Saturday, July 31, 2010

Hankering for a rewrite of the credit meltdown

Barry Ritholtz turned his loving eye on a piece written by Hank Paulson in WaPo today, in which Paulson blames housing policy for the credit bubble and bust.

Here's a taste of what Hank said in his article:
we must have the fortitude to create a more level playing field between housing and other productive investments.

Fannie Mae and Freddie Mac should not be allowed to revert to their old form, crowding out private competition and putting taxpayers on the hook for failure while shareholders benefit from success. Reform should address the systemic risk they pose and should wean our mortgage finance system from its dependence on these institutions.

Placing Fannie and Freddie in conservatorship was, in my view, the most effective of the stimulus efforts undertaken in the past two years. This stimulus was aimed squarely at the driver of our financial and economic crisis: the decline of home prices.

Barry takes it apart, as usual, so much better than Guambat could ever, so his post is where you should be headed. But before you go, remember that it was Paulson who put Fannie and Freddie into conservertorship, and note these blasts from the past.

Risque business March 16, 2006
Riding a wave of wild trading, a frenzied merger market and some savvy investments, Goldman Sachs rolled over investor expectations to rack up almost $2.5 billion in profits, the most lucrative quarter in Wall Street history.

Goldman's $2.48 billion in net income, or $5.08 a share, was a 64 percent increase over the previous quarter

Surging income in proprietary trading and at the merchant banking unit - where Goldman bet its own money on deals - led the profit rise, but all of the firm's units reported at least double-digit growth.

The story behind Goldman's incredible gains appears to have been a willingness to take more risk - a lot more risk.

"Goldman is ramping up risk appetite to almost uncharted waters,"
said CreditSight's David Hendler.

Goldman's results are a strong boost for its boss, Hank Paulson, who raked in more than $38 million in total compensation last year.

Hendler said the profits may be coming from aggressive trading in sophisticated financial instruments devised by Goldman's own staff, including what he termed "new age" derivatives and complex "black box" structured products.

Up to 40 percent of Goldman's net income is currently at risk, up from an average of 30 percent last year, wrote Hendler in a recent report.

Ratings agency Standard & Poor's said this stellar performance came as all of Goldman's broader risk measurements - the so called VaR, or value at risk - increased.

What's in Santa's Sachs of gifts? Goldman? December 04, 2007
David Gaffen of the WSJ MarketBeat blog has begun the process of shaking the boxes in anticipation of what's under the tree. The tree in this case being the Big Freeze that Hank Paulson, now US Treasury Secretary, recently top Goldman Sachs guru, has been hoping to use to chill out the credit markets.

Ostensibly, the Big Freeze (Matrix, as Gaffen calls it) is meant to help out the poor small schmucks who got teased into ARM breaking mortgage deals. But more sensibly, as Gaffen notes, it is the really big boys, who stand to loose the only leg they have to stand on whilst the little guys only loose an ARM, that are the real intended beneficiaries of Santa's Sachs of goodies.

Gaffen blogs,

"commenters are wondering whether the Treasury’s plan isn’t so much about those on the bottom rungs with subprime loans as those who are leveraged to those loans in the first place.

Marc Chandler, chief currency strategist at Brown Brothers Harriman points out ... “We suspect the subprime problem has been exaggerated to obfuscate the real issue and the real threat to the capital markets,” he writes. “It is the old nemesis – leveraging.

“If we make the payment structure better, who wins? A few people that will eventually default anyways? Nope,” he writes. “The folks that sit on the bulk of the sub-prime related paper, those ‘so far’ untouched from the sub-prime crises. Yep. Goldman Sachs and their pals.”

Fannie Mae's Demise Rooted in the Swinging '60s: Amity Shlaes Sep 10, 2008
This week the news coverage focuses on identifying the implosion's [of Fannie and Freddie] possible catalysts.

One may be all the cash foreign governments had placed in so-called agency debt, the category that includes Fannie and Freddie bonds. My Council on Foreign Relations colleague Brad Setser notes that Treasury Secretary Henry Paulson probably acted with an eye to foreign markets when he announced the government takeover.

Another analysis says that Fannie and Freddie's failure is the result of crony capitalism. This is doubtless also legitimate: aside from Richard Baker, the Fannie critic who served in Congress representing Louisiana until this year, it's been hard to find a lawmaker not intimidated by the GSE arm- twisters.

Yet a third view is that Fannie and Freddie matter because they tell us that recent growth has been more illusory than real.

As Barry wraps up his post:
Paulson oversaw the greatest transfer of wealth in the history of mankind — from taxpayers to insolvent banks and their bondholders. His commentary is thinly veiled attempt to rewrite what actually occurred, and to shift his own sad role from conductor of the theft, to hapless victim of long standing government policy.

If this exercise wasn’t such a transparent attempt at self-exoneration, it would be amusing, Instead, it is merely pathetic.

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