Paulson Deserves Praise

Paulson should be commended for making the right moves to get us out of the crisis. Each time, he was ahead of the curve, he asked Congress for TARP before the crisis actually hit the entire financial system, but Congress took its sweet time debating for a week and then voted no. He asked for a lot of new powers, but did it in many increments because there was just no way Congress would consent to authorize all that he knew he would need, at once.

People criticize him for not rescuing Lehman, but don't take into consideration the political impossibility of bailing out both AIG and Lehman at the time. Only after things got worse and people saw the effects of the crisis were they willing to concede that Paulson needed all that power and money.

I say this with all honesty, it's really too bad that people always have conspiracy theories and look through a political filter. Paulson should be thanked for taking the personal abuse and for putting his ego aside and begging Pelosi on his knees, to authorize TARP because he knew that a failure to authorize would destroy the US financial system and cause another depression.

A less competent would not have come up with TARP and understood that he needed a "bazooka", though it was politically impossible to ask for several trillion all at once. A less competent person would have been frozen in fear and asked too little or waited for the crisis to force a move, rather than try and move ahead of the crisis.

For the critics, I ask what he should have done instead? Let's put impossible demands, like prevent the crisis, aside, since he's isn't God and he didn't arrive at Treasury until the bubble was already in full bloom.

Sometimes it saddens me to see so many people so unreasonable and with such a distorted view. If it's on an event that really doesn't matter, then I just shrug it off, but this was a genuine moment where we could have fallen off of a cliff into disaster. That this man is not getting any credit for saving us from another great depression is simply unfair. Was he perfect, no, but he was about as perfect as you can be without the benefit of hindsight and in a crisis without precedence. Give the man the recognition he deserves.

The Road Ahead

The more I dig into this, the more I realize that there is no easy way out. Recapitalizing a worthless bank pretty much guarantees a loss for the taxpayer. The taxpayer will have to eat the losses first just to get the bank back up to $0 book value, then pump more money in to move equity into positive territory. Now the taxpayer could make that money back in the future, but that's far from assured, what's clear is that the taxpayer is "overpaying", which is why private equity doesn't step in right now.

We have to figure out a way for taxpayers to be able to make money through future profits or a future sale. However, we also don't want government to run the bank because government is terrible at running things and politics would enter into the daily operations of the bank. If only we could trust that politicians wouldn't interfere but we know they will by demanding loans to "low income" borrowers (translation: ultra-high risk subprime borrowers) and to forgive outstanding mortgages in default. That means more bad loans will be made and the nationalized bank will face insolvency again a few years down the road, the crisis will be prolonged.

That's why we have very little choice but to use taxpayer money to recapitalize the banks while still making sure they are in private hands. The government can and SHOULD demand changes to the Board, but only qualified bankers should replace those ousted, please no more political hacks like Daschle, maybe someone competent like Warren Buffet would take the job as a service to the country. The Board would decide on a new CEO, again with the sole focus on competency and profitability. That might mean financial sector employees further down the ranks would be promoted or given the CEO job. Again, there will be the usual cries of enriching Wall Street, but only people with banking experience can be expected to run a bank. Those calls will have to be ignored and Obama will have to use his golden voice to explain that to the public. Obama will lose favor with the leftist extremists who are out of touch with reality, and be called just another Bush. He will have to take the criticism for the sake of doing what's best and hopefully he will be able to articulate why only Wall Street people are being given CEO jobs. A tough task lies ahead.

Defending the TARP's Execution

Below is my response to Alan Blinder's Op-Ed in the New York Times.

The original plan was abandoned because 1) there isn't enough money to buy all the toxic securities out there 2) Since these securities are non-standard and have various structures and terms, buying them through an auction would be a difficult and time consuming process 3) buying securities at market value would expose many banks as being insolvent or below regulatory capital requirements 4) it would be hard to limit purchases to US banks, we would in effect, have to buy all the toxic stuff in the world, how do you prevent foreign banks from selling toxic assets to US banks so that they can be sold to the Treasury? 5) Now you know why there isn't enough money.

The author is indeed dazed and confused. The terms of the capital infusions were favorable because the banks are in trouble. Predatory terms, as with the initial AIG deal, would have been too onerous. Banks need to make money so that they can use the earnings to write off their bad loans, if Treasury takes all of the earnings or even most, then it will take more time for the banks to get better. The whole point of a "bailout" is to HELP, not put banks out of business, thus the 5% preferred shares. And as for non-voting shares, it allows room for private equity investment as it leaves control to the private sector and minimizes government interference on the Board. Furthermore, preferred shares eliminate the need for the government to find people to run the companies they invest in. There are too many companies, and Treasury or FED are ill-equipped to run dozens of companies. Who are the heads to report to? Who will call the shots? Paulson has enough on his hands and even he can't run dozens of separate companies.

Forget about stopping foreclosures, it's a foolish idea and would only prolong the crisis. Real estate prices have fallen so much that it's not possible anymore to pretend that they are anywhere near what someone in foreclosure paid for them. Thanks to that fact, there's very little incentive for a person to continue paying on a mortgage when he'll never see a penny from the eventual sale. Remodify the mortgage and he still has no incentive other than it allows him to rent the property. If rent is cheaper elsewhere, then he'll default again, why should a person pay extra for rent? And that house is, by all accounts, being rented since the mortgage defaulter will never see a penny of profit.

I'm glad Paulson wisely saw the above and chose the best course of action left to him. It's ridiculous to expect a quick or painless end to this crisis. Else it wouldn't be a crisis. There are no easy solutions. Whatever the criticism, the downturn will take its course and NOTHING can change the fact that the losses are real and have to be borne by someone. Nationalizing the banks would just transfer the losses to the taxpayer and cause panic in the stock markets. When government seizes private equity, then appetite for that equity disappears.