More questions for Paulson

Posted by: Michael Mandel on September 23

Barry Ritholtz of the Big Picture Blog has 14 questions for Paulson and Bernanke. I’ve excerpted from his list.

Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke are scheduled to testify today before Congress on their massive bailout program.

Here are some questions I would like to hear asked:

1. You two gentlemen have been wrong about the Housing crisis, missed the leverage problem, and understated the derivative issue. Recall the overuse of the word “Contained.” Indeed, you two have been wrong about nearly everything financially related since this crisis began years ago.

Question: Why should we trust your judgment on the largest bailout in American history?

….

4. In the nationalization of AIG, the US taxpayer received 80% of the company. What is the taxpayer getting for their money in this $700B bailout?

5. You have said that “The Housing correction is the root cause of market stability.” What about leverage — how significant was that as a root cause?

6. Your initial estimates for the cost of this were $700 billion dollars. Yet you also asked for a blank check, an unlimited ability to spend more “as needed.” What is your worst case scenario for the total costs of this bailout?

7. The original version of this bailout package requested no judicial, administrative, or budgetary review of the spending of this bailout, What was the thought process behind that extraordinary, extra-constitutional request?

….

9. Its just cost the taxpayer $50 billion to bail out money market funds, which are clearly non-insured, risk instruments. Why did we do that?

14. If we make this inordinate grant of unlimited cash, how can we rein in the budget in the future? How can we as a Congress say no to expensive budget items such as Nationalized Health Care, or Infrastructure repair programs or fill in the blank on the grounds they are “too expensive?”

Interesting questions. I’d like to know the answers too.

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Reader Comments

clyde

September 23, 2008 06:25 PM

In baseball 3 strikes and you are out. Our financial leaders have been wrong for the past two years over and over again with no end in sight. Why does the American public put up with such. Their greed has no limits to protect wall street vendors. Main street vendors have been in recession for three years already, along with the common man on the street yet according to wall street we might go into a recession is taxpayers do not bail out these stooges, and allow them to get greedy again and never face fraud charges. We have been sold a hugh bill of goods by these tycoons.

D. Hurford

September 23, 2008 06:47 PM

May I take a stab at the answers?

1) Who out there has perfect foresight on the global economy and securities markets, not hindsight, that also has Bernanke's grasp of the Depression and Paulson's experience with the global capital markets? You? Congress, with its approval rating lower than Bush's? There is a fire in the theater, people. Let's focus on putting it out before it kills more people (e.g., your bank, your broker, your money market fund, your insurance companies, etc).
4) The AIG deal is not done yet, as shareholders are scrambling to sell assets sufficient to pay off the smaller initial loan and get the government out of the picture entirely. But the broader answer to your question is: the taxpayer gets an economic correction less catastrophic than the Great Depression, where only one in three adults could keep their jobs.
5) The collapse in home prices is what first put the leverage at risk; the loans were not at risk when prices were rising 10-20% per year in some markets, and employment was the highest it had been in years.
6) It's a question on everybody's mind. But, please, with mortal limitations on predicting the future, what is he supposed to say? One thing to keep in mind is that the RTC recovered for taxpayers, from the eventual sale of yesteryear's toxic assets, roughly two-thirds of their acquisition cost.
7) Some oversight is appropriate. But delegating a rescue plan, with acquisition strategy, asset valuation, etc. to committees of Congressmen beholden to one special interest group or another is not how this crisis will get fixed. That's what we have an Executive Branch for.
9) Investors and institutions have so little faith in stocks and bonds already that they are keeping about $3.4 Trillion in money market funds. After the Government let Lehman collapse, people pulled tens of billions out of money funds at a daily escalating pace. Money funds are a safe haven for many that needed to be kept safe. They are also a major buyer of commercial paper, which is a key funding source for credit companies, corporations, et al. The paralysis appearing in the commercial paper market began to subside as soon as the money market insurance was announced.
14) The current threat to the domestic and global banking systems has escalated beyond any reasonable person's capacity to anticipate. And it has reached a critical stage, where decisive action is needed to prevent deeper, long term damage to our jobs, savings, and standard of living. Healthcare, Social Security, etc are trainwrecks unfolding in slow motion that we have seen coming, and failed to address, for years. You want solutions to those without busting the budget? Elect a better Congress.

DaveL

September 23, 2008 10:35 PM

If a couple of more shoes drop you will see why Helicopter Ben and Hank the Hammer want to move fast. We'll be toast with cascading failures. These assets they plan on taking have no value in this market, that is not to say the homes at the end of this paper trail are worthless, it means nobody can assess their true value, ergo it is $0 in this market. This places the holders in insolvency. Taking them off the books will allow them to be liquidated at some value, the higher the better. Hopefully better than 50c on the dollar.

After the brush with death last week when the money markets were minutes for seizing shut it became apparent that something must be done to relieve the pressure on the books and to instill some confidence. If the computers had had been primed with their sale orders on money markets last week we would all be sitting around in a barrel right now.

Now the Congress is trying act like they are leading this crisis and dragging their feet. Politics, Pork and Posturing are returning to these idiots who have already burdened our children's children's children with debt.

