Showing posts with label Paulson. Show all posts
Showing posts with label Paulson. Show all posts

Thursday, November 20, 2008

TARP Oversight Hearing 11/18 (Tian Weng)

The Bush administration last week announced its plan to abandon the original $700 billion economic rescue plan (Troubled Asset Relief Program (TARP)) and launched a new initiative to inject $250 billion directly into financial institutions. This is to be accomplished by buying bank stock. The thinking is that this will help thaw frozen credit markets and get skittish banks lending again.

On Tuesday November 18th, Members of Congress held a hearing titled “Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and of Government Lending and Insurance Facilities” in 2128 Rayburn House Office Building. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair testified before the House Financial Services Committee. Our overall opinion: the hearing led to plenty of blame being passed around concerning this unanticipated policy shift.

In his statement, Treasury Secretary Paulson defended his decision to change the focus of the bailout plan. He told the panel that Treasury assessed how best to use the TARP funds thru this period. "The U.S. has 'turned a corner' in averting a financial collapse, but more work needs to be done to get things back to normal", Paulson said.

Then he explained why the administration switched bailout strategy. He indicated that, given the severity and magnitude of the situation, an asset purchase program would not be effective enough, quickly enough. Therefore, Treasury decided to forgo its initial plan to buy illiquid assets from banks and other entities and instead developed a plan to inject capital directly into banks. The rationale for developing the capital injection program rests on the assumption that “by investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit.”

Many Congressmembers complained about the administration's “180 degree change in policy”. Purchasing trouble assets was the cornerstone of the financial market rescue plan and was almost the entire focus of Congressional debate in the period leading up to legislative enactment. But, as soon as Treasury received the money, it decided that giving capital to banks in return for preferred stock was a better use of the funds. This, some members felt, was obviously deceptive. Members felt that they were fooled by Treasury policy makers.

Paulson argued that Treasury couldn't pursue its initial strategy because after investing $250 billion in banks, Treasury didn't have enough left to have a meaningful impact. An emphasis on capital seems the better strategy going forward. Paulson said he believed that “more capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is also essential to increasing lending which, although difficult to achieve during times like this, is essential to economic recovery.”

However, one of Congressman, a gentleman from Pennsylvania, expressed his disappointment that the Administration has been flip-flopping and that Treasury did not inform Congress immediately of the change. “Do we have a plan? Where are we going?” He asked. “There is no playbook for responding to turmoil we have never faced,” Mr. Paulson responded. “We adjusted our strategy to reflect the facts of a severe market crisis.”

Congressional Democrats questioned the management of the bailout program, stating "Congress gave you the authority you requested, but the economy has only gotten worse." Mr. Paulson suggested not all the news was bad. “Our system is stronger and more stable than just a few weeks ago," he said. And Mr. Paulson pointed out that the financial rescue legislation was not meant to be a panacea for all our economic difficulties. "It will take a while to get lending going and repair our financial system" he said. “This won’t happen as fast as any of us would like, but it will happen much, much faster than it would have had we not used the TARP to stabilize our system.”

(Tian Weng,
Master of Economics' 09
George Washington University)

Tuesday, October 7, 2008

Stunned… again… and we’re not the only ones…(Deanne R. Upson)

We wrote on September 22, 2008 that we were stunned to learn that banking and financial market regulators were considering using taxpayer funds to finance the creation of a separate entity to hold "toxic" financial instruments. We thought this would be a dangerous suggestion that will not solve the problem.

We wrote on April 3rd : With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic.

We wrote: "To protect the public and the markets, these newer derivative contracts should be extinguished. To put the fire out, put the fire out."

Apparently, we’re not the only ones who saw this coming, raised the alarm, and were ignored. In his Commentary in the New York Times on Sunday, September 28 Ben Stein notes similar concerns and the need to “annul” financial gambling run rampant by the financiers who peddle derivatives, including the impossible to value “credit-default swaps.” Stein notes, “These derivatives are “weapons of financial mass destruction,” in the prophetic words of Warren Buffett.” Stein questions, “Why is this [correction] causing so much anguish? It must be the side bets, the credit-default swap bets, multiplying the effect of the housing downturn many times over.”

Socially responsible investing principles require that the perspectives of high, low- and moderate-income people are taken into account. We noted that on Friday, September 26, House Financial Services Committee held a public hearing titled, “The Future of Financial Services: Exploring Solutions for the Market Crisis” on Wednesday, September 24th. At the hearing one member noted her worries concerning the adverse impact of the current situation on women and minority owned businesses. Mr. Paulson replied that he got her message but would work through the Treasury plan first.

Right. It may be that impacts on owners of minority and women owned businesses – let alone homeowners and small businesses – are of little concern, since these are not people that members of the Wall Street Buddy System know, and therefore come after the people and financial markets they do know.

We noted in our posting Wednesday October 1, SRI Provisions of the Bailout Bill, that SRI principles are included in Sec 103 Consideration (of social issues):
(1) Protect the interest of taxpayers
(2) Protect American jobs, savings, and retirement securities
(3) Keep their homes and to stabilize communities
(4) Providing financial assistance to financial institutions, including those serving low and moderate-income populations and other underserved communities.

SRI Principles are also considered in Sec. 107 Contracting (social issues):
The Secretary shall develop and implement standards and procedures to ensure the inclusion and utilization of minorities and women, and minority- and women-owned business, in that solicitation or contract, including contracts to asset managers, servicers, property managers, and other service providers or expert consultants.

We urge Secretary Paulson and Mr. Kashkari to heavily utilize SRI principles and MWBEs considerations in the implementation of the Bailout Plan. There needs to be a bottom up approach to augment the top-down approach. This, hopefully, will create a path to new prosperity.

