We’re getting notes from Wall Street folks on the Paulson-Bernanke performance this morning, some of which we’ve excerpted below. Please send us your thoughts ([email protected]), and we’ll add. Or just add directly in comments.
Bernanke and Paulson Are Full Of It
B/P are basically trying to inject a ton of capital into the banking sector to get credit flowing ASAP. In their view, any modification (such as “contigent equity”) would limit the scope or speed of the intervention.
What annoyed me is that B/P weren’t candid. Privately, I suspect B/P would admit:
* We expect to overpay for assets. That’s the whole point.
* If we don’t overpay for assets, banks will have less capital, credit conditions will be tighter, and the economy will be slower to recover. The lost output is a deadweight loss that has to be measured against the direct cost of our plan to taxpayers.
*The direct cost of our plan will be enormous, but we think the benefits to the economy will outweigh the fiscal cost.
* We don’t give a shit about small, regional banks. We have a system to deal with their failure. It’s the big banks that have caused the financial system to seize and our primay goal is to free up capital for the big banks.
* Our plan is horribly unfair; it bails out stockholders and bondholders who should properly bear the costs of the bad bets they made. But this is a situation where principle should give way to prudence: it’s not worth enduring a much deeper recession in order to treat stockholders and bondholders fairly.
Are B/P correct? Perhaps over a 5-year timeframe. I’m not at all convinced B/P are right from a long-term perpective. Given considerations of moral hazard, other issues of precedent, and the effect on the federal debt, it’s hard to like the B/P plan.
Paulson Speaks, Says Nothing
I watched Paulson “testify” for about 20 minutes earlier, hemming and hawing. No straight-forward answer to anything, just generalities and evasions.
While he’s obviously tired, one would think that they would have handed him a decent set of talking points to refer back to. That his banker buddies would have prepped him with something plausible (even if false) to say.
But… nothing. There is no there there. I’m not sure why/if he really believes that this needs to be done. So far, after the (unprecedented) guarantees for the Money Market accounts were put in place (without any of the proposed bail-out legislation), nothing else has seized up.
Goldman and Morgan have already asked for and received implicit unlimited Fed liquidity protection with their move to becoming “normal banks” in one day… and the other banks all presumably had access to the discount window from the Fed already…
So what gives? Are they really going to be able to scare the politicians into submission to this sleight-of-hand? The more I hear from Paulson/Bernanke/Bush, the less credible it all becomes.
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