Finance

§

20:30 GMT

Paulson's Fantasy

Those in the world of finance have seen things happen in the past 10 days which they never could have imagined. The Fed/Treasury pulling the plug on Lehman Brothers, before the market did so, an extortionist 'bail out' of AIG, money funds breaking a buck, 20-50% moves in some financial stocks (over $10), and now to top it off, comes Paulson with his 'plan'.

A few choice items from the Pauly Plan:
Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States

Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets:

(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 8. Review:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.
So lets take a look at this. Paulson is going to 'designate' certain financial institutions - who were probably either a holder or seller of the various bad debts and derivatives - to act as his agent. We assume this shall be to buy, hold auctions and value these securities. And of course, pocket what will likely be some substantial fees.

Paulson will also manage the portfolio of assets the Treasury buys. We wonder though, where will the expertise come? Does the Treasury Dept. have on hand staff who are versed in RMBS, CMBS, CMOs, CDOs, CDO2, CPDOs? Or will Paulson fall back at his agents at Goldman Sachs or JP Morgan to value these assets? And wasn't that the root of the problem? And by the definition above, Paulson can buy all of those and probably a few other things nobody has heard of yet.

The press keeps bleating about this being a $700B bailout but in fact, it can be much larger. Paulson will be allowed to keep $700B at any one time on his books. So as some paper matures or is sold, he will be able to buy more distressed assets.

Perhaps the most offensive portion of the Paulson proposal is his coronation as Financial Emperor of the World. Nobody, not even the Spanish Inquisition, may ever challenge any decision he makes going forward with this plan.

But the most glaring error in this whole plan - what makes it a complete fantasy - is that he has no authority to force anyone to sell things they do not wish to sell. Will Paulson show bids sufficiently high to attract selling interest? After all, if a bank or other investor has been holding a CDO tranche they believe will be worth at least 40 cents (or perhaps much more), why would they hit Paulson's 10 cent bid when they chose not to hit the same already? And why, if a firm has already written down as unrealized loss or impaired 70,80 or 90% of an asset, would they sell it to Paulson and then lose any upside while turning an unrealized loss into a realized one?

The Paulson plan, just like all prior actions by the Fed, SEC and Treasury Department, is too little, too late, ill conceived and reactionary. As it stands now, it will have limited, if any, positive effect.
No comments yet    22-Sep-2008


Copyright 2004-2011 by Gedanken Experiment (previously Rant Street) except as otherwise noted. Our terms of use are as follows: Content on Gedanken Experiment may not be indexed, cached, reproduced or syndicated in any manner by any party whose purpose is to provide such an index, cache, reproduction or syndication of our content for a monetary fee or other consideration to their clients, customers or users. Content on Gedanken Experiment may not be copied, reproduced, republished, indexed, cached, uploaded, posted , transmitted, framed or distributed in any way, without the prior written permission of Gedanken Experiment, except that a) user may download, display, or print one copy of the materials on any single computer solely for user's use; b) user may briefly quote or excerpt for use in a review or criticism for purposes of illustration or comment or as part of a news report as per fair use guidelines of www.copyright.gov; c) internet search engines which provide the public the ability to search online content at no charge (free) may index and cache content from Gedanken Experiment which is not explicitly blocked by robots.txt; in case (a), (b) and (c) above user agrees to keep intact all copyright, trademark, and other proprietary notices of both Gedanken Experiment and any other third parties mentioned in our content. Modification of the materials or use of the materials for any other purpose is a violation of Gedanken Experiment's, its affiliates', or its third-party information providers' copyrights and other proprietary rights. Nothing contained herein shall be construed as conferring by implication, estoppel, or otherwise, any license or right under any copyright, patent, trademark, or other proprietary interest of Gedanken Experiment, its affiliates, or any third party, except as expressly set forth herein. 02-13-2007

Information provided by Gedanken Experiment, its predecessor Rant Street! and other sources on this Web site is believed to be accurate and reliable when placed on this site, but we cannot guarantee it is accurate or complete or current at all times. Information on this site is for informational purposes only and is not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard.

Gedanken Experiment is not responsible in any manner for direct, indirect, special or consequential damages, however caused, arising out of your use of this Web site and/or any web browser, including any damages you may suffer if you transmit confidential or sensitive information to us or if we communicate such information to you at your request over the Internet.

Archives/Blogroll

RSS/Contact Info

XML: RSS Feed 
XML: Atom Feed 




All materials Copyright 2004-2011 Gedanken Experiment (previously Rant Sreet!) unless otherwise noted. All Rights Reserved. Detailed terms of use at bottom of page.

You may contact Gedanken Experiment by sending email to admin AT gedankenexperiment.dk