Posted on 09/28/2008 5:55:12 PM PDT by presidio9
Congress is working on the controversial $700 billion bailout of the national economy. A lot of Americans are angry about it, but Henry Paulson, the secretary of the Treasury, says an extraordinary emergency demands action that was once unthinkable. Paulson has helped to nationalize two mortgage giants, seize the nation's largest insurance company, manage the biggest bank failure in U.S. history, and oversee the end of Wall Street as we know it.
Who is Henry Paulson? 60 Minutes shadowed him these past two weeks as he worked to convince the Congress that it should give him perhaps more power than any Treasury secretary has ever had.
--------------------------------------------------------------------------------
"What if the plan doesn't work, what if 700 billion doesn't do it?" correspondent Scott Pelley asked Sec. Paulson.
"Scott, it's gotta do it and we're going to make this work, and we're going to do what it takes to work," Paulson replied.
"Shouldn't the price of failure be failure on Wall Street?" Pelley asked.
"And failure and the market discipline that goes with it is the right thing, but unfortunately we have a system that is way out of whack, where our institutions are too big to fail. We don't have the regulatory authorities and structure in place to protect the American people," the secretary said.
"You can't be proud of Wall Street," Pelley remarked.
"I'm not proud of a lot of things. You know, as I go around the world right now, representing the United States of America, it's a humbling experience," Paulson replied.
Paulson's office in the Treasury building overlooks the White House next door, but the view that has seized his attention is behind his desk: four market monitors that have signaled one emergency after another.
"What was the most difficult moment, what was the moment that put a knot in your stomach?" Pelley asked.
"Scott, I've had a lot of knots in my stomach, but I would say last Wednesday night, when the capital markets froze, when there started to be a run on money markets, banks stopped lending to each other. And, I know people in America won't understand what that means, but if money doesn't flow freely between financial institutions, then it impacts everyone in the country," Paulson explained.
"The economy had a heart attack in that moment," Pelley remarked.
"I would say this: whether it had a heart attack or not, the arteries were clogged," Paulson said.
That was Wednesday, Sept. 17, and Paulson told 60 Minutes that was the night he realized the collapse of Wall Street needed a sweeping intervention.
How much jeopardy is the economy in?
"It's a fragile situation, a very fragile situation. There were times, a couple days, last week, and a day this week, when U.S. Treasury bills were trading for well under one percent," Paulson told Pelley.
"People were buying Treasury bills knowing that they would get almost no return. But it was a safe place to stuff their money," Pelley said.
"It is, in some ways, the equivalent of sticking money in your mattress," Paulson said.
It was a classic "run on the bank" panic. At the Capitol that Wednesday night, Speaker of the House Nancy Pelosi grabbed a phone.
"I called Secretary Paulson. And I said, 'Mr. Secretary, we would like to meet with you tomorrow morning because of some of the chaos we see in the markets.' And he said back to me, 'Madam Speaker, it cannot wait until tomorrow morning. We have to come today.' And so they came in and painted a very, very, very grim picture. A couple of days later we got in writing their request, which was even more shocking," Rep. Pelosi recalled.
60 Minutes was with Paulson and his team later in the week as they wrote that first draft to send up to Congress. It ran three pages, and would put him in charge of the largest bailout in American history.
"We've got to get this up to the Hill quickly," Paulson instructed his top advisers in his office that afternoon. "We’ve got to keep it simple, very simple… this is about recapitalizing our banks and financial institutions."
"It was shocking in that the Treasury Department wrote the bill in a way that gave the secretary czar-like powers. And also it had a $700 billion figure, a number that had never been used. And that was pretty shocking," Pelosi told Pelley.
"I want strong oversight and transparency," Paulson explained. "Scott, the last thing in the world I wanted to do was be sitting in this seat and be going up to Congress asking for these kinds of things. It is a terrible position to be in. The only thing worse is the alternative."
The President called Congressional leaders and the two presidential candidates to the White House this past Thursday. Behind closed doors, there was a tense, angry debate over how the bailout would be structured. Republican House members revolted. Speaker Pelosi led Democrats out for a break and Paulson followed.
Asked what happened, Pelosi told Pelley, "We had our conversation."
"I'm given to understand that Secretary Paulson kneeled down on his knees and begged you to move this bill forward," Pelley said.
"No, no, no," Pelosi said.
Asked if that did not happened, Pelosi said, "Well, Secretary Paulson injected a moment of levity into the conversation but…"
"Levity on one knee?" Pelley asked.
"Well, for a thousandth of a second," Pelosi replied.
"There was a lot of tension. And frustration. And I thought we needed a moment of levity. And I wanted to break that tension. There was some shouting going on," Paulson remembered.