Read up on the Great Depression, we could be in one real soon.

Did you know you can boil and eat Russian Thistle?

Barry Ritholtz

September 23, 2008 11:22 PM

Follow up questions to Mr. Hurford:

1) Who out there has perfect foresight on the global economy and securities markets,
PERFECT FORESIGHT? YOU GUYS MISSED THIS AS IT WAS HAPPENING AND DENIED IT FOR A YEAR. EVEN WORSE, YOU 2 STILL DONT KNOW WHAT HAPPENED AFTER THE FACT

4) The taxpayer gets an economic correction less catastrophic than the Great Depression, where only one in three adults could keep their jobs.

GLAD TO SEE YOU SUDDENLY DISCOVERED YOUR OWN PERFECT FORESIGHT.

NOW, AS TO THE ACTUAL QUESTION WE ASKED, WHAT DOES THE TAXPAYER GET FOR HIS MONEY? IS THIS THE BEST DEAL WE CAN GET? DOES AVOIDING ECONOMIC CATASTROPHE PREVENT US FROM DEMANDING A BETTER DEAL FOR AMERICANS, OR ARE YOU GIVING THAT AWAY ALSO?


5) The collapse in home prices is what first put the leverage at risk; the loans were not at risk when prices were rising 10-20% per year.

ALL WE HAD TO DO TO AVOID THIS WAS HAVE HOUSING RISE AT UNSUSTAINABLE LEVELS FOR FOREVER? HOW DID YOU EVER GET A JOB AT GOLDMAN SACHS IN THE FIRST PLACE?

6) It's a question on everybody's mind. But, please, with mortal limitations on predicting the future, what is he supposed to say?

YOU DONT NEED TO HAVE PERFECT FORESIGHT TO KNOW THAT IF YOU ARE ASKING FOR A BLANK CHECK, YOU ARE GOING TO USE IT. YOUR $700B IS LIKELY TO BE SOMEWHERE BETWEEN $1-2TRILLION.

7) Some oversight is appropriate. But delegating a rescue plan, with acquisition strategy, asset valuation, etc. to committees of Congressmen beholden to one special interest group or another is not how this crisis will get fixed. That's what we have an Executive Branch for.

THANK FOR ELIMINATING THE LEGISLATIVE ROLE OF FROM THE CONSTITUTION.

9) Investors and institutions have so little faith in stocks and bonds already that they are keeping about $3.4 Trillion in money market funds.

THERE HAS BEEN 3-4 TRILLION IN MONEY MARKET FUNDS FOR MANY YEARS. AGAIN, DID YOU REALLY WORK AT GOLDMAN SACHS?

14) You want solutions to those without busting the budget? Elect a better Congress.

THANKS FOR COMING TO CAPITAL HILL. YOUR FIRED.

Rycoka

September 23, 2008 11:31 PM

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)
3rd president of US (1743 - 1826)

wiseguy

September 24, 2008 01:51 AM

D Hurford:

You are making many angry people angrier. This is brief response to your response

1. Many people has been warning about this crisis for years. Please do not give excuses that these are all hindsights.

4. In other words, tail I lose and head and I lose more. So, no gain for tax payers.

6. Worse case scenario is a completely reasonable question. Please don't avoid the question. (And I thought you just said Paulson and Bernanke are the best brains)

7. Sure, as if Paulson himself is not a special interest. And you want us to ask the fox to guard the hen.

14. Again, excuses and excuses. This is not "beyond any reasonable person's capacity to anticipate". On the contrary, this is TOTALY 100% predictable.

I am just wondering who you are working for.

Frank Loweser

September 24, 2008 01:17 PM

When did Hank Paulsen become the smartest guy in the room. May I remind everyone that Paulsen is an architect of an era of investment instruments too complicated to understand.
When Paulsen says, "We don't know what these securities are worth, or what the underlying aseets are".....hellllloooooooo.

Im only agreeing to let Hank Paulsen run this thing if there is a rider to the legislation that calls for a serious watchdog to get a new title...I mean a real bastard who will force banks to go back to taking deposits at 3% and lending it out at 5% before they take the rst of the day for golf.

Wall Street got too complicated. It's time to simplify investments. And I don't believe Paulsen has that on his agenda.

Brandon W

September 25, 2008 09:47 AM

Frank has a good point...
Hank Paulsen was CEO of one of the companies that orchestrated these huge financial schemes, and now he's telling us "We don't know what these securities are worth, or what the underlying assets are..."

And now he runs our national treasury?

And we're supposed to trust him with it?

He ought to be arrested with the rest of the con artists on Wall Street.

Doug

September 25, 2008 12:32 PM

They will not reign in the budget and they will not quite doing the very things that cause these problems over and over:

http://www.theproletariatsnews.com/2008/09/socializing-financial-losses-what-does-it-mean-for-you/

Doug

September 25, 2008 12:39 PM

They will not reign in the budget and they will not quite doing the very things that cause these problems over and over:

http://www.theproletariatsnews.com/2008/09/socializing-financial-losses-what-does-it-mean-for-you/

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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