Tag Archives: Paulson

Paulson text

Posted on by


[Skip to the end]

“During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets—our initial focus—would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.”

He knew this before the bill was signed and didn’t mention it?


[top]

Share

NYT: Fed to Give A.I.G. $85 bln Loan and Takeecon

Posted on by


[Skip to the end]

The Fed has a major strategic advantage over private sector buyers.

With the Fed making the loan, credit spreads in general should narrow.

This will add value to AIG’s short credit position which is where most of the mark to market losses are.

So the Fed’s actions to reduce systemic risk also increase the value of AIG once they take them over.

It’s good to be the Fed!

(not that it matters to the Fed itself financially one way or the other, but they probably don’t know that)

Fed Close to Deal to Give A.I.G. $85 Billion Loan


by Michael J. de la Merced and Eric Dash

In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

In return, the Fed will receive warrants, which give it an ownership stake. All of A.I.G.’s assets will be pledged to secure the loan, these people said.

The Fed’s action was disclosed after Treasury Secretary Henry M. Paulson and Ben S. Bernanke, president of the Federal Reserve, went to Capitol Hill on Tuesday evening to meet with House and Senate leaders. Mr. Paulson called the Senate majority leader, Harry Reid, Democrat of Nevada, about 5 p.m. and asked for a meeting in the Senate leader’s office, which began about 6:30 p.m.

The Federal Reserve and Goldman Sachs and JPMorgan Chase had been trying to arrange a $75 billion loan for A.I.G. to stave off the financial crisis caused by complex debt securities and credit default swaps . The Federal Reserve stepped in after it became clear Tuesday afternoon that the banking consortium would not be able to complete the deal.

Without the help, A.I.G. was expected to be forced to file for bankruptcy protection.

The need for the loans became necessary after the major credit ratings agencies downgraded A.I.G. late Monday, a move that likely to have forced the company to turn over billions of dollars in collateral to its derivatives trading partners worsening its financial health.

Until this week, it would have been unthinkable for the Federal Reserve to bail out an insurance company, and A.I.G.’s request for help from the Fed of just a few days ago was rebuffed.

But with the prospect of a giant bankruptcy looming – one with unpredictable consequences for the world financial system – the Fed abandoned precedent and agreed to let the money flow.


[top]

Share

Thoughts on the bailout of Freddie Mac and Fannie Mae

Posted on by


[Skip to the end]

It comes down to public purpose.

The agencies were set up to provide low cost funding for moderate income home buyers.

They have done that reasonably well.

However, for probably 20 years I’ve been saying the agencies should fund themselves directly with the Treasury or Fed financing bank (same as Treasury). This both lowers their cost of funds, which would get passed through to the home mortgages they originate, and eliminates the possibility of a liquidity crisis.

Market discipline should not be on the liability side. It subjects them to risk of a ‘liquidity crisis’ where those funding you can decide to go play golf one day and cut you off for no reason and put you out of business. (And any entity subject to private sector funding to continue operations is subject to this kind of liquidity risk.) Regulation should focus instead on the asset side with assets and capital fully regulated.

This was done for the most part, and this is the same as the general banking model which works reasonably well. Yes, it blows up now and then as banks find flaws in the regulations, but the losses are taken, regulations adjusted, and life goes on.

The agencies made some loans to lower income borrowers as that went bad.

Even with this, most calculations show that at today’s rates of mortgage default they still have adequate capital to squeak by – the cash flow from the remaining mortgages and their capital is pretty much adequate to pay off their lenders (those who hold their securities).

But if defaults increase their ‘cash flow net worth’ could turn negative; hence, it would currently not be prudent for the private sector to fund them.

Paulson has now moved funding to the Treasury where it should have been in the first place.

This removes the possibility of a liquidity crisis and allows the agencies to continue to meet their congressional charge of providing home mortgages for moderate and lower income borrowers at low rates.

