Property Grunt

Monday, September 29, 2008

Paulson: "Scott, it's gotta do it and we're going to make this work, and we're going to do what it takes to work,"

What will be left of the economic frontier?

By now we have all heard that that 3 page plan has become a 110 page bill which is set to be voted on today.

The bill's approval is still in question considering that there are parties who are quite resistant which is understandable. So we'll see if this gets through or not.

60 Minutes has done a great piece on the whole bailout which includes an interview with Paulson and Pelosi.

I really recommend watching it when you have the chance because it sheds more light on this situation which include the following.

The economy.

How much jeopardy is the economy in?

"It's a fragile situation, a very fragile situation. There were times, a couple days, last week, and a day this week, when U.S. Treasury bills were trading for well under one percent," Paulson told Pelley.

"People were buying Treasury bills knowing that they would get almost no return. But it was a safe place to stuff their money," Pelley said.

"It is, in some ways, the equivalent of sticking money in your mattress," Paulson said.

It appears that is the only place to protect your cash and who knows how long that will last for.

60 Minutes was with Paulson and his team later in the week as they wrote that first draft to send up to Congress. It ran three pages, and would put him in charge of the largest bailout in American history.

"We've got to get this up to the Hill quickly," Paulson instructed his top advisers in his office that afternoon. "We’ve got to keep it simple, very simple… this is about recapitalizing our banks and financial institutions."

"It was shocking in that the Treasury Department wrote the bill in a way that gave the secretary czar-like powers. And also it had a $700 billion figure, a number that had never been used. And that was pretty shocking," Pelosi told Pelley.

"I want strong oversight and transparency," Paulson explained. "Scott, the last thing in the world I wanted to do was be sitting in this seat and be going up to Congress asking for these kinds of things. It is a terrible position to be in. The only thing worse is the alternative."

The President called Congressional leaders and the two presidential candidates to the White House this past Thursday. Behind closed doors, there was a tense, angry debate over how the bailout would be structured. Republican House members revolted. Speaker Pelosi led Democrats out for a break and Paulson followed.

Asked what happened, Pelosi told Pelley, "We had our conversation."

"I'm given to understand that Secretary Paulson kneeled down on his knees and begged you to move this bill forward," Pelley said.

"No, no, no," Pelosi said.

Asked if that did not happened, Pelosi said, "Well, Secretary Paulson injected a moment of levity into the conversation but…"

"Levity on one knee?" Pelley asked.

"Well, for a thousandth of a second," Pelosi replied.

"There was a lot of tension. And frustration. And I thought we needed a moment of levity. And I wanted to break that tension. There was some shouting going on," Paulson remembered.

"He said, 'Please, please, I beg you. Don't blow this up.' And we said, 'We're not blowing up. It's the Republicans.' To which he said, 'I know. I know,'" Pelosi told Pelley. "Well, for a thousandth of a second," Pelosi replied.

I have heard another version of this story but it do not involve Pelosi, as far as I am concerned, this is canon. Paulson is no idiot and he has gotten toe to toe with some of the biggest and baddest of finance. The fact that he is willing to act in such a self deprecating manner just indicates how scared sh**less he is.

Federal agencies that regulate Wall Street didn't understand, and neither did the companies that rate the quality of investments.

"You're telling me that the credit rating agencies didn't understand these investments?" Pelley asked Altman.

"We had the first instance, at least in my memory, where AAA rated instruments, the highest rating, actually defaulted while rated AAA. Now there's something wrong with that," he replied.

While people wonder what's coming next, many are asking why experts like Paulson didn't see this coming.

"A year ago, last April, you said this, and I'll quote, 'I don't see subprime mortgage market troubles imposing a serious problem. I think it's going to be largely contained.' Why did this seem to take you by surprise?" Pelley asked Secretary Paulson.

"Well, again, hindsight's 20/20. When I came to government, I said, 'You know, we are about due for some kind of market turbulence.' I didn't expect quite this. But I said to the team, as we worked, 'You never know, when there's a lot of dry tinder out there, you never know what spark is gonna light the tinder,'" he replied.

