Wall Street Rapes America, Edition 9

Wall Street is a very tough place, if you don't know what is going on, your money will be taken from you. I can't think of a more outrageous rape of the taxpayer, ever, than the TARP program run by GW Treasury Secretary Henry Paulson. It should be noted that Paulson's lieutenant in the rape of the taxpayer was Timothy Geithenr, who came up short paying his own personal taxes, but managed to help dole out $350 billion in taxpayer money through TARP and is likely to be confirmed by the Senate today as the new Treasury Secretary.

If you get the sense today that someone is laughing at you behind your back, you'll be right. It's Geithner.

Oh yeah, here's the latest outrage.

Merrill Lynch lost $15 billion in the fourth quarter of 2008 and more than $27 billion for the year. In October, Merrill received $10 billion in bailout money. But the problems were so deep that Merrill CEO John Thain(surprise a former Goldman man) sold the company to Bank of America. The actual sale to B of A was a shrewd move by Thain. It does, however make B of A look like it is run by a bunch of country bumpkins,taken advantage of by a New York slickster. We indicated as much at the time, when we wrote:

Has Bank of America Chairman Ken Lewis come to his senses? Has the ether Merrill Chairman John Thain slipped Lewis during his sales pitch to get Lewis to buy Merrill, at a premium to the market price in the middle of a crisis, worn off?

Closing date on the B of A takeover: January 1, 2009.

Employee bonuses at Merrill are normally paid out in January. Since Merrill had lost $27 billion in 2008, it is likely that Bank of America would have looked good and hard before passing out those bonuses. Thain found away around the bonus payout problem, he paid out the bonuses in December, when he was still in full control of the company. Reports indicate the bonuses amounted to between $3 billion and $4 billion.

To recap:

Merrill loses $27 billion.

Treasury gives Merrill $10 billion in bailout money.

Merrill uses the money to payout $3 to $4 billion in bonuses.

Oh yeah, Thain also spends $1.2 million refurbishing his office.

Bottom line: Wall Street has always run circles around the American taxpayer, but the Paulson-Geithner era has brought in such disrespect for the taxpayer that not even Shakespeare would have thought of penning such an open and brazen tragedy.

Middle America better wake up, and with Obama bringing "change" like Geithner into the Treasury, Barack ain't the directon from where they should be looking for change. America is burning.

The Robert Rubin Wing of Goldman Sachs is Doing Well Under President-elect Obama

The Robert Rubin Wing of Goldman Sachs (Citigroup) did very well for itself under GW and Treasury Secretary Paulson.

It appears that the trend will continue under Obama. Dean Baker spots a very interesting tax break as part of Obama's "stimulus" package (my emphasis):

The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal. According to theWashington Post, the proposal will allow companies to write off current losses against taxes paid over the last 4-5 years, not just 2 years,as in current law.

There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against. But, really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007.

Baker then asks the big question:

Did the political connections of Robert Rubin and others in the financial industry have anything to do with the decision of Obama's economic team to be so generous to them? I don't have an answer to that question, but the media should be asking it.

How tight are Obama and Rubin? Very tight.

The 2008 EPJ Awards

There are no statues or television events associated with my EPJ Awards, but feel free, if you are so inclined, to don a tuxedo before reading the remainder of this post, to pour yourself a glass of champagne, and to clap, cheer, hiss or boo when appropriate.

Economist of the Year: Peter Schiff

The award of economist of the year should go either to an economist who has made path breaking new discoveries in the science, or who has advanced the general level of economic understanding on the planet. Schiff falls into the latter category. His consistent and clear presentation of sound economics that proved correct in forecasting events over recent months, in the face of laughter and derision, will raise curiosity across the land about the business cycle theory, specifically, Austrian Business Cycle Theory.

Here's a YouTube video of Schiff battling mainstream nonsense. It puts everything into perspective:



Inside Operator of the Year: Treasury Secretary Henry Paulson

In short order, Pauslon was able to convince Congress to give him $350 billion to buy up distressed mortgages. Paulson managed to disperse the entire $350 billion to his crony buddies without buying one distressed mortgage. In a remarkable disrespect for Congress and the public at large, Paulson also changed, on a near daily basis, the reasons he was distributing the funds in the fashion he was.

Inflationist of the Year (Also known as the Robert Mugabe Award): Ben Bernanke

After nearly halting money printing through out the Summer of 2008, Bernanke has reversed engines and tells us that his monetary policy is now one of "quantitative" money supply control, which apparently is Bernanke's attempt to replace "speed of light" with "speed of money printing" in Einsten's equation E=MC2. Over the last three months, Bernanke has increased money supply, as measured by M2 nsa, at an annualized rate in excess of 20%. Bernanke's effort will result in a change by the end of 2009 from the belief that "cash is king" to the knowledge that cash, in the form of paper dollars, is toilet paper.

Madoff Family Members Had Exclusive Briefings from Treasury Secretary Paulson on the Financial Crisis

As I have pointed out before, those who try to get close to regulators are generally doing so for a reason. The reason is to get the inside scoop, and to try and influence regulations.

WSJ knows this. They write that Bernie Madoff's niece, Shana Madoff, was an active member of a number of associations."The benefit would be to have close encounters with the regulators to express your opinion," WSJ quotes an unnamed colleague of Shana's as sayng.

So how high up the financial regulation ladder were the Madoffs' "close encounters"? All the way up.

Shana and her father were both a part of Sifma (Securities Industry and Financial Markets Association), the industry's main lobbying group. Shana was on the compliance advisory committee. Her father was a member of the board.

According to WSJ:

Sifma is one of the financial industry's most powerful advocates in Washington. It's members have received exclusive briefings on the nation's financial crisis from Treasury Secretary Henry Paulosn and the architects of the Treasury's $700 billion financial markets rescue plan. The Madoff family and firm has contributed more than $50,000 to Sifma's political action committee, and tens of thousands more to sponsor industry meetings , Ms. Madoff helped organize.

Who knew Paulson was making these "extensive briefings" to anyone outside of Congress? Do you realize how much money could have been made by those who got a drift of the next direction of one of Paulson's ever changing policies?

Bottom line. In many ways Wall Street is a semi-rigged game, and it is rigged as a result of regulatory and other government agencies. In some cases, the government operators know the rigging they are conducting, most likely such is the case, for example, with Paulson, in other cases, government regulators are used as innocent dupes, e.g. most of the SEC. But, either way, the agencies are more a hindrance than a help in creating free flowing unrigged markets.

Bob Murphy Is Going to Flip

On Wednesday, Bob Murphy wrote at his blog:

Paulson Flips Again On Whether He Needs the Remaining $350 Billion In TARP

Now I didn't specify in the title of this post whether it means Paulson wants the money or not; do you remember? I know it's a tough question since I think Paulson has literally flipped twice in the past two weeks. But as of right now, Paulson claims he doesn't need to tap into the other half of the TARP. Now what would be funny is if he comes back and says, "Yeah, of course I want to spend another $350 billion. But I meant I wouldn't be spending it on troubled asset relief."

Guess what?

Paulson, in his statement on the automotive bailout, flips again and says he needs the remaining $350 billion of TARP funds for "financial market stability":

As a result of this decision [to bailout the auto industry], Treasury effectively has allocated the first $350 billion from the TARP...In the very short-term, the allocated but not yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the FDIC, give me confidence that we have the necessary resources to address a significant financial market event. It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect's transition team in the near future.

I think Murph has Paulson figured out.

The Fish Are Really Beginning to Stink in the Lehman Non-Bailout

Last week came news that GW's cousin George Herbert Walker was able to buy the crown jewel of Lehman, Neuberger Berman on the cheap for $1.2 billion with no money down.

Today, NYT's Ira Ross Sorkin is breaking news of some activities at the time of the bankruptcy that can't seem to be properly squared by Hank Paulson and company:

In the early hours of Sept. 15, after the government refused to rescue the foundering Lehman Brothers, something odd happened. The Federal Reserve lent tens of billions of dollars to a subsidiary of the newly bankrupt bank.

In other words, government officials who had refused to risk taxpayers’ money on Lehman before it collapsed did just that after it collapsed.

On Monday the Fed lent the Lehman unit $87 billion through JPMorgan Chase. After being repaid on Tuesday, it lent another $51 billion — putting the bailout, arguably, in the same league as the initial $85 billion bailout for the American International Group.

This mystery loan is just one piece of the larger Lehman puzzle. Who lost Lehman? Why, and how? Three months later, those questions still nag...

...no one, least of all government officials, has fully explained why Lehman, one of the grand old names of Wall Street, was allowed to fail while so many others were rescued...

he recently disclosed documents detailing the Fed’s loan to Lehman’s subsidiary cast some light on a failed effort to prevent Lehman’s implosion from cascading through the financial system.

The loan, according to these documents, was a “carefully thought-out decision” to stabilize the market by propping up Lehman’s broker-dealer business, called LBI New York, so it could stay afloat long enough to “facilitate an orderly wind-down” of tens of thousands of trades with the other Wall Street firms. The unit was kept out of the Lehman bankruptcy.

That might seem like a reasonable explanation. But Henry M. Paulson Jr., the Treasury secretary, and Ben S. Bernanke, the chairman of the Fed, have said that they did not have legal authority to lend any money to Lehman. The firm, officials said, did not have enough collateral.

“We didn’t have the powers,” Mr. Paulson insisted. He also said Lehman’s bad assets created “a huge hole” on its balance sheet, adding that he had actually tried to find a way for the government to provide money to help support a deal between Lehman and Barclays, but legally could not. His explanation has evolved over time, however. He told reporters the day after Lehman went bankrupt: “I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers.”...

Whatever the case, the Fed’s loan to the Lehman subsidiary makes all these explanations increasingly hard to square. Mr. Paulson said Lehman had lacked the collateral for the government to backstop a deal between Lehman and Barclays. But then the Fed turned around and lent a Lehman subsidiary billions, based on that same collateral.

Bottom line, Hank Paulson did not like Lehman and so he took it down. The payoff to the Bushies, so that they would go along, was Neuberger Berman, no money down.

(HTnick)

The Bushies Show Blagojevich How It's Done

There are no tapes of how this deal went down, but my bet is that it went down something like this.

Hank Paulson and The President, back in September:

Paulson: Lehman's a bunch of asssholes, lets take'm down.

The President: Ah, I dunno. My cousin George Herbert Walker works there and my brother, Jeb, is an advisor.

Paulson: Come on , outside of your cousin and your brother, they're assholes. I'll even let your cousin and your brother grab the crown jewel, Neuberger, from Lehman once it is in bankruptcy, and they won't have to put up any cash.

The President: Yeah?

Paulson: Yeah, consider Neuberger a new family jewel.

The President: What if somebody else tries to bid for Neuberger with cash?

Paulson: Fuck em. If anybody tries, we'll send them in an envelope an annonymous post card from Guantanamo saying "Wish you were here" and enclose a picture of former Lehman CEO Dick Fuld. They'll get the message.

Laughter all around.

High fives all around.

Bloomberg reports Wednesday:

Lehman Brothers Holdings Inc.’s planned sale of its investment-management division is valued at about $1.2 billion in stock, according to two people familiar with the transaction.

Lehman, in bankruptcy, was forced to deal away Neuberger Berman for no cash last week...

Analysts valued the money-management division at as much as $7 billion earlier this year, before market declines eroded its assets...When the business was valued at around $7 billion in August by Sanford & Bernstein analysts, it initially drew interest from some of the world’s biggest private-equity firms, including Blackstone Group LP and KKR & Co. Neither one ultimately bid...

The Walker [Group also] beat a bid of $2.15 billion for the whole division by private-equity firm Bain Capital LLC.... Carlyle Group [with $40 billion in cash on the sidelines]...weighed a bid... though it didn’t make an offer.

“Neuberger management [Lead by George Herbert Walker] received the deal of a lifetime by obtaining 51 percent of the common stock for no cash, because that will take control of Neuberger away from the Lehman bankruptcy,” said Martin Bienenstock, who heads the restructuring group at the law firm Dewey & LeBoeuf and represents Lehman creditors, today in a telephone interview.

In addition to cousin George Herbert Walker as CEO, GW's brother Jeb will remain an advisor. Plus they both most assuredly received tons of stock, no money down.

Blago, eat your heart out.

What Exactly Did Robert Rubin Do To Earn $115 Million?

WSJ is asking:

Was Mr. Rubin to be primarily a member of the board overseeing management, or a part of the management reporting to the board? Things became even murkier when Messrs. Weill and Reed described Mr. Rubin's job: "Bob will participate in strategic managerial and operational matters of the Company, but will have no line responsibilities."

As a great man of finance, Mr. Rubin would be paid CEO money -- a total of $115 million since 1999, not including stock options -- but without having to run a business or be accountable for the results. For years, journalists tried to figure out exactly what Mr. Rubin's job was at Citigroup, and perhaps even his fellow Citi directors weren't entirely sure.

Then WSJ reaches the only conclusion possible. He was the fixer. As former Treasury Secretary and former head of Goldman Sachs, he's the man with the insider hook-up:

Mr. Rubin was reportedly critical to securing the latest federal bailout of Citi -- $20 billion in preferred shares plus taxpayers taking on most of the risk in a $306 billion portfolio of dodgy assets. This is on top of the $25 billion in Citi preferred shares that taxpayers bought in October. Giving Mr. Rubin the benefit of the doubt that he is the fixer who delivered the federal cash, this could make his paycheck appear more reasonable to many shareholders.

Former Treasury Secretary and former Goldman CEO Rubin cut a deal with current Treasury Secretary and former Goldman Sachs CEO Henry Paulson for billions in taxpayer money and guarantees. Cute, eh?

Oh, to be the head of Goldman Sachs and a Treasury Secretary, this is a club you want to get into.

Citi wasn't stupid paying Rubin what they paid him. That's how insiders operate. Many, many years ago I worked for a money manager of sorts, who had this high powered white shoe law firm on his payroll. Month after month, he sent this firm a pretty big check. I never saw any of them and they certainly weren't doing any work for the firm. At the time, I didn't understand it. Why was my man sending this firm this huge check, which it appeared he had been doing for years? Then one day a knock came on the door and my man appeared to be in, shall we say, a little trouble. My man called the law firm he had been sending checks to for years, and they came over and sat down with the people who knocked on the door, all like true gentlemen, the white shoe lawyers all wore suspenders and horn rimmed glasses, and they all discussed this "misunderstanding" .

Something that usually doesn't go away very easily, completely went away. The door knockers went to knock on other doors of those who didn't have a downtown law firm on retainer.

That's what Rubin is there for at Citi, so that if a problem arises, he can sit down like a gentlemen, solve sticky problems and rape taxpayers when necessary.

Goldman Faces Loss of $2 Billion for Quarter

Goldman Sachs Group is likely to report a net loss of as much as $2 billion for its quarter ended Nov. 28, according to industry insiders, says WSJ.

Can you imagine what the losses would have been like if Hank Paulson wasn't shoveling money to them every way possible?

Goldman Sachs Starts the Avalanche That Will Crowd Out Non-Connected Borrowers

Goldman Sachs yesterday became the first US bank to issue debt backed by the Federal Deposit Insurance Corp under yet another new Paulson/Geithner government plan to shovel money to the politically connected. Goldman raised $5 billion.

Under this program, money raised is guaranteed by the FDIC, which makes it as good as a Treasury raise. Among others, JPMorgan and Morgan Stanley, GE Capital are all expected to follow Goldman.

When all is said and done. $300 billion is expected to be raised by this program. That's $300 billion that won't be available to non-bank, non-privileged elite.

