Will Paulson's Bank Plan Finally Unfreeze Credit?

Reply Fri 10 Oct, 2008 12:09 am
Will Paulson's Bank Plan Finally Unfreeze Credit?
The longer the credit markets remain dry, the more things are going to die. That's what's behind yet another day of bloodshed on Wall Street, where the market shed 678 points, or 7.33%, in panicky late trading on Thursday. It's also what's behind yet another financial jack-in-the-box move by Henry Paulson at Treasury, who hinted on Wednesday that he was considering using part of the massive $700 billion bailout package approved by Congress to directly buy stakes in banks, after having dismissed the idea less than a week before.

Why the turnaround? It comes down to this: Banks need money. The U.S. government has it. Or can print it. So in addition to the end-around plans to buy mortgage securities and other toxic assets that Paulson and Fed Reserve Chairman Ben Bernanke have been devising, why not go with a more direct approach too?

"A capital shortage is a capital shortage is a capital shortage," says Anil Kashyap, Professor of Economics and Finance at the University of Chicago Graduate School of Business. To Kashyap and a number of economists, this has been the problem from the beginning, and any proposed solution that doesn't address the basic issue of recapitalizing banks won't succeed in the long run. Treasury has now come to the same conclusion, that the best way to shore up both the banks' balance sheets and their confidence in lending " to each other, to businesses, to us " is to become an investor.
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Robert Gentel
Reply Fri 10 Oct, 2008 12:13 am
@Robert Gentel,
Building a Better Bailout

Last month, when he defended his bailout plan before Congress, Treasury Secretary Henry Paulson was reluctant to have the government take an ownership stake in the banks that taxpayers are going to rescue. It came as a relief on Wednesday when he executed an about-face and said that the Treasury was now considering doing just that.

Injecting cash directly into banks in exchange for an ownership share would provide a quicker and more powerful boost to the financial system than the measures proposed in the original bailout plan. It would also be a better deal for taxpayers, because it would give them a direct claim on any postbailout profits earned by the bank.
Reply Sat 8 Nov, 2008 06:14 pm
@Robert Gentel,
Paulson was the architect of this credit crunch. As Chairman of Goldman Sachs he spearheaded the move to loosening the reserves required to cover bad debt the "Net Capital Rule".

Quote of the Day: Net Capital Rule

Here is the quote of the day:

...we and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place.

Translated into English, this testimony from back in 2000 was from someone asking that major brokerage firms be permitted to increase leverage subject to oversight of their wondrous mathematical risk models. The request was agreed to four years later, in 2004, and it helped lead to the meltdown in independent brokers this year.

The speaker? Some guy named Henry Paulson, the then-CEO of Goldman Sachs. I wonder what happened to him.

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