Relevant and even prescient commentary on news, politics and the economy.

Hank Paulson and Some Animals Are More Equal than Others

byMike Kimel

Barry Ritholtz points us to a Bloomberg article showing, once again, that when it came to measures to prop up the economy in 2008, some animals are more equal than others:

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.

The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.

There’s no evidence that they did so after the meeting; tracking firm-specific short stock sales isn’t possible using public documents.

And law professors say that Paulson himself broke no law by disclosing what amounted to inside information.

The article goes on:

At the time Paulson privately addressed the fund managers at Eton Park, he had given the market some positive signals — and the GSEs’ shares were rallying, with Fannie Mae’s nearly doubling in four days.

William Black, associate professor of economics and law at the University of Missouri-Kansas City, can’t understand why Paulson felt impelled to share the Treasury Department’s plan with the fund managers.

“You just never ever do that as a government regulator — transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”

Janet Tavakoli, founder of Chicago-based financial consulting firm Tavakoli Structured Finance Inc., says the meeting fits a pattern.

“What is this but crony capitalism?” she asks. “Most people have had their fill of it.”

The Bloomberg article is worth reading in its entirety.

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I Agree with Hank Paulson, not Paul Krugman

Ken Houghton notes that no one has stolen my ID or shifted my sense of politics or the economy.

Brad DeLong has been running excerpts from the February 2009 Vanity Fair “Oral History” of the Bush White House. Time and priorities being what they are, I didn’t get a chance to read the whole piece until today—coincidentally, right after Paul Krugman said that Larry Summers

“is right” in his assessment that the sense of the economy falling of the table was likely ending.

Now, Krugman went on to qualify this, in the same manner, though with less clear terms, as he did on his blog last Wednesday:

Many will herald this as the end of our problems. But they’ll be wrong, for reasons I laid out during an earlier false dawn, back in early 2002 (the unemployment rate continued to rise for more than a year after that point)….[long, well worth reading but not anywhere close to excerptable for “fair use” example omitted]… I wanted to include a graph to go with this post, illustrating what happened in 2002. And guess what: that surge in output in early 2002 has been revised out of existence.

So Krugman may believe that this is a “false dawn,” but affirms that the worst is probably over.

Contrast that with Hank Paulson’s comment in the Vanity Fair piece:

This’ll be the longest we’ve gone in recent history without there being turmoil, and given all the innovation in the private pools of capital and the over-the-counter derivatives and the excesses around the world, we figured that when there was turmoil, and these things were tested for the first time by stress, it would be more significant than anything else.

I said at the time, I have a concern that every rally we’re going to have in the financial markets will be a false rally until we break the back of the price correction in real estate. And these things are never over until you have a couple of institutions go that surprise everyone. Bear Stearns can hardly be a shock.

But having said that, it’s one thing to see it intellectually and it’s another to see where we are.[italics mine]

The “couple of institutions” to “go” still hasn’t happened.

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I’d like to refinance, please.

In one of the stupidest wastes of Treasury monies this month—a major accomplishment, though AIG hasn’t hit the trough again yet, so there might be hope—the Treasury wants to subsidize new mortgages (link to CR):

Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. [amazement, not to mention emphasis, mine]

This will, of course, address the underlying problem perfectly:

Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.

It’s Deborah Solomon, so we expect lies and deception. So let’s fix that last sentence:

Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners having already provided ridiculous amounts of money to the lenders.

There. Much better.

*Someone please break the news to the Ed Leamers of the world that those are tax dollars that are being used as “monetary policy,” which will be just as much of a liability to future generations as his “fear of public goods spending,” except that we get a boost to profits when we build public goods. Good thing he’s not an economist or…never mind.

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Felix Salmon Explains It All to You

Ken Houghton

There does indeed seem to have been a visible change in Treasury policy since the election. Until that point, it cared a little about optics. Now, it’s giving monster bailouts to the likes of AIG and American Express; it’s dragging its feet on homeowner relief; and in general Hank Paulson’s Wall Street buddies seem to be getting much better access than anybody in Detroit. And no one’s even trying very hard to defend these actions in public: they know they’ll be out of a job in January anyway, so they’re just doing what they want to do and what they feel is right, without caring much whether anybody else agrees with them.

Background at this link.

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"A Man With a Briefcase Can Steal More Money than any Man with a Gun"

Ken Houghton

I would prefer not to talk about AIG, especially since we already have two posts on it today: Robert brilliantly puts it into context, while DOLB goes for blood.

But the Gorgeous, Brilliant, and Talented BessNormally-not-this-astute-or-succinct Equity Private posted the perfect summary.

And Floyd Norris is on fire as to why this move, with the pathetic, lying excuse for corporate leadership the company now has, makes anyone taking out the perpetrators guilty of nothing more than Justifiable Homicide (not that I’m suggesting that; far from it*).

Clearly, the kleptocrats at the White House and Department of the Treasury are making certain that their lamest two months and ten days make the previous eight years appear to be the epitome of frugality.

*I’m thinking of something longer and slower, like public stockades.

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