Blog on the Run: Reloaded

Tuesday, June 9, 2009 9:20 pm

Well, if, by “national hero,” you mean “self-dealing jerkwad who got us into this mess in the first place” … and, by the way, does your mom know you’re smoking all that crack?


There actually is someone in the world, a guy named Evan Newmark at the Wall Street Journal, who considers former Treasury Secretary Hank Paulson a national hero who has saved the economy.

I’ll wait a minute while you stop laughing.

OK. No, really:

I said it last October and I’m sticking by it. And now, there’s actual evidence to back me up. The TARP bailout worked. The Wall Street crisis is over.

At least, the market thinks so. At around 30, the VIX, the market’s volatility barometer, is trading at less than half the average level of last autumn. A share of Morgan Stanley is trading more than 400% higher than its October low.

And by this coming Sept. 15, the first anniversary of the fall of Lehman Brothers, five of the original eight TARP banks will have repaid the American taxpayer $50 billion plus interest.

Don’t get me wrong. The economy is still in crummy shape. But, at least it’s functioning. Not too long ago, we fretted over TARP banks collapsing. Now, we worry about getting full value for our warrants in the same banks.

In an excellent piece published today, my WSJ colleague Peter Eavis grumbles about the measly 5.6% returns earned by taxpayers off their investment in the top 16 TARP banks.

But Paulson’s intent for TARP wasn’t just to make money for the taxpayer. It was to stabilize the credit markets and save the banks at the lowest possible cost.

And that’s exactly what TARP has done. Who can doubt the amazing recovery of the credit markets? The best performing asset class so far in 2009 has been distressed debt, up by nearly 40%.

And the banking system? Investors are now throwing money at it. In May, $85 billion of fresh capital was raised by TARP banks. Bank of America alone has raised $33 billion in capital since the start of the year. …

Of course, everybody in Washington and on Wall Street, got all excited when Obama came to town. The collective wisdom was that both Paulson and his TARP were failures. And the incoming Treasury Secretary duly promised all sorts of new-fangled programs like the PPIP.

But what did Geithner end up doing?

Basically, what Paulson had done before. The TARP. Yes, the Treasury dressed the TARP up with the rigor of the “stress tests,” but at its core Geithner’s primary policy is the TARP.

Nothing wrong with that. If something works, it works. Just give credit where it’s due. And that would be with Hank Paulson, national hero.

Good God, where to start. Well, how ’bout with this: The fact that Geithner is doing the same thing Paulson is doing does not automatically mean that what Paulson was doing was right.

Second, the banks in general are not nearly as healthy as has been reported; they simply were able to game the system to make it look that way:

Analysts who have examined the quarterly profits and government tests say that accounting rule changes and rosy assumptions are making the institutions look healthier than they are.The government probably wants to win time for the banks, keeping them alive as they struggle to earn their way out of the mess, says economist Joseph Stiglitz of Columbia University in New York. The danger is that weak banks will remain reluctant to lend, hobbling President Barack Obama’s efforts to pull the economy out of recession.

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

(Then there’s the strong possibility that we could be seeing a new wave of residential foreclosures later this year when another big round of ARMS resets. And that doesn’t even get into the commercial real-estate market, which no one even seems to be talking about.)

Third, we knew even at the time that the stress tests were nowhere near as rigorous as they needed to be. They presumed, for one thing, a worst-case unemployment scenario in 2009 of 8.4 percent. And what was May’s unemployment figure? 9.4 percent. Whoops!

Fourth, yeah, banks are able to raise capital now, but only because investors are confident that if the banks run into any more trouble the feds will just bail them out again instead of nationalizing them, fixing them and selling them off again like they should. (Also, there’s reason to believe that at least in the specific case of Bank of America, that raising of capital wasn’t necessarily completely clean, although I’ll grant I’m not sure how relevant that is to the larger issue.)

Fifth, there’s the role of Paulson himself. Take it away, Matt Taibbi:

Exactly what part of Paulson’s record is heroic, Evan? The part where he called up SEC director William Donaldson in 2004 and quietly arranged to get the state to drop capital requirements for the country’s top five investment banks? … After that, it was party time! Bear Stearns in just a few years had a debt-to-equity ration of 33-1! Lehman’s went to 32-1. By an amazing coincidence, both of these companies exploded just a few years after that meeting, and all of the rest of us, Evan, ended up footing the bill, thanks to a state-sponsored rescue of Bear and a much larger massive bailout of Wall Street in general, necessitated in large part by the damage caused by the chaos surrounding Lehman’s collapse.

