Paulson's Plan

I listened to Treasury Secretary Paulson a lot this morning as he explained the "plan."   Under his concept, the federal government will buy a great deal of presently worthless securitized mortgage debt, hold it for years and then sell it to someone who wants it, presumably because the value of the underlying real estate has gone up.  The institutions from which the federal government will buy the debt will play a large, perhaps decisive, role in setting the price at which they "are willing" to sell the now worthless debt to the federal government. 

Paulson hopes that the institutions that will be unburdened of this worthless paper will once again soar like eagles (wasn't there a song?).  This would seem likely to lead to high profitability for the unburdened institutions with lots of money for all.

Wait!  Not so fast!  Paulson is not enthusiastic about requiring the "unburdened" to give the government warrants for future stock sales to the government.  Such warrants would enable the tax suckers (us little people) to buy the companies at distressed prices (like, now prices) and sell the stock at later higher prices so that the Treasury of the United States (us tax suckers) could make money out of this whole thing.

Paulson also does not think that in return for the US government buying the nearly worthless mortgage securities, the "unburdened" should accept restrictions on executive compensation.  Why?  He believes that such a restriction would cause the presently burdened institutions to refuse to sell the government their "treasured" worthless paper.  Hmmm.

When asked why he thought the presently worthless mortgage "bundles" will become valuable some day "over the rainbow," he expressed faith in the future of America.  Bless him!  pl

If I do not understand this, explain it.  pl

http://www.bloomberg.com/apps/news?pid=20601087&sid=atwDaTfVQX64&refer=home

Comments

[VietnamVet]

Colonel,

It is a scam; the bailout gives dictatorial powers to the Bush/McCain Secretary of Treasury. Wall Street gets 700 billion dollars for its worthless paper; free and clear, with no strings attached.

The money would be much better spent on stabilizing the housing market by refinancing family home mortgages at affordable monthly payments. Bush/McCain and the puppet Congress can’t do that. That is socialism for American citizens just like VA Home Loans.

[WP]

One of the most interesting details of this Paulson scam is that the government is going to buy back "mortgage related securities." This is really different than buying back the actual mortgage pools that contain real mortgages. A good example of a "mortgage related security" is a forward contract where, say, last september, a trader bought the right to receive delivery of a million dollar mortgage pool this month that, last September, was worth $100,000,000 and now is trading at $50,000,000 or half its purchase price. This contrace IS NOT a mortgage backed contract, but is a "mortgage related" contract. Essentially, it is a direct wager on the future price of existing mortgage pools that has gone sour. Normally contracts such as this are settled, not with the actual delivery of a pool of mortgages, but by a monetary transfer of the difference between the forward price at the time the deal was made and the current market price of such securities. Thousands or millions of contracts such as this must exist in the market place. Probably many more contracts exist than mortgage pools exist to complete them. These wagers are the type of contract Paulson is suggesting that we, the taxpayers buy.

If the problem is bad mortgage pools themselves, then a better approach for the taxpayers would be for the government to take on the job of guaranteeing payment of the actual existing mortgage payments as they come due with a mechanism for working out the defaulting homeowner's financial problems and reductions in mortgage interest rates so the mortgages would not have to be foreclosed and the people lose their homes. Over time, such a program could revitalize things.

Paulson's plan, making bad bet untied to real mortgages is just theft and has nothing for the citizens.

Also, the banks such as BOA that are borrowing huge amounts of money from the government at nominal interest rates should be forced to reduce their usureous credit card rates substantially. If a consumer has a credit card with interest running at 30% had that rate reduced to five percent, the consumers could begin to catch up even if their credit card accounst were frozen and they could no longer charge. It is unconsionable that credit card companies can borrow at near zero cost and still charge the consumers such unreasonably high rates.

Right now, the solutions presented simply are not a good deal for the consumer citizen taxpayer, they are a massive theft by the pirates who run the place.

[Ronald]

I say no deal unless the government ends up with equity interest. There is no free lunch. If the current shareholder get diluted out, then that is good. It is a feature, not a bug. It mitigates the moral hazard.

