fast, because our banks are about to report horrible third quarters, due to FAB 157 and because many were holders of now worthless Fannie and Freddie preferred, which will lead to lending contraction and tip us into a real recession. The expected cost of the bailout is a lot less than that of a recession. There's a lot of blame to go around, which we can figure out later -- but we need this done now. When it comes time for the blame game, I saw a shocking statistic ... the average down payment for a US mortgage got as low as 3% ... that's all mortgages, not just subprime ... how did we let that happen????!!!  

By Anonymous Anonymous, at Wed Sep 24, 03:31:00 PM:

Yesterday, Beranake in particular and also Paulson, failed to sell the plan at all well.

The plan is much different than what I’d initially been led to believe, which was that it would allow the Treasury to invest in individual firms. Instead, it’s a logical extension of what the Fed does every day in it's central banking activities of maintaining money supply stability on behalf of the Treasury. In effect Paulson and Bernanke are asking for the right to trade bad mortgage securities in the market, and also to act as a buyer of last resort for mortgage portfolios. They are proposing to buy these at some near semblance of market value (and how that is determined is going to be the devil in the details issue ultimately), instead of at par, Then, they intend to make a profit on those investments and trades.

By doing this, the Treasury and the central bank are going to fulfill their most ancient roles and provide sufficient liquidity to the market to end the current total constipation of the credit markets. The goal is to free up credit to the markets, not "bail-out" particular financial firms, and by doing so avoid a depression. They aren't selling this well, but it’s potentially a brilliant plan.


By Blogger Cardinalpark, at Wed Sep 24, 04:07:00 PM:

My general sense of the Treasury's objective is to solve a massive supply demand imbalance or dislocation. At the moment, the challenge faced by financial institutions is that they are being forced to mark down securities held on their balance sheet to "market." Today, the problem with "market" is that it is being determined by the weakest hands in small transactions relative to the overall market size. These markdowns are in turn triggering tremendous selling pressure and there is precious little capital on the demand side to absorb the massive overhang of supply.

The Treasury is proposing to act as a huge marketmaker, with a bid available at something other than a vulture/firesale price. Because the US can finance at the lowest rates, that makes us taxpayers the best buyers.

A side benefit is that by providing a strong bid in size, you preserve both the solvency and liquidity of our financial institutions.

Its a damn good idea, and the alternative is the insolvency and illquidity of our financial system. So it will pass. The question is how man y other corrupt bells and whistles will the pols hang on this to try to help their particular friends.

In this event, speedy passage is probably the best result. I trust Paulson and Bernanke way mroe than Pelosi, Reid and Frank.  

By Blogger Admin, at Wed Sep 24, 04:19:00 PM:

i love this blog, you guys have been so wrong about so much for so long and continue to do so without a smidgeon of shame.

ya'll are truly a testament to absolute dedication and hypocrisy of the bush republicans!


By Blogger Steve M. Galbraith, at Wed Sep 24, 05:30:00 PM:

ya'll are truly a testament to absolute dedication and hypocrisy of the bush republicans!

Now there's the type of mature contribution that we all welcome.

Not surprised by it.  

By Blogger Escort81, at Wed Sep 24, 06:01:00 PM:

CP - I agree with you that I'd trust Bernanke and Paulson to backstop the market and provide for an orderly liquidation of troubled mortgage securities a great deal more than I would trust Pelosi, Reid, Schumer (!), Frank et al. Bernanke and Paulson (regardless of their party affiliation) actually understand this complex problem and have a reasonable approach to solving it that may actually work. The political leadership of the House and Seneate (and some Rs get included in that group) would get it so wrong with, as you say, "the corrupt bells and whistles", that the rush for the exits from the capital markets would make the final scene from Animal House look like a walk in the park.

Do we want an orderly liquidation or do we want a stampede?

Schumer's desire to do the $700 billion in sequential segments requiring additional Congressional approval misunderstands the psychology and dynamics of the capitlal markets entirely. Your ship is sinking, and one of the officers says, "hey, let's try to let down a few of the life boats first to see if they work, then report back to me and I'll consider lowering down a few more. Maybe." Think the passengers and crew will like that idea, or would they prefer than all of the life boats be set out in a rapid and orderly fashion?

As to the comp issue, the politics of that are bad, and I don't particularly want bonuses paid to employees of dead firms with taxpayer money, but the bottom line and more important narrower issue is that prospectively, we want the best people looking out over the government's interest in this new huge facility.

Let's try to remember that just because a mortgage hasn't been paid in the better part of a year doesn't mean that the entire piece of paper is worthless, because the house that is tied to that mortgage is worth something -- the collateral, no matter how compromised, is still there and has some market clearing price. We can find that price via a stampede or through some orderly process (such as the reverse aution proposed by Bernanke and Paulson).  

By Anonymous Anonymous, at Wed Sep 24, 07:43:00 PM:

Wikipedia, Henry Paulson., and you will know, we are getting him on the cheap.

After many attempts of reform over the years and being rebuffed by a certain party, this admin knew what would eventually happen years ago.

Hank Paulson comes to us on the cheap, as he forgoes a minimum of $200,000,000 a year to help out in this situation.

Now that's a patriot.

And maybe he brings a bit of the private markets to public policy.

Heaven knows we need it.  

By Blogger Elise, at Wed Sep 24, 07:46:00 PM:

Even if you trust Paulson to do a good job with this the simple fact is that in four months it's not Paulson who is going to be running this program. Unless Paulson manages to buy all the distressed assets; inactivate his $700B credit line; and re-sell all the distressed assets before January 20 there is going to be a new Treasury Secretary wielding some or all of this power.

It would be nice to know who McCain and Obama are going to pick for Treasury before we all agree to this deal.  

By Blogger Dawnfire82, at Thu Sep 25, 09:03:00 AM:

"i love this blog, you guys have been so wrong about so much for so long and continue to do so without a smidgeon of shame."

That's funny. I remember arguing here in favor of an American 'surge' in Iraq during the early summer of 2006. Turns out that was a good idea that worked.

And let's not forget the "Iraq is in a Civil War!!1!11" discussions. Right again.

I also remember discussing the adoption of Sarah Palin as McCain's VP. In March. One of my wife's co-workers thinks I'm a psychic now because I predicted it back then...

Yep, a real pattern of failure.

I also remember you claiming that the Iraq war was about 'propping up the dollar.'

No, really.


And 'so is iran.' Sprinkled with some stuff about how much smarter you and friends are than the US intelligence community and national leadership.

Thanks for the reminder. I could use a laugh this morning.  

By Blogger Dawnfire82, at Thu Sep 25, 09:10:00 AM:

Oh, I forgot. TH labeled John Edwards a slimeball *years* before it was publicly known just how much of a bastard he really is.

Seems like he's a better judge of character than Barack 'I attanded his church for 20 years but had no idea he was a crazy, hateful racist conspiracy-monger' Obama.  

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