Sen. Inhofe: Paulson Threatened Martial Law To Pass Bailout

Sen. James Inhofe, R-Okla., revealed to a Tulsa radio station details of Treasury Secretary Henry Paulson's conference call as Paulson pressured to get the "bailout" bill passed.Clip is approximately one minute.

(Via LRC)

Carlyle Funded Bank Also Gets Treasury Money

Boston Private Financial Holdings Inc. will get $150 million in capital through the Paulson "Bailout" program. This comes on top of $173 million Boston Private raised in July from private investors, including $75 million from the Carlyle Group.

According to Chris Carey at BailoutSleuth, the total number of institutions that have been selected to receive taxpayer money from Paulson's $250 billion program is now just beyond 70.

Alert: Paulson, Bernanke Testimony

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are scheduled to testify today before the House Financial Services Committee.

Grassely's Probe of Ex-Goldman Execs at Treasury Could Lead Directly to Paulson

Obviously, the political winds have shifted, Senator Chuck Grassely is calling for an investigation of ex-Goldman execs at Treasury. FT reports:

A senior Republican senator is seeking an investigation into potential conflicts of interest among former Goldman Sachs executives serving at the US Treasury and whether any officials exceeded their authority by implementing a controversial tax change without the approval of Congress.

Chuck Grassley, the most senior Republican on the Senate finance committee, asked Eric Thorson, inspector-general of the Treasury, to investigate the "independence" of several Treasury officials who formerly worked at Goldman Sachs and serve as advisers to Treasury secretary Hank Paulson, the former chief executive of the Wall Street bank.

Mr Grassley said in a letter to Mr Thorson that there was reason to be concerned that “relationships” between the officials and board members at two merging banks, Wells Fargo and Wachovia, gave the “appearance of preferential treatment”.

Mr Grassley singled out Robert Steel, a former Goldman official who worked under Mr Paulson at the Treasury before he became chief executive of Wachovia...

Mr Grassley, who has a reputation for aggressively uncovering and pursuing tax evasion, has a previous working relationship with Mr Thorson, who served as chief investigator for the Senate finance committee and whom Mr Grassley once praised for having “integrity and courage”.

Since ex-Goldman CEO and current Treasury Secretary Paulson signed and approved the tax change, this investigation is headed right at Paulson.

For background on this developing story, read my October 6 post, Pigs At The Trough: Behind The Citigroup, Wachovia, Wells Fargo Circus.

Inhofe: Forget Credit Squeeze, Freeze Paulson

U.S. Senator. Jim Inhofe (R-OK) lets go on Treasury Secretary Henry Paulson. He told the Tulsa World:

It is just outrageous that the American people don't know that Congress doesn't know how much money he (Treasury Secretary Henry Paulson) has given away to anyone.

It could be to his friends. It could be to anybody else. We don't know. There is no way of knowing.

He was able to get this authority from Congress predicated on what he was going to do, and then he didn't do it.

I have learned a long time ago. When they come up and say this has to be done and has to be done immediately, there is no other way of doing it, you have to sit back and take a deep breath and nine times out of 10 they are not telling the truth.

And this is one of those nine times.

Inhofe wants to freeze what is left of the initial $350 billion — reportedly $60 billion, but Inhofe concedes he does not know for sure, according to the Tulsa World.

Then he wants a provision requiring an affirmative vote by Congress before Paulson can get his hands on the second $350 billion of bailout money.

Inhofe may be the only member of the Senate who actually understands economics. He told the Tulsa World, with regard to extending unemployment benefits, that, "You don't stimulate the economy by giving away more money."

With regard to an automobile industry bailout, Inhofe said "If we keep on nursing a broken system, then we can't expect to have a different result come later on."

Issa Grills Kaskari

The link to this youtube video was posted in a comment below. I have never come across Karl Denninger before, but, as you will see, he gets it BIG TIME.

Hank Paulson Must Think Water Freezes at 60 Degrees

The latest news from our Treasury Secretary is that the consumer credit markets are frozen. The only problem is that Hank Paulson's idea of frozen is different than yours and mine. This guy is probably the only person lookng, in August, for the ice skating rink in New York's Central Park.

Robert Higgs explains:

Notwithstanding the many developments on the bailout front during the past six weeks, the New York Times, like other media outlets, continues to quote Wall Street insiders who report, as Alex Roever of JPMorgan Chase did recently: "You have a market that is frozen." What planet do these guys live on? It certainly is not the same one to which the Federal Reserve's data apply. I’ve been singing this song for many weeks, but I’m going to keep singing it until somebody in the news media wakes up and realizes that these "frozen credit market" tales are pure hooey. Look at the data, for crissake. By now we should all be ready to move beyond hysteria, get a grip on reality, and begin thinking about how to repeal everything the government has done during the past six weeks...

Memo to NYT: check the data on consumer loans published by the Federal Reserve System. The latest report, dated November 7, says: "Consumer credit increased at an annual rate of 1-1/4 percent in the third quarter. Revolving credit increased at an annual rate of 2-1/2 percent, and nonrevolving credit increased at an annual rate of 1/2 percent. In September, consumer credit increased at an annual rate of 3-1/4 percent." Would you describe this report as indicating a "frozen" credit market? Total consumer credit outstanding in September, $2,588 billion, exceeded the average amount outstanding in any year from 2003 to 2007, the period of the credit bubble.

My gut tells me that in Henry's mind unfreezing this non-frozen market means shipping more billions to the Robert Rubin wing of Goldman Sachs, i.e. Citigroup.

THE HEAT IS ON Issa to Paulson: I Want the Time and Date

Three cheers for two truth seekers in Congress.

Congressman Darrell Issa (R-CA), along with Congressman Dennis Kucinich (D-O), are raising important questions about the Paulson Bailout plan, and just how and why it was changed from a mortgage bailout plan.

“I want to know whether Congress was lied to or whether there was a team all along that had an alternate idea of how the money was spent,” Issa said, before demanding to know the “time and date” Hank Paulson, Treasury secretary, had decided to abandon his initial plan to buy up mortgages, reports FT.

"I think it's fairly obvious that Congress would have never passed the [rescue plan] had it known how Treasury would marshal the resources it was given," Kucinich said during his opening remarks before a hearing on the bailout.

Note to Kucinich and Issa, the Paulson bailout plan was a scam from the start. See my post The BIG LIE: The Supposed Paulson Bailout Plan, written BEFORE Congress even approved the plan. But, I really suspect the scam started with the takedown of the competitors of Goldman Sachs. An investigation (away from the clueless SEC) must be done to determine the exact causes that led to the collapse of these two firms. Goldman, Paulson's old firm, has publicly admitted that it has picked up 100 new major clients since the financial crisis began.

If Banks Are Supposedly Not Lending...

...why are they competing so aggressively for new deposits?

From today's WSJ:

Banks across the U.S. are engaged in a heated competition for deposits as the battered industry tries to shore up its funding sources.

From giant Citigroup Inc. to tiny S&T Bancorp Inc. -- which is based in Indiana, Pa. and has just 55 branches -- banks are responding to uncertain times by sharply increasing the interest rates paid on deposits.

Bottom line, if you are a good credit, you can get money. Banks aren't chasing deposits so that cash is piling up in their vaults. The frozen credit markets are just more Paulson propaganda.

Why the "Stimulus" Packages Are Suffocating the Economy

Terence Corcoran at Canada's Financial Post nails it:

Henry Paulson’s about-face yesterday on Washington’s US$700-billion financial market bailout should be the last straw. It is now past time for governments, from the G20 through to Washington and Ottawa, to call a moratorium on bailout plans and stimulus efforts, liquidity injections and capital supports, rescue packages and mortgage guarantees, deposit insurance expansions and credit subsidies.

To put the matter bluntly: These measures — from Mr. Paulson’s surprise policy turnaround to China’s fake stimulus program to the looming spectre of the G20 meeting this weekend — are all undermining global financial market recovery.

Complicating matters, the world today faces the prospect of an Obama administration hell-bent on more initiatives, including auto-industry bailouts and even bigger blasts of “stimulus” to rescue an economy that’s drowning in too much stimulus.There’s a simple reason this endless succession of interventions, the most radical and massive in global financial history, is not working and is instead making a bad situation worse. They are designed to subvert market realities and by doing so, they make it impossible for the rest of us to make rational market decisions — about our money, our jobs, our investments, our spending...

Totally Clueless Barney Frank

What part of the Henry Paulson scam doesn't Barney Frank get.

The fact that Paulosn has admitted that while the bill was going through Congress he wasn't going to buy up mortgages?

That the mortgage plan drawn up by Treasury made no sense from day one?

It appears Frank still doesn't have a clue. From today's WSJ:

House Financial Services Chairman Barney Frank (D., Mass.) said Wednesday he was disappointed Mr. Paulson was scrapping the asset-purchase plan. "I think he's wrong not to use it that way," Mr. Frank said.

Behind Bush's New Free Market Religion When It Comes To the Auto Industry

So why has the Bush Administration and Henry Paulson suddenly found Free Market religion when it comes to auto industry and is dragging its feet on an auto industry bailout?

The auto industry via the United Auto Workers union is a tool of the Democrats, not the Republicans. The blatant hypocrisy in this "bailout" never fails to amaze.

Bloomberg with the ugly details:

President-elect Barack Obama is pushing Congress this year to approve as much as $50 billion to save cash-starved U.S. automakers and appoint a czar or board to oversee the companies, a move that would require President George W. Bush's support, people familiar with the matter said...Still, the Bush administration so far has opposed bailing out the carmakers...``The intent of the TARP was to deal with the financial industry,'' Treasury Secretary Henry Paulson, who is administering the program, said yesterday in a press conference. ``My focus is on the financial sector, getting credit going, getting lending going.''

Paulson Deserves The Electric Chair

How obvious is Paulson's scam getting? Even mainstream media is figuring it out.

Here's ABC's Dan Arnall on whether there has been, as he puts it, a "Great TARP Bait & Switch:

No Troubled Asset Purchases? Then what are they doing with that $700 billion blank check? They are buying bank stock, not troubled assets. We probably shouldn't call it the TARP anymore. Instead, they are focused on a capital purchase plan (CPP) which is the widely reported $250 billion plan to use taxpayer money to purchase a stake in banks. "By October 26th we had $115 billion out the door to eight large institutions," said Paulson. "In Washington that is a land-speed record from announcing a program to getting funds out the door. We now have approved dozens of additional applications, and investments are being made in approved institutions." When we'll get a list of those dozens of additional applicants which will be getting a piece of the $125 billion in remaining taxpayer case remains to be seen. The original CPP participants were told about the program at a closed-door meeting at Treasury and no minutes have been released on what was said during the meeting.

So, is this the biggest bait and switch in American history? There will certainly be critics who say that Paulson and the Bush Administration were disingenuous when they were selling Congress and the American public on the program back in September. And they’d probably be right. Paulson said today, he knew when the bill was signed the purchase of trouble assets wasn’t the right solution to the problem.

Of course, if you read EPJ, you would also have known about this back in September. On September 25, BEFORE THE BILL WAS APPROVED BY CONGRESS, I titled a post THE BIG LIE: The Supposed Paulson 'Bailout' Plan

At the time Paulson was talking about paying for mortgages at deep discount prices. That wasn't going to help out banks in trouble and in my post I discussed this, and I clearly smelt the rat as I wrote:

This $700 billion may end up in many places, but it doesn't appear it is going to bail out many troubled banks. This could be news to many Americans, since it also appeared to be news to Fed Chairman Ben Bernanke, who is something of Paulson's lapdog. Bernanke tends to follow Paulson's lead and doesn't generally get out of order, but he even barked as he was figuring out what Paulson was up to... As best that can be determined, since Paulson likes to keep everything vague, it appears the $700 billion will act as a feeding trough for all sorts of insiders and wannabes.

I really don't know what is going on with Congress and most other observers. Most really have no clue. Most don't know the Fed tightened money supply all summer, to worsen the crisis, most don't know the Fed has changed the rules so that the Fed Funds rate is not as relevant, and they missed a $700 BILLION inside bank job as it was going on, since most don't know what causes a business cycle or how to deal with it.

Part of the blame has to go to the authors of basic economic texts, for this lack of basic understanding. Some of the blame can be put at the feet of teachers for ineffectual teaching, but a bright student should be able to pick up a Paul Samuelson text or a Greg Mankiw text and get the economic basics, but that is not the case. Congress, the media, the world is filled with nothing but economic idiots. If I was Mankiw, I would not be proud of the fact my texts are the best selling texts, when college students graduate clueless about economics.

But, I digress. Even the Mankiw educated students are beginning to understand the scam Paulson has pulled off. Even if it took Paulson, himself, to admit today, that even he didn't believe in his plan as it was being passed by Congress.

Did he tell Congress this at the time? NO.

Did he go to Congress and say, "I made a mistake in my calculations, and we are going to have to do it differently"? NO

Instead he took the money and passed it out to his crony buddies. Goldman Sachs got $10 billion (after being a bank holding company for all of a week!). The Robert Rubin wing of Goldman (Citigroup) got $25 billion. And it should be noted that before Paulson went to Congress for money, he crushed both Bear Stearns and Lehman Brothers. There was no bailout money for them. The crushing of Bear and Lehman wasn't a bad thing for Goldman. Goldman's chief earlier this week bragged at a conference that Goldman has picked up 100 new clients because of the crushing of Bear and Lehman.

This $700 billion is the greatest heist of all time. If Dennis Kozlowski can get 25 years for bogus "crimes". And, Jeffrey Skilling can get 24 years for his edgy pranks, then Henry M. Paulson Jr. deserves the electric chair, for taking the "bailout" money and bringing the economy to its knees.

Dean Baker With the Big Question

Are Ben Bernanke and Henry Paulson crony capitalists?

Alert: Paulson Speaks Wednesday

Details:

Wednesday, November 12, 2008, 12:00 p.m. EST
Secretary Henry M. Paulson, Jr.
Financial Rescue Package Update
Treasury Department
Media Room (4121)
1500 Pennsylvania Avenue, NW
Washington, D.C.

Treasury Secretary Paulson Lied to Congress

I don't know how else to interpret this report from WSJ:

Mr. Paulson wanted flexibility to use the money any way he saw fit. Privately, he told his staff that equity injections might be needed. But in public testimony, he all but ruled out that option, describing it as something a government would do for failing institutions, not the solvent ones he wanted to assist.

Of course, as we now know, the money has gone mostly to solvent financial institutions and in the form of equity investments. With Goldman Sachs, Paulson's old firm, and the Robert Rubin wing of Goldman, Citigroup, among the first to get billions from the Treasury.

AIG Bailout Is Now at $250 Billion?

The Treasury is in full obfuscation mode. It is putting out some very confusing numbers as to its bailout of AIG. For example today's press release on the bailout said:

The U.S. Treasury on Monday announced that it will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York (New York Fed) on September 16, 2008...

In one new facility, the New York Fed will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the LLC’s purchase of residential mortgage-backed securities from AIG's U.S. securities lending collateral portfolio. AIG will make a $1 billion subordinated loan to the LLC and bear the risk for the first $1 billion of any losses on the portfolio. The loans will be secured by all of the assets of the LLC and will be repaid from the cash flows produced by these assets as well as proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

Proceeds from this facility, together with other AIG internal resources, will be used to return all cash collateral posted for securities loans outstanding under AIG's U.S. securities lending program. As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, will be repaid and terminated...

