Tuesday, November 18, 2008

Treasury Secretary's NYT Op-Ed annotated

In Case You Missed It:
“Fighting the Financial Crisis, One Challenge at a Time”

Annotations in BOLD added by me

By Secretary Henry M. Paulson, Jr.
The New York Times
November 18, 2008

We are going through a financial crisis more severe and unpredictable than any in our lifetimes (assuming you don’t count the fact that it was CAUSED in large part by our own neglect) . We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and the American International Group. Each of these failures would be tremendously consequential in its own right. But we faced them in succession, as our financial system seized up and severely damaged the economy.

By September, the government faced a systemwide crisis. After months of making the most of the authority we already had, we asked Congress for a comprehensive rescue package (with no strings attached no oversight and no review a request so ridiculous it scared the Heck out of financial markets) so we could stabilize our financial system and minimize further damage to our economy.

By the time the legislation had passed on Oct. 3, (and after our request itself scared the beejeebers out of markets…) the global market crisis was so broad and so severe that we needed to move quickly and take powerful steps to stabilize our financial system and to get credit flowing again. Our initial intent was to strengthen the banking system by purchasing illiquid mortgages and mortgage-related securities (...after saying that housing was the real problem). But the severity and magnitude of the situation had worsened to such an extent that an asset purchase program would not be effective enough, quickly enough (…well it was far too slow, it was experimental and the wheels were coming off the wagon so we reacted to the news on the ground we had helped to create) . Therefore, exercising the authority granted by Congress in this legislation, we quickly deployed a $250 billion capital injection program (...that we had never before mentioned or endorsed, but that followed on the heels of a plan the Brits seemed to be using with some success), fully anticipating we would follow that with a program for buying troubled assets ( WINK,WINK).

There is no playbook for responding to turmoil we have never faced (..and when it comes to thinking outside the box hey I’m only from Wall Street. If you can’t solve it with more leverage or de-regulation, count ME OUT!). We adjusted our strategy to reflect the facts of a severe market crisis, always keeping focused on our goal: to stabilize a financial system (.. or housing?) that is integral to the everyday lives of all Americans. By mid-October, our actions, in combination with the Federal Deposit Insurance Corporation's guarantee of certain debt issued by financial institutions, helped us to accomplish the first major priority, which was to immediately stabilize the financial system. (Thats’ why banks are lending again, the housing market is recovering…oh, wait it isn’t? Geeze, rats…)

As we assessed how best to use the remaining money for the Troubled Asset Relief Program, we carefully considered the uncertainties around the deteriorating economic situation in the United States and globally (...and we decided to BAIL. That’s right we FREEZE our actions for now declare victory Iraq> and plan to DUMP the whole schmear in Obama’s lap) . The latest economic reports underscore the challenges we are facing. The gross domestic product for the third quarter (which ended Sept. 30, three days before the bill passed) shrank by 0.3 percent. The unemployment rate rose in October to a level not seen since the mid-1990s. Home prices in 10 major cities have fallen 18 percent over the previous year. Auto sales numbers plummeted in October and were more than a third lower than one year ago. The slowing of European economies has been even more drastic (Huh? The slowing in Europe is weaker than a drop of 33%?) .

I have always said that the decline in the housing market is at the root of the economic downturn and our financial market stress (..and that is why I am bailing out the banks, that are buying other banks, not lending at anything but high rates to the best possible borrowers!). And the economy, as it slows further, threatens to prolong this decline, as well as the stress on our financial institutions and financial markets.

A troubled-asset purchase program, to be effective, would require a huge commitment of money (…you call it a TARP but we realize it’s a TRAP so we are freezing it!). In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum, in a worse economy, simply isn't enough firepower.

If we have learned anything throughout this year (…and that is doubtful…), we have learned that this financial crisis is unpredictable and difficult to counteract (DUH!?). We decided it was prudent to reserve our TARP money, maintaining not only our flexibility, but also that of the next administration (Freezing it and doing nothing makes us VERY flexible since now we can do nothing is so many ways…).

The current $250 billion capital purchase program is strong medicine for our financial institutions. More capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is essential to increasing lending, which is vital to economic recovery (…even if they don’t do it).

Recently I've been asked two questions. First, Congress gave you the authority you requested, and the economy has only become worse. What went wrong? Second, if housing and mortgages are at the root of our economic difficulties, why aren't you addressing those problems?

The answer to the first question is that the purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties (…we pursued this goal despite our repeated statements that the housing market is the problem so not fixing housing has been a clever plan of ours to stop the contagion fro housing as it gets worse since we are clueless about what to actually do to help housing..) . The crisis in our financial system had already spilled over into the overall economy. But recovery will happen much, much faster than it would have had we not used TARP to stabilize our system. If Congress had not given us the authority for TARP and the capital purchase program and our financial system had continued to shut down, our economic situation would be far worse today.

The answer to the second question is that more access to lower-cost mortgage lending is the No. 1 thing we can do to slow the decline in the housing market and reduce the number of foreclosures (..and our plan is not achieving that goal at all) . Together with our bank capital program, the moves we have made to stabilize and strengthen Fannie Mae and Freddie Mac, and through them to increase the flow of mortgage credit, will promote mortgage lending ( eventually…). We are also working with the Department of Housing and Urban Development, the F.D.I.C. and others to reduce preventable foreclosures (at long last).

I am very proud of the decisive actions by the Treasury Department, the Federal Reserve and the F.D.I.C. to stabilize our financial system (..even though they have been see-saw and last minute and have not worked) . We have done what was necessary as facts and conditions in the market and economy have changed (or have been changed by us and our indecision…) , adjusting our strategy to most effectively address the crisis (after we worsened it, for example by letting Lehman go down) . We have preserved the flexibility of President-elect Barack Obama and the new secretary of the Treasury to address the challenges in the economy and capital markets they will face ( by backing out and increasing the probability that things get even worse by the time he gets here…) .

As policymakers face the difficult challenges ahead, they will begin with two considerable advantages: a significantly more stable banking system, one where the failure of a major bank is no longer a pressing concern (probably) ; and the (scratch ’the’ replace with ‘some’…) resources, authority and potential programs available to deal with the future capital and liquidity needs of credit providers (and nearly nothing done for homeowners where prices STILL decline and foreclosures set new records – but don’t worry! The White House is paid for!) .

Deploying these new tools and programs to restore our financial institutions, financial markets and the flow of lending and credit will determine, to a large extent, the speed and trajectory of our economic recovery. I am confident of success, because our economy is flexible and resilient, rooted in the entrepreneurial spirit and productivity of the American people (…so we admit our cluelessness and end the TARP here, taking a risk that nothing will blow up in the next two months and hope that the new administration has a better idea than we did how to fix this thing).

1 comment:


The situation gets worse and worse.