Browsing the blog archives for December, 2008.

Let’s Do The Time Warp Again

Treasury Secretary Hank Paulson has wreaked havoc on our capital markets. What might have happened if he’d never been nominated?


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If you’re like me, you’ve already felt like you were in some sort of wickedly cruel time warp since March 17, 2008. It marked a ground zero for a new regime of socialism in our financial markets and businesses. The day we all learned that Bear Stearns (BSC) was being bailed out by the U.S. Taxpayer, even though BSC clearly merited bankruptcy status instead. The day most everyone looked the other way when the power players in the Fed (NY Fed Gov. Tim Geithner) and Treasury (Secy. Hank Paulson) single-handedly bailed out their bondholder friends at the expense of Uncle Sam. Refusing to divulge the true quality of the BSC assets that were backed by fiat with $29 Billion of our taxpayer money, the Fed and Treasury met no further consequence from an already very weak Congress. And so the carnage continued. Fannie and Freddie bought by fiat for the U.S. Taxpayer in July, as opposed to their merited dissolution and liquidation, with a $25 Billion Housing bill (HR 3221) tacked on – all of which was supposed to end all bailouts, remember? $85 Billion for AIG, one of the worst managed companies in recent years, whose assets should have been sold to pay down their debts, and their business shifted to the many competitors who had not asked the government for a dime. A $700+ Billion Troubled Asset Relief Program (TARP) to aid banks that probably should either fail or consolidate. Recent discussions of adding yet even more scope to TARP has eventual figures pegged at the stratospheric $3-8 Trillion high end. Add yet another special $20 Billion to Citibank, one of the worst managed banks in recent years, and with growing foreign ownership. The list here is not complete, only the high profiles are mentioned, and yes, there are strange exceptions like Lehman Brothers. I can only imagine that no one at the Fed or Treasury had any good friends among Lehman management or bondholders. But they too clearly merited bankruptcy given management’s poor navigation. And did the world collapse? ‘Too big to fail’ and meaningless terms like ‘systemic risk’ have become socialist crutches. When the going got tough in the financial sector, the power players at the Treasury and the Fed made sure that a select few were not going to suffer the consequences of reckless management and near fraud. The consequences of concocting ever higher-yielding and profitable financial instruments, such as structured investment vehicles (SIVs) and collateralized debt obligations (CDOs) – many just packaged sub-prime mortgages that were doomed to fail on the basis of ubiquitously lax loan standards. The management of more than a few financial sector companies that clearly conducted business downright close to that of the failed Enrons and Worldcoms, yet still merited taxpayer bailouts and leniency. Does this escape higher reason? Perhaps reason, along with true capitalism, has been sucked into that time warp I started with.

So where do we go? As long as we’re talking about the now surreal nature of our financial markets – the loss of capitalism, the rise of cronyism and socialism – and that we may in fact have gotten lost in some time warp, let’s use that time warp as a ‘gedanken (thought) experiment.’ Is there a way we could have prevented the malaise that has now hit every corner of our venerable capitalist markets? Can we do it by replacing one person, or are there a series of events that need to be corrected? Is it such a complex and chaotic outcome that we can never return in time to a solution to fix what has happened?

Let’s start with the simple task of replacing just one person. If I had to pick, it would logically be Mr. Henry (Hank) Paulson, our 74th Treasury Secretary. So let’s do the time warp back to April-May 2006, when Hank was considered and nominated for the job. First, what was Mr. Bush thinking at the time? Hank Paulson was then, and has always been, a liberal-leaning figure. John Snow was then our 73rd Treasury Secretary, a former CEO of CSX, having overseen the enormous return of growth to the transportation sector. Was John Snow really that bad? The critics were crying at the time about Treasury’s lack of a dollar policy, that it would do wonders to drop Mr. Snow, who was talking a strong dollar but not actually doing much about its slide. Mr. Snow was touted as ‘boring’ and Bush supporters in the financial community urged the president to name someone from the private sector who was well known on Wall Street [1]. Would John Snow have reacted to the concoction of cheap money, lack of lending standards, and the near fraudulent peddling of housing-related investment products the same way as Hank has done? I’m willing to believe not. Critics complained that the Bush Administration neglected to fight for fiscal policies that would reduce the growth of spending, in effect to avoid a “mortgage [of] the present prosperity to the earnings of future generations,” and that Snow was underhandedly caught in a web in which he could not make that case with the Administration “committed to placing grubby political exigency over economic principle, a tendency the Bush Administration has turned into a compulsion [2].” Apparently Hank was in the right place at the right time and has better fighting skills. He has since killed any possibility of the Bush Administration having a sound economic platform or legacy – a reduction of unnecessary spending, a cut in the corporate tax rates, a stage of lending standards for the mortgage industry, a stage of leverage standards for the securities industry, to name a few. In Hank Paulson we got a fox that guarded the hen house. Hank left the lucrative and insulated top job at Goldman, perhaps because he saw the opportunity to help guide his firm and their counterparts into making even more money than imaginable. He was (and still is) an insurance policy for his bailout country club. Some might say this is just sheer accusation. But what exactly did he do on the job during his first year? Not much. And when the mortgage industry, and along with it, the mortgage securities industry, started showing the first signs of cracks, he did nothing. And when Bear Stearns failed, he finally acted to save some of his friends, at the expense of the U.S. Taxpayer. I refuse to believe that with his position he had no insightful knowledge of the landscape of the housing market, and of the toxicity of the products that his firm promoted.

Perhaps Mr. Bush got lost in the time warp and Hank caused the disturbance. And here’s the real time warp kicker: he’s completely snowed over those who perhaps trusted him to do the job that is required of every Treasury secretary: protect the U.S. Taxpayer balance sheet. So let’s do the time warp again and go back and make sure he isn’t even considered or nominated. Leave John Snow in and ask the following: what could have been done in 2006 to avoid the economic wreckage we now deal with? Let’s start with recognizing the very high inflation in housing prices, a good portion of it fueled by cheap money, lax lending standards and yes, that peddling of ever higher-yielding SIVs and CDOs that were based on poor assets (bad mortgages). Who at the time recognized that all of this was leading to a train wreck (pun intended)? John Snow. So Mr. Snow puts on his fighting gloves and knocks some sense into Mr. Bush, perhaps in the process getting through Bush’s thickly insular circle of advisors. He fights and fights for the same capitalist principles that guided him so well in rebuilding the prosperous railroad, port and shipping industry. He warns the financial sector that lending and leverage standards need to be strengthened immediately, and that any consequence will not be at the expense of the taxpayer. He fights for a cut in the corporate tax rates, to promote business investments and create solid jobs. He refuses ethically to pad his former constituencies’ pockets with taxpayer money if they falter. He insists capitalist risks continue to be taken, and that prudence will avoid failure, as the taxpayer will not yield a socialist response. He protects the U.S. Taxpayer balance sheet, exactly as he had done for the balance sheet of a solidly performing public company.

Now don’t we all want to do the time warp again? Anything might be possible in a time warp. Even Mr. Snow as a superhero.


[1] Inside Report by Robert Novak – Local News – News : Lincoln Tribune : Instant, reliable and credible local news

[2] Spend, spend, spend . . . the bountiful economics of a president in denial | Gerard Baker – Times Online

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