In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC's purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts. AIG will make a $5 billion subordinated loan to the LLC and bear the risk for the first $5 billion of any losses on the portfolio. In connection with the purchase of the CDOs, the CDS counterparties will concurrently unwind the related CDS transactions. The loans will be secured by all of the LLC's assets and will be repaid from cash flows produced by these assets as well as the proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

PEU Report takes a stab at figuring out what all this means:

AIG lined up more billions in taxpayer funds. The first $143 billion wasn't enough to save the company. In a confusing, financial magician move, AIG will get $40 billion for preferred stock, $52.5 billion in TARP money for junk assets, and their total debt to Uncle Sam shrinks by $25 billion. That sleight of hand brings the total for AIG to over $250 billion.

Hey, if you spent $250 billion on a bailout of one company, you would try to hide the fact also.

Paulson Wants To Expand "Bailout" Beneficiaries Even Further

Bond insurers and specialty finance firms such as General Electric Co.'s GE Capital unit, CIT Group Inc. are now, among others, on Paulson's mind bending Bailout Road.

David Warsh with Big Questions and Big Stories

David Warsh has just published the silver anniversary issue of Economic Principals. I have been reading him from the start, when his column was at the Boston Globe. Twenty-five years ago, his column was the first item I turned to, in the big, thick Sunday Globe. The memories come back, as if it were only yesterday. He is not an Austrian, but he is a damned honest, sincere, interesting and informative writer. We definitely need more people like him (or at least hope, he carries on for another 25 years!)

His silver anniversary issues comes out with rockets blaring and asks these important questions:

How deep has been the opposition between the Federal Reserve Board and the US Treasury Department these last fifteen months? Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson have presented a generally united front. But what goes on behind the scenes? What of their staffs? The sheer opacity of Paulson’s initial plan to buy and hold troubled securities, and the clumsiness with which it was presented, has yet to be explained. What was the process by which it was developed and internally reviewed?

Warsh is on to something here. In early Congressional testimony, Bernanke's view of how the mortgage bail out would proceed was decidedly different from Paulson's. Bernanke testified that the bailout would result in mortgages being bought at "value at maturity". Paulson said they would be bought at discounted market value. The next day in further testimony, Bernanke fell in line with Paulson. Paulson's plan proved a non-starter. Indeed, WSJ reported that it is a dirty little secret that Paulson's Plan to buy up mortgages would not work and indeed would cause more problems for banks, and that is why Treasury shifted to infusing capital directly into banks. And, then, of course, there is the fact that Goldman Sachs and Morgan Stanley become bank holding companies, and each receive a $10 billion infusion from Treasury. What Just Happened? is the title to Warsh's column, yes indeed.


Warsh also broke wide open Harvard University’s Russia scandal of the 1990s.


Warsh writes:

No column I ever wrote cost more than “The Thing’s a Mess,” the first installment, in 2002, of many columns over the last six years about the collapse in 1997 amid charges of corruption of Harvard University’s USAID-sponsored mission to advise the government of Boris Yeltsin. I knew I was damaging several longstanding relationships with economists whom I admired by calling attention to the details of the US Justice Department’s ultimately successful attempt to recover damages in Boston’s Federal District Court.

Since then I have gotten used to it, and in more than twenty pieces, I have given a pretty good account of how Harvard professor Andrei Shleifer was found to be investing in Russia, along with his wife, deputy, and deputy’s family, in violation of his contractual obligation to provide disinterested advice, and how his close friend and mentor Lawrence Summers sought unsuccessfully to distance himself from the lawsuit, but not from Shleifer, first as Treasury Secretary and then as president of Harvard, as the matter plowed on to its ignominious conclusion. The episode was widely covered in Russia, and became part of the rich lore of Russian resentment
of US policy in the aftermath of the Cold War.

Warsh also writes of the reception he received from the usual suspects about his breakthrough story:

But you would never have a clue that any of this [the Russia episode] had happened from three of the most widely-read economists’ blogs, the Freakonomics site, J. Bradford Delong’s Semi-Daily Journal, or N. Gregory Mankiw’s blog. Why? Because they are economists, and not committed to “without fear or favor” news, though they deliver plenty of interesting tidbits over the course of a week. Besides, Shleifer is on the board of directors of the Becker Center on Price, where Freakonomics’ Steven Levitt teaches. DeLong, who worked under Summers at the Treasury Department, has been Shleifer’s friend since the two were college roommates. Mankiw regularly touts his colleague for a Nobel Prize.

The online edition is free, but the $50 Bulldog edition puts bread, not likely steak, on Warsh's table, and is available by subscripton.

Alert: Paulson Speaks Tuesday in NYC

Details:

Tuesday, October 28, 2008, 10:45 a.m. EDT
Secretary Henry M. Paulson, Jr.
Remarks on Markets and the Economy
Securities Industry and Financial Markets Association Annual Meeting
Marriott Marquis
1535 Broadway
New York, N.Y.

The Dirty Little Secret You Read About First At EPJ

A Brian Carney interview with Anna Schwartz, published this weekend by WSJ, hints at how dangerously clueless Treasury Secretary Hank Paulson is. 

In September, I wrote, of Paulson's initial plan to buy up mortgages:

Treasury Secretary Paulson's "bailout" plan has little to do with bailing out banks in trouble. In fact, if his plan is approved by Congress, it is likely the number of banks that will be in trouble will hardly decrease...You see, Paulson wants to buy the mortgages on the cheap, at their "real" value. But the bad stuff, the sub-primes, and the like, are worth at best 50 cents on the dollar. For banks that are insolvent because they own this paper, a Treasury purchase of 50 cents or less on the dollar isn't going to help things, indeed, it may make it clear to even more that these banks' liabilities far exceed their assets. 

Carney, a member of WSJ's editorial board, confirms that the reasoning in my analysis was exactly why Paulson ditched the first plan:

The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week.

Of course, whatever Plan Paulson developed, it would include getting cash into the pockets of his crony buddies. Paulson's first plan would have just sunk the rest of the entire banking system while Goldman Sach's wallet, and the lke got fatter.

Why You Read EPJ

Andy Kessler in today's WSJ:

Wall Street and banks live by short-term loans.

EPJ in September:

Since the Fed operates on the short term end of the interest rate spectrum,that's where investment bankers borrowed their billions. Borrow at the low short-term rates and lend long on mortgages and the like at higher rates, and earn the spread. That was the Fed enabled game.

Kessler today:

But here's the current dilemma: If Treasury pays more than market price for these distressed securities, it would look like a taxpayer gift to Wall Street. That's politically unfeasible. So Treasury has to pay the current distressed prices. (Despite this week's stock-market bounce, prices are still dropping on toxic CDOs.) But if Treasury pays current, fire-sale prices, it would lead to major write-downs at banks. Since most of these securities are collateral for other loans, and regulators force banks to have minimum capital requirements and cash on hand, any write-down in value immediately means new capital needs to be raised. And then who would throw good money after bad?

EPJ in September:

Treasury Secretary Paulson's "bailout" plan has little to do with bailing out banks in trouble. In fact, if his plan is approved by Congress, it is likely the number of banks that will be in trouble will hardly decrease. Billions more in real bailout money will be needed to bail these banks out...You see, Paulson wants to buy the mortgages on the cheap, at their "real" value. But the bad stuff, the sub-primes, and the like, are worth at best 50 cents on the dollar. For banks that are insolvent because they own this paper, a Treasury purchase of 50 cents or less on the dollar isn't going to help things, indeed, it may make it clear to even more that these banks' liabilities far exceed their assets. The only way a Treasury purchase of these mortgages would help is if they were bought closer to face value, boosting the value of the banks assets.

More Details On 'Wall Street' Sequel

As if Henry Paulson and Ben Bernanke are not enough entertainment, FOX is fast tracking a 'Wall Street' sequel.

Michael Douglas will return as Gordon Gekko, according to Variety. Bud Fox is history.

Allan Loeb will write the screenplay. In addition to screenwriting, Loeb is a licensed stockbroker who once worked at the Chicago Board of Trade.

Big Banks Get $125* Billion Cash Going Away Gift From Paulson and the Bush Administration

Please sit down before you read this. If you have high blood pressure or heart trouble don't even try to read this, find a decent sports page instead, this is not for you.

Approximately half of the first $250 billion tranche of money approved by Congress for the mortgage crisis will end up in the hands of the "healthy" big banks.

"For the good of the American financial system," Treasury Secretary Paulson has told the big banks they must take his $125 billion (Give or take a billion or two) handout, reports NYT.

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch. So much for bailing out the mortgage market.


Here's the kicker: The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings. In other words, all current shareholders are protected, unlike Lehman, Bear Stearns, Fannie Mae and Freddie Mac shareholders.

No matter how they frame this,the truth is this is a roughly $125 Billion going away gift from the Bush Administration to Wall Streets elite.

UPDATE: The exact terms of the funding have been released by Treasury. For the first five years, the dividend on the preferred stock will be only 5%, not 10%. The full terms on the funding can be found here.

*Note I initially put the headline handout number, and number in the story, at $135 billion. The handout number is a bit unclear, so to be conservative I have lowered the total handout estimate to $125 billion

They Are Getting Ready To Divvy Up The Lucre: US Summons Only Super Elite Bankers To A Meeting

The Bush administration summoned executives from leading banks to a meeting in Washington Monday afternoon to work out details of the $700 billion plan.

And, as they say in Chicago, "If you are not at the table, you are on the menu."

For the record those expected at the table are:

Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon, and Bank of America Corp. CEO Kenneth Lewis were all asked to attend. There was some speculation that Paulson might have expanded the invitation to at least three other CEOs from various regional banks, people said.

The FDIC directly examines and supervises about 5,250 banks and savings banks, and Paulosn invites at most 8 bankers to discuss how to divvy up $700 billion?

"It was expected that whatever comes out of the meeting will be used to put the finishing touches on the plan," AP reported its sources as saying.

Report: U.S. To Guaranty Japanese Firm's Investment In Morgan Stanley

In continued moves that favor Wall Street's "chosen ones", it appears that the United States government will guaranty an investment by Japanese bank Mitsubishi UFJ Financial Group in Morgan Stanley.

Andrew Ross Sorkin at NYT is reporting (My emphasis):

In what could set an important precedent, federal officials assured a big Japanese bank late Sunday that its planned investment in the embattled Wall Street giant Morgan Stanley would be protected, according to people involved in the talks...

The Treasury’s assurances amount to another extraordinary move by the government and could serve as a model for future deals. The tense, weekend talks were so critical to the financial markets that they drew in both the Treasury and the Japanese government...Mitsubishi and the Japanese government pressed the Treasury Department over the weekend to guarantee that if the United States were to inject money into Morgan Stanley at a later time — a step the Treasury has ruled out for now — the move would not wipe out Mitsubishi’s investment.

Paulson has found another formula that protects his cronies, their jobs and their stock positions, while funneling them money. Remember the days, oh so long ago, of Freddie Mac and Fannie Mae officers losing their jobs because they needed cash injections? Remember the days when these poorly managed companies' stock turned to dust when the government put in rescue money? Those days are gone. For Paulson's elite, they will show up this morning with their jobs intact, their stock positions intact (in fact, thanks to the government guaranty, a likely soaring Morgan Stanley stock). Somewhere, Dick Fuld, former Lehman CEO, is fuming.

Tape Blows Cover On True Treasury Intentions

The new kid at the Treasury hasn't quite learned you really can't talk in public about what you are really up to at Treasury. New Interim Assitant Secretary of the Office of Stability, Neel Kashkari, has been caught on tape providing the true details of what Treasury is up to. This will get him muzzled pretty fast, but it provides us the opportunity to see the scheming going on at Treasury.

Kashkari's statements were posted on YouTube, and now appear to have been removed.

WSJ reviewed the tapes and reports first on the fact that Kashkari considers the executive pay caps demanded by Congress a joke:

As the biggest market intervention in U.S. history made its way through Congress, Neel Kashkari, the Treasury official named this week to run the program, offered assurances to 800 financial-industry players.

Attempts by Congress to make beneficiaries pay for their mistakes, such as placing caps on executive pay, were "quite reasonable" and "a pretty modest hindrance to you," he told them, according to a recording of the Sept. 28 conference call made public on video-sharing Web site YouTube.

Kashkari told participants in the call that lawmakers' interest in limiting executive compensation was "emotional" and "probably the most difficult part of the negotiation" with Congress.

When one industry participant said the caps might discourage participation, Kashkari noted their limited scope, which he called "a pretty modest hindrance to you coming into the program," WSJ reports.

WSJ also reports that the conference call took place the night before the House rejected the rescue plan, on September 28. The plan passed days later on October 3.

The dates are important because Kashkari, according to WSJ, also reported to the financial insiders that, "Our preference would be to try to help healthy banks become even healthier." (My emphasis.)

Remember, the entire focus, at the time, was on buying up bad mortgages and there was no news out publicly about Treasury helping "healthy banks"?

Indeed, I just did a search of the New York Times database and the first time the words "healthy bank" come up in a search is on October 9, where NYT reports that as Part of a NEW "Plan B" that Treasury may take positions in banks, even healthy ones.

This is how NYT reported the story (My emphasis):

Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials...

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it...including healthy ones.

This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.

As Bob Murphy has pointed out, they haven't even bought one mortgage yet, so how could they have failed at attempting to unlock the supposed frozen market?

"New interest"? "New options" "After yet another tumultuous day"? Then why was Kashkari talking about these details to the securities industry, even BEFORE the first House vote?

A database search of WSJ pretty much shows the same thing, the first time "healthy bank" is used with regard to the takeover of banks is October 10. The only other relevant search that comes up is an Op-Ed piece on 9-26 by John Paulson , a respected Wall Street investment manager--not the Treasury Secretary--, who discusses the Treasury's plan to buy mortgages from all banks. And he would certainly be shocked to hear that two days after his Op-Ed that Kashkari said the Treasury's preference was to help healthy banks, given that John Paulson wrote in his Op-Ed:

By allowing all banks to sell their worst assets to Treasury at inflated prices, taxpayers would be subsidizing healthy banks which have access to private capital (Goldman Sachs, J.P. Morgan, Wells Fargo, and Bank of America, for example) as well as banks that don't have a private alternative. But under a Preferred plan, only banks that don't have a private alternative will be given federal assistance. This would reduce the outlay otherwise required to solve the crisis.

Folks, we have a smoking gun here, you would have to be blind not to see that the Bernanke-induced crisis is being used by Paulson to funnel money to Goldman Sachs and his other crony favorites. The plan all along was to help out "healthy banks". It's on tape from the interim Assistant Secretary of Stability. Yeah, crisis and fear alright. Every time they utter those words, they move more of the $700 billion closer towards Goldman Sachs' vault.

UPDATE: There is a poor quality audio tape of the conference call on YouTube. Here is Part 3 where at the 9:00 minute mark the mention is made that healthy banks will be preferred. Thanks, Anthony.

Ian Welsh On Hank

Welsh on Hank's plan:

Apparently Fannie and Freddie are to start buying 40 billion a month (20 billion apiece) of non-performing crap mortgage securites. This is Paulson's way to get things moving before his TARP fiasco is up and running, a way to spend more money than Congress gave him, and a way to make up for having to divert money from TARP to an equity infusion by buying preferred stocks.

200 billion was made available to Freddie and Fannie at the time they were placed
into receivership. This plan will blow through that in 5 months and that doesn't even cover the fact that, well, Freddie and Fannie had massive losses and the money was meant to cover those losses, not as a slush fund to buy up trash.

At this point I simply have no benefit of doubt left to give to Paulson or his cronies in the Bush administration. TARP never made any sense, and the rationale of supporting mortgage markets through this is transparently stupid. If the mortgage markets are having problem and Freddie and Fannie need to be used to support them, then buying up old crap mortgage securities is far less helpful than having them buy up new mortgages or mortgage backed securities.

Instead this seems designed to help Hank's friends offload trash, more than to clear a market blockage.

