Not for the Greater Good?

When disaster strikes, it is not unusual to see people working together for the greater good.

Indeed, troubled times often bring out the best in people. Many will go out of their way to assist others, including perfect strangers.

Unfortunately, that is not always the case. Sometimes, there are those who seek to capitalize on the chaos or put the boot in to those who are on the ropes.

In "Paulson's Reason's for Delaying Day of Reckoning," Bloomberg columnist Jonathan Weil suggests the motives of at least one individual at the center of recent "rescue" efforts are anything but pure.

If you think this bailout is expensive, just wait until you see the next one.

The $700 billion rescue plan approved by the U.S. Senate won't fix the core problem with the nation's ailing financial institutions. And it almost guarantees that you and I will have to pony up for an even costlier bailout someday, maybe soon, if the House of Representatives passes it tomorrow.

Treasury Secretary Hank Paulson has correctly identified the quandary: Lots of shaky banks and insurance companies are showing strangely high values for assets that aren't worth squat in the market. Many need more capital and can't raise it. And he's right in saying the outlook is grim if we don't get this fixed.

What's stunning is how little the taxpayers would get in return for their money under Paulson's package, and how illusory much of the banks' newly minted capital would be.

Under the plan, Treasury would buy some companies' troubled assets at above-market values. To boost their capital, Paulson would have to pay the companies more than what their balance sheets say the assets are worth. Then other companies would use the rigged prices to write up, or avoid writing down, the values of similar holdings on their own books.

So, the taxpayers get hosed on the asset purchases. Other banks use the trumped-up prices to cook their books. And investor confidence supposedly is restored.

That brings us to this question: Why would a smart guy like Hank Paulson -- the former boss of Goldman Sachs -- advance such a dumb, shady plan? Let us count the reasons:

No. 1: It delays our national reckoning until after the presidential election.

Paulson first floated a bailout Sept. 18, at the very hour when shares of Goldman Sachs Group Inc. and Morgan Stanley looked like they might go into a death spiral. It's not so much a bailout, as it is a timeout. He had to follow up with something, anything, to stop the freefall from resuming. It didn't have to make sense.

So it doesn't. The plan is about creating the illusion of stronger financial institutions, not strengthening them.

The banks know this. Otherwise, they would have stopped charging each other near-record rates for three-month loans by now. The reason they haven't is because they're still afraid their customers -- other banks -- might go broke.

No. 2: The reckoning will be worse than you can imagine.

If Paulson were serious about recapitalizing rickety U.S. banks, he would infuse them with hundreds of billions of dollars of fresh government money, in exchange for ownership stakes. And if he wanted to create market liquidity for all those troubled assets on their books, he would be ordering banks to disclose everything there is to know about them, so Mr. Market could figure out their present value.

He can't let that happen. Not now. If everyone could see how much the toxic waste is worth, the writedowns would be so huge that many banks would have to be declared insolvent.

Better to let the next administration deal with the clean- up. The trouble is, the longer the government waits to address the banks' lack of capital, the worse it gets, barring a miracle.

No. 3: He's helping his friends.

Is there any doubt? Let's see.

As of yesterday, Morgan Stanley Chief Executive John Mack owned 2.75 million shares of his company's stock, valued at about $67 million. If Mack can get Morgan Stanley to trade reams of sketchy paper for billions of dollars of our Treasury's cash, without diluting any of his stake in the company, who benefits?

Paulson would have us believe it's you.

No. 4: There's an excellent chance the Congress will pass it. Leave someone else to figure out the costs another day.

Comments

[roger]

It has been my experience that when disaster strikes & threatens the
WHOLE group then yes people do pull together,but I also know that if
disaster strikes only a portion of the group,then watch out for the
vultures/looters.Hat off to Michael for passing along this priceless info.

[dome]

Priceless info? Yes
But I wonder how long he will keep his job after writing this article !!

[Independent Accountant]

Mike:
This is exactly what I have been saying. $700 billion today, $700 billion more a year from today! Kill the banks now! Jefferson was right!

[Professor StV]

Best analysis of the bailout I have read. This is one giant FUBAR in the making. Keep up the good work!

[Jim G]

This bailout is nothing short of fiscal insanity on steroids!

[Chris]

Good analysis but it doesn't explain Warren Buffet's investment in GS. That said I agree with #1 and #4. I thought the friends point diminished his argument.

I like #2 but don't necessarily agree with it. Basically it's about the structure and timing of the bailout. "If Paulson were serious about recapitalizing rickety U.S. banks, he would infuse them with hundreds of billions of dollars of fresh government money, in exchange for ownership stakes." Yeah, Congress has larded up the plan so much that the original Paulson proposal looks good.

But equity should be mandatory.

[Martin]

Could it be that Bloomberg journalists finally start asking the sort of questions that journalists should ask, instead of being good boys and girls, rather like the editorial staff of Neues Deutschland up to November 9, 1989?

[Mr.Mortgage]

We just posted one the most comprehensive slideshows on the meltdown we have seen to date.
http://thegreatloanblog.blogspot.com

[Bank Sh*tpile]

Using some widgets and an RSS integration script I've set up a site that will highlight the coming bank failures. Only 13 this year (yeah, only), but I am sure more will come.

http://www.bankspiral.com

[Leon Fainstadt]

Day of Reckoning. Wow what can one say when America is plundered in broad
daylight by both parties? No guns were used that I could see. Nobody had
knives to their throats? Hey did you see the get-away car? They went that
a-way! Right up the steps to the Federal Reserve and the Treasury. Is there
still gold in fort knox or is it the American people that are getting knocked.
There are no longer Democrats or Republicans in America. Just a bunch of Socialist boot lickers. What a party they must be throwing in Manhattan.
Money is no object. Hey Paulson print some more.

[JJL]

Mr. Panzer was nice enough to stop by my site and leave a comment, so I thought I would return the favor!

I have a request on my site that relates to sending a message to the congress in November. Please stop by and see if you can help.

I get tons of traffic from this site and I do appreciate it.

[bobn]

"Good analysis but it doesn't explain Warren Buffet's investment in GS. "

That is so obvious: Paulson will bail out his old buds first and best. Why do you think he came to DC in the first place?

[John S]

"This is exactly what I have been saying. $700 billion today, $700 billion more a year from today!"

That's very optimistic. I'm guessing $1.5 trillion the day after the election. And it still won't work...