Take this to the bank: for all of their blathering about supporting personal responsibility, there is no group more allergic to notion of accountability for their mistakes than the current GOP. On virtually every issue.

If Democrats end up supporting this disaster, they need to go, too.

[WP]

A further comment on my prior post. There is a huge difference between the government buying back a pool of mortgages actually made up of real mortgges and a mortgage "related" that is essentialy a bet on the future price of mortgages.

There might be a real recovery for the taxpayers buying back the mortgage pools because those pools are made up of mortgages given by real people who want to stay in their homes, and if not, they consist of real property security, even if some of that real property is overvalued. While some of those mortgages may be overvalued, the great majority will pay off. Also, if the government owns the pools, it can stop the interest rate adjustments and make the interest rates reasonable and make other contract adjustment that will ultimately get the mortgages paid at close to par.

On the other hand, the derivatives that are not actually backed by specific mortgage pools are just bets and are subject to extreme manipulation and further theft.

I can imagine that there are thousands working this Sunday planning how their securities firms are going to milk the proposed plan--and they will succeeed if it is not stopped.

[mock turtle]

Paulson and the Bush administration are simply supporting the "banksters" at the expense of the country.

they lie

this is not a "sumbprime" crisis

the crisis is the fraudulent money making schemes that the banksters on wall street built upon the mortgage mess

and that mess was a shit storm of "liar loans" (no stated income req), "arms", "pay option arms" and "neg amortization loans" with teaser rates and no money down...

and then, all repackaged as garbage securities and derivatives.

this has to be stopped

i suggest we have a boston tea party of sorts

very important that what ever we do MUST be peaceful and MUST be leagal

the proposed bush-paulson top down bailout of the wall street criminals has got to be stopped

here is the plan

drive the legal minimum speed limit in the right lane of any interstate highway

in many places thats 55 mph...check for yourself

do not block left lane

put sign in rear window

"no gov bailout banksters"

---

if just 5% of people do this there will be a media shit storm

----

in addition i have written 6 emails and phoned rep and 2 senators 3 times each past 2 days.

this proposed legislation is a blank check

read the actual proposed language at the well respected blog named calculated risk

http://calculatedrisk.blogspot.com/2008/09/bailout-proposal.html

note article 8

may God help us , the country is teetering on the brink of disaster

[zanzibar]

Hanky Panky just informed us that what he wants to do is steal from us "little guys" and our children so that his cronies on Wall Street can get a second bite at the apple. All in broad daylight!

If we allow our Congress to pass his proposal as legislation we deserve the fate of a banana republic.

There's only one word to describe this plan - THEFT!

[Dave of Maryland]

In what way is this not a form of tribute?

[Curious]

1. If those worthless papers are so valuable in the future, somebody would have bought it. But no smart money wants to buy it. Because it's toxic. The going rate at this moment is 6-20 cents to the dollar. And Paulson wants taxpayer to pay nearly full dollar. In other world, in any known universe, Paulson lovely scheme won't give tax payer return for another 5-6 decades, if ever.

(btw, Lehman brother court filing indicates that their entire asset only worth less 50c to the dollar.)

2. There is no way to determin if Paulson and his buddies will scamming us or not. Selling pig in a poke.

3. By moving debt obligation to US budget, anybody in the planet know US economy is now ready for short attack. (Korea/argentina style)

People will bet against dollar, commodity against dollar, etc etc.

every hedge fund will bet that US federal budget will finally collapse. (It's only logical.)

If you think the last global commodity price spike was painful, wait until the entire planet hedge fund betting against us.

4. Injecting $700B into the system? ARE THEY CRAZY? last time they inject $200B, there was gigantic global inflation. Price of everything exploded. The global economy CANNOT absorb that much cash.

This massive inflation will eat away peoples wage, saving, earning power... and economy will slows down further.

5. These scheme does not address the fundamental. People CAN'T pay their mortgage!! Not with crashing economy, unemployment and inflation. Buying few hundred billions of these CDO/SIV won't change the fact that $50T of derivatives market are cratering.

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

What they are doing is moving the highly toxic debt that kill investment houses and banks into federal budget. Then it will kill the federal budget because of its size.

