Michael Steinberg at Click Broker discusses Paulson’s bailout proposal:
Can Paulson Add $700B Worth of Value to the Mortgage Market?
Courtesy of Michael Steinberg
Treasury Secretary Paulson is asking Congress for another go at unlimited authority – only this time he has acquiesced to a budget of $700B. Paulson claims that the financial system is facing Armageddon if he and his puppet Federal Reserve Chairman Bernanke don’t get their way. They need $700B to liquefy the toxic mortgage market and calm the financial markets.
Let’s look at the dynamic duo’s track record. Instead of calming the markets, their version of moral hazard created such a fright that banks and other financial institutions are virtually shut out of the capital markets. The initial $2 merger stock price Bear Stearns got from JP Morgan (JPM), and the 79.9% solution for American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE) were absolute failures in building confidence. The government got $0 worth of investor confidence for the taxpayer money spent.
The Paulson proposal allows him to hire and fire personnel, enter contracts, designate financial institutions as “agents of the Government”, establish vehicles to purchase assets, and issue regulations at will. Paulson would also be able manage the purchase process, portfolio, and asset sales without restriction. It is simply ridiculous to give this bazooka to someone with such a poor track record.
Hopefully Congress learned something from bazooka round 1. I am sure Congress had no idea that the Administration would stress moral hazard to the detriment of confidence building. The only positive I can say is that Paulson is not trying to stick this toxic waste in my Fannie and Freddie.
The political sticking points appear to be the Democrats insisting that this effort be used to stem the tide of foreclosures, and the Republicans insisting the sanctity of contracts be maintained. Paulson wants to just trade whole mortgages, MBSs and CDOs without any encumbrances.
Beyond liquidity, Paulson doesn’t appear to be adding any value to the mortgage market. He needs to be able to break open the MBS and CDOs to modify delinquent mortgages and make them current. Paulson should follow the lead of Bob Steel, CEO of Wachovia (WB). Steel is aggressively refinancing or modifying Golden West Financial’s Pick-a-Pay (option ARM) mortgages to prepare them for sales. Steel is adding value; Paulson needs to do the same with the toxic waste he acquires.
The clause that I fail to understand is Sec. 8. Review: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Does this clause allow Paulson to crack open MBSs and CDOs to modify mortgages without judicial challenge? Do the Republicans lose their sanctity of contracts or does this simply indemnify and hold Paulson harmless?
If Paulson does not intend to modify mortgages, then he is nothing more than a market maker with the ability hold assets. If the Administration truly wants to add value to the mortgage market, why are they dragging their feet on implementing the $300B FHA guarantee plan? Barney Frank’s FHA mortgage refinance plan was included in Paulson’s bazooka 1.
Disclosure: Author is long AIG, FNM, FRE, JPM and WB.