But, as they say in the tech business, I guess from the Bush administration's point of view, that's a feature, not a bug.

Nothing ever makes any sense with Hank until you realize it always somehow ends up with Goldman.

Alert: Interim Assistant Secretary for Financial Stability To Speak

Treasury Interim Assistant Secretary for Financial Stability Neel Kashkari will deliver remarks Monday before the Institute of International Bankers in Washington. He will discuss financial markets and Treasury's progress implementing the Emergency Economic Stability Act.

When
Monday, October 13, 8:00 a.m. EDT

Where
The Four Seasons Hotel
Salon A
2800 Pennsylvania Avenue, NW
Washington, D.C.

Keep in mind that this is another Goldman Sachs man brought over to Treasury by Paulson.

Alert: Paulson Post G-7 Press Conference Scheduled for Friday

Details:

Friday, October 10, 2008, 6:45 p.m. EDT
Secretary Henry M. Paulson, Jr.
Post-G7 Press Conference
Office of Thrift Supervision
Auditorium, 2nd Floor
1700 G Street, NW
Washington, D.C.

First Details of The Paulson Heist Emerge

OK, it's been clear from day one that the Paulson $700 Billion "Bailout" is the biggest scam in recorded history, since Paulson has set it up in a way that it won't bailout anyone.

Now, the first details of Round 1 of the scam emerge from WaPo (My emphasis):

The Treasury Department this week plans to start outsourcing the management of up to $700 billion in troubled securities using special contracting authorities that enable it to retain private portfolio managers, custodians and other financial services consultants without following standard acquisition procedures....

...it means that the government has little time to assess the companies that will be partners in what could become one of the largest public-sector funds in American history. Some of the same firms that have played roles in the rise and collapse of the mortgage-backed securities market may end up guiding the government as the bailout unfolds, department officials said...

Contracting specialists said the department has the authority to retain "financial agents" to manage money on its behalf. By using that authority at a rapid clip, instead of through traditional acquisition procedures, the government creates a risk that it won't hire the best firms at the best price, they said.

D. Kent Goodger, a contracting official for four decades who now teaches procurement classes for the federal government, said decisions to bypass federal acquisition regulations for urgent and compelling reasons in the past has led to trouble and cost overruns. "By rushing ahead, doing this quickly, it creates inherent risks," Goodger said...

An analysis by Taxpayers for Common Sense, a watchdog group, found that the government's use of private firms during the resolution of the savings-and-loan crisis two decades ago lead to "untrammeled payouts to the private sector and reprimands from Congress and the Government Accountability Office."

Bottom line, the public was right in opposing this measure, and one has to begin to think that Naomi Wolf is right and that a coup has taken place in America.

The Bill just passes, so you would think that the Treasury would be walking on egg shells trying to do everything step-by-step with prudent procedures. Instead, they not only throw out standard procedures, they go out and employ that great method known as reckless abandon, which in the past has lead to "untrammeled payouts to the private sector and reprimands."

And, this is Round 1. Just wait for the details on how Treasury plans to buy and sell mortgages and mortgage securities, when no one has a clue as to what many of them are actually worth.

On Paulson And His Phony Frozen Market

The National Association of Realtors says pending home sales rose 7.4 percent from July to August.

The group said its seasonally adjusted index of pending sales for existing homes rose to 93.4 from an upwardly revised July reading of 87. The reading was the highest since June 2007.

Pigs At The Trough: Behind The Citigroup, Wachovia, Wells Fargo Circus

First a very quick summary of what has been going on.

Early last week, the FDIC forced the hand of Wachovia and pushed them to be taken over by Citigroup. It was a typical FDIC sweetheart deal. This time for Citi. Citi paid $1 a share, or about $2.2 billion.

The government agreed to provide Citigroup with a financial guarantee on Wachovia’s most risky assets. It is similar to the deal that the Federal Reserve established with JPMorgan Chase’s emergency takeover of Bear Stearns.

Then later in the week, Wells Fargo recognizing that Wachovia was worth a lot more than $2.2 billion, especially because of some tax law changes made by Paulson's Treasury, bid, get this, $15.4 billion WITHOUT any government protection against risky assets.

Now,the courts will decide who gets Whacovia

So what is going on with all this aggressiveness to buy a bank in trouble?

Paulson's Treasury is writing regulations that will benefit firms like his old firm Goldman Sachs. It just so happened that this rule change was made last week Tuesday and Wells Fargo decided to try and steal Wachovia from the grips of Citigroup and its sweetheart deal. A signed agreement between Citi and Wachovia be damned.

What's the Treasury rule change that caused all this commotion? Specifically, companies are allowed to shelter profits from taxation based on their past losses. When a profitable company buys a company with losses, however, the government historically has limited the profitable company's ability to shelter its income based on the acquired company's losses. In the case of Wells Fargo, the company could only have sheltered about $1 billion in income each year --for a total of $20 million over the 20 year life span of tax loss carry forwards..

But the Treasury last week Tuesday changed the rules and removed the limits on the income banks can shelter based on the losses of acquired companies. In announcing its deal for Wachovia, Wells Fargo estimates it could write down $74 billion in losses on Wachovia's loan portfolio. Absorb that: Instead of $1 billion in tax sheltered income per year under the old rules, the new rules will allow $74 billion in sheltered income in any time period.

So basically, you have the government throwing so many goodies at the elite players that are left standing, like Citi and Wells Fargo, that they are fighting over who gets the goodies. Will it be Citi with its FDIC sanctioned low ball bid of $2.2 billion and the financial guarantee by the government against losses on Wachovia’s most risky assets, or will it be Wells Fargo and the super sized increase in value of Wachovia's tax loss carry forwards of $74 billion.

Either way, it is a heist.

Citi and Wells Fargo are pigs at the trough of multi-billion dollar gifts from the government under the cover of the overall financial crisis.

You can be certain there are all sorts of these hidden deals tucked inside the 400 plus page Paulson Plan and other rules being changed by government agencies because of the crisis. Most of them are hidden and unknown to the general public. The story was broken by WaPo on the tax benefit change only because of Wells Fargo's aggressive bid for Wachovia, and thus focus on the deal.

But, keep in mind that Goldman Sachs (Paulson's old firm) just became a bank holding company that is expected to be making very aggressive acquistions in the banking industry. Thus, Paulson's change in banking tax law will likely benefit Goldman to the tune of billions upon billions in tax benefits--especially since Paulson's phony bailout will require mortgage securities to be sold at depressed market values, which will producee greater tax loss carry forwards for Goldman from the banks they acquire.

So it doesn't matter how the court rules, whether in favor of Citi or Wells Fargo. The fix is in, with major benefits handed out by the government to whichever pig wins.

Given the billions involved, let's hope they at least pay for their own lipstick.

UPDATE: Forgot to mention, the new CEO at Wachova is Robert Steel, a former Treasury AND Goldman man. Cozy.

Jim Chanos On Frozen Markets

Top flight short-seller Jim Chanos emails Joe Nocera with some observations on the frozen markets that Treasury Secretary Paulson is so concerned about:

[T]he only reason these markets are illiquid is because THE CURRENT MARKS DON’T REFLECT REALITY! There are plenty of buyers (including me)for "distressed assets,” at the right price. We may reasonably argue if a certain C.D.O.[collateralized debt obligation] is worth 25 or 30 cents on the dollar, but I have no interest when the bank showing me the same paper at 60, could “do the deal” at 55…! The illiquidity is due to the continued overpricing of this paper, not the paper itself.

The Oligarchs Win...

...not exactly surprising. The Paulson Plan has passed the House and has been signed by GW.

Other than to emphasize that billionaire Warren Buffett, one of the wealthiest men in the world, will likely be a major beneficiary of this bill, I have nothing new to add to what I have already posted on the topic:

Mr. X Has Read the Senate Version of the Paulson Plan...

The Very Clueless New York Times

Warren Buffett As Fear Monger...

Buffett Boosts His Oligarch Credentials, Again

FDIC Insurance Increase: Ground Cover for Paulson Bill

The Paulson Plan Is Dissed, What Next?

The Paulson Plan And The Rise Of The American Oligarch Class

THE BIG LIE: The Supposed Paulson 'Bailout' Plan

The Bad News Bailout

Henry Paulson, American Oligarch

The Very Clueless New York Times

Today's NYT carries a story reported by Andrew Ross Sorkin, Diana B. Henriques, Edmund L. Andrews and Joe Nocera. It was written by Nocera. There was additional reporting by Jenny Anderson, Nelson D. Schwartz, Eric Dash, Louise Story, Michael M. Grynbaum, Carter Dougherty and Vikas Bajaj.

Written in the style of a cheap paperback thriller, it recounts the recent activity by Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke and other government officials in dealing with the current financial crisis. Yet none of these reporters reported on the key elements behind the crisis. For starters, not a word about the poorly structured balance sheets of the firms in trouble. Simply put, the financial incompetents borrowed short-term and lent out long term--a mismatch of assets and liabilities that was an accident waiting to happen. Properly matched assets and liabilities would have gone a long way toward eliminating the runs on most of the investment banks.

Botching this, the NYT reporting gets worse. They report a ridiculous statement made by Bernanke:

That Thursday evening, however, time was of the essence. In a hastily convened meeting in the conference room of the House speaker, Nancy Pelosi, the two men presented, in the starkest terms imaginable, the outline of the $700 billion plan to Congressional leaders. “If we don’t do this,” Mr. Bernanke said, according to severl participants, “we may not have an economy on Monday.

But fail to point out that while Bernanke is begging Congress for $700 billion, he has authority at the Federal Reserve to buy as much of whatever he wants, whenever he wants. Indeed, when the House failed to pass the bill on Monday, the Fed went in and pumped $630 billion into the system.

Ultimately, this crisis is about the Fed creating an economy dependent on more and more new money pumped into the system, and that the Fed stopped creating new money approximately four months ago. As we warned during the entire period here, here, here, here, here, here, here and here.

Am I justified in calling this the VERY CLUELESS NYT? I think so.

NYT put 11 reporters on this story and they all missed the mismatched balance sheets of the institutions in trouble, they failed to point out that while Bernanke is begging for $700 billion, the Fed can print $700 billion everyday if it wants to, and they failed to point out the immediate cause of the crisis--Bernanke's crashing of the money supply over the last four months.

-Robert Wenzel

Buffett Boosts His Oligarch Credentials, Again

Last week, billionaire Warren Buffett bought into Goldman Sachs with a $5 billion investment. Today, General Electric announced that Buffett is buying $3 billion of perpetual preferred stock from it.

GE has fallen 42 percent this year as a result of negative reyurns from its huge finance arm.

Both, Goldman Sachs and General Electric will be major beneficiaries if the $700 billion Paulson Plan is passed. Thus, the most significant beneficiary of the $700 billion Paulosn Plan is the richest man in America. Cute.

Buffet's father, Howard, is surely turning in his grave. The senior Buffett was an old school conservative. He most assuredly would have preferred dying a pauper then to accept or benefit from government "bailout" money in anyway.

On CNBC today Boone Pickens said that "[Treasury Secretary] Paulson is in communication with Buffett; that's good. The coach is out there in Nebraska. It's a nice, quiet place to think. He's available."

So Pickens, who has been hawking a bailout in advance of his future money losing wind turbine project, knows Buffet is talking to Paulson. Guys, this is one small club.

-Robert Wenzel

Interventionist Economists

Nothing can provide a better sense of the poor quality of economics being taught at many colleges and unversities today, then the large number of economics professors who signed the letter below that is being sent to Congress in support of the $700 billion Paulson Plan. For a well reasoned presentation of why bankruptcy is a much sounder alternative to the Paulson Plan, see Harvard Professor Jeffrey Miron's commentary here.

September 30, 2008

To the Speaker of the House of Representatives and the President pro tempore of the Senate:

As economists, we write to support the plan before Congress dealing with the financial crisis. We are well aware that the proposed intervention entails very large sums and considerable risk for American taxpayers, albeit upside as well as downside risk.

Ours is a mixed, private-public economic system. Even in normal times, our government is heavily involved in the economy and holds a considerable claim on the private sector via the tax system. That said, none of us would counsel government arrangements of the proposed type in normal times. Today’s situation is far from normal. Nor, unfortunately, is it unprecedented.

Our country has weathered significant financial crises over the years. It will weather this one as well. The main lesson learned from prior crises is that timely and aggressive government intervention can restore confidence and galvanize the private sector to take mutually reinforcing and economically beneficial actions. This ability of the government to set the economy on a healthy path makes the proposed intervention much less risky than would otherwise seem to be the case.

We call upon all members of Congress to support this important legislation knowing full well that doing so is neither easy nor guaranteed of success. *

Signed by*

Richard J Arnould, University of Illinois
Henry Aaron, The Brookings Institution
Bahram Adrangi, University of Portland
Lanny Arvan, University of Illiniois
Alan Auerbach, University of California at Berkeley
Lawrence Ausubel, University of Maryland
Kathy Baylis, University of Illinois
Valerie R. Bencivenga, University of Texas, Austin
Douglas Bernheim, Stanford University
Dan Bernhardt, University of Illinois
John Bigelow, The Princeton Economics Group
Douglas Blair, Rutgers University
Alan Blinder, Princeton University
Emily J. Blanchard, University of Virginia
Michael Boskin, Stanford University
Ricardo Caballero, MIT
Domingo Cavallo, Fundación Mediterránea, Argentina
Christophe Chamley, Boston University
Joaquin Cottani, LECG, LLC.
Peter Cramton, University of Maryland
Robert H. Dugger, Tudor Investment Corporation
Todd Easton, University of Portland
Everett Ehrlich, ESC Company
Niall Ferguson, Harvard University
Jeffrey Frankel Harvard University
Daniel Friedman, University of California, Santa Cruz
Donald Fullerton, University of Illinois
K.C. Fung, University of California
Eric Furstenberg, University of Virginia
Robert Hall, Stanford University and the Hoover Institution
Daniel S. Hamermesh, University of Texas at Austin
James Harrigan, University of Virginia
James Henry, Sag Harbor Group, Inc.
Firouz Gahvari, University of Illinois
Richard Gilbert, Compass Lexecon
John Goodman, National Center for Policy Analysis
Lawrence H. Goulder, Stanford University
Seung-Hyun Hong, University of Illinois, Urbana-Champaign
William Johnson, University of Virginia
Joseph Kasputys, Global Insight, Inc.
Justine Kilpatrick, retired
Roger Koenker, University of Illinois
Laurence J. Kotlikoff, Boston University
Howard Kunreuther, University of Pennsylvania
Arvind Krishnamurthy, Northwestern University
Kevin Lang, Boston University
Barton Lipman, Boston University
Michael Manove, Boston University
Preston Mcafee, Caltech Robert Margo, Boston University
Walter W. McMahon, University of Illinois
David G. Mathiasen, United States Senior Executive Service
Joe Minarik, Committee for Economic Development
Len M. Nichols, New American Foundation
Van Doorn Ooms, Committee for Economic Development (retired)
Jon Orsag, University of Southern California
Christina Paxson, Princeton University
Thomas J. Prusa, Rutgers University
Salim Rashid, University of Illinois
Bruce Reynolds, University of Virginia
Hugh Rockoff, Rutgers University
Alice M. Rivlin, The Brookings Institution
Isabel Sawhill, Brookings Institution
Elliot Schwartz, Committee for Economic Development
Neil Sheflin, Rutgers University
George P. Shultz, Stanford University
Hal Sider, Compass Lexecon
Alan Spearot, University of California, Santa Cruz
Eric Toder, The Urban Institute
Eric Van Wincoop, University of Virginia
Luis M. Viceira, Harvard University
Ingo Vogelsang, Boston University
Eugene N. White, Rutgers University
Roberton C. Williams III, University of Texas at Austin
Robert Willig, Princeton University
Sidney G. Winter, University of Pennsylvania

* We are signing as individuals and not as representatives of our organizations, which are mentioned for identification purposes only.