Paulson thinks he can bail out the entire derivative market! (buy buying gigantic amount of these useless paper)

[b]

The Paulson plan tries two things:

- stabilize the pyramid until the election is over
- bail out his old company
- distract from the REAL PROBLEM.

It does not tackle the real problem.

Think an inverted pyramid.

On the bottom the housing market and mortgages.

In the middle mortgages bundled and sliced to Mortgage Backed Securities and sold to investors.

On the top completely unregulated 'insurance' (Credit Default Swaps) written and sold that guarantees the value of the MBS against default.

There were ten+ insurance $ written for every MBS $!!! These are written, sold, dealt covered or not without ANY regulation.
People could buy and sell ten times the insurance values against the MBS value and make a killing in a default.

Now:
On the bottom a few tens of billions of losses and foreclosures.

In the middle MBS in a total value of some 6 trillion losing some 20% of value. - Unavoidable.

On top 'insurance' - CDS contracts in a nominal value of 60+ trillion that are not backed by the capital needed. (that would be more than world GDP)

Paulson says he wants to save the MBS values. But the real danger are the CDS contracts of 10+ times the MBS values.

AIG was nationalized because it had written, bought and sold bad CDS.

If the CDS pyramid defaults in an unruly way, as it will, it will take down the financial system.

There is a solution for this. Declare All Credit Default Swaps Null And Void

Similar legislative action was taken during the Great Depression.

Touching the MBS problems will do nothing at all to solve the 60+ trillion of bad CDS'.

The problem CAN be solved by coordinated international legislative action.

This has to be done very soon or this crisis will be worse than the Great Depression.

[Curious]

Yep, confirmed, they are trying to scam the public!
(from insider account)

http://www.dailykos.com/comments/2008/9/21/11359/7555/279#c279

Yet as we discussed, the plan makes no sense unless the Orwellian "fair market prices" means "above market prices." The point is not to free up illiquid assets. Illiquid assets (private equity, even the now derided CDOs were never intended to be traded, but pose no problem if they do not need to be marked at a large loss and/or the institution is not at risk of a run). Confirmation of our view came from a reader by e-mail:

I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It's supposed to be members only, but there's no way to enforce that if it's a conference call, and you may have already heard from other staff who were listening in.

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won't sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that's because he didn't want to admit that the government would just keep offering more and more.

I don't think that our leadership has been very good during this negotiation (or really, during any showdowns with this administration) at forcing the administration to own their position. If Paulson wants this plan, then he needs to sell it to the public, and if he sells a different plan to the public (the nonsense buying-at-market-price plan) then we should pass that. I'd rather see the government act as a market maker for the assets to get them transferred over to private equity firms and sovereign wealth funds and other willing holders. And if we need to recapitalize these companies, it seems like the cheapest way for the taxpayer is to go in and buy up the distressed debt and then convert that to equity.

So unlike the Resolution Trust Corporation, which took on dodgy assets which had fallen into the FDIC's lap due to the failure of thrifts, and the Home Owners' Loan Corporation, which was established in 1934 after the housing market had bottomed, this program is going to swing into action with the clear but not honestly disclosed intent of buying assets at above market prices when future markets and the analysts with the best track records on forecasting this decline (you can add Robert Shiller, CR at Calculated Risk, and Nouriel Roubini to the list) believe it has considerably further to fall.

As we said earlier, this is a covert, not particularly well designed, inefficient, and unduly costly recapitalization of the banking system. Why?

Losses on the paper acquired are guaranteed. This is not a bug but a feature. The whole point of this exercise is an equity infusion to banks. The failure to be honest about it upfront will lead to a taxpayer backlash (or will lead to the production of phony financial statements for the rescue entity, which will lead to revolt by our friendly foreign funding sources).

Taxpayers have no upside participation.

There is no regulatory reform as part of the package. This would seem to be a minimum requirement for a donation of this magnitude.

There is no admission that deleveraging is inevitable. This plan seems to be a desperate effort to keep bad debt from being written down. Yet the sorry fact is that a lot of these assets simply will not be repaid.