Meanwhile your own Goldman, Sachs ended up with a 22:1 debt-to-equity ratio a few years following that meeting, a number that would have been much higher if one didn’t count the hedges Goldman bought through a company called AIG. Thanks in large part to Paulson’s leadership in his last years as head of Goldman, the company was so massively over-leveraged that it would have gone under if AIG — which owed Goldman billions when it went into its death spiral last September — had been allowed to collapse. But thanks to Hank Paulson, who heroically stepped in and gave AIG $80 billion the same weekend he allowed one of Goldman’s last key competitors, Lehman, to collapse, Goldman didn’t have to go without that money; $13 billion of the AIG bailout went straight to Goldman. So I guess we have Paulson to thank for the fact that he used about $13 billion of our taxpayer money to essentially bail out his own [screw]ups. …

Maybe it was the way Paulson pronounced the subprime fallout “contained” in 2007 and called the economy the “strongest in decades?” Or maybe it was the way he remained calm last July, saying that it was a “very manageable situation” and “our regulators are on top of it?” Remember how he said all that [stuff], Evan, just about six weeks before the world exploded? Remember that Henry Paulson was actually in charge of regulating the financial environment during the last years of the crisis and did nothing as his buddies on Wall Street built one gigantic mountain of leverage after another, gashing underwriting standards across the board, saddling the country with a generation of toxic assets that all of the rest of us will be paying for in taxes (instead of, for instance, a health care program, which we can now no longer afford) for the next fifty … years? Do you remember that part? …

Maybe it was that. Or maybe it was the way Paulson got a $200 million tax deferral thanks to an obscure rule that allows executives who join the government to defer taxes on their holdings. That means that not only did Paulson use billions of our money to bail out his own mistakes, he managed to use a loophole to get out of paying his fair share of that same bailout.

Even if it weren’t about five years too early to make any kind of judgment at all about whether or not TARP helped, the notion that Henry Paulson is a hero is complete and utter madness because TARP would never have been necessary if someone, anyone, who wasn’t a greed-addled incompetent like Paulson had actually been regulating the economy in the last years of the Bush adminstration.

I understand that the WSJ op-ed pages and blogs are dedicated to propagating a wide variety of opinions (ahem). But is it asking too much that those opinions at least be based on facts that apply in this dimension?

Apparently so.

UPDATE: Taxpayers, the banks’ TARP repayments may well mean just another screwing:

Through cheap loans, debt guarantees and a promise that big banks will not be allowed to fail, these officials say the government has created an artificial environment in which profits and stock prices have rebounded, helping banks in recent weeks to raise about $50 billion from private investors.

The money allows the strongest banks to return federal aid provided at the peak of the fall financial crisis, but few banks have expressed eagerness for the government to end the other forms of support, creating concern that these programs will be habit-forming and more difficult to terminate.

As a result, independent experts warn that the government’s relationship with the industry is entering a precarious new phase. As with mortgage giants Fannie Mae and Freddie Mac, the government will no longer share in the banks’ profits, but it still stands ready to absorb losses.

“It’s good from an individual investor point of view, it’s great for the banks, but from a system point of view it’s very dangerous,” said Simon Johnson, a Massachusetts Institute of Technology professor and former chief economist at the International Monetary Fund.

See, the thing is, despite Paulson’s, um, heroism (and Newmark’s sycophancy), we’re still vulnerable if we don’t fix the things that got us here in the first place:

We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. But wishing for improvement and managing by the Dow’s swings are a fool’s game. …

The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse. …

Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed.

Instead of hauling out the new drywall to cover up the existing studs, let’s seriously consider ripping down the entire structure, dynamiting the foundation and building a new system that rewards taking prudent risks, allocates capital where it is needed, allows all investors to get accurate and timely financial information and increases value to shareholders and creditors.

Problem is, the Tim Geithners of the world are what got us here in the first place. And Barack Obama is what got Geithner here in the first place.

1 Comment »

  1. [...] Second wave Filed under: We're so screwed — Lex @ 8:35 pm Tags: commercial real estate You know the growing problems in the commercial real-estate market — the ones I said earlier that no one seems to be talking about? [...]

    Pingback by Second wave « Blog on the Run: Reloaded — Thursday, July 23, 2009 8:38 pm @ 8:38 pm | Reply


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