FDIC Insurance Increase: Ground Cover for Paulson Bill

WSJ is reporting that according to Sen. Christopher Dodd, the Senate will vote on raising the FDIC limit to $250,000 from $100,000 for one year.

It will be inserted as part of the $700 billion Paulson "Bailout" Plan. The insert will provide cover for legislators who vote for the bill. "Hey, I voted for it because it raised FDIC coverage."

BANKS ARE IN PLAY: Randal Quarles Gets His Change In Fed Rules

Those who have been following EPJ for sometime know that I have been carefully watching the activities of ultimate insider, Carlyle Group managing director Randal Quarles. One thing Quarles has been aggressively pushing for is to get an increase in the size of stakes that private equity firms, like Carlyle, can acquire before triggering bank holding company regulations. Today, Quarles got his wish.y.

Not only has the Fed granted Goldman Sachs status as a bank holding company, but, today, the Fed announced the approval of a policy statement on equity investments in banks and bank holding companies. The policy statement provides additional guidance on the Board's position on minority equity investments in banks and bank holding companies that generally do not constitute "control" for purposes of the Bank Holding Company Act.

The new policy raises the limit for those with a minority stake to 33% and allows some investors to have as many as two board seats.

Goldman gets bank holding status, Quarles gets the increase in the size of a position the Fed considers a minority stake, it can't be any clearer that the boys are ready to start buying bank stocks at fire sale prices and that bank stocks are in play.

-Robert Wenzel

Puttng Power In The Hands of Hank Paulson

From Treasury Secretary Paulson's bailout proposal that was sent to Congress:

The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States....

The Secretary is authorized to take such actions as... issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act...

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time...

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...

-Robert Wenzel

Treasury Announces Guaranty Program for Money Market Funds

September 19, 2008
hp-1147

Treasury Announces Guaranty Program for Money Market Funds

Washington

- The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion to guarantee the payment in the circumstances described below.

Money market funds play an important role as a savings and investment vehicle for many Americans; they are also a fundamental source of financing for our capital markets and financial institutions. Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system.

Concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets. In turn, these pressures have caused a spike in some short term interest and funding rates, and significantly heightened volatility in exchange markets. Absent the provision of such financing, there is a substantial risk of further heightened global instability.

Maintenance of the standard $1 net asset value for money market mutual funds is important to investors. If the net asset value for a fund falls below $1, this undermines investor confidence. The program provides support to investors in funds that participate in the program and those funds will not "break the buck".

This action should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss. Investors in money market mutual funds with a net asset value that falls below $1 would be notified that their fund triggered the insurance program.

The Exchange Stabilization Fund was established by the Gold Reserve Act of 1934. This Act authorizes the Secretary of the Treasury, with the approval of the President, "to deal in gold, foreign exchange, and other instruments of credit and securities" consistent with the obligations of the U.S. government in the International Monetary Fund to promote international financial stability. More information on the Exchange Stabilization Fund can be found at http://www.treas.gov/offices/international-affairs/esf/.

-30-

Paulson Statement on Comprehensive Approach to Market Developments

September 19, 2008
hp-1149

Statement by Secretary Henry M. Paulson, Jr. on Comprehensive Approach to Market Developments

Washington, DC--

Last night, Federal Reserve Chairman Ben Bernanke, SEC Chairman Chris Cox and I had a lengthy and productive working session with Congressional leaders. We began a substantive discussion on the need for a comprehensive approach to relieving the stresses on our financial institutions and markets.

We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. And this morning we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

Despite these steps, more is needed. We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses.

The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.

A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged.

These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.

To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.

I believe many Members of Congress share my conviction. I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies. Our economic health requires that we work together for prompt, bipartisan action.

As we work with the Congress to pass this legislation over the next week, other immediate actions will provide relief.

First, to provide critical additional funding to our mortgage markets, the GSEs Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities (MBS). These two enterprises must carry out their mission to support the mortgage market.

Second, to increase the availability of capital for new home loans, Treasury will expand the MBS purchase program we announced earlier this month. This will complement the capital provided by the GSEs and will help facilitate mortgage availability and affordability.

These two steps will provide some initial support to mortgage assets, but they are not enough. Many of the illiquid assets clogging our system today do not meet the regulatory requirements to be eligible for purchase by the GSEs or by the Treasury program.

I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system. When we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.

Right now, our focus is restoring the strength of our financial system so it can again finance economic growth. The financial security of all Americans – their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs – depends on our ability to restore our financial institutions to a sound footing.



-30-

Paulson Statement On Fed Action Surrounding AIG

September 16, 2008
hp-1143

Statement by Secretary Henry M. Paulson, Jr. on Federal Reserve Actions Surrounding AIG

Washington, DC--

Treasury issued the following statement by Secretary Henry M. Paulson, Jr. on Federal Reserve actions surrounding American International Group:

These are challenging times for our financial markets. We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy. I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.

-EPJ Original Documents

ALERTS: Fed and Treasury

FOMC monetary policy meeting today.

Two scheduled Paulson appearances:

Tuesday, September 16, 2008, 10:00 a.m. EDT
Secretary Henry M. Paulson, Jr.
Testimony on Recent Regulatory Actions Regarding Fannie Mae and Freddie Mac
Senate Committee on Banking, Housing and Urban Affairs
538 Dirksen Senate Office Building
Washington, D.C

Tuesday, September 16, 2008, 1:30 p.m. EDT
Secretary Henry M. Paulson, Jr.
Remarks on the Economy & the Housing Market
The Brookings Institution
Falk Auditorium
1775 Massachusetts Avenue, NW
Washington, D.C

-EPJ Newsdesk

The Morning Ahead

The factors to monitor in the morning are near overwhelming.

To start, we have an FOMC meeting. Will the Fed cut rates?

Henry Paulson is scheduled to testify before Congress in the morning, and later in the day he is scheduled to give a speech at the Brookings Institute about the economy and housing. He is likely to be very cautious at both venues about what he says. Will he by accident trigger more downside action?

Lehman has filed for Chapter 11 and other banks have continued to trade with it. Yet, despite being in Chapter 11, and presumably under court supervision, Lehman continues to push for a shotgun sale of its money management firm, among other assets. How will this activity sit with the bankruptcy judge and other bankers?

The Merrill Lynch acquisition by Bank of America looks shaky. Will the deal still be alive by the end of the day? How tight of an acquisition contract was John Thain able to draw up in such an intense, short term period?

What news will develop from the AIG situation?

How will the markets react to the downgrade of WaMu?

Will the panic in the investment bank arena spread to the two remaining major independent players, Morgan Stanley and, the very well connected, Goldman Sachs? 

How bad will things get overnight in overseas trading?

Have a good nights sleep.

-Robert Wenzel

Paulson Statement on Lehman Brothers

September 14, 2008
hp-1134

Paulson Statement on SEC and Federal Reserve Actions
Surrounding Lehman Brothers

Treasury Secretary Henry M. Paulson, Jr. made the following statement today:

I strongly support the actions announced tonight by SEC Chairman Chris Cox, Federal Reserve Chairman Ben Bernanke and market participants. These changes will strengthen and enhance our financial markets.

These initiatives will be critical to facilitating liquid, smooth functioning markets, and addressing potential concerns in the credit markets.

I particularly appreciate the efforts of market participants who came together this weekend and initiated a set of steps to facilitate orderliness and stability in our financial markets as we work through this extraordinary environment.

Today we are looking forward. This weekend's discussions made clear that both market participants and regulators in this country and abroad recognize the need to support market stability and remove uncertainty as they address current challenges.

I am committed to working with regulators and policymakers – including Congress – to take necessary and appropriate steps to maintain the stability and orderliness of our financial markets. And I will engage with regulators and policymakers around the world to that end.

Healthy capital markets are the backbone of a vibrant U.S. economy and critical to the well-being of our economy and American families. I am confident in the resilience of our capital markets, and in the commitment of U.S. regulators and market participants to work together through this difficult period.

-EPJ Original Documents

SEC Statement On Emergency Meeting

FOR IMMEDIATE RELEASE
2008-196

Washington, D.C., Sept. 12, 2008 — The U.S. Securities and Exchange Commission tonight issued the following statement:

Senior representatives of major financial institutions are meeting at the Federal Reserve Bank of New York Friday evening to discuss recent market conditions. Also participating in the meeting are Treasury Secretary Henry M. Paulson, Jr., U.S. Securities and Exchange Commission Chairman Christopher Cox, and Federal Reserve Bank of New York President Timothy F. Geithner.

-EPJ Original Documents

NY Fed Holding Emergency Meeting On Lehman's Future

From WSJ:

In attendance are New York Fed President Timothy Geithner, Mr. Paulson and Securities and Exchange Commission Chairman Christopher Cox. The Wall Street executives included Morgan Stanley Chief Executive John Mack, Merrill Lynch Chief Executive John Thain, J.P. Morgan Chase CEO Jamie Dimon, Goldman Sachs Group CEO Lloyd Blankfein, Citigroup Inc. head Vikram Pandit and representatives from the Royal Bank of Scotland Group PLC and Bank of New York Mellon Corp., among others.

-EPJ Newsdesk

As The World Crashes....

Bear Stearns..Gone.

Fannie Mae...Government hearse has arrived.

Freddie Mac...Government hearse has arrived.

Lehman Brothers....A priest has been called.

Washington Mutual...On life support.

Wachovia...Alarm buzzer in Emergency Room is screeching.

AIG...Being rushed to hospital.

Merrill Lynch...High fever.

Goldman Sachs (Where Henry Paulson was Chairman and CEO before heading the Treasury).....Today's closing price: $153.47 per share.

-Robert Wenzel

Alert: Paulson Speaks on The Economy and Housing Tuesday September 16

Details:

Tuesday, September 16, 2008, 1:30 p.m. EDT
Secretary Henry M. Paulson, Jr.
Remarks on the Economy & the Housing Market
The Brookings Institution 
Falk Auditorium
1775 Massachusetts Avenue, NW
Washington, D.C.

-EPJ Newsdesk

Alert: Paulson Appears Before Congress Tuesday September 16 Re: Fannie and Freddie

Details:

Tuesday, September 16, 2008, 10:00 a.m. EDT
Secretary Henry M. Paulson, Jr.
Testimony on Recent Regulatory Actions Regarding Fannie Mae and Freddie Mac
Senate Committee on Banking, Housing and Urban Affairs
538 Dirksen Senate Office Building
Washington, D.C.

-EPJ Newsdesk

Paulson: "Adamant" No Government Funds For Lehman

Treasury Secretary Henry Paulson is "adamant" that no government money be used in any deal that resolves the crisis at Wall Street investment bank Lehman Brothers, a source familiar with his thinking said on Friday, accordiing to Reuters.

"There are two things that make this different from Bear Stearns. The market's been aware of the situation for a long time and has had time to prepare. Second, the Primary Dealer Credit Facility was created by the Fed to allow time for an orderly process," the source told Reuters.

"Given these things, (Paulson) is adamant that there will not be government money used in the resolution of the situation," the source added.

NB: Sounds like Paulson is the source.

-Robert Wenzel

Paulson: Hopeful Stabilty In Housing Market By End Of The Year

Business Week just posted a Maria Bartiromo interview with Treasury Secretary Paulson. Here are key excerpts, including Paulson hinting at subtle pressure from China:

BARTIROMO: One fund manager said to me: "Look, the Chinese government, which owns billions in Fannie and Freddie paper, basically said to Paulson, 'We're not buying any more unless it is explicit that you are guaranteeing this.'"

PAULSON: That's not true. There was growing concern and questions about what Treasury was going to do, and we were reassuring investors. But I received no threats or anything as direct as you're suggesting.

-------

BARTIROMO: Most Americans just want to know when we will see this dramatic move stop the slide in home prices.

PAULSON: I'm hopeful we would have more stability in home prices by the end of the year, but I'm not prepared to project it.

Note: Stability won't occur for a long time unless the Fed reverses its current tight money policy. M2 money supply is growing at only a 1.8% annualized rate.

-------------------

BARTIROMO:One day after the market reacted positively to the Fannie and Freddie takeover, fears of Lehman's inability to raise capital led the S&P 500 to its biggest drop since February '07. Are there plans afoot for a takeover of Lehman?

PAULSON:I can't comment on any specific company in the news today. I've got to hop, and I thank you very much.

-Robert Wenzel

Rubbing It In Soros' Face

Street talk has Treasury Secretary Paulson's former firm, Goldman Sachs, taking over Lehman Brothers, which will not be a profitable transaction for George Soros, who has a 9.47 million common stock position in Lehman.

Soros, big time Democrat, behind Barack Obama versus Paulson and a Republican Administraton. Get it?

-Robert Wenzel

Paulson's Takeouts: Is Lehman The Last?

It's quite curious that all the major bankruptcies, and the like, that have occurred in recent weeks are all companies that have been out of favor with Treasury Secretary Paulson.

Bear Stearns has been on Paulson's list since they initially refused to help bailout Long Term Capital Management. Paulson has never liked Freddie Mac and Fannie Mae. Now, there is one more ticking time bomb, Lehman Brothers, where George Soros has a 9.47 million common stock position.

Soros is no friend of Republicans and, in fact, is a major backer of Barack Obama. Thus, it is a perfect target for Paulson, but Lehman is fighting hard for survival. Only time will tell how this one plays out,there are strong players on both sides, so it is too close to call, but there is a slight advantage too Paulson.

-Robert Wenzel

Paulson Had Special Future Tax Break Written For Fannie and Freddie

How's this for a smack on the side of the head. Not only does the government bailout Freddie Mac and Fannie Mae, but if they become profitable down the road, they won't have to pay income taxes on billions of those earnings. This  tax break will amount to tax free earnings for roughly  the first $14 billion of any future Freddie and Fannie net income. Treasury Secretary Paulson had the special tax rule written for Freddie and Fannie, so that they will be eligible for the huge tax break. It won't apply to any other companies.

Paulson ... had the IRS issue Notice 2008-76, which essentially allows the two government-sponsored enterprises to retain all of their [net-operating losses] NOLs, despite a change of control of ownership, tax expert Robert Willens told CFO.com.

Under the tax code — specifically Section 382 — NOLs are severely limited when there is a change of control. But not for Fannie and Freddie, thanks to the change in rules, just for them. The rule is generally in place to prevent acquiring companies from buying up targets just to gain access to their NOLs. The NOLs for Fannie and Freddie are substantial. Over the last four quarters, Fannie and Freddie recorded about $14 billion in aggregate losses.

"I am not saying that the IRS ruling is a good thing, or a bad thing, it is just unusual," added Willens. "Then again, this is a very unusual situation."

One has to wonder what bizarre justification Paulson will have to come up with to explain, after putting billions of dollars of taxpayer money at risk to bailout Freddie and Fannie, that he then grants Frannie and Freddie special privileges so that they won't have to pay taxes on billions of dollars in income. 

Paulson's Formula: Use taxpayer money to bailout Freddie and Fannie. Write in special tax breaks so that Freddie and Fannie, if they turn profitable again (Thanks to the taxpayer bailout), won't have to pay billions taxes.