There was no operational reason for Paulson to do more than that, only political reasons.

The agencies could then have continued to function as charged by Congress.

If there were any long-term cash flow deficiencies, they would be ‘absorbed’ by the Treasury as that would have meant some of the funding for new loans was in fact a Treasury expense as it transferred some funds to borrowers who defaulted.

Congress has always been free to change underwriting standards.

In fact, the program was all about easier underwriting for targeted borrowers.

If there were any ultimate losses, that was the cost of serving those borrowers.

To date there have been only profits, and the program has ‘cost’ the government nothing.

With Treasury funding and a review of underwriting standards the program could have continued as before, which it might still do.

The entire episode was a panic over a possible liquidity crisis due to the possibility of the Treasury not doing what it did, and what should have been done at inception.

I don’t think the Treasury getting 79.1% of the equity after making sure it took no losses and got a premium on any ‘investment’ it made served any non-political purpose.

There was no reason current equity holders could not have gotten the ‘leftovers’ after the government got its funds and a premium also determined by the government.

Equity IS the leftovers and could have been left alone. (It wouldn’t surprise me if some of the shareholders challenge this aspect of the move.)

Yes, holders of direct agency securities were ‘rescued’, but they were taking a below market rate to buy those securities due to the implied government backing and lines of credit to the government.

I don’t see it as a case of ‘market failure’ but instead poorly designed institutional structure with a major flaw that forced a change of structure.

It’s a failure of government to do it right the first time, probably due to politics, and much like the flaw in the eurozone financial architecture (no credible deposit insurance – another form of allowing the liability side of the banking system to be subject to market discipline), also due to politics.

As for compensation, that too was ultimately under the control of Congress, directly or indirectly.

Lastly, in the early 1970s, with only 215 million people, housing starts peaked at 2.6 million per year.

Today, with over 300 million people we consider 2 million starts ‘gangbusters’ and a ‘speculative boom’.

And in the early 1970s, all there were was bunch of passive S&Ls making home loans – no secondary markets, no agencies, etc.

Point is, we don’t need any of this ‘financial innovation’ to further the real economy.

Rather, the financial sector preys on they real sectors, in both financial terms and real terms via the massive brain drain from the real sectors to the financial sector.

At the macro level, we’d be better off without 90% or more of the financial sector.


[top]

Share

Bloomberg: Paulson continues weak USD policy

Posted on by


[Skip to the end]

Seems Paulson is still blocking foreign CBs from accumulating USD financial assets. This is a negative for the USD and a negative for US real terms of trade.

It does support US exports and reduces the need to add to domestic demand, even as US consumption remains low.

Yuan Rises Most in 3 Weeks After Paulson Calls for Appreciation

by Kim Kyoungwha and Belinda Cao

(Bloomberg) The yuan climbed by the most in three weeks after U.S. Treasury Secretary Henry Paulson urged China to let its currency appreciate to curb inflation and deter Congress from introducing trade penalties. Bonds gained.


[top]

Share

Bloomberg: Stern Says Fed Rate Rise `Can’t Wait’ for Markets to Stabilize

Posted on by


[Skip to the end]

A minority view but a growing one.

They are thinking the low rates are destabilizing the housing and financial markets via the weak USD channel.

Stern Says Fed Rate Rise `Can’t Wait’ for Markets to Stabilize

by Vivien Lou Chen
(Bloomberg) Federal Reserve Bank of Minneapolis President Gary Stern said the central bank shouldn’t wait for financial and housing markets to stabilize before raising interest rates.

“We can’t wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course” and begin raising rates, Stern said in an interview in Minneapolis today. “Our actions will affect the economy in the future, not at the moment. Forecasts play a critical role.”

The comments by Stern, a voter on the rate-setting Federal Open Market Committee this year, may reinforce traders’ forecasts for a rate increase by year-end. Stern indicated that Treasury Secretary Henry Paulson’s rescue plan for Fannie Mae and Freddie Mac will help prevent a deeper housing and economic slump.