"He said, 'Please, please, I beg you. Don't blow this up.' And we said, 'We're not blowing up. It's the Republicans.' To which he said, 'I know. I know,'" Pelosi told Pelley.
Henry Paulson, who tells his staff to call him "Hank," is a negotiator. He was chairman of perhaps the most successful Wall Street investment bank, Goldman Sachs. He's 62 years old and spends much of his free time on environmental issues. When he left Wall Street for the Treasury, he was worth about $500 million.
"You were asked to take this job as secretary of the Treasury by the White House more than two years ago. First time they asked you what did you tell them?" Pelley asked.
"I told them I would prefer not to do this," Paulson replied.
But the White House asked again, and he said yes.
Asked if he regrets that now, Paulson said, "No, I don't. It was, you know, sometimes I look up and say, you know, 'What's happening?' But in all my life I've been trained that when there's a big problem, you run toward it."
"Has he saved the country?" Pelley asked Roger Altman, who was number two at the Treasury in the Clinton administration and now runs an investment firm.
"We don't know yet," Altman replied.
"There's a very long list of financial institutions that are not sure whether they can get through this. Very long list," Altman said.
Asked if he's talking about more than a dozen such institutions, Altman said, "Oh, I would say so around the world sure, sure."
Altman says one of the biggest problems is uncertainty about how much bad debt Wall Street has hidden away.
"You know I have heard that some of these financial institutions were hiring mathematicians and physicists to write the mathematical formulas that underlied some of these investments, and pretty soon nobody understood what was going on any more," Pelley said.
"Well yes, a level of financial exotica ensued, which boggled the mind and which almost everyone involved didn't understand," Altman replied.
Federal agencies that regulate Wall Street didn't understand, and neither did the companies that rate the quality of investments.
"You're telling me that the credit rating agencies didn't understand these investments?" Pelley asked Altman.
"We had the first instance, at least in my memory, where AAA rated instruments, the highest rating, actually defaulted while rated AAA. Now there's something wrong with that," he replied.
While people wonder what's coming next, many are asking why experts like Paulson didn't see this coming.
"A year ago, last April, you said this, and I'll quote, 'I don't see subprime mortgage market troubles imposing a serious problem. I think it's going to be largely contained.' Why did this seem to take you by surprise?" Pelley asked Secretary Paulson.
"Well, again, hindsight's 20/20. When I came to government, I said, 'You know, we are about due for some kind of market turbulence.' I didn't expect quite this. But I said to the team, as we worked, 'You never know, when there's a lot of dry tinder out there, you never know what spark is gonna light the tinder,'" he replied.
"The regulators should have been suspicious that something very strange was going on," remarked Joseph Stiglitz, a Nobel Prize winning economist who warned of danger two years ago.
Asked if this was not unforeseeable, Stiglitz told Pelley, "Oh, not only was it foreseeable, it was foreseen. Now, economists aren't very good at predicting the precise date in which the whole thing is gonna unravel. But that it was unsustainable was perfectly clear."
Stiglitz agrees a bailout is necessary, but he doesn't like Paulson's plan, which would have the American taxpayer buying bad debt now held by banks. "His proposal is to take on to American taxpayers the millions of bad mortgages, toxic mortgages that no one in Wall Street wants to take. When they announced that plan, the champagne bottle corks were popping on Wall Street. They finally found the sucker to take off these bad assets. No one in the private sector would touch these toxic mortgages," he explained.
Stiglitz says the "sucker" is the American taxpayer.
The bailout plan calls for the government to borrow up to $700 billion to buy troubled assets, and then sell them as the economy improves.
"Now some people, [including investor] Warren Buffett and others have argued to me, and said 'Hank, if you do this right the taxpayer could actually make money on that.' We're not saying that because I see this as a risk, depending on how the economy does. I believe the cost to the taxpayer will be far less than what is actually spent to buy these assets," Paulson said.
Still, Paulson understands many Americans are angry that they're being forced to bailout Wall Street recklessness.
"I would be angry too. People are frustrated. They're angry. They're angry at the excesses. They're angry at executive compensation. They're angry at a whole series of things," Paulson said.
"Let me suggest one of the reasons that people are angry,” Pelley said. He read from e-mails uncovered by federal investigators. The e-mails were written by analysts for the credit rating agencies on Wall Street.
One of the e-mails said, “quote, 'It could be structured by cows and we would still rate it.' And this one, this is my personal favorite, one Wall Street analyst to another wrote, quote, 'Let's hope we are all wealthy and retired by the time this house of cards falters.' They were writing these e-mails nearly two years ago. Why are we bailing these people out?" Pelley asked.