Treasury Announces Detalis of Freddie and Fannie Bailout; Some Banks Will Be In Trouble

At a press conference held today, Treasury Secretary Henry Paulson outlined the details of the bailout of Freddie Mac and Fannie Mae. Among the highlights. The Treasury will not bailout common or preferred shareholders. The Treasury expects that this will result in trouble for some small banks who hold large preferred positions. The Treasury will ensure that Freddie and Fannie maintain positive net worth by buying Preferred stock in them when necessary. The Treasury will enter the open markets to buy Freddie and Fannie mortgage backed securities, to stabilize these markets.

Here are the details:

First, Freddie and Fannie "will modestly increase their MBS [mortgage backed securities] portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size,"according to Paulson.

Second, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. "This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares," Paulson stated.

Third, there will be no bailout of common and preferred stock holders. "Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservator ship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

"Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses," said Paulson.

There is clearly concern that some banks holding preferred stock wll will face net capital problems. Paulson said, "The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital."

Fourth, Paulson announced thatan additional step "Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks".

Finally,Paulson announced that "to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuance's and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury's temporary authorities in December 2009."

UPDATE: The takeover also includes the departure of Fannie Chief Executive Daniel Mudd and Freddie Chairman and Chief Executive Richard Syron. The FHFA said TIAA-CREF Chairman Herb Allison will take over as CEO of Fannie, while U.S. Bancorp Chief Executive David Moffett will be CEO at Freddie. Messrs. Mudd and Syron have consented to stay on and help with the transition, and Paulson said he hopes that "the vast majority" of key Fannie and Freddie employees remain will with the firms.

Paulson's full statement is here.

Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action

Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers

Washington, DC--

Good morning. I'm joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.

In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.

Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve.

We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection.

Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.

Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.

***

I support the Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.

I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.

I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.

To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.

Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below "well capitalized." The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.

Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today's action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.

Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury's temporary authorities in December 2009.

Together, this four part program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs. Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking. The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs' business outlook.

Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.

And let me make clear what today's actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.

While we expect these four steps to provide greater stability and certainty to market participants and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a "time out" where we have stabilized the GSEs while we decide their future role and structure.

Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don't use this time out to permanently address the structural issues presented by the GSEs.

In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate.

Hot Buzz: Government Moves On Fannie, Freddie

It appears that the  goverment is about  to pump capital into Fannie Mae and Freddie Mac, in what is sure to be a near takeover of the two agencies. 

A meeting was held this afternoon at the Federal Housing Finance Agency. Richard Syron CEO of Freddie Mac and Daniel Mudd CEO of Fannie Mae were summoned to it, according to Deborah Soloman and Damian Paletta at WSJ.  Also attending were the Fed's Ben Bernanke and Treasury Secretary Henry Paulson.

Reportedly, Mudd and Syron will be axed as part of the Treasury move.

An announcement could come as early as this weekend.

Specific details of Treasury's plan and specifics of the capital infusion are not yet available. The plan is expected to involve "a creative use" of Treasury's authority, according to WSJ. More than likely common stock shareholders will be crushed, with their shares diluted down to near worthlessness.

It looks like a done deal, more details here.

The Secret to Survival for Freddie and Fannie....

...more debt, higher leverage.

Treasury Secretary Paulson, perhaps unwittingly, has created a a life saving escape hatch for Freddie and Fannie.

The Treasury has made it clear that it will guarantee Freddie and Fannie debt. It has made it clear, it will not back up common stock of the two companies, and the Treasury has been hazy as to where it stands on preferred.

Thus, the market has no interest in common stock or preferred, BUT because of the Treasury guarantee on Freddie and Fannie debt, the market will buy their debt.

This was proven by today's successful sale of $2 billion of short-term debt by Freddie. It sold $1 billion each in three- and six-month bills,at a yield of 2.58% Though it was a bit expensive since this was about 90 basis points more than similar-maturity U.S. Treasuries.

Nevertheless, with the debt window open, Freddie and Fannie can survive. The big question remains will they be willing to test the markets willingness to buy long term debt and thus raise more permanent money.

Chef Paulson Simmers Freddie and Fannie

Simmering is a cooking technique in which foods are cooked in hot liquids kept at or just barely below the boiling point of water (at average sea level air pressure), 100°C (212°F). To keep a pot simmering, one brings it to a boil and then adjusts the heat downward until just before the formation of steam bubbles stops completely. Water normally begins to simmer at about 94°C (200°F).

Treasury Secretary Paulson is in the kitchen and Frannie and Freddie are in the pot. As Wall Street watches Freddie and Fannie simmer, no sane investment banker, money manager or private equity firm will buy an equity position in these GSE's until it is clear how Chef Paulson plans to serve his dish.

Charles Duhigg and Vikas Bajaj at NYT explain:

Anxiously awaiting a move by the Treasury Department and spurned by large investment firms, Freddie Mac and Fannie Mae find themselves unable to raise capital and with little ability to maneuver.

Treasury officials have reviewed multiple plans for intervention, according to people who have spoken to top Treasury officials. But they have not identified a set of triggers that will compel a government bailout. Nor have they indicated to Freddie Mac or Fannie Mae executives when a bailout may occur or what form it may take.

As a result, investors are telling Freddie Mac and Fannie Mae that they remain unwilling to purchase new shares in the firms.

“We’re in a Catch 22,” said an executive with one of the mortgage firms who was not authorized to speak to the media. “As long as there is uncertainty over Treasury’s plan, we can’t raise money, and as long as we can’t raise money, there’s going to be more and more speculation about Treasury’s plan.”...

As speculation mounts about if and when the government will intervene, Treasury Secretary Henry M. Paulson Jr. has declined to discuss with the companies or other outsiders how a bailout might look. People close to Mr. Paulson and other Treasury officials say those policy makers are constantly taking the temperature of market participants, and will act when they think that confidence has eroded to the point that it damages the firms’ capacities to buy and sell mortgages.

Make no mistake. When Paulson moves Freddie and Fannie from the pot to the platter, it will signal the beginning of a feast. Champagne will flow, grapes will be dropped into the mouths of invited guests by exotic women and money will be made, lots of it.

It will be interesting to see who is on the guest list, but rest assured it won't be you or me.

Alert: Paulson Conference Call in Chna

Tuesday, August 19, 2008, 11:15 a.m. EDT
Secretary Henry M. Paulson, Jr.
Foreign Affairs Magazine Conference Call on China

The Conspiracy Theory View of the Banking Crisis

J. T. Holley at Daily Speculations writes:

Sometimes I think that all these banks with brokerages attached are issuing 8%-9% preferred while simultaneously driving down their own common to be able to buy back their own stock later on the cheap and ride it back up gaining momentum until the 2013 call dates on all these preferred where they'll do secondary offerings pay off the preferred and the beat goes on! I know it ain't that simple but it sure looks like that is what is going on to me. I mean the real probability of a bank run has what been elevated from what, 2%, to 2.5% probability?

Holley has a point here, but I think it is a much more sophisticated and complex game. There is stuff going on at the individual bank level as Holley suspects, but it is a multi-level game, that at the top level includes the Treasury Secretary and the connected, such as the Carlyle Group. They are settling old scores and positioning themselves for huge profits.

Given that the mismatched short liabilities/long assets balance sheets of the entire financial industry could result in a liquidity crisis for nearly any financial institution in the United States, isn't it quite curious that the financial institutions that seem to have had, or are having, the most liquidity troubles are those that Treasury Secretary Paulson always wanted to see taken out, i.e. Bear Stearns, Freddie and Fannie?

The mortgage/housing crisis is real, but the inside players are certainly using it to set up their next big score.

Paulson: No Plans for Federal Funds for Fannie or Freddie

Treasury Secretary Henry Paulson said in an interview broadcast Sunday on NBC’s “Meet the Press” that there are no plans to insert any federal funds into Freddie Mac or Fannie Mae.

It's pretty obvious to me that Paulson has no interest in bailing our Freddie and Fannie stockholders. He'll protect debt holders, but as far as stockholders it's drop dead, as far as Paulson is concerned.

Alert: Treasury Secretary Paulson Event In China

Details:

Wednesday, August 13, 2008, 12:30 p.m. Local Time
Secretary Henry M. Paulson, Jr.
Presentation of the U.S. Green Building Council's LEED Gold Award to the Beijing Olympic Village
Beijing Olympic Village
Beijing, China

Clueless Corrigan

As a former president of the New York Fed, Gerald Corrigan is a firm believer in the key role the central bank should play in oversight of the financial sector, writes WSJ. “Central banks are the only institutions of public policy that literally operate in financial markets every day of the week,” they quote Corrigan as saying. “If that doesn’t give you some kind of advantage, I don’t know what does.”

Corrigan left the Fed to become, surprise, a managing director at Goldman Sachs.

This guy has a very short memory if he thinks the Fed should supervise things because they have an "advantage" since they "literally operate in the financial markets everyday of the week" .

It was at the New York Fed in 2004 that New York Fed economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No". At the time we wrote that when the housing crash did finally hit that we thought their analysis would prove as embarrassing as Irving Fshers 1929 forecast:

They have set themselves up for perhaps making the worst economic prediction since Irving Fisher declared in 1929, just prior to the stock market crash, that "stocks prices have reached what looks to be a permanently high plateau."

Now, we are certain of it. And, Corrigan wants the markets regulated by these type characters?

Alan Greenspan was correct when he recently wrote:

We may not easily confront or accept the price dynamics of home and equity prices, but we can fend off cries of political despair which counsel the containment of competitive markets. It is essential that we do so. The remarkably strong performance of the world economy since the near universal adoption of market capitalism is testament to the benefits of increasing economic flexibility.

It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs. Since early this decade, central banks have had to cede control of long-term interest rates to global market forces. Previously heavily controlled economies – such as China, Russia and India – have embraced competitive markets in lieu of bureaucratic edict. The danger is that some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs. If that becomes widespread, globalisation could reverse – at awesome cost

Further, during a recent interview on CNBC, Greenspan was even more specific of the dangers of the Fed becoming regulator of the financial sector. We reported on his comments this way:

He very perceptively warned that the plan Treasury Secretary Paulson is pushing to put the Federal Reserve in the role of regulator of the financial sector is foolhardy and such a role by the Fed would end in failure by the Fed as all factors are never known in advance and thus it is impossible to regulate them in advance. Hear, hear!

There is downright danger in Corrigan thinking he can micro-manage the economy, or a significant sector in it. These guys really don't believe in free markets, and simply are incapable of doing Hayekian deep thinking that will result in their understanding how the economy really works and why it can't be successfully controlled. It was with a pessimistic understanding of Corrigan type thinking that resulted in Friedrich Hayek titling one of his books The Fatal Conceit, in which he described the fatal dangers and conceit of those who think they can control and regulate an economy better than free market interactions can.

Freddie Mac Shareholders to Get (Dean Baker) Baked

So much for all those who misinterpreted the statements of Treasury Secretary Paulson, by believing that Paulson said he was going to step in and support the price of Freddie Mac and Fannie Mae stock.

The misinterpretations included a doozy by Dean Baker, who specializes in finding minuscule errors in economic reporting (A pimple on an elephant kind of stuff). No problem finding Baker's errors though, they are like nuclear bombs going off by accident. Chernobyl has nothing on this guy. Baker actually headlined his error after I pointed it out in the comment section of an earlier post he made. The headline on the Baker post:

Yes, Virginia, Henry Paulson is Bailing Out Fannie and Freddie Shareholders

He then wrote:

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level.

We responded to his post this way:

I have not seen anywhere, where Paulson says he wants to bailout shareholders. In fact, Paulson will bailout debt holders, but if it comes to a rescue at the shareholder level where the Treasury comes in to buy newly issued Freddie or Fannie stock, current shareholders will be diluted down to pennies in value, for all practical purposes they will be wiped out. Baker just doesn't seem to get this. It really indicates an alarming lack of understanding of basic finance.... Anyone reading Baker's posts, and buying Fannie or Freddie stock based on Baker analysis that the Treasury is bailing out shareholders could very well get baked big time.

The baking is about to began.

In its earnings press release today, Chairman and CEO Richard Syron stated:

We remain committed to raising $5.5 billion of new capital and will evaluate raising capital beyond this amount depending on our needs and as market conditions mandate.

The current market cap of Freddie s $4.2 billion and heading south fast. A raise of $5.5 billion at current levels(The stock is trading at 6.50 per share) would require an offering of approximately 840,000,000 shares. There are currently approximately 647 million shares outstanding. Thus a raise at current levels would require an increase in the number of shares outstanding by approximately 129%.

That's if Syron can pull it off on his own. And, Syron will discount the stock as much as he has to get the deal done, since he doesn't want Treasury to step in and buy stock. If the Treasury steps in, the price could be significantly lower than the current bad news price.

UPDATE: Here's how bad things really are for stockholders: “Either investors are going to be massively diluted given the amount of equity they are going to need or they are going to be nationalized,” Dan Alpert, managing director of Westwood Capital LLC in New York, told Reuters. “Without a larger equity capital base, they are going to be incapable of surviving. We don’t think $5.5 billion even scratches the surface.”

Did Treasury Secretary Paulson Have a Grudge Against Bear Stearns?

Buzz has it that a book to be released soon, Bear-Trap: The Fall of Bear Stearns and the Panic of 2008, will charge that Treasury Secretary Henry Paulson had a grudge against Bear Stearns (Going bact to Long Term Capital days)and that it was an important factor behind the collapse of Bear.

The author of the book was a top level Bear exec whose name will be revealed on September 25 when the book is released.

Treasury's New Goldman Sachs Man Will Be Subject to Less Stringent Ethics Rules

Ken Wilson, the Goldman Sachs banker who is joining the US Treasury to help Henry Paulson through the financial crisis, is expected to take a temporary post that will subject him to less stringent ethics rules than many other high-level officials, according to FT.

Wilson is likely to be treated as a “special government employee”, making it unlikely he will have to sell assets or produce the detailed disclosure reports required of officials appointed by the president and confirmed by the Senate.

What is this guy, some kind of super secret spy? According to FT, the Treasury has declined to comment on Wilson’s appointment or the scope and length of his assignment.

Greenspan Talks and You Should Listen

In a wide ranging interview on CNBC with Maria Bartiromo, former Fed Chairman Alan Greenspan provided one of the best overall analyses of the current economic situation.

As we have pointed out in the past, Greenspan studies the details of economic data better than any other economist. The one weakness Greenspan has is that, amazingly, he doesn't have a business cycle theory. This weakness displays itself briefly in the interview, but for the most part it is top notch commentary by Greenspan.

Significantly, as we have pointed out also, Greenspan understands that the current crisis is housing and housing finance crisis, rather than a full-fledged recession.

But,Greenspan does not, and this is where his lack of a business cycle theory comes in, discuss the current slowdown in money supply that could throw the economy into a full-fledged recession.

From his data digging, he points out that currently there are some 12 million homeowners that have negative equity in their homes. Of course, homes with negative equity are homes very susceptible to foreclosures and walk aways. It is these kind of numbers that cause Greenspan to say that the US is “nowhere near the bottom” of the housing slump.

Greenspan also warned that "Fannie and Freddie are a major accident waiting to happen," and speculated that the two may eventually have to be nationalized.

He very perceptively warned that the plan Treasury Secretary Paulson is pushing to put the Federal Reserve in the role of regulator of the financial sector is foolhardy and such a role by the Fed would end in failure by the Fed as all factors are never known in advance and thus it is impossible to regulate them in advance. Hear, hear!

He also very perceptively pointed out that the financial crisis shall ultimately pass, but the real long-term problem will be inflation and stagflation.

In a moment of complete honesty, he pointed out that during his reign as Fed chairman productivity growth suffocated inflation problems, but that now the tide has turned and inflation is a much bigger problem than when he was Fed chairman.

Part 1 of the interview is here.

Part 2 of the interview is here.