“We’re pretty well-positioned for the downside risks we might encounter from here,” said Stern, 63, the Fed’s longest-serving policy maker. “I worry a little bit more about the prospects for inflation.”

The bank president compared the current credit crunch to the one in the early 1990s, which restrained economic growth for almost three years. That’s a more sanguine assessment than others have. The International Monetary Fund has said it’s the worst since the Great Depression and former Fed Chairman Alan Greenspan said it’s the most intense in more than half a century.

17-Year High
Stern spoke two days after government figures showed consumer prices surged 5 percent over the past year, the biggest jump since 1991. Excluding food and fuel, so-called core prices rose 2.4 percent, higher than the 2.1 percent average over the last five years.

“Headline inflation is clearly too high,” Stern said. He added that he’s concerned that will feed through to core prices and public expectations for inflation.

As long as energy and food costs level off, core inflation ought to slow over the next year, Stern said.

Crude oil has surged 73 percent in the past 12 months, and rose to a record of $147.27 a barrel on July 11. Worldwide, prices for food commodities such as wheat and rice were 43 percent higher in April than a year earlier, according to the United Nations Food and Agriculture Organization.

Stern declined to say when policy makers may shift toward raising rates. The FOMC halted its series of seven reductions last month, after reducing the benchmark rate to 2 percent, from 5.25 percent last September.

Rate Outlook
Traders estimate 58 percent odds that the Fed will boost its main rate at least a quarter point from 2 percent in October, after keeping borrowing costs unchanged in August and September. There’s a 73 percent probability of a move by year-end, futures prices show.

Minutes of the Fed’s June 24-25 gathering, released July 15, showed that some Fed officials favored an increase in rates “very soon.” Fed Chairman Ben S. Bernanke this week said there are risks to both inflation and growth, abandoning the FOMC’s June assessment that the threat of a “substantial” downturn had receded.

“This is a very challenging policy environment,” Stern said today. “I don’t think we ought to pretend that” an end to the credit crisis “won’t take some time,” he said.

The Fed on July 13 offered Fannie Mae and Freddie Mac access to direct loans from the central bank in case the firms needed the financing before Congress acts on Paulson’s rescue plan. The Treasury chief is seeking power to make unlimited loans to and purchase equity in the companies if needed.

Stern said the proposals are “clearly designed to bolster Fannie and Freddie.”

Stern is the only FOMC member who’s served with three chairmen: Paul Volcker, Greenspan and Bernanke. He became the bank’s president in 1985.


[top]

Share

FT: Time for comrade Paulson to pull the plug on the Fannie and Freddie charade

Posted on by


[Skip to the end]

Totally misguided regarding public purpose.

For one thing, the shareholders of the agencies are still there for ‘market discipline’ – all that’s been done for them is eliminated liquidity issues, not solvency issues.

At the end of the day a lot of houses were built for a lot of people who live there.

These are real assets and real standards of living that have been supported.

Is anyone arguing it’s a waste of real resources? That’s the real issue.

Also, fiscal policy is all about demand management, not a ‘pretty’ balance sheet by some arbitrary standard.

And, of course, without the fundamental understanding that the funds to pay taxes and buy government securities comes from government spending policy is likely to be suboptimal at best.

Also, note the bias towards ‘inflation’ that’s built into the political process.

This all supports prices and GDP.

There are no supply side constraints on government spending and/or lending with floating fx, unlike the gold standard of 1907/1930, and other fixed fx regimes, past and present.

Time for comrade Paulson to pull the plug on the Fannie and Freddie charade

by Willem Buiter

Are Fannie Mae and Freddie Mac adequately capitalised, as asserted recently by US Treasury Secretary Hank Paulson, Federal Reserve Board Chairman Ben Bernanke and their regulator Office of Federal Housing Enterprise Oversight Director James B. Lockhart III? The answer is: obviously not, if these two government-sponsored enterprises of the US federal government had to make a living on normal private commercial terms. Obviously not if they were subject to the market discipline preached by Paulson and Bernanke, but not practiced when it comes to large financial institutions perceived as systemically important (too large or too interconnected to fail) or too politically sensitive to fail.


