The 11 Blunders of Hank Paulson
James Pethokoukis is the money and politics blogger for U.S. News & World Report, where he writes the monthly Capital Commerce magazine column. Pethokoukis is also the assistant managing editor of the magazine’s Money & Business section. A 1989 graduate of Northwestern University where he double majored in Soviet politics and American history and a 1991 graduate of the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! champion.
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The 11 Blunders of Hank Paulson
Strategist Ed Yardeni says that “everything that [Hank] Paulson has done or endorsed has worsened the credit crisis and sent stocks reeling.” Like what, for instance? Like these, and I quote:
(1) Paulson’s Super-SIV proposal was a distraction that went nowhere. It was the first clue that he likes half-backed schemes that are hard to implement.
(2) The vaunted “Teaser Freezer” hasn’t worked. Neither has the Hope Now Alliance. Indeed, many borrowers who’ve been foreclosed never even heard about these new outreach programs to keep them in their homes.
(3) Letting investment banks borrow from the Fed’s discount window just after Bear Stearns failed suggests that letting the firm go was done as a risky gesture to the principle of avoiding moral hazard, which has subsequently been thrown out the window.
(4) The government’s unwillingness to provide transparent rescue plans started with the mysterious $29bn Bear Stearns portfolio acquired by the Fed.
(5) After multiple assurances that Fannie and Freddie were solvent, they were seized and put into conservatorship. Stiffing owners of their preferreds opened an estimated $25bn black hole in the capital of regional banks that owned these securities. It also seized up the one market that financial firms had for raising capital.
(6) Refusing to support the suspension of mark-to-market accounting was Paulson’s second biggest mistake.
(7) His biggest mistake was letting Lehman go under. Dick Fuld should have been forced out, and Lehman should have been rescued. A guy who ran GS and all the MS advisors around him should have known that letting Lehman go under would blow up money market funds and the commercial paper market. It also blew up the prime brokerage business and massacred the hedge fund industry, which sent stock prices into a free fall.
(8) When AIG was seized, the terms of the government’s rescue package were punitive. They’ve been recently eased, but the firm can’t raise funds by selling only 49% of its various non-core assets, as required by its “bailout” deal.
(9) TARP was a really bad idea that was sold to Congress and the public by inciting a panic, and sending the global economy into a tailspin. Claiming that the Treasury could purchase one-of-a-kind troubled assets in reverse auctions made no sense. The RTC solution to the S&L crisis of the early 1990s won’t work to end this crisis.
(10) The Capital Purchase Program of TARP, started on October 14, is providing capital to banks that probably should be forced to fail and to those that don’t even need it. Hopefully, Congress won’t give the second $350bn installment of TARP to the Treasury.
(11) Paulson has been aiming to kill “bad” hedge funds. The result of his disjointed fixes has been a massacre of innocent bystanders, including long-only investors getting killed in all the stocks that hedge funds are being forced to sell.
My take: I think Paulson’s credibility with the financial markets has been exhausted. Now I am not sure what the magic solution was. Maybe some recapitalization of key players plus an Uncle Sam-led home refinancing plan. Or maybe a) suspending mark to market, b) a zero capital gains tax for the next five years, and a corporate income tax holiday. But I will give this to Paulson: He does strike me as a guy who is working himself near death to deal with an amazingly tough problem.
November 18th, 2008 at 12:06 pm
I think he forgot to mention the enormous loopholes in the TARP, e.g.,
Dutch Insurer May Buy Thrift to Get US Bailout Funds
http://www.cnbc.com/id/27780339
November 18th, 2008 at 12:20 pm
Begin liquidation. Depression is inevitable. Sorry everyone.
November 18th, 2008 at 12:38 pm
I chose GoLD instead of cash. I don’t know if that’ll be the right choice or not. Who knows.
November 18th, 2008 at 12:52 pm
jm:
Short term, gold may be as bad and illiquid as anything else if no one has cash to exchange for it. There could be another round of selling by hedge funds and banks in the denouement.
November 18th, 2008 at 12:59 pm
10-4 Mike I realize that. I think the only way out of this though is to print money like never before. The gov’t has to send out thousands of dollars in tax rebates to each person in the US.
November 18th, 2008 at 1:07 pm
The PPT will buy the futures up to try to create a bid. It normally works but this time I think it will not.
November 18th, 2008 at 1:17 pm
How is (6) Suspension of Mark-to-Market accounting transparent in any way? Isn’t that simply allowing banks to say, “We haven’t lost any money because we haven’t sold anything yet.”
November 18th, 2008 at 1:29 pm
“Or maybe a) suspending mark to market, b) a zero capital gains tax for the next five years, and a corporate income tax holiday. ”
Maybe my sarcasm detector is not working, but are you seriously suggesting removing any transparency from banks’ balance sheets, blowing an even huger hole in the federal budget than is already anticipated, and then cut capital gains taxes which will either benefit the wealthy investor class or not benefit anyone because the key word is ‘gains’?
November 18th, 2008 at 2:12 pm
PPT working overtime no doubt. Nas is down over 2% and AAPL is flat. Look at single stocks the PPT doesn’t support and they are way down.
November 18th, 2008 at 3:48 pm
You forgot to mention the shorting ban, although that could be blamed on Cox. Above all, this event chased participants out of the market and shattered confidence. No short covering meant no buyers for a while.
I suspect Paulson’s plan was to kill BSC, LEH and as many other I-banks as possible to leave GS as Last Man Standing with a clear run at future I-banking business. Clearly he had no idea how bad things were going to get.
November 18th, 2008 at 5:44 pm
This *analysis* was almost as bad as the *blunders*.
November 18th, 2008 at 5:58 pm
1. I didn’t know he was finished with his job. Many of us have run our own businesses - we certainly have faced temporary failure in the pursuit of success.
2. Failure presented has not created turmoil in the market place. Paulson or no Paulson, many are surprised the markets are as high as they are at this time
3. Off topic, sort of, Bear Stearns and Arthur Anderson failed for the right reasons. There is no place in business for Obsessed Arrogance - They got what they deserved - anyone who has ever dealt with either knows we are better off with both of them being out of business.
4. If I were Paulson, I would have made the following statements today:
A. I wouldn’t give the automobile companies any money until the employees through their unions cut their wages, health benefits and retirement in half. From the 1970’s the unions have been digging the grave for these companies - Yes 50% reduction in all employment costs - immediately! 25Billion without some solution that severe is pure WELFARE - why can’t anyone say it?
B. If any of you have any suggestions for an immediate replacement of me in my position - call my wife and she’ll pick that person up before this session is over.
C. Finally, I don’t need this!
5. The Accounting Profession is owned by those who pay the bills. “Verified By Independent Auditors”
is and always has been bullshit.
6. There is something “terrible” being withheld from the public that Lehman was involved in. I’m sure they know and I’m sure it will come out down the road.
I could go on with 4 more, but why - believe it or not, he is doing the best job anyone could, if not
please suggest an immediate replacement.
Finally, People who run for congress should have to pass a test before they can run for office - Ignorance Enhanced!
November 18th, 2008 at 7:16 pm
#12 - He only worked himself to “near” death. (yes, I know that’s harsh - BFD)
November 19th, 2008 at 12:15 am
I didn’t any mention of the Paulson-Bernanke connection. Bernanke is getting a free ride? Surely Hank talked to Ben about some of the decisions that Treasury made.