Secretary Paulson on The State of the Housing Market

Treasury Secretary Henry Paulson spoke today on the Markets and Economy at the Exchequer Club, in Washington D.C. As part of his remarks, he provided an overview of the current state of the housing market (our emphasis.)

It took years of excesses – lax underwriting standards, excessive home price appreciation and overbuilding – to sow the seeds of the housing correction.

That said, we need to recognize that there is not a national housing market, but a collection of regional markets. The severity of the current correction varies widely by state and region. Areas that had some of the most pronounced price appreciation are facing the most pronounced price declines and foreclosure increases. Of course, that does not mean the correction isn't being felt across the nation. Foreclosure starts as a share of total outstanding mortgages have risen from 0.4 percent to 1.0 percent since the beginning of 2006. However, OFHEO's home price data shows that home prices actually rose in about half of the states in the first quarter.

Due to overbuilding in prior years, home inventories are now far above normal levels. At the current sales rate, there is a ten month inventory of new single-family homes on the market, and an 11 month inventory of existing single-family homes. This compares with a historical average of about six to seven months. The key to stabilizing the housing and financial markets is to work through these home inventories as quickly as possible.

Inventories decrease in two ways – fewer homes are built, and more buyers come into the market. We are seeing the necessary sharp decline in homebuilding. Single-family housing starts are down 65 percent from their 2006 peak and look to remain weak through this year.

New home sales appear to have stabilized to a degree – sales of new single-family homes are down 62 percent from their peak; and sales have been flat, rather than declining, for three months now. The drastic slowing in new construction has helped reduce the number of new single-family homes on the market, which is down 26 percent since its 2006 peak. The number of existing homes on the market remains elevated, but there are also tentative signs that sales in this category have been stabilizing since early 2008.

We all recognize that foreclosure sales increase inventories and, as foreclosed homes are put on the market, they drive down prices. Foreclosures and short sales now make up about one-third of existing home sales....

Foreclosures and existing home inventories are likely to remain substantially elevated this year and next and home prices are likely to decline further on a national basis. The key question is, "When will the correction be largely behind us?" While home price adjustments will continue for some time, and certainly well beyond the end of the year, I believe we can move through the bulk of the correction in months rather than years.

Bush Signs "Housing" Bill

It's law.

President Bush signed the bill without any fanfare or signing ceremony, in the Oval Office in the early morning hours. He was surrounded by top administration officials, including Treasury Secretary Henry Paulson and Housing Secretary Steve Preston.

The bill contains provisions to fingerprint mortgage brokers, requires that all credit card transactions be forwarded to the IRS, and it raised the national debt ceiling by $800 billion.

Paulson: GSE's Now Funding 70% of Residential Mortgages

At a news conference held today to promote "covered bonds" as a method to increase mortgage financing and improve underwriting standards, Treasury Secretary Paulson pointed out that:

The housing government-sponsored enterprises, Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and the Federal Housing Administration are funding more than 70 percent of residential mortgages during these months of market stress.

Covered bonds are debt securities backed by cash flows from mortgages or public sector loans. They are similar in many ways to asset-backed securities created in securitization, but covered bond assets remain on the issuer’s consolidated balance sheet.

Because the assets of covered bonds remain on the balance sheet of the issuer, the issuer has incentive to make sure the assets issued are quality assets, unlike under asset-backed securities where issuers have no further obligation with respect to assets securitized.

Alert: Treasury Secretary Paulson To Hold 2:30 ET Press Conference

Details:

Monday, July 28, 2008, 2:30 p.m. EDT
Secretary Henry M. Paulson, Jr.
Mortgage Finance Press Conference
Treasury Department
Media Room (4121)
1500 Pennsylvania Avenue, NW
Washington, D.C.

Alert: Treasury Secretary Paulson Speaks Next Week Thursday

Details:

Thursday, July 31, 2008, 1:00 p.m. EDT
Secretary Henry M. Paulson, Jr.
Remarks on Markets & the Economy
Exchequer Club of Washington
St. Regis Hotel
923 16th Street, NW
Washington, D.C.

Is The Fed About To Change The Rules For Randal Quarles?

As long time readers of EPJ know, Future American Oligarch Randal Quarles wants his Carlyle Group to be able to buy into banks stocks without additional supervision. Well, ladida, notice this news from Bloomberg. The Fed is considering changing the rules for private equity, i.e. Randal Quarles. Notice the Fed isn't considering changing the rules for everyone, just private equity.

So here's how the play remains. Henry Paulson continues to scare the s#@*t out of bank shareholders, a few bank lines thrown in for good measure, and Randal Quarles wants to buy into the bank stocks Big Time, just him and his private equity cronies. Get it? You aren't going to be able to play in his sandbox, it has gold in it.

Here's the latest from Bloomberg:

The Federal Reserve, looking to spur investment in lenders hit by credit-market losses, is weighing three measures to ease rules for private-equity funds that buy bank stakes, people with knowledge of the deliberations said.

Notice how the change in rules mentions private equity only.

One proposal would permit buyout firms to use ``silo'' funds walled off from their other investments to buy the stakes without subjecting the rest of their holdings to more federal oversight, said the people, who declined to be named because the talks aren't public. Under another scenario, the Fed would let private equity firms exercise more control of banks they invest in. A third plan would encourage firms to team up on bank deals.

So Henry Paulson is talking about giving the Federal Reserve greater authority so the financial industry can be regulated more intensly by the Fed, and simulataneously the Fed is meeting with Randal Quarles so that there is less regulation of private equity funds that buy into banks. Cute.

Buyout firms are ``hesitant to invest in banks because of the various levels of regulation that would apply to them,'' said Thomas Vartanian, a partner at Fried Frank Harris Shriver & Jacobson LLP in Washington who advises buyout funds and lenders. ``The banks need capital, and private equity has it. Necessity is often the mother of invention.''

So Thomas Vartanian is a new front man for Quarles and private equity. Everything he is quoted as saying, Quarles said privately at a luncheon months ago.

Treasury Secretary Henry Paulson has called on banks and brokerages to raise cash as their losses from the collapse of the mortgage market and the ensuing credit-contraction climb to more than $466 billion. Blackstone Group LP and Carlyle Group, the world's two biggest private-equity firms, discussed the topic when they met with Paulson this month, say people briefed on the talks.

They just started talking about this plan in the heat of the crisis this month? Who makes up these movie scripts? Read my report from the Quarles luncheon again and you will know this play has been in motion for months.

Half-Baked Baker

Dean Baker , whose shtick is bashing the media for poor economic analysis, over at his blog, Beat The Press, has apparently made a doozie of an error, himself.

Over two posts and an additional comment, Baker is either guilty of poor writing, or poor writing and not understanding what the Treasury is attempting to do in the Fannie Mae/ Freddie Mac rescue.

In a post yesterday, Baker wrote:

There is a clear rationale for making good on Fannie and Freddie's bonds... .

But what interest does the public have in protecting the share prices of Fannie and Freddie stock? Don't stockholders understand they take a risk when they buy stock? In this case, the stockholders made a bad investment. They are supposed to lose their money (possibly all of it), right?

I have yet to hear any explanation from anyone as to why the government is supporting the share price...

NPR's "Power Breakfast" did an unbelievably awful segment in which it commented that some conservatives oppose bailing out shareholders as "socialism." What? Huh? Is this Planet Earth? Socialism is about giving tax dollars to shareholders? In which volume of Das Kapital does this appear? Conservatives may oppose the bailout for whatever reason, but handing tax dollars to shareholders does not correspond to any definition of socialism I've ever seen.

I replied to this in the comment section:

I have not seen anywhere a government proposal to give money to shareholders. The Treasury has suggested it may have to buy newly issued stock of Fannie and Freddie to keep them alive, but that is far different than buying shareholder stock.

Paulson was clear on this, here.

Since, socialism refers to various economic and political concepts of government whereby ownership and administration of property and the means of production are controlled by the state, the Treasury buying shares (ownership) and influencing the operations (administration) of Frannie and Freddie, sounds to me like NPR nailed the socialism call..

Late yesterday, Baker posted again with more sloppy writing and confusion:

Yes, Virginia, Henry Paulson is Bailing Out Fannie and Freddie Shareholders

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level. Without this commitment, short sellers would see these two bankrupt giants sitting there with positive valuations and push their price very close to zero.

This is as much a bailout as if Treasury just sent a multi-billion dollar check to be
divided among the shareholders. This is exactly the sort of nonsense that Treasury invents so that it can do a bailout without owning up to it. Reporters are supposed to catch this sort of deception and inform the public of what is really going on. Paulson is betting that the U.S. press corps is sufficiently incompetent that the public will not realize that they are being taxed to reduce the losses of Fannie and Freddie shareholders.

--Dean Baker

I have not seen, anywhere where Paulson says he wants to bailout shareholders. In fact, Paulson will bailout debt holders, but if it comes to a rescue at the shareholder level where the Treasury comes in to buy newly issued Freddie or Fannie stock, current shareholders will be diluted down to pennies in value, for all practical purposes they will be wiped out. Baker just doesn't seem to get this. It really indicates an alarming lack of understanding of basic finance.

Further, this particular part of his post :

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level

is just total nonsense. Treasury has never ever said they would step in to buy stock if the share price of Freddie or Fannie drop to a certain level.

At best, in the following ,we can possibly say that only the sloppy writing comes in, when Baker states the Treasury "...is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level..." He does not state at all that the Treasury is only going to buy newly issued shares from the Treasury. I wonder if he really understands this? His writing can clearly lead to the impression that the Treasury may well go into the open market to buy stock, which is completely not the case.

Anyone reading Baker's posts, and buying Fannie or Freddie stock based on Baker analysis that the Treasury is bailing out shareholders could very well get baked big time.

Plunge Protection Team Disses Senate Bill Harassing Speculators

The Plunge Protection Team gets one right:

The members of the President’s Working Group on Financial Markets (aka, The Plunge Protection Team) fired off a letter denouncing a Senate measure designed to curb speculation in the oil futures markets.

The working group — which consists of Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Christopher Cox and Commodity Futures Trading Commission Acting Chairman Walter Lukken — called the measure a bad idea.

The four noted in their letter that the bill would “significantly harm U.S. energy markets without evidence that it would lower crude oil prices.”

What’s more, they said, the bill’s “unprecedented restrictions on market participation could reduce market liquidity, hinder the price discovery process and limit the ability of market participants to manage and transfer risk.”

Paulson Speech: From Bad To Worse

Add another name to the list. Along with luminaries such as Alan Greenspan, Treasury Secretary Henry Paulson in remarks on Reinforcing Market Stability and Confidence, delivered at the New York Public Library, made clear at the start that he doesn't understand business cycle theory:

As we all know, the U.S. economy and our financial markets are undergoing a period of stress. We will work through this period, as we always do. Our workers, industries and companies are the most productive, resilient and innovative in the world. Periods of economic difficulty are not new. They are,unfortunately, inevitable.

Inevitable? No. They are the inevitable result of the Federal Reserve micro-managing the money supply. But, end the micro-managing and freeze the money supply at current levels and the distortions that cause the business cycle will disappear.(For a thorough explanation of business cycle theory see, Rothbard: Economic Depressions: Their Cause and Cure):

From there Paulson went from bad to worse.

He called for a "Modernized Financial Regulatory Structure ", which Carlyle Groups' Randal Quarles seems to think means, "let private equity buy up banks stocks, while they are flat on their butts." By coincident, we're sure, Paulson also called for (our emphasis):

Working through the current turmoil will take additional time, as markets and financial institutions continue to reassess risk and re-price securities across a number of asset classes and sectors. I have and will continue to encourage financial institutions to strengthen their balance sheets by raising capital, de-leveraging and reviewing dividend policies so that they continue to play their vital role in supporting economic growth.

Of course, Quarles, who used to work at the Treasury under Paulson, has made clear that only private equity has the ability to supply such capital. And, we are sure that Quarles is happy to hear that that this capital funding should be done at "re-priced" levels.

Paulson also dropped this interesting comment toward the end of his speech (our emphasis):

We also need additional powers to manage the resolution, or wind-down, of large non-depository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system.

Hedge funds? Who said there was any problem with any hedge funds? Is Paulson just being forward looking, or does he know something the rest of us don't? Time will tell.

Paulson really needs to understand, though, that the United States financial system needs to stop being fed from the breast of Big Mother. The U.S. financial system is beyond infancy, hell, it is beyond puberty, it is nearly at old age. An old man sucking at his mother's teat is not an attractive picture.

If someone is trading with a hedge fund, then they should be aware of the risks involved and suffer the consequences should the fund go belly up. To set up to "manage the resolution of hedge funds" is simply setting up for larger collapses. Talk about moral hazard!

Scary character, this Paulson.

The Goldman Octopus Grows

Goldman Sachs Group Inc.'s most senior financial-institutions banker, Ken Wilson, is temporarily leaving the firm to advise Treasury Secretary Henry Paulson on how to resolve the country's banking crisis, according to people familiar with the matter, reports WSJ.

Wilson is expected to serve without pay, in a period through January. President George W. Bush made a personal call to Wilson in recent days, asking him to assist Paulson, according to WSJ.

Also, I just became aware this weekend via an NYT profile of CNBC's Erin Burnett that she worked for Goldman for a year.

Mmy full report on the incredible penetration of Goldman in government circles and the financial world is here.

Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks Borrowers With Subprime Junk

Those who call for regulators to supervise the financial industry fail to get that government is spelled g-o-v-e-r-n-m-e-n-t, not g-o-d.

In 2004, New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No".

I issued a reply to their paper, at that time writing under a pen name because of other business commitments:

...the record climb in housing prices is, indeed, a bubble... the Federal Reserve study fails to consider past declining interest rates as a cause of the bubble. The faulty conclusions reached by Federal Reserve economists Jonathan McCarthy and Richard W. Peach may make many potential new home buyers comfortable about a purchase, when, in fact, we are very near the top of a housing market that will experience substantial declines in prices...

They reach the conclusion that because of ....[the] "fundamental factor" of low nominal interest rates, higher housing prices are justified.

But does this mean real estate prices will not drop? Our answer is decidedly no. Indeed, McCarthy-Peach report that "since 1995, real home prices have increased about 36 percent, roughly double the increase of previous home price booms in the late 1970's and late 1980''s." We view this increase as largely the result of the Federal Reserve's lowering of interest rates and the pumping of liquidity into the banking system, thus producing the byproduct of higher housing prices. But by incorporating falling nominal interest rates as a "fundamental factor" that can not be a cause of a bubble, McCarthy-Peach have literally defined the cause of the current bubble from being taken into consideration....

Further, the current structure of many mortgage loans whereby no money down is acceptable and/or adjustable rate mortgages are popular, sets up the possibility that many may walk away from current mortgage commitments down the road as interest rates begin to climb. Indeed, as ARM's rates become more and more burdensome and as housing prices begin to decline, walk away situations are likely to become quite prevalent, thus adding even more downward pressure to the housing market.

It is our conclusion, then, that by defining nominal interest rates as a fundamental factor and not as the Fed induced causal factor of the real estate boom, and by completely ignoring the structual features of current mortgage loans, McCarthy and Peach have blinded themselves to the real estate bubble that does exist. They have set themselves up for perhaps making the worst economic prediction since Irving Fisher declared in 1929, just prior to the stock market crash, that "stocks prices have reached what looks to be a permanently high plateau."

Apparently, McCarthy and Peach thought my reply was funny and included this quote from me in their power point presentation, when they went around the country declaring there was no housing bubble. Under the headline Opposing View, they would flash this quote from me:

The faulty analysis by Federal Reserve economists McCarthy and Peach may go down in financial history as the greatest forecasting error since Irving Fisher declared in 1929, just prior to the stock market crash, that stocks prices looked to be at a permanently high plateau.