[top]

Share

Schmidt of RBS favors USD over Euro — a turning point?????

Posted on by


[Skip to the end]

Bloomberg News Video Clip

Maybe, but…

It will be tough for the USD index to move up without the CBs and monetary authorities buying it, and that means crossing Paulson and accepting being labeled a ‘currency manipulator’ and ‘outlaw.’

And the higher crude prices mean USD spent on imports increase and unless spending on US domestic assets, goods, and services goes up by that much those unspent USD need to be/are ‘saved’ by non-residents and the USD goes to a level that reflects their current desire to accumulate them.

A rising USD is evidence that the foreign sector wants the extra USDs and are fighting over them. A falling dollar is evidence of the reverse.

Also, if they don’t like the other currencies any more than they like the USD, the currencies can remain relatively stable as the excess USDs are all spent on US exports and US domestic assets. The evidence of this is rising/accelerating US exports and export prices and support for US assets which can include real estate and equities. Note the falling USD has made US equities that much cheaper for non-USD based investors.

This is all part of the same adjustment process, which includes ‘inflation’ as all the pieces described above support higher prices for goods and services both in the US and elsewhere.

And the ‘inflation channel’ also is part of the adjustment of the trade gap. I use the extreme example (hopefully it’s only an extreme example) of prices adjusting upward until coffee is $60 billion a cup, in which case the trade gap of $60 billion per month is only one cup of coffee. In other words, higher prices work to bring down the ‘real’ trade gap.

So they are all working together -trade, fx, prices- within current institutional arrangements (including CBs not wanting to be labeled outlaws and currency manipulators vs the desire to support their exporters, etc) as they always and continuously do to adjust desired to actual ‘savings’ of financial assets, and sustain all the indifference levels.

A turning point if the level of the USD is sufficiently low to drive the US exports and asset sales to non residents needed to keep their residual accumulation of USD to their desired levels.

And with crude prices still rising, it seems likely to me that more USD are being credited to ‘their’ accounts than they currently wish to cling to at current exchange rates, so more downward pressure on the USD would not surprise me. Along with the associated increase in US exports and higher prices in general.


[top]

Share

DXY and exports

Posted on by


[Skip to the end]

2008-06-03 Dollar Index vs US Exports

Dollar Index vs US Exports

Right – seems to me the dollar will fall until it’s at a level where the trade gap goes to about zero. So even though exports are way up and the trade gap down, there could be a lot more to go.

A nation can only run a trade deficit to the extent non-residents (governments and private sector agents) desire to net accumulate its financial assets (or buy its domestic assets such as real estate).

Seems to me Paulson, Bush, and Bernanke have successfully kept the world’s CBs, monetary authorities, and portfolio managers from actively accumulating USD financial assets.

Doesn’t seem like jawboning is going to alter foreign ‘savings desires’ apart from short term trading responses.


[top]

Share

2008-05-03 Weekend update (in brief)

Posted on by


[Skip to the end]

2008-05-03 Real GDP

No recession here, and Q1 likely to be revised higher when March trade numbers come out.

Q3 could be 2% depending on the multiplier from the fiscal package, and by Q3 other government spending will be kicking in for the elections and housing is unlikely to be subtracting from GDP. It could even be adding by then.

As suspected, the current weak housing market has been offset by strong exports.

Financial sector losses have nothing to do with GDP unless they somehow reduce aggregate demand.

The prime suspect was the credit channel, but so far the evidence shows only limited damage due to tighter credit conditions, and not the downward spiral feared by the Fed and many other private economists.

