Or at least that’s what used to be said.
Today, the phrase is more like, “When Hank Paulson talks, the market listens!”
Hank Paulson went to Capitol Hill to give an update on how he’s been spending the TARP money. The market went from a down day, to one of those that gets posted on the top end of the history charts. Unfortunately, this is something we’ve become accustomed to when Paulson speaks.
What did Paulson tell Congress?
- We didn’t know what we were doing.
- We don’t know what we’re doing now.
- We aren’t sure what we’ll do in the future.
- Trust me, I’m spending the money well!
You doubt me?
Remember when it was “urgent” that we get a bailout bill? So urgent that a mere 10 pages, double spaced, was enough for Paulson to get $700 billion? At that time Paulson was urging passage of the bill so that he could go out and buy toxic debt, CDOs. Remember all the questions about how the $700 billion was arrived at and Paulson’s kind of answer that it was 5% of outstanding debt? Geez, as late as October 24th, Dana Perino was making excuses for why Paulson hadn’t implemented his CDO buyout with, “it’s complicated.” Yeah, well, that was then:
"Over these past weeks we have continued to examine the relative benefits of purchasing illiquid mortgage-related assets," Paulson said in a speech today. "Our assessment at this time is that this is not the most effective way to use TARP [Troubled Asset Relief Program] funds."
Instead of doing what he said he was going to do with the money, Paulson decided that direct infusions of capital into financial institutions was the way to go. Paulson has been purchasing non voting stock or warrants for stock in various financial institutions. Even though some have questioned whether the Treasury has been getting good value for their investments, Paulson has continued…up until now.
After about $200 billion and about six weeks, Paulson has figured out, along with the Congressional buffoons, that if you put money into entities with “no strings attached,” that those entities will use the funds in their own best interests. Funny thing is that the entity’s “best interest” hasn’t been aligning with what Congress and Paulson have thought the “best interest” was. This has made Congress mad (I don’t know why. After all, they were the ones that wrote the bill that was specifically vague in what Paulson could do with the money. If they didn’t care enough to put the time in to provide some guidance, why are they surprised when the actions are following to a “T” their lack of direction!) and has put just a hint of yolk on Paulson’s face.
In his written report and verbal comments, Paulson now wants to try a third path. Paulson now believes that Treasury should use a combination of approaches. He still believes that some direct cash infusions will occur. Additionally, Paulson wants to do a matching fund approach where Treasury would match an amount raised through private equity (What have we got, some kind of a share-a-thon going on?) Finally, Paulson told Congress that he didn’t want to be limited to just banks:
“We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments,” he said. “In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program; broadening access in this way would bring both benefits and challenges.”
I would read that as “consumer loans,” most likely auto loans.
A couple of weeks back I reported on a study done by the Federal Reserve Bank of Minneapolis. They looked at the initial reasons that Paulson gave Congress that the bail out was needed. The study concluded that the issues that Paulson claimed he was attacking, really weren’t impacting the economy. The combination of that report with Paulson’s helter skeltering from one approach to the next, leaves me wondering whether Paulson knows what the problem is or how to actually affect it.
If only Smith Barney were still alive. Maybe he’d have the answers.