Deanne R. Upson
Sustainability Advisor

Friday, September 26, 2008

Cash for Trash (Revised)

President George W. Bush last week laid out a $700 billion Wall Street rescue plan ostensibly aiming at preserving the nation’s overall economy. Dubbed "Cash for Trash,” the plan has sparked a sharp debate. The House Financial Services Committee held a public hearing titled, “The Future of Financial Services: Exploring Solutions for the Market Crisis” on Wednesday, September 24th at Rayburn House Office Building. This was a legislative hearing to examine the Bush Administration’s financial services proposal. Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke explained the proposal at the hearing.

The hearing started at noon and included two parts. At the beginning, members of the Committee were given an opportunity to note their concerns and to comment on the bailout plan. Most did not endorse the plan: they thought it would be a mistake to rush such a huge expenditure, one that would boost the national debt to over 70% of GDP.

Committee members addressed four major sticking points. First, the lack of communication with the public before the plan came out. Members indicated that the Administration should tell the American people what happened and why the plan is needed. The second concern centered on benefits to the taxpayers, and members suggested that "people must be the first priority - we should protect taxpayers. It is absolutely unfair to use taxpayer funds to fix a hole Wall Street firms dug. Taxpayers should share in the benefits of this plan." Third, some members suggested that “robbing Peter to pay Paul” will not solve the problem. From a long-term development perspective, the country may experience a long and painful recession. Last but not least, members stated that public oversight of the Treasury rescue operation is required, especially in light of the lack of financial asset transparency. Members were concerned that someone may receive a unfair windfall using taxpayers’ money.

In the second part of the hearing, after 2:30pm, Mr. Paulson, and Mr. Bernanke tried to convince Congress that a $700 billion plan is the only way out of the current crisis. Mr. Paulson acknowledged the severity of the problem and stated that he understood the concerns raised, but explained the plan seeks to “avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of business both small and large, and the very health of our economy”. He clarified that the $700 billion program was an “asset purchase program” instead of a “government spending program” because these assets would ultimately be resold with proceeds coming back to the government. He also pledged to protect the taxpayer to the maximum possible extent possible and to ensure transparency and oversight while implementing the program. Moreover, he is convinced that, although this approach may look bold and risky, it would be a far less costly approach than other alternatives. Finally, he expressed a desire to have Congress and the Administration work closely together to get through the difficult period. “Many of you also have strong views, and we must have that critical debate, but we must get through this period first,” he said.

The Fed Chairman Mr. Bernanke outlined the threat to the economy from the home mortgage crisis and argued that inaction would produce an even larger catastrophe, hence, the Federal Reserve's strong stand in favor of Treasury’s proposal to buy illiquid assets from financial institutions. He argued that having the government steps in would help restore normalcy to the market. “It’s possible for the government to buy these assets, to raise prices, to benefit the system, to reduce the complexity, to introduce liquidity and transparency into these markets and still acquire assets which are not being overpaid-for in the sense that under more normal market conditions, and if the economy does well, most all of the value can be recouped by the taxpayer.” Mr. Bernanke said in his testimony.

One member noted her worries concerning the adverse impact of the current situation on women and minority owned businesses. Mr. Paulson replied that he got her message but would work through the Treasury plan first.

(Tian Weng, Master of Economics' 09
George Washington University
Washington, DC 20052)

Thursday, February 14, 2008

Treasury Secretary to Subprime Mortgage Victims: "I did not create this problem."

We attended today's Senate Banking Committee hearing on the State of the U.S. Economy and were surprised to hear the Secretary of the Treasury of the United States say, in response to a question from Senator Robert P. Casey (D-PA),

"I did not create this problem..."

Not only is this poor customer service (imagine a General telling you "I did not start this war," or your doctor telling you "I did not create the health issue you are having..." or a Chef telling you "I did not grow this corn...") but some will tell you that the statement itself may, in fact, be false. Several market analysts feel that Mr. Paulson may have, at some level, helped create the problem. They point out that the firm he once ran, Goldman Sachs, made millions by facilitating the creation and distribution of subprime-backed investments. We would point out that Goldman has not been implicated in the most egregious subprime mortgage market practices.

Still, the statement is especially troubling coming from the Administration's top economic policy official. Some will believe this statement reflective of the prevailing attitude within the Administration: those who are in trouble are, somehow, at fault for falling prey to sophisticated, well designed, well executed, misleading and fraudulent financial market practices.

As we noted on November 9th, 2007, most of the people losing their homes are low to moderate income people of color. Those with new ideas and solutions to the problem were carefully excluded from providing suggestions to help with the problem, due to the same bigotry that gave rise to it.

What some will see as even more troubling is the fundamental lack of understanding of the seriousness of the problem. We did not hear, from any of the witnesses (Federal Reserve Board Chairman Bernanke, Treasury Secretary Paulson and Securities and Exchange Commission Chairman Cox), any statement that would lead anyone to believe they know:
  1. How many subprime mortgage loans there are currently;
  2. The terms of the average subprime mortgage loan (interest rate, maturity, points paid to originator, who originated the loan, who owns the loan...and how it got to its current owner..), and;
  3. How many subprime mortgage loans might default over the next month, year, five years, etc.
  4. Who got paid? What were the total fees paid by subprime borrowers? Who got these fees?
  5. Who, and I mean who EXACTLY, owns these subprime mortgages now?
  6. How did they come to own them? By what mechanism? other words, a complete and stunning lack of relevant information that policymakers need to effectively address the problem.

Now we are worried....