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Take this weekend off, Hank
September 10, 2008
My column in the FT this week is on Hank Paulson, the bail-out of Fannie and Freddie, and the dangers of endless intervention. It starts like this:
I do not know what plans Hank Paulson, the US Treasury secretary, has for the weekend. Bird-watching, perhaps. Whatever they are, may I suggest that he sticks to them?
Mr Paulson is a keen ornithologist but he is also an energetic intervener in financial markets and, when he has worked on weekends recently, the US taxpayer has paid dearly.
In March, it was a line of funding to steer Bear Stearns, the investment bank, into the hands of JPMorgan Chase. On Sunday, it was the bail-out of Fannie Mae and Freddie Mac, the quasi-public mortgage lenders, which could cost the US government $200bn or more.
It is only Thursday and, already, others seem to be preparing to interrupt his days of rest again.
The first is Lehman Brothers, whose shares fell sharply after the failure of its talks with Korea Development Bank aimed at gaining a capital injection to offset its mortgage-related losses.
You can read the rest here and comment below.
Hello Mr. Gapper,
The Federal Reserve should not have bailed out Bear Stearns nor Lehman Brothers. It had never been its mandate to provide bailouts of private businesses. Let the financial markets bail them out. The Bear Stearns precedent has only encouraged reckless lending and asset management. Investment banks may spurn conservative principles and the cautious advice of lenders and shareholders because the Federal Reserve will erase the results of any foolish and brazen behaviour. Investments as ludicrous as they are risky are now a possibility.
The fortification of deposit taking institutions are quite another matter for obvious reasons.
The mortgage lenders Fannie Mae and Freddie Mac have been a political and financial fiasco decades in the making. With the common absence of fortitude or courage among the politicians and bureaucrats, an unnecessary and badly managed institution has finally collapsed, and the taxpayer must settle the mess.
These measures only create the precedent for further public intervention and settlement of financial disasters caused by others.
If this were the end of the two public mortgage lenders, then the price might be worth it. However, given the narrow minds of those who direct the government and of those employed by it, resurrection and subsequent failure are a certainty.
I do not believe, as Mr. Gapper suggests, that a $350 billion charge to the public will do much damage to the nation’s wealth or its credit. Yet, it is money that could be used for far better things in these difficult times.
Regards,
Posted by: Gary Marshall | September 11th, 2008 at 4:05 am | Report this commentGary Marshall
Dear Mr. Gapper,
Posted by: D. Wang | September 12th, 2008 at 7:30 pm | Report this commentHank Paulsen’s continual bailout of Wall Street is both disgusting and disappointing. I cannot help wondering whether there is something going on between him and his Goldman Sachs cronies. I am not accusing him of overt corruption, but rather something more subliminal and unconscious. His relentless support of Wall Street is almost irrational and does not make sense for a man purported to be so intelligent.
Like you, I hope he goes bird watching this weekend. Sadly, I fear I will be looking at his smug face on Meet the Press, yet again, this Sunday. Perhaps his friends at GS are all going long Lehman.
D. Wang
“Take this weekend off, Hank”…
In view of the role that Henry Paulson plays in the US economy (currently in meltdown), I’d re-phrase that title to read
Posted by: J.J. | September 13th, 2008 at 10:18 am | Report this comment“Take off, Hank”.
Hmmm… so a $30bil super-senior loan to a large bank to buy LEH is bad business and moral hazard? Sure. I guess so. But, what if it helped avoid the current market collapse which is in the process of destroying over a TRILLION in capital as we write? Capital in taxpayers 401k’s and pensions, I might add. And save 25k jobs. And keep the number of competitors on Wall St. at a reasonable level to insure healthy competition. It seems like more of weak political decision than a good business decision to me. Nay-sayers are just dogmatic anti-interventionists. We have never and never will live a trul free caoitalist market. Quash that thought now. Paulson at all shrugged their responsibility to make the hard decision and the right business decision and we will all pay for it. Right now we need leaders who are not afraid to risk moral hazard for a good business deal. After all, what REAL decision in life comes without moral hazard?
Posted by: JH | September 16th, 2008 at 4:44 am | Report this commentHmmm… so a $30bil super-senior loan to a large bank to buy LEH is bad business and moral hazard? Sure. I guess so. But, what if it helped avoid the current market collapse which is in the process of destroying over a TRILLION in capital as we write? Capital in taxpayers 401k’s and pensions, I might add. And save 25k jobs. And keep the number of competitors on Wall St. at a reasonable level to insure healthy competition. It seems like more of weak political decision than a good business decision to me. Nay-sayers are just dogmatic anti-interventionists. We have never and never will live a truly free capitalist market. Quash that thought now. Paulson et al shrugged their responsibility to make the hard decision and the right business decision and we will all pay for it. Right now we need leaders who are not afraid to risk moral hazard for a good business deal. After all, what REAL decision in life comes without moral hazard?
Posted by: JH | September 16th, 2008 at 4:46 am | Report this commentHello JH,
Nothing, not even a loan to some LB suitor, was going to stop present difficulties. They have been there for some time. Rather than all these financial wizards admitting and confronting those problems, they ignored them.
Now there is a panic.
The Federal Reserve does not have the financial resources to aid everyone that comes asking. It is only a $900 billion institution. It might be able to bail out 1 maybe 2 large member banks at most.
If LB had been willing to part with half the company to save itself, then it should have done so. Half of something is better than all of nothing.
Regards,
Posted by: Gary Marshall | September 16th, 2008 at 5:58 am | Report this commentGary Marshall