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 Treasury Secretary Henry Paulson was trying to strong-arm the supposedly free markets again last week, this time catching headlines for his fronting of the government’s proposal to temporarily freeze interest rates on some troubled subprime mortgages. You have to give Mr. Paulson credit for having the bluster to constantly make media appearances – first to dispel contagion fears, then to announce that he was helping banks set-up an SIV bailout, and now to provide an update on his subprime bailout plans. At the same time, you have to give the media very little credit* for questioning both his tactics and his apparent lack of results. Of course juggling two Treasury coordinated bailouts at the same time is no simple task. Most immediately there are the tactical concerns associated with directing Citigroup representatives to the right conference room – we can only imagine the reception desk querying new arrivals as if they were diners at a low-end stake-house: ‘are you here for the SIV or subprime bailout?’
Needless to say, the appropriateness of his entire interventionist mentality bears scrutiny. Longer-term neither of the planned Paulson-led bailouts are likely to provide the cure for financial market sea-sickness. Instead, recall that while the bailout of LTCM may have momentarily averted disaster, it also permitted the embers of uncertainty to smolder. Nothing Mr. Paulson or anyone else is discussing begins to even remotely deal with financial markets that are ridiculously overleveraged, under-regulated, and in desperate need of increased transparency. At best, Paulson’s plans - a la LTCM - to quarantine the carnage and give financial market participants a feeling of false hope. This is something to think about when Paulson next meets with the applicably coined ‘Hope Now alliance’.
Paulson Has Been Eating His Spinach
Paulson entered the month of November pressuring the White House to help out the mortgage industry and trying to put the final touches on the SIV superfund. Incidentally, the argument has been made that Paulson was/is concerned that many average Americans are losing their homes (something that has been happening all-year!). However, that Paulson’s bailout timetable shortens only as his Wall Street buddies start to come under more pressure gives the impression of more than coincidence.
Regardless of his objectives, Bloomberg noted in late October, ‘Paulson has used contacts from three decades on Wall Street to prod the nation's largest banks to avoid a fire-sale of $320 billion in assets held by SIVs.’ Seemingly a junkie for pressure, Paulson contended shortly thereafter that “It will be more valuable if it's [the SIV fund] up and running sooner. It will take a while, but it should be done by the end of the year.” [bold added] With these extremely timely expectations in place, the sheer amount of issues Paulson took the time to touch on in the month November was mind-boggling – almost superhuman. Below is a brief recap of his high energy high jinks.
November 8: Paulson fields the question of a slumping dollar with: “the U.S. has a very competitive, strong economy that's proven itself over many years.”
November 9: Paulson finds more time to talk about the dollar: “The dollar has been the world's reserve currency since World War II and there's a reason. I put the U.S. economy up against any in the world in terms of competitiveness…a strong dollar is in our nation's interest.”
November 9: During remarks at the China Institute in New York Paulson said ‘We [the U.S.] do not fear an economically stronger and more competitive China…’ This statement was made in an attempt to dull Paulson’s October 20 call for the IMF to look more closely at the intentions of sovereign wealth funds (SWF). Paulson concluded with the party line: China’s exchange rate is “viewed by many countries as a source of unfair competition” and that “China needs more flexible prices, including a much more flexible, market-driven exchange rate.”
November 10: During a meeting with reporters Paulson reiterated that the SIV rescue fund should be in operation by year’s end, adding that “The market forces are working.”
November 13: Paulson goes to Africa for G-20.
November 16: With dollar decline recently accelerating, Paulson tells reporters, “I believe that we are going to continue to grow and that our economy is going to continue to grow. Its fundamental, long-term strengths will be reflected in currency markets.” During a South African radio interview (picked-up by Dow Jones), Paulson adds “We have very much a strong dollar policy; that's in our nation's interests”. Finally, while pressed by reporters on the dollar an irritated Paulson responded with “What I said yesterday was a strong dollar is in our nation's interest…You heard the part about being reflected in currency markets, right?...I think I have been very, very consistent on a strong dollar and I'll leave it at that”.
November 19-20: After a tour of Thandi Wines, Paulson releases a long statement before preparing to Tour the Ghana Stock Exchange Trading Floor and ring the opening bell. The statement vaguely highlighted his dual bailout affront: “…we are working to avoid preventable foreclosures and promote orderly markets.” Paulson’s 6-day trip to Africa is book-ended by yet another “strong dollar is in our nation's interest and our economy like any other has its ups and downs”.
November 21: Talking with the Wall Street Journal about the issue of subprime Paulson says, “The nature of the problem [foreclosures] will be significantly bigger next year because 2006 (mortgages) had lower underwriting standards, no amortization and no down payments.”
November 29/30: Paulson and other government officials meet with mortgage industry officials to try and outline the details of the mortgage bailout program. Paulson’s ‘optimism’ stokes speculation that a deal may be finalized within a week. Paulson notes that “This is not a government subsidy that we're talking about here. This is something that the industry will do where it makes sense."
But Is The Spinach Missing An Ingredient?
Mr. Paulson severely underestimated how serious the subprime/credit crunch would be earlier this year, and his actions since coming to grips with the ominous realities of growing foreclosures, global bank runs, Wall Street blow-ups, and widening credit market tightness have been disjointed, to say the least. To be completely frank, all Mr. Paulson has established is that he likes doing interviews! During these interviews Paulson relishes discussing SIV bailouts, subprime bailouts, the non-death of USD hegemony, and the potentially ‘political’ actions of SWEs. However, what he doesn’t do, at least not yet, is sail his optimistic platforms into practical policy vehicles. The word ‘adrift’ comes to mind.
Our suggestion is to slow it down Popeye-Paulson! In order for this to be accomplished perhaps someone needs to spike Paulson’s spinach with Ritalin. This would help Paulson focus on the issue that is most pressing and/or a problem that can be temporarily fixed. Remember that the ultimate goal in bailout land, ala Greenspan**, is to act decisively, rinse, and repeat, not to hype multiple bailout initiatives before they come to pass like Paulson has been doing.
Will Popeye-Paulson arrive in time to save the day? Perhaps. Perhaps also it is worth remembering that Popeye, while extremely powerful, was essentially a rowdy love struck sailor.
* Bloomberg is one notable outlet that has questioned Paulson’s actions/motives in recent weeks. Unfortunately the chatty Paulson does not comment on his employment record at Goldman Sachs.
** Of course we are not suggesting that any of Greenspan’s policies as Fed boss improved the long-term health of the U.S. markets (they didn’t!), only that his record of bailing the markets out of trouble was uncanny and superhero like.
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