Last I heard, they aren't using that power point presentation anymore.

The point being that regulators do not have a magic wand that makes their beliefs 100% accurate. But, the problem is that regulators will direct regulation in the direction of what they believe and not, "Opposing Views". Thus, any crashes under heavy regulation become greater, because regulators have driven ALL market participants in that direction.

Regulators aren't gods. As we learn today in a WSJ report even the FDIC got caught up in te sub prime madness:

It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court.

The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank's subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.

The FDIC then sold a big chunk of the loans to another bank. That loan pool was afflicted by the same problems for which regulators have faulted the industry: lending to unqualified borrowers, inflated appraisals and poor verification of borrowers' incomes, according to a written report from a government-hired expert. The report said that many of the loans never should have been made in the first place.

Hundreds of borrowers who took out Superior subprime loans on the FDIC's watch -- some with initial interest rates higher than 12% -- have lost their homes to foreclosure, data on the loans indicate...

The Superior situation could be costly for the FDIC. Texas-based Beal Bank SSB, which bought a portfolio of Superior loans, about half of them originated under the FDIC, is suing the agency in U.S. District Court in Washington. The suit claims many of the loans were made improperly and are plagued with problems.

An internal FDIC legal assessment, obtained by Beal Bank and filed in court last month, acknowledged "numerous appraisal deficiencies" in the portfolio and a "small number of loans that appear to be fraudulent from inception." Calling the FDIC's legal position poor, the undated 26-page assessment suggested that the agency's liability could be as much as $70 million. Another FDIC official, in a deposition, estimated that the cost of settling the case could be less than one-third that amount.

In a recent court filing, the FDIC estimated that about 1,500 of the 5,315 loans it sold to Beal either have defaulted or are nonperforming. The FDIC already has bought back another 247 of the mortgages, most of them for violations of federal anti-predatory-lending laws intended to protect borrowers from unreasonably high fees or deceptive practices. Beal Bank has said in court filings that 73 of the repurchased loans were originated while the FDIC was running Superior...

Meanwhile, a separate portfolio of Superior subprime loans that the FDIC sold to Bank of America Corp. -- which the bank in turn sold to investors -- also has been troubled. As of April, investors had suffered "realized losses" -- which generally occur after foreclosures -- on 511 of the 3,964 loans in that pool, according to data provided to investors...

FDIC Chairman Sheila Bair has been unusually forthright in putting part of the blame for the mortgage mess on regulators, who she has said should have acted earlier

.

And Paulson wants to put Fannie Mae and Freddie Mac under the control of the Federal Reserve, and the likes of McCarthy and Peach? I'd rather see Randal Quarles and Carlyle Group in there right now competing against other private equity firms--as long as others are also allowed to compete for the banks and their assets.

What's going to happen, though, is that, at a minimum, new regulation will be instituted so that no one but Quarles will understand what the hell is really going on. At worst, Paulson will takeover Freddie Mac and Fannie Mae and carve it up in some way that Quarles and other private equity firms will be able to pick off the juicy meat. And at the same time new regs will be saddled on the banking industry overall, making it more difficult to operate, especially for those survivors who were smart enough to stay away from the subprime wacky loan business in the first place.

That's government at work, not God.

Paulson: More Bank Failures On The Way

Treasury Secretary Henry Paulson hit the Sunday talk shows to tell America what you could have learned in April from future American Oligarch Randal Quarles, there are more bank failures on the way.

"I think it's going to be months that we're working our way through this period _ clearly months," he said. "Of course the list is going to grow longer given the stresses we have in the marketplace, given the housing correction," he continued.

Paulson said he hoped Congress soon would approve his plan to help shore up Fannie Mae and Freddie Mac, the government-sponsored mortgage companies.

"I'm very optimistic that we're going to get what we need from Congress here, because Congress understands how important these institutions are," Paulson said.

Paulson appeared on "Face the Nation" on CBS and "Late Edition" on CNN.

Alert: Treasury Secretary Paulson Speaks Tuesday

Details:

Tuesday, July 22, 2008, 8:00 a.m. EDT
Secretary Henry M. Paulson, Jr.
Remarks on Markets and the Economy
The New York Public Library
Humanities and Social Sciences Library, Celeste Bartos Forum
Fifth Avenue at 42nd Street
New York, N.Y

Paulson Calls for "Wind-Down" Facility

In an interview with WaPo's David Ignatius, Treasury Secretary Henry Paulson has called for the creation of a "Wind-Down" facility to deal with the current financial crisis.

Ignatius writes:

The other practical worry for Paulson is finding a mechanism for unwinding the skein of debt for financial institutions that aren't covered by banking regulations. If Bear Stearns had been allowed to collapse, for example, what would a bankruptcy judge have done with the billions of dollars in derivatives contracts -- and what would the other parties in these contracts have done in assessing their potential losses?

If Congress wants to avoid future bailouts similar to the one given Bear Stearns, "you need a resolution or wind-down facility," Paulson says, so that the liabilities of failing investment banks or hedge funds can be sorted out carefully, the way the Federal Deposit Insurance Corp. untangles the books of a failing bank.

The country needs to address the big systemic issues of regulation, Paulson says, but not in the middle of an emergency. "Right now, we need to emphasize stability. That's our top priority."

Freddie Mac To Paulson: Watch This

Freddie Mac is considering raising capital by selling as much as $10 billion in new shares to investors, according to people familiar with the matter, WSJ is reporting.

Freddie will try an do anything it can to stay free of a tighter Treasury Secretary Henry "Hank is for Hank" Paulson grip on the firm. But, pulling off a $10 billion money raise will be quite a trick. Freddie currently appears to have approximately $16 billion in shareholder equity, while Goldman Sachs is estimating it will need to write-down another $21 billion in mortgage related assets.

Thus, any new stock issued would in essence be, a probably very expensive, call option on the mortgage market.

Of course, if Freddie can't do the raise, the company will find itself in the tight grasp of Paulson, which could mean that Freddie could eventually fall into the hands of future American Oligarch Randal Quarles.

Will The Mortgage Crisis Create The First Trillionaires?

In yesterday's Washington Post, Franklin D. Raines, chairman and chief executive of Fannie Mae from 1999 to 2004 charged that

...ideologues in the Bush administration and commercial competitors of Fannie and Freddie have skillfully manipulated the markets to undermine Fannie and Freddie for more than six years. The result has been a weakening of the two linchpins of the housing finance system just when they are needed most...

Raines is no saint. It appears he manipulated Fannie Mae's books to insure a larger pay out to himself to the tune of tens of millions, and Fannie Mae is certainly a vulgar monstrosity from the FDR era. But he may have something with the charges that Fannie Mae and Freddie Mac were being undermined.

Indeed, certain parts of this mortgage crisis appear to be setting some people up to get very, very rich.

Back in the Spring of 2007, I attended the Michael Milken Conference in Beverly Hills, California. Among the attendees at the conference were Robert Toll, Chairman and CEO, Toll Brothers Inc.,and Angelo Mozilo, Chairman and CEO, Countrywide Financial. It was early in the the crisis. At one point Toll got up to speak and he rattled of a few areas of the country where trouble in the housing markets appeared to be developing. Then Mozilo got up to speak and one of his off the cuff remarks was that there were a "couple of minor regulatory changes" that made it more difficult for some to get mortgages. Hmmm. I made a note to myself. When you have a roaring bull market, like you did up to the early part of 2007, you need more and more new buyers, not even a tiny few less because of a "couple of minor regulatory changes".

These minor regulatory changes were I believe the snowball that started the mortgage crisis avalanche.

So when former-Fannie Mae chairman Raines talks about skillful manipulations attempting to take down Fannie Mae, it has a ring of truth to it. Tiny changes in regulations can make a big difference when you know where to make the changes.

And, clearly, the Treasury has been out to smash Freddie Mac and Fannie Mae for sometime.

Here are remarks from Randal Quarles two years ago on July 19, 2006 at the Reuters Panel Discussion on Government Sponsored Enterprises. Quarles was then Under Secretary for Domestic Finance, U.S. Department of the Treasury. He said, in part, at the conference:

Secretary Paulson has made it clear to me that he believes there is systemic risk associated with the GSE's retained portfolios. While he shares the view that a legislative outcome is preferable, he has instructed us to ensure that the mechanics of our debt approval process are robust enough to give Treasury the practical option of limiting the GSEs' debt issuance in accordance with our statutory authority should that become necessary. If a legislation solution is not achieved, Treasury will have no choice but to consider additional action.

It's obvious that Treasury has been after Fannie Mae and Freddie Mac for years. They are using the current crisis to put a nail in the coffin. This would not be a bad thing if it was just a case of disassembling Fannie and Freddie, and ultimately leaving the mortgage business up to the free markets. After all, Fannie Mae is a throwback to the FDR era of government make work programs and other monstrosities that should be put to sleep.

But that is not what appears to be going on. What appears to be going on is a Russian oligarch style takeover of major parts of the financial sector. Randal Quarles, who spoke for the Treasury warning that changes would have to be made at Freddie and Fannie, is gone from the Treasury and is now at the Carlyle group. I attended a luncheon in Washington D.C. where he spoke in April. My report on that luncheon is here.

At the luncheon, I learned that Quarles is aggressively pushing to get rules changed so that private equity firms, such as Carlyle Group, can aggressively buy bank stocks. Now, word has leaked that Carlyle, presumably Quarles, has been having "on going dialogue" with the Fed.

Quarles also, along with Oliver Sarkozy (half brother of French President Nicolas Sarkozy), recently wrote an Op-Ed piece for WSJ calling for restrictions to be removed from private equity firms that make it difficult, if not impossible, for them to take more than a 10% positon in a bank.

Say what? People are lining up outside banks trying to get their money out and Quarles is writing Op-Ed pieces so that Carlyle Group can buy huge chunks of bank stocks? What's going on here? Back in April, at the luncheon I attended, he said there would be more bank failures and at the same time he said that private equity was in the best position to invest in these banks.

So what we have here is a huge, I MEAN HUGE MONEY GRAB, Quarles' former boss Paulson continues to make statements that scare bank shareholders. While Quarles gets ready to scoop up bank stocks.

We are at the scare the public stage, and they sure have that running well. Next, when fear is everywhere, they will start the scooping up of the bank stocks. Keep in mind that Fannie Mae and Freddie Mac, alone, have $5 trillion in mortgages or guarantees on their books. With the housing market down by about 20%, the value of their mortgages and guarantees has probably shrunk by about 20% or $1 trillion. Thus, a current valuation on Fannie and Freddie will knock more than $1 trillion off old estimates, perhaps $2 trillion--if you consider the current fear in the markets. And, this doesn't apply just to Fannie and Freddie but also most other bank stocks. So who knows which banks Carlyle and other private equity firms will buy up. But this is a multi-trillion dollar play. And once the stocks are all bought up, Paulson (or his successor)will put the call into Bernanke, who appears to be Paulson's new lap dog, and tell Bernanke to start the money printing presses so all those losses on the banks books will be erased and become gains. Trillions of dollars in gains, and the United States will have the world's first trillionaires. And America will also have their first Russian-style oligarchs.

Pass the caviar, please.

Rozeff: A Wimp and a Manipulator Are in Charge of the Bailout

Michael Rozeff gets it right:

Bernanke is destroying the independence and the balance sheet of the Fed. Whatever independence it may have had is being compromised as it becomes more and more a creature of the national government. The reason for this seems to be Bernanke’s fears. He has little or no confidence in the ability of the capital markets to recover, in a short timeframe at least. In this respect, he is a Keynesian. Bernanke has exaggerated fears of declines in asset prices, especially stock prices. He overreacted and caved in the Bear Stearns case. He has made clear his anxieties and apprehensions about the banking system, derivatives, and investment banks. But price declines are just what is needed to place depreciated assets in the hands of those willing to shoulder the risks of owning them. Price declines will raise the expected rates of return on assets to proper levels. By creating a stock price bubble, inflation lowered rates of return below their appropriate levels. This had numerous bad consequences which include more corporate scandals, more accounting peccadilloes, and more investments that destroy value rather than create it. A stock market decline is just what is needed to lead to a resolution of these and other such financial problems caused by the earlier inflation. Now Bernanke fears the demise of the GSEs. The result seems to be that Paulson, who is strongly statist and a stronger figure, is ruling the roost.

Rozeff also ponts out the dangers this will cause for the overall economy:

The recommended measures, being hustled through Congress, have several negative consequences. (1) The GSEs are to be kept in the business of being the major end-buyers of housing loans. This maintains the same system that has led to the current mortgage market woes and does nothing at all to rectify the situation. (2) By maintaining the system and opening both the Fed and the Treasury to the GSEs, the latter can actually become even larger. (3) They will also be even more beholden and responsive to the political forces surrounding the housing business.

(4) The Fed will provide the GSEs with money loans, on either Treasury or a GSE’s own debt as collateral. That is directly inflationary and amounts to printing money and placing it at the disposal of the GSEs. (5) If money has to be created for the GSEs, there is less that can be created for all the other many banks that are in trouble. The Fed is less likely to discount their bad paper. This may be one reason (beyond the Indymac failure) why regional bank shares fell so sharply on the news (an index was down more than 8 percent.).

(6) Feeding the GSEs taxpayer dollars from the Treasury is a pure bailout. It rewards them for financing too many mortgages and too many mortgages of low quality. It means that Congress intends business as usual. (7) More government money and government stock ownership enlarge the GSEs while worsening the control and financial structures of the company. Any control by the government is going to enhance politically-motivated conflicts about the company policies and retard taking politically unpopular measures. The GSEs become even more of a political football than they already are.

(8) Another negative result is that the uncertainty surrounding the financial crisis will be prolonged. (9) Instead of the Fed and Treasury strengthening the GSEs, the GSEs will weaken the Fed and Treasury, that is, weaken the government. The government debt will rise. This jeopardizes other government programs, which is likely to end up either being inflationary or mean higher taxes. The Fed is basically losing a degree of independence while kowtowing to the dominant political forces, which weakens it and raises the odds of higher inflation. (10) Giving the GSEs taxpayer monies weakens the country’s productivity. It takes capital out of the private sector and transfers it to an industry that is already overbuilt.

It appears that Bernanke has become Paulson's lap dog. The curious news last week Friday that Bernanke was going to open the discount window to Fannie Mae and the denial issued by the Fed on Saturday, now appears to be Paulson asserting himself as top dog. Bernanke most likely leaked the story and Paulson made him kill it, even though that news was announced on Sunday by the Fed in conjunction with a Treasury statement.

Yes, "Hank is for Hank" Paulson is in charge and his plan is in execution phase.

Paulson Drove Plan to Shore Up Fannie, Freddie

It all fits. Pauslon as lead bank basher.

WSJ reports that about two weeks ago Paulson ordered his staff to draw up contingency plans in case Freddie or Fannie faltered. When that planning was leaked in a WSJ article last Thursday, equity investors realized that any bailout plan would seriously dilute their holdings, and this led to more selling of Fannie and Freddie. Apparently Paulson believed this selling forced his hand.

So who leaked to the WSJ, Treasury's plan, that started the selling?

The Plan Seems to Be Working

Paulson scares the sh#@#t out of bank shareholders. While Randy Quarles gets ready to buy.

In trading today,Citigroup fell 6%, J.P. Morgan Chase dropped 4.4%, and Bank of America fell 7%. Zions Bancorp dropped 23.2% and First Horizon National plunged 25.2%.National City slid 14.7%. Washington Mutual fell 34.8% and Wachovia dropped nearly 14.7%.