[Bobo]

Yes, $700 billion to buy someone elses junk at their price and then hope, pray and cross your fingers that a few years
from now our real estate values have gone up so they can unload it for a profit. Sounds good but Antique Shops have been trying this for years and they are filing Chapter 11 at higher rates than any other business.

Our economy had a dramatic contraction last week (past year also) which will be seen shortly with thousands out of work and unless our government finds a way to put them back to work they will be defaulitng on their mortgages over the next year driving real estate values down further so I think Paulsons solution is a beginning not an end, more solutions will be coming in the near future. Thus the Trillion Dollar number may be conservative .

Cox's taking the short-sellers out of the market has allowed stock prices to inflate on fluff so please do not believe
that all things are rosy just yet. You have to own the stock to sell it so volume will be down and we will not need so many people to keep churning it.

Being one of the little people my concern is for my fellow taxpayers. So whatever Paulson does or congress lets him do (that is the big rub) he better start figuring out how to put all these people back to work or we are all in for a big wake up call.

[Mad Dogs]

From Pat's Bloomberg link:

...the Treasury chief said, "this is not a position where I like to see the taxpayer, but it is far better than the alternative."

I'm sure that Paulson was being truthful here. The way I translated it was:

"...this is not a position where I like to see the taxpayer, but it is far better than the alternative of having my best buds, the Robber Barons, pay for their own sins."

Shorter Paulson: "Heads we win, tails you lose."

[Arun]

You understood it perfectly.

But we rely entirely on Congress to convert this understanding into the right bailout plan. Based on past performance, I don't see them standing up to Paulson.

[michael palmer]

If we're going to bail out wall street's worthless paper - why not wipe out all existing student loan debt in the same package and free the best and brightest of america from "toxic debt".

[euclidcreek]

From his crib in Cleveland, Mr. Stress writes:

I now believe in reincarnation
with President P. T. Barnum and vice President Ponzi

[alnval]

Col. Lang:

It's hard to contain the anger I feel at the stupidity, venality, and just plain greed that this administration continues to foist off on the public as good policy. I've always kind of thought I understood what others meant by "going postal." Now I'm sure of it.

I'm a lot less concerned about insuring the stability and integrity of the financial system than I am of insuring that the government of this country start treating its citizens with dignity and respect.

[Paul]

The week-end stampede is puzzling. George Bush was quiet for a couple of weeks while Bernanke and Paulson did their thing with AIG and the money market funds.

All of a sudden, Bush emerges with this $700 Billion demand that HAS to be authorized "early next week". That the world will explode without the authorization is nonsense.

This sudden Bush apparition suggests that he and his cronies know something that the rest of us don't. What could that be?

If the Congress goes along with this scam without further scrutiny and condition they should all be hounded out of office. Schumer's eagerness should be ignored - he's Wall Street's senator.

Europeans get the attention of their governments when they take to the streets. That's what we have to do.

Like the run-up to the war in Iraq, Bush has something up his sleeve but we have not yet made it out. Any ideas, anyone?

[Curious]

http://www.dailykos.com/storyonly/2008/9/21/75335/6687/799/605351

But this gets us back to a very simple question, in a crisis of liquidity, the question is how to put money into the system, and then pull it out once the crisis has passed. In a financial crisis such as this one was some time ago, the question is how to borrow money to clean up the mess, and then impose regulations to prevent the exploitation of both the bail out, and the flaws in the system. However, we are not faced with either of these two smaller problems.

The problem is what, exactly, are we going to pay these loans off in? Remember the reason this is a crisis, and we can't just walk away, is that our money is based to no small extent on mortgages. We buy oil and import goods with this money. If the total money supply cannot expand, then it must mean that American living standards must drop dramatically in order to pay back the mortgages. The American people, in 2000 and 2004 were sold "a pig in a poke." They were not told what the differences were, nor were they told what the consequences could be. While it will be impossible to avoid having the penalties fall on the American public for what they bought and voted for - "You don't know what it is, and you're voting for it." - the greater blame must fall on elites. However, as long as elites can stay in power promising that the land casino will re-open after some clean up from the last party, there will be no such change.