One of the key principles of investment is that if there is a financial product that you do not understand, do not get anywhere near it. This is a rule they obviously ignored.

"The regulators should have been suspicious that something very strange was going on," remarked Joseph Stiglitz, a Nobel Prize winning economist who warned of danger two years ago.

Asked if this was not unforeseeable, Stiglitz told Pelley, "Oh, not only was it foreseeable, it was foreseen. Now, economists aren't very good at predicting the precise date in which the whole thing is gonna unravel. But that it was unsustainable was perfectly clear."

Stiglitz agrees a bailout is necessary, but he doesn't like Paulson's plan, which would have the American taxpayer buying bad debt now held by banks. "His proposal is to take on to American taxpayers the millions of bad mortgages, toxic mortgages that no one in Wall Street wants to take. When they announced that plan, the champagne bottle corks were popping on Wall Street. They finally found the sucker to take off these bad assets. No one in the private sector would touch these toxic mortgages," he explained.

Stiglitz says the "sucker" is the American taxpayer.

You know what I noticed? Nobody panics when things go according to plan. Even if the plan is horrifying. If tomorrow I tell the press that like a gang banger will get shot, or a truckload of soldiers will be blown up, nobody panics, because it's all, part of the plan. But when I say that one little old mayor will die, well then everyone loses their minds!

The Joker

This weekend I saw the Dark Knight again with a friend of mine who works in finance. We were discussing the current economic climate and how it related to the Joker. And we both agreed that what got us into this mess was that everything was going to plan. Everyone was making money and all was right in the world. No one bother to listen to anyone who stated otherwise and gave good reason to watch our backs.

Stiglitz is right. We are the suckers of this whole clusterf**k. However, we know we are the suckers and we know who screwed us over.

"Now some people, [including investor] Warren Buffett and others have argued to me, and said 'Hank, if you do this right the taxpayer could actually make money on that.' We're not saying that because I see this as a risk, depending on how the economy does. I believe the cost to the taxpayer will be far less than what is actually spent to buy these assets," Paulson said.

Still, Paulson understands many Americans are angry that they're being forced to bailout Wall Street recklessness.

"I would be angry too. People are frustrated. They're angry. They're angry at the excesses. They're angry at executive compensation. They're angry at a whole series of things," Paulson said.

"Let me suggest one of the reasons that people are angry,” Pelley said. He read from e-mails uncovered by federal investigators. The e-mails were written by analysts for the credit rating agencies on Wall Street.

One of the e-mails said, “quote, 'It could be structured by cows and we would still rate it.' And this one, this is my personal favorite, one Wall Street analyst to another wrote, quote, 'Let's hope we are all wealthy and retired by the time this house of cards falters.' They were writing these e-mails nearly two years ago. Why are we bailing these people out?" Pelley asked.

"Scott, first of all, that is outrageous behavior. Absolutely outrageous behavior. But what we're doing, right now, Scott, is working to protect the American people. Because a breakdown of our financial system is going to hurt the American taxpayer," Paulson said.

"Once this bailout proposal, as it's called, takes effect, are we out of the woods?" Pelley asked.

"We will have turbulence and turmoil in our financial system for some time, but I believe that this is going to work and it will instill the confidence in our system and the stability we need to allow us to work through this very difficult period and to let the economy continue to function the way it needs to function," Paulson replied.

The finance industry might not have understood what they were doing, but they sure as hell knew it was not going to end well. Paulson better pray to God that this deal works, because alot of people are not going to simply shrug this off. Those empty champagne bottles that were used to celebrate are going to end up being used as molotov cocktails and thrown at these idiots who got us here in the first place.

I honestly hope it does not come to that. Because if the economic situation deteriorates to that point, that is when people cry out for someone to take control of the situation.

You crossed the line first, sir. You squeezed them, you hammered them to the point of desperation. And in their desperation they turned to a man they didn't fully understand.

Alfred Pennyworth

What would be truly frightening if the people embrace someone that they do not fully understand until it is too late.