How cute. . .

Hank is going to let Bush pretend he’s still in charge. . . .

The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks, according to officials. The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers, officials said.

And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

. . . .

Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes.

President Bush plans to announce the measures on Tuesday morning. . . .

Henry Paulson, who himself had to be dragged kicking and screaming to this equity injection plan, worked out the details in private with the biggest players on Monday. . . and then kept it on the QT so that Still President Bush could come out on Tuesday morning and make it seem like he had some role to play in all this.

He didn’t.

Truth is, Mr. Hanky didn’t much either. Democrats in Congress inserted the language (over Paulson’s objections) in the TARP bill that gave Treasury the authority to do this; Paulson then did nothing for ten days, until markets tanked, credit got tighter, and UK PM Gordon Brown got most of the Europe on board with a similar plan. Hank Paulson is just desperately trying to keep up.

Meanwhile, Hank’s old pals at Goldman Sachs have cut a deal with New York state to headquarter their newly configured full-service bank in New York City. So, they get more from the federal government, and a state tax break, too.

How cute.


(cross-posted on The Seminal)

What’s the opposite of leadership?

When last we spoke, the Dow was starting Friday in freefall while all eyes turned to a meeting of the G7 called by the chief executive of the United States, George W. Bush Henry Paulson. During the course of Friday, the Dow did a bit of a rollercoaster rebound, but I am not going to tell you it was because investors were expecting x or y from the G7 or the US Treasury Department, or because there was some bargain hunting, or because Mercury was in retrograde. (I utterly despise this kind of Stock Market analysis—it’s post-hoc hooey—so when you catch me doing it, and I assure you I will, take it with appropriate measures of sodium.)

What happened next? Well, the G7 released an abysmal document pledging future efforts, sunshine and lollipops, etc., but when it came to the details of actually doing something, one can sum it all up with, “splunge!” The next day, the IMF mostly followed the G7’s “lead.”

That was all very bad news.

As I wrote last week, economists out here in the real world had coalesced around a “stock injection” or “equity injection” plan, coupled with government guarantees on interbank loans—essentially a partial nationalization of banks willing to enter into the bargain—as the best way to quickly loosen up the credit market (and, ideally, provide time for more and better long-term changes to our global economic systems). It was an option that Hank Paulson rejected outright in late September. However, language permitting an equity injection was inserted into the $700 billion bailout signed into law ten days ago.

Still, Paulson did nothing last week to use that new authority. Never mind asking about the actual president of the United States. . . what was he up to? (You can’t see me, but I’m tipping my head back and pointing my right thumb toward my mouth while mimicking gulping sounds.) Well, there were those morning pep talks. . . zheesh!

Prime Minister Gordon Brown of the UK, however, did float the idea of equity injection and guarantees last Wednesday—and, late Sunday night, Brown made the float flesh, moving to pump 50 billion quid into British banks, and guarantee interbank lending, to boot. The European Union appears to be following suit.

Lo and behold, Hong Kong, European, and London markets are up sharply this morning. (You see, I told you I’d do it.) (Afternoon update: the Dow is also up sharply. The US and Japanese exchanges have Monday off.)

Which all raises an interesting question: If Brown came to Washington’s G7 confab with the equity plan in tow, and we now see that the EU was ready to go along with that framework, then why was the G7’s statement so unproductively obtuse? In other words, who prevented the G7 from simply issuing a statement saying, “What Gordon said”?

Hmmm. . . .

There is, clearly, only one possibility—Why, hi-de-ho, it’s Mr. Hanky!

And perhaps even more amazing, today, Monday, after the UK and EU have taken decisive action, the US Department of Treasury has let it be known that they will maybe, probably start injecting some of our bailout billions directly into banks in exchange for equity. . . but they have not issued any instructions or details of how, or who, or when, and they are offering this without the other part of the Brown plan, the guarantees!

What is Paulson’s rationale? What is the opposite of leadership? (Again, forget about “the leader of the free world”—and again, head tipped back, glug, glug, glug.)

Paulson fought against getting this authority, and now, once granted it, despite movement from economies much smaller than “his,” he still drags his feet. Contrast this with Hammerin’ Hank, say, September 17, hyperventilating and threatening the end of civilization as we know it if he didn’t get his 70 billion Benjamins to spend however he pleased. How can we explain the difference?

Well, as we seem to have to say too much these days, we can’t know what is in a man’s heart. . . but might the behavior gap have something to do with the ideological purity of this administration, and the company Paulson supposedly left behind to gallantly take over at Treasury?

Yeah, that was a rhetorical question.

First, the Bush Administration’s—hell, the whole Republican/Conservative movement’s—“private good, public bad,” “markets know best” philosophy not only helped usher in this nightmare, it lead to a stunning inability to entertain any viable solutions.

Second, from the beginning (or before the beginning) of this credit calcification and market tumble, it seems that Treasury has worked to protect, and even enrich, Goldman Sachs.

Just look at some of this: Lehman Brothers, a direct competitor of Goldman, was allowed to fail. Treasury said it had to draw a line. But a week later, the government steps in to save AIG by injecting capital (at first $80 billion; now well over $100 billion) in exchange for equity. It turns out that AIG owed Goldman something like $30 billion—in fact, a representative from Goldman Sachs was in the room when the AIG bailout was being negotiated.

With the big five investment banks reduced to the big two, many expected Goldman would be the next to go. Investors start shorting Goldman stock. The government’s response? Ban all short selling (not just naked short selling, as some had recommended).

That was quickly revealed to be a disastrous move for a variety of reasons, and the ban was lifted. Paulson went back to demanding his near trillion dollar blank check so that he could buy toxic assets off the hands of banks. . . investment banks included. Never mind that Paulson never was able to explain how that plan would actually solve the problems at hand.

All of this dicking around took weeks, of course; weeks where markets tanked, credit froze, jobs were lost, and the whole mess, by most accounts, grew worse and more expensive to fix.

By the way, there is a downside to the equity injection plan—that is if you own bank stock. If you own shares in a bank that opts in to an injection plan, a bank like, maybe, say, Goldman Sachs, the value of your shares will be diluted because the bank will have to issue additional preferred shares to exchange for government capital.

You don’t think that might adversely affect Hank’s “blind” trust, or the coffers of many of Paulson’s pals, now, do you?

I guess that’s a kind of leadership.


. . . .

Congratulations to Paul Krugman, Nobel Laureate.



(cross-posted on Daily Kos and The Seminal)