the visible hand

it is the theory which decides what can be observed – einstein

Paulson’s unmitigated gall

Posted by ecoshift on September 25, 2008


As everyone paying attention is no doubt aware Treasury Secretary Paulson has floated a three page proposal asking for 700 billion dollars to purchase toxic assets at “hold to maturity” prices from failing financial institutions. His reason? Our financial system is collapsing. And everything was contained and the economy fundamentally strong just last month. Not only were there few details provided, but Paulson proposed not to reveal any details as the buyouts were executed.  The last thing the holders of this debt want is price discovery as mark-to-market pricing will force real accountability.

What a scam. I’ve been searching for the right word to describe this effort. Cheeky seems to lack gravitas. Arrogant kind of goes without saying. I think I’ve settled on gall. Unmitigated gall. A three page proposal. This can’t be real.

I’m basically a progressive kind of guy. I don’t mind the government using tax money to cover social and ecological needs overlooked by the typical business plan — particularly in an emergency.  But, this brings out my inner libertarian.

I was out of town for the past week and barely had time to keep up with the various rumors and outraged responses regarding this attempt by the current administration to loot the US treasury on it’s way out the door. The same people that have been trying to convince us that housing prices had bottomed, that the crises was contained to subprime, that our economy was fundamentally strong — are now spreading over-the-top fear, uncertainty and doubt in an effort to extort 700 billion+ out of the taxpayer to buy out their buddies’ bad investments. The same buddies that have been “earning” double digit returns in the market for mortgage backed securities for the past five+ years–at least up until last summer when the foundation of this house of cards began to show strain.

This is just opportunism. Free markets with no regulation on the way up. Government intervention and buyouts on the way down.  WTF happened to all the Free Market rhetoric?

The only ideological, political, moral, or intellectual consistency here is “me first”.  They don’t give a damn if family balance sheets go negative as housing prices fall through the floor as long they can keep up the fiction of mark-to-model hold-to-maturity pricing until they get those assets off their books.  Get real.  Americans can’t make their house payments and the underlying collateral supporting this house of debt is gone.

The main problem with this proposal is that it doesn’t solve the problem. It won’t stop the recession, it won’t create jobs, it won’t protect pension funds from further losses and it won’t stop the fall in housing prices. Like all the other attempts to turn this crisis around the effect of this bailout will be a temporary run up in stock market values while our real economy remains on the ropes. </rant>

It’s been quite while since I wrote a letter to my representatives in congress, but I wrote one this week.

Here it is:

Dear Congressperson:

I’m writing in opposition to the Treasury Secretary’s current 700 billion dollar plan to bail out financial markets and investors at taxpayer expense.

This plan will reward the very market participants that 1) profited from an egregious lack of regulatory oversight on the part of the current administration, and 2) promulgated the opaque and highly leveraged real estate investment instruments that allowed and encouraged an unprecedented misallocation of resources and capital in the housing market.

The unregulated, securitized and marketable debt instruments at the heart of this debacle provide little to no added value to the real economy. Rather than strengthen our financial system, the availability of capital and our competitiveness in the global marketplace they have increased our vulnerability to and dependence on foreign powers and threaten the value of the dollar and the credit rating of the US Treasury itself. Those who created and purchased these instruments should not remain in charge of our financial infrastructure. Housing markets must be allowed to correct and the investors who profited must be allowed to fail.

Wealthy and sophisticated investors knowingly took on market risk in exchange for substantial returns when they purchased these instruments. Purchasing these toxic assets at a mark-to-model (or “hold-to-maturity”) prices introduces significant moral hazard to accurate risk analysis and will further corrupt efficient functioning of our financial markets.

I understand that the jobs and pensions of ordinary citizens are at risk. Yet this plan offers no promise that unemployment will go down, that pension funds will be protected from further losses or even that loans and commercial paper will be made available to US businesses. I see no assurances that this plan will be any more effective in rebuilding the US economy than the ill-fated and ill-conceived Tax Rebate Stimulus Plan. Please learn from this previous mistake. Don’t invest hundreds of billions in taxpayer dollars without clear strategic objectives that add real value to the productive capacity and competitiveness of the US economy.

If there is no political alternative to this effort to strong arm the taxpayer you must insist on full and open transparency, accountability, mark-to-market pricing, an equity position for the taxpayer and returns commensurate with what private investors would receive.

Paulson’s plan lays the burden of this fiasco on those that can afford it the least. Any action taken must not be administered by the administration and the financial executives that created the ponzi scheme now unwinding.

For our children’s sake: No Bailout. No Blank Check. No Way.


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