"Scott, first of all, that is outrageous behavior. Absolutely outrageous behavior. But what we're doing, right now, Scott, is working to protect the American people. Because a breakdown of our financial system is going to hurt the American taxpayer," Paulson said.
"Once this bailout proposal, as it's called, takes effect, are we out of the woods?" Pelley asked.
"We will have turbulence and turmoil in our financial system for some time, but I believe that this is going to work and it will instill the confidence in our system and the stability we need to allow us to work through this very difficult period and to let the economy continue to function the way it needs to function," Paulson replied.
As much as we all would love to blame the people getting rich on Wall Street for the current troubles, the causes are much bigger than them. And the ones in mortgage backed securites include some of the smartest minds on the planet. Everyone knew that a major correct was coming, be the fact that nobody saw one of this magnitude comeing is a testament to its complexity.
Well, one thing is for sure, Bush’s dog and pony media show to push this through fast before the congressment go to campaign is clearer. “Just happens” 60 minutes is “following” Paulson just as the scheduled pr scare campaign begins? What better to have a positive 60 Minutes show just before the vote.
Blame Bush if you want for how much the final deal is about things that the Democrats want (like lower executive pay, which is 100% opposed to capitalism) rather than being about the only thing that is truely important (freeing up liquidity in the market place). If the Treasury had begun buying up and holding MBS and and mortgage derivative portfolios from the street, it makes money, and everybody wins.
I don't trust anything this asshole says.
When he left Wall Street for the Treasury, he was worth about $500 million.
I bet he's worth several billion now.
And if it doesn’t work, he’s unelected so it doesn’t matter!
www.KickOutOfCongress.com those support the bailout
Paulson is a typical friend of the Bush family. They have nothing in common with you or I; you have worth only as a vote and as a taxpayer and behind your back, they want nothing to do with you. He will take care of his Wall Street buddies (and on bended knee to Pelosi) while Main Street can go pound salt.
I’m not defening Paulson, but undestand this: As long as FNMA and FHLMC kept buying loans with an implicit guarantee from the Treasury, there was nothing he could do to stop them. Stopping them would have required Congressional action. This move was suggested to them repeatedly for ten years, and they did nothing about it.
Paulson and the Goldman Sachs goons have systematically come out on top of every “collapse” in the last year. He magically shows up with a plan to dump all the toxic debt on us and hand our cash over to the same guys. Paulson is the last person on the planet who should be in charge of this train wreck as he was intimately involved in causing it as the former CEO of Goldman Sachs.
“If the Treasury had begun buying up and holding MBS and and mortgage derivative portfolios from the street, it makes money, and everybody wins.”
We don’t win. We won’t in the future. We lose, Wall Street cuts its losses. It is socialization of risk when it fails.
> And the ones in mortgage backed securites include some of the smartest minds on the planet.
Smart AND CORRUPT. Go read
http://biglizards.net/blog/archives/2008/09/democrats_try_t_1.html
Here’s an excerpt:
“Let’s jump back 18 months. I spent several letters going over how subprime mortgages were sold and then securitized. Let’s quickly review. Huge Investment Bank (HIB) would encourage mortgage banks all over the country to make home loans, often providing the capital, and then HIB would purchase these loans and package them into large securities called Residential Mortgage Backed Securities or RMBS. They would take loans from different mortgage banks and different regions. They generally grouped the loans together as to their initial quality as in prime mortgages, ALT-A and the now infamous subprime mortgages. They also grouped together second lien loans, which were the loans generally made to get 100% financing or cash-out financing as home owners borrowed against the equity in their homes.
“Typically, a RMBS would be sliced into anywhere from 5 to 15 different pieces called tranches. They would go to the ratings agencies, who would give them a series of ratings on the various tranches, and who actually had a hand in saying what the size of each tranche could be. The top or senior level tranche had the rights to get paid back first in the event there was a problem with some of the underlying loans. That tranche was typically rated AAA. Then the next tranche would be rated AA and so on down to junk level. The lowest level was called the equity level, and this lowest level would take the first losses. For that risk, they also got any residual funds if everyone paid. The lower levels paid very high yields for the risk they took.
“Then, since it was hard to sell some of the lower levels of these securities, HIB would take a lot of the lower level tranches and put them into another security called a Collateralized Debt Obligation or CDO. And yes, they sliced them up into tranches and went to the rating agencies and got them rated. The highest tranche was typically again AAA. Through the alchemy of finance, HIB took subprime mortgages and turned 96% (give or take a few points depending on the CDO) of them into AAA bonds. At the time, I compared it with taking nuclear waste and turning it into gold. Clever trick when you can do it, and everyone, from mortgage broker to investment bankers was paid handsomely to dance at the party.”
