Wednesday, November 12, 2008

Paulson does a re-think

Paulson: bloodied but still fighting
It is easy to be critical of a plan that weaves back and forth changing focus and emphasis. But these are difficult times and flexibility in and of itself is not a bad thing. Hank Paulson made this point with a reference reminiscent of the great economist John Maynard Keynes. Keynes, once was told he was now argung the opposite side of the argument that he previously had taken, he replied, "When the facts change I change my mind, sir. What do you do?"

This response also raises the question of how much HAVE the facts really changed?

There has been no pat answer to the ongoing problems. Treasury Secretary Paulson came to us with the best of the best of the best of Wall Street pedigrees: head of Goldman Sachs. But I must conclude that he has not fulfilled his promise. On the positive side I'll say he is still in there making changes and trying. He has tried to be bi-partisan. His efforts are showing some progress... but they may also have caused confusion and that might have come at the cost of confidence and progress. Moreover, the new direction he is hinting at has dangers in its own right.

A brief on Hank's resume
CHINA -Paulson came into this Administration to replace John Snow. Snow had been ineffectual in dealing with China Paulson was supposed to be skilled in plying the Chinese while at Goldman. As Treasury Secretary, however, his secret powers failed him. He mostly succeeded in getting us to be tolerant of their slow speed of response. He had no real success with China, prompting me at one point to term him, The "Manchurian Candidate.'
Stimulus - Paulson was good in working with Congress and reaching across the aisle. He did help to rebuild a dialog with democrats in an administration that had been very strained in its bipartisan thinking. This talent proved significant when it came time to implement an economic stimulus package.
Crisis: SIV- When the economic crisis broke out Paulson's idea was to form a giant SIV (special investment vehicle) to contain the 'bad' assets. This idea proved unworkable.
Crisis: Fed - When the Fed was shorthanded on its board the Treasury Secretary used a little known rule to add the needed vote at the Fed to get a Fed program in place. Hank is and has been a team player- it is one of this true strengths.
Crisis: TARP - The TARP is his biggest efforts and has been the most controversial so far. In the first place he scared the heck out of us by asking for $700billion with no strings no oversight and no recourse in a joint appearance with Fed chief Bernanke. Eventually that plan was scrapped for something more elaborate with checks and balances. In their initial presentation, Bernanke and Paulson were championing the idea of asset purchases from banks using a 'reverse auction' that is a new and untested vehicle. However, this auction would take a long time to put in place. And, in the aftermath of the Lehman failure, markets unraveled quickly. The Fed began to employ its funds to put capital into banks and was forced to modify an earlier plan to assist the insurance giant AIG. On November 12th Paulson announced that asset purchases no longer were an objective. After frantically trying to line up professionals to execute this plan the treasury is shifting gears again. It is dropping teh idea of bad asset purchasing and looking instead to do something to assist the asset-backed markets that are a source for much of consumer credit. They are also thinking of making future capital injections in firms contingent on that firm getting private funds as well. This is another big change since up to this point capital injections have been made on their own.

Requiring firms that get future capital injections to also have private funds injected means that the new treasury plan switches to being one that picks winners. Up until now Treasury has avoided that as it purposely injected capital in some banks that DID NOT WANT IT when it first began these injections. The idea was to put funds in all institutions so that the receipt of funds did not flag an institution as 'troubled.' Now that the Treasury apparently has 'stabilized all the main institutions, it is more willing to start giving the market signals about who is good. It is not clear if this was the treasury's plan all along. But it may have been. Co-mingling Treasury funds with private funds help the treasury to make its money go farther, sort of like a financial hamburger helper. But when you do this you run the risk of signaling who is good and who is not. Financial markets are not exactly back to normal so there may still be some 'good' firms that will have a hard time obtaining private capital matching funds.

Trying to find the right gear...
While some are worried that the Treasury has been switching gears too often on its plans and that could be making it harder for firms to figure out what to do, at least it is staying flexible. But, on closer look, it seems that the Treasury is simply changing its tactics when it realizes its old tactics are lacking. There is not much evidence that market conditions have changed appreciably calling for a new Treasury response. There is evidence that the treasury's first plan to use reverse auctions was just too new, too untried, and took too long in developing to be effective. Jettisoning that makes sense. It also seems that the Treasury is simply coming to have a different realization about the markets and their needs than that it is reacting to new circumstances. We will have to see if its assistance to the asset backed market really works.


Jason said...

Congress has chosen members of an oversight committee specifically for the Troubled Asset Relief Program. The oversight committee members which lacks the ability to have proper oversight Which is defined as an oversight committee they should be looking for an omission or error due to carelessness, unintentional failure to notice or consider; lack of proper attention and supervision; watchful care. Supervision is a process that allows it to oversee a process during execution or performance; superintend needs to be replaced without regard to political affiliation.


Things cannot be much worse.