2008-05-03 Capacity Utilization, ISM Manufacturing

On the soft side, but no recession.

2008-05-03 Personal Spending, Personal Income

The consumer is muddling through as best as can be expected in an export economy.

2008-05-03 New Home Sales Median Prices, New Home Suppy (Actual Units)

Median prices are soft and may or may not have bottomed, as actual inventories have worked their way down to relatively normal levels for a relatively normal sales pace (which we don’t have yet).

2008-05-03 NAHB Housing Index, NAHB Present Sales Index, NAHB Future Sales Index, Conference Board Home Buying Intentions

The bulk of the adjustment may have been bottoming around October/November.

2008-05-03 Housing Starts, Building Permits

Low starts have reduced supply as builders and buyers remain cautious.

2008-05-03 Government Spending, Government Revenue

Government spending is roaring back and added nicely to Q1 GDP (March print above has timing issues and wasn’t functionally as low as indicated).

Revenue also holding up, indicating no recession yet.

2008-05-03 Export Prices, U. of Michigan 12 Month Inflation Expectations

Every price chart is looking higher, and expectations have elevated, and the Fed keeps cutting rates. Who would’ve thought?

Fisher and Plosser make the mainstream case and are outvoted.

2008-05-03 Employment Cost Index

Wages remain ‘well contained’.

(If you don’t count import prices from China..)

2008-05-03 Import Prices ex. Petro

Globalization is now inflationary.

2008-05-03 U. of Michigan Confidence

All the confidence surveys look about this weak, and at recession type levels, and about 90% of voters think we are in a recession.

American’s aren’t used to an export economy with declining real terms of trade – a mercantilist concept publicly supported by Bernanke and Paulson.

And they don’t seem to like it.


[top]

Share

Money (USD)

Posted on by

My take on the USD:

It was at a level based on foreigners wanting to accumulate $70 billion per month which also = the US trade gap (accounting identity).

Most of that desire to accumulate came from foreign CBs trying to support their exporters, oil producers accumulating USD financial assets, and foreign portfolios allocating some percentage of assets to USD assets.

Paulson cut off the CBs calling the currency manipulators and outlaws.

Bush cut off the oil producers by being perceived to be conducting a holy war.

Bernanke scared off the portfolio managers with what looks to them like an ‘inflate your way out of debt’ policy.

And US pension funds are diversifying out of USD into passive commodities and foreign securities.  Looks to me like the desire to accumulate USD overseas is falling towards zero rapidly.

This means they sell us less and buy more of our goods, services, and our real assets.

Volumes’ of non oil imports are falling and of oil imports are flat.

The dollar has gotten low enough for the trade gap to fall from over $70 billion to under $60 billion per month (February was an aberration IMHO).

The dollar will ‘adjust’ until it corresponds with a trade gap that = desired foreign accumulation of USD financial assets.

I see no reason to think the trade gap should not go to zero.

The USD probably has not traded down enough to reflect the zero desire to accumulate USD abroad.

The ECB has serious ideological issues regarding buying of USD.  Not the least of which they don’t want to give the impression that the USD is ‘backing’ the euro, which would be the appearance if they collected USD reserves.

The ECB has an inflation problem, and they believe the strong euro has kept it from being much worse.

The policy ‘shift’ might be the process of ending of US rate cuts at the next meeting by cutting less than expected.

This might first mean only a 25 basis point cut when the market prices in 50 basis points, followed by no cut when markets price in 25 basis points, for example.

This would firm the USD and soften the commodities near term, as after the last 75 basis point cut when markets were pricing 100 basis points.

But this does not change the foreign desires to accumulate USD as direct intervention by the ECB would, for example.

So the adjustment process that gets us to a zero trade gap will continue.

And it will continue to drive up headline CPI with core not far behind.

And US GDP will muddle through in the 0% to +2% range with weak private sector consumption being supported by exports, US government consumption, and moderate investment.

Share