Wednesday, November 12, 2008

Gov't Won't Buy Bad Mortgage Debt

An interesting endeavor it has been to watch the slow disintegration of the US economy. Trouble in the housing markets was just the beginning; the proverbial straw that broke the camel’s back, if you will. This giant mess has been accumulating for thirty-some odd years. The turmoil has now bubbled over from housing to credit crisis to credit collapse. Lack of access to credit is exposing weakness in the markets, and in a big way.

The Big 3 of the Auto Industry are now asking the government for money - threatening they will each fail otherwise. This is a result of, and on top of, the perfect storm that has hit consumers and businesses driving up the overall cost of credit.

Meanwhile, the Fed’s been throwing money around trying to keep the economy chugging along. But in their haste, the Fed & Treasury haven't been very open about where the money is going. This has resulted in Bloomberg News filing a Freedom of Information Act lawsuit in recent days against the Fed. This action was meant to force the Fed (Ben Bernanke, Federal Reserve Chairman), and the Treasury, to disclose which troubled assets the government has already purchased with the $700 billion in taxpayer money they are currently partially controlling (Congress hasn’t released the other portion yet). Perhaps moved forward by the lawsuit, today Treasury Secretary, Hank Paulson held a news conference to present the US with a market update.

Just a few short weeks ago, the Treasury Secretary, Federal Reserve Chairman and the President (Bush) told us (the American public) that the government would be using seven hundred billion of our hard earned tax dollars for the purpose of buying up “troubled” assets to fix the financial markets as they were near collapse. They told us we would eventually get our money back over time via their program. Then they developed the TARP (Troubled Asset Relief Program) to purchase the assets.

Despite the plan outlined to Congress, what Hank really did was take a portion of the $700 billion of “Troubled Asset Relief Program” money and handed it over to banks for recapitalization. The Treasury hasn't bothered to tell us if they’ve received assets in return (securities) from the banks they’ve funded. According to Hank, after he gave the banks some moola, he "encouraged" lending. The banks didn’t lend. The banks are simply keeping the money. They’re still having problems with those bad investments (that the government has not purchased) and are hanging onto the cash in the coffers incase they might need it later. So now Mr. Paulson tells us the whole plan to buy assets is not going to work.

As mentioned earlier, the government has used some of the money, therefore Bloomberg filed suite to find out which assets the government is now holding. We suspect the news conference was a direct result of Bloomberg's pressure. Of course, Paulson was asked about this minor point. His answer - astounding. Mr. Paulson basically said the plan would become transparent just as soon as he got done writing it! Bwahahahahahahaha! Surely Bloomberg, along with the rest of the leveraged financial community is pretty serious about gaining access to the special pricing formulas the Big Boyz’ are using to price illiquid assets, considering the assets in question are not being priced on the open markets (because, uh, nobody is buying them).

After announcing that taxpayer money will not be used to purchase troubled asset securities as the acronym TARP suggests, the Treasury Secretary outlined his plan B. Rather than purchasing "toxic debt," money will be redirected toward bank recapitalization efforts, which has already begun at Mr. Paulson’s choice.

Paulson boldly asserted he would make no apology for shifting plans when asked why the structure drifted so far from the design presented to Congress. He simply answered that the financial landscape had changed over the last several weeks, and stressed matters would have been worse had he not shifted as the markets dictated.

Somewhat glossed over early on, Mr. Paulson mentioned that banks continue to hold a “significant” amount of illiquid assets.

The bailout is truly a giant mess. Yet this is exactly what a nation that puts the fox in charge of the henhouse should come to expect. Between his job with President Nixon to the boardrooms of Goldman Sachs, Mr. Paulson is well versed in confusion creation and its self-serving mitigation.

The man just told the American public and Congress to shove it. He is taking the reigns as he sees best fit. So, this week TARP is dead. Bait. Switch. Officially, per Mr. Paulson we are now moving to a bank and non-bank (whomever is vital for providing credit) recapitalization plan.

The markets screamed displeasure with Paulson's new direction. Since Paulson's gone rogue, we are now playing a "wait and see" game. What will the Masters of the Universe come up with next??? At any rate, within a few more weeks all this will probably have changed again. Interesting developments may come from the G-20 which begins in a few short days.

Update: Angry Bear has an Excellent Article, Paulson Reverses Course.

1 comment:

Jason said...

Once again Congress has failed to use its congressional oversight to protect the American people.

"Fool me once
Shame on you
Fool me twice
Shame on me."
--Chinese Proverb