Now, if you ask me, anyone who can turn subprime mortgages into AAA bonds at a rate of 96% is corrupt.
Bush and Paulson have sold out every decent hard working person in America. I am spitting blood over this. They are traitors.
To say such a thing strains your credibility.
*Some* folks understood the magnitude; they were writing about the magnitude of the problem in 2003. I don't know if Warren Buffet fits into your "smartest minds on the planet" cohort or not, but the fact is he warned early, and he got the magnitude of the problem correct.
I'd say it's much more likely that those "smartest minds on the planet" were too caught up in the bubble greed to think very far beyond personal enrichment. The problems, and their magnitude, were not only understandable but obvious to anyone paying reasonable attention.
>> If the Treasury had begun buying up and holding MBS and and mortgage derivative portfolios from the street, it makes money, and everybody wins.
Only if housing prices manage to stay in a bubble do those mortgage portfolios and their derivatives “win”.
Is that not so?
That is an out and out LIE !!! Madame Speaker if your plan was so goddamned great you have the votes to pass this POS without the Republicans.
Drive-by meidia rule #1 never challenge a lie by a democRAT.
No, his cronies’ financial situations are in a fragile situation.
Same routine as with the Immigration Reform battle.
Paint the Republican as the problem preventing a good solution because the bill is actually awful and they don’t want Democrats to be branded with it alone.
No that's incorrect. Wall Street only cuts its losses in the sense that they have to see now, at a very deprecieted price. In other words, they end up LOSING a lot on their investments. But they have no choice, because they are all in. The UST, on the other hand, makes money, because MBS can't continue to go down infinitely. They are fully collateralized by the underlying mortgages. Meanwhile, if banks can't sell their securitized loans, they can't make money. If they can't make money, they can't lend money. Then they start to fail, and busines can't get loans for expansions and capital improvements. Then they have to start laying off employees and, well, you see where this is going. Everybody loses. On the one hand, you find a plan that will end up costing the taxpaer little. In the long run we will probably make money. On the other hand, everybody loses. A lot of small minded people here see Hamilton as a traitor to capitalism for how he handled a similar situation.
Whoever wrote this blog has no idea what they are talking about. This is obvious because MBS are simply called "MBS." Morgage Backed Securities off of commerical loanes are called "CMBS." Mortgages off of some other fixed stream, such as credit cards are called "ABS." Et cetera. The person who wrote this had very little familiarity with the MBS market, and most likely got what they wrote here from some place like wikipedia.
Now, the securities that the street is dealing with today are typically issued by FNMA and FHLMC, because they make up the vast majority of the market in mortgage backed securities. In which case, FNMA and FHLMC bought the securities from the lending banks. Wall Street had nothing to do with it. The person you are getting your information from is talking out of his ass.
Sorry, I am talking about Buffet, among others. People all over the street knew that the implied protection of the GSEs was going to get a lot of people hurt. And they talked about it openly, and even wrote articles about it. After that it was out of their hands, and people on both sides of the aisle in Washington preferred to ignore it. If there are to be free markets, you have to be willing to accept the fact that those who chose to work in them do so for their own personal gain, and that the rest of the economy is better be cause they do.
I am no longer involved with the MBS market, but it is my understanding that the markets have forced the value of MBS below the value of their underlying collateral.
Sounds like foreplay in a cheap novel.
He's 62 years old and spends much of his free time on environmental issues.
What does that tell us? If you need a hint:
And we said, 'We're not blowing up. It's the Republicans.' To which he said, 'I know. I know,'" Pelosi told Pelley.
> The person you are getting your information from is talking out of his ass.
Thanks for the reality check.
Sorry for the language. But the fact that you posted what this joker had to say made it sound like you had to believe it it. CMOs off of FNMA or FHLMC collateral have not needed a senior/suborditate structure since at least the late 80's, and every bond in that structure up to and including the last companion piece is ALWAYS rated "AAA." There is no residual class in an agency CMO. If this sort of thing is not second nature to whoever wrote the the material you posted than I guarantee you he has absolutely zero idea what he's talking about. Structuring agency CMOs was all I did for eight years before I traded them for four years. And I worked at two of the big names mentioned this week. If there is any subject where I might be the resident expert on FR, this is it.
> Sorry for the language. But the fact that you posted what this joker had to say made it sound like you had to believe it
Hey man, I’ve been taking a crash course in Econ this week, along with millions of other Americans. I don’t know whether to $H!T or go blind.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.