[Mad Dogs]

Looks like somebody is making a stand. We'll see if this turkey flies now that Barack Obama has laid out his demands:

"As of now, the Bush Administration has only offered a concept with a staggering price tag, not a plan. Even if the U.S. Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects the basic principles of transparency, fairness, and reform.

First, there must be no blank check when American taxpayers are on the hook for this much money.

Second, taxpayers shouldn’t be spending a dime to reward CEOs on Wall Street.

Third, taxpayers should be protected and should be able to recoup this investment.

Fourth, this plan has to help homeowners stay in their homes.

Fifth, this is a global crisis, and the United States must insist that other nations join us in helping secure the financial markets.

Sixth, we need to start putting in place the rules of the road I’ve been calling for for years to prevent this from ever happening again.

And finally, this plan can’t just be a plan for Wall Street, it has to be a plan for Main Street. We have to come together, as Democrats and Republicans, to pass a stimulus plan that will put money in the pockets of working families, save jobs, and prevent painful budget cuts and tax hikes in our states."

[triangular gutters]

There's this persistent meme that lowering interest rates for recent borrowers will help fix the mess. This will only help if borrowers could afford the underlying asset in the first place, and comparisons of median income to median transaction price make that seem unlikely.

What will be necessary at the retail level is to reduce the principal (possibly in bankruptcy). This will pit newer home purchasers who need a retroactive markdown against those who thought they had accumulated "equity".

This will be quite entertaining, and by design it will take many years---I guess the spectacle value is mediocre consolation for those including myself who were "responsible" enough to refuse to spend their down payment money on an overinflated market. Ah, another five years.

[WP]

Paul wrote, "Like the run-up to the war in Iraq, Bush has something up his sleeve but we have not yet made it out. Any ideas, anyone?"

Perhaps a coup later in the year when the election process fails due to the crooked and faulty voting machines and after we have a "surprise" attack by "Al Quaeda" around the first of November.

Seriously, such conspiracy fears are not rational, but the financial crisis combined with the pathetic performance of congress over the last few years has put our republic in serious danger because the transparancy of the government has been so degraded.

Again, we are faced with a "crisis" that gives some people the opportunity to blackmail the rest of us to permit them to rip-off the people again. And, I fear, the rip-off will succeed.

Where is some real leadership?

[TomB]

Col. Lang wrote:

"Paulson is not enthusiastic about requiring the "unburdened" to give the government warrants for future stock sales to the government."

Gee, from being worried about the "moral hazard" of merely guaranteeing some of Bear Stearns' bad debts to pimping this orgy, Paulson sure has proven ... flexible.

You'd think that given all this happened on his watch he might instead want to think about the moral hazard of government representatives not resigning when they've overseen what he has.

I'd like to see him now answer the question of just why exactly the ordinary American should still feel obligated to fully and fairly pay their taxes out of anything but stark fear of going to jail.

Beyond obscene.

Cheers,

[Strudel & Shotguns]

Ever been robbed?
This is what it feels like.

[DaveGood]

Is this the same Hank Paulson who used to run Goldman Sachs?

Weren't Goldman Sachs one of the worst "short sellers" in the market... and fined as such because they crossed over from (legal if immoral) Short-selling into outright fraud?

Isn't it one of life's delicious ironies that Hank Paulson now bans the very practise that provided much of his wealth as unethical and not in America's interests and uses the taxes of working American families, and their children, and their children yet unborn.... to defend the financial institutions against the very practise they themselves have used for so long against the rest of us?

Senator Bernie Sanders has the right idea... a surtax of 10 per cent on any couple earning over one million a year will go a long way to paying for some of this.

After all... as Warren Buffet has pointed out... on Youtube.... he takes no steps whatsoever to avoid paying income tax....But the person who scrubs his toilet is taxed at twice the rate he is.

Warren Buffet might be the richest man in the USA.... but he's right when he says this is not fair, not just.

DaveGood

[DaveGood]

PS..

The London Times is reporting that the senior staff at Lehmans Brothers will get to share out 2.4 billion in "Bonuses".... presumably for a job well done... meanwhile the bulk of the staff will be packing up their lives into cardboard boxes.