October 5th, 2008

Trust betrayed:
The Paulson Plan gets privatized

Posted in Goodbye to All That, Money by ed

An article in the Times re the structure of the new Treasury bond trading operation — perhaps to become the biggest on the planet — is alarming in the extreme. First doubts about the Paulson Plan, however misdirected through the murk, turn out to have been well rooted in muck.

O my prophetic soul …

1.  Treasury intends to “outsource” all the asset management. To things like Blackrock — which is already involved in scandal over its participation in the Bear Stearns take-under.

Foxes, then, are to guard the hen house.

“I can’t even fathom how I would manage that,” Mr. Siegel said. “How would I manage one side, where I’m seeking to maximize profit, and the other side, where I’m looking out for the social good?”

This is in stark contrast to the Savings & Loan rescue, where a single trust controlled and operated by the federal government handled all assets, and turned a profit.

Why are they going the other way now?

Most financial experts agree it would be impossible to build an internal operation of this size in a few weeks.

Don’t got time to do it right …


The Street is awash with laid off lawyers and bankers who used to draft and sell these very wounded instruments.  Let them manage a static trust — with one-time sales of securities permitted, but no active trading.

This would be safer (bond trading is a tricky business) and not require an army of specialists to man.


2.  Further, the prices at which wounded mortgage bonds and the like will be bought are to be determined by … the broken credit markets.

The main mechanism for buying these assets will be reverse auctions, using the same principles that govern auctions of electricity or the wireless spectrum. In this case, the government will issue an offer to buy a class of assets — for example, subprime mortgage-backed securities — with the final price being determined by how many banks are willing to sell.

(I.e., the more willing to sell, the lower the price.)

It seems that Bernanke’s “hold-to-maturity price” — based on performance not market forces, and which he spoke about at length on the Hill in past weeks — is toast.  So then, too, is the plan Congress bought.

If the markets were competent to achieve “price discovery” with these complex and wounded instruments, they would have. It was their failure to do so that provoked the notion of a public rescue to begin with.  These facts remain:

– The market for mortgage bonds (MBS and CMO tranches) has been seized up with loss and fear for fourteen months; and

CDOs were never designed to support efficient en masse trading, and never have.  Least of all now.  The notion of “market value” here has always been a phantom.

And yet it’s into the frozen machinery of these markets — in a matter of weeks — that Treasury means to pour its hundreds of billions in mad money.


3.  What then is going on?  Don’t need a weatherman …

Stories of finance lobbyists descending on D.C. are everywhere.  And the Times piece points out that not only Paulson but his top planners on the rescue are all from Goldman Sachs.

Of all the challenges that the Treasury faces, the trickiest might be determining a price for the largely unwanted wreckage it will be buying.

Many of the junk loans and mortgage-backed securities have no market price at all because they have no potential buyers. The firms hired by the government will have enormous power to push the “market” price up or down as they choose.

If the government bargains to buy at the lowest possible price, it will protect taxpayers. But forcing the banks to book big losses could be self-defeating if they cannot resume lending until they raise fresh capital. If the government agrees to buy the assets at the value at which banks are keeping them on their balance sheets, taxpayers will almost certainly be overpaying.

The “right” price will depend on whether the government is favoring buyers or sellers. Many banks are hoping that the government will pay close to par — the value listed in their books.

But hedge fund managers and other potential buyers are demanding that the government push for the much lower price …

O heat, dry up my brains! 

Tears seven times salt, burn out the sense
and virtue of mine eyes!

The public trust has been betrayed.

Why were these free-marketeer ideas never publicized before Congress passed the bill?

Is it too late to stop Paulson, Sachs from railroading into the private sector what was sold as a public utility?

Call and email your Senators and Reps and scream bloody murder.

(Go to, eg, www.[senator's last name].senate.gov and then to the Contact page, where you’ll find an email form.)

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One comment

  1. ed says:

    Aha …

    The good people at Naked Capitalism — by reminding us of Paulson’s MLEC rescue plan last year for the staggering SIVs — have provided something of a missing link as to how/why the new plan has suddenly gone private.

    The MLEC rescue was a privatized affair — quite like what the Times story linked atop the post above describes for the new bigger rescue now afoot.

    And the MLEC didn’t work at all — because the SIV market was broken: buyers unwilling or unable to meet sellers’ offers.

    The same scenario is set to recur.

    Confirmed: Paulson is a dangerous moron.  The Free Marketeer …

    There may also be something more treacherous going on than blind ideological stupidity: something like Big Money raiding the cookie jar before Momma (the new president) gets home, and the Age of Reagan finally comes to an end.

    October 5th, 2008 at 10:53 am

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