Saturday, November 15, 2008

"Paulson did it quietly and in the background": Then How Did I Know It?

I wonder how many times that I have to read this. From 124 Monkeys:

"I had completely missed this story by Amit Paley until Michael Scherer put up a blog post about it. Basically, the Treasury Department completely bypassed Congress and the Constitution* to revise Section 382 of the U.S. Tax Code. The why of it is pretty obvious on its face. Paulson believes that we’re on the verge of another Great Depression and he intends to not make the mistakes of letting banks fail and contracting the money supply that caused the first one.

*you know, that pesky document that spells out and specifically states that Congress and only Congress shall have the power to tax the people and pass laws about taxation

Paulson’s original plan was to buy up the bad securities and encourage the credit markets to start trading and lending again. Part of that scenario would definitely involve banks buying up other banks that had tons and tons of losses and bad assets on their books. In order to encourage such behavior, Paulson ordered a roll back of Section 382 to make buying companies with lots of losses - either on their books or waiting to be declared - more attractive.

Paulson did it quietly and in the background because he knew the top down nature of his plan, which essentially was “save Wall Street, let the solvent banks carry the overall economy through the crisis, screw the little guys” would go over very, very badly with Congress who would need votes from all those little guys to get re-elected in a month.

What I don’t understand is why this roll back wasn’t rolled back when the TARP plan changed to bank nationalization. Plus, its like totally unconstitutional and stuff."

Here's my post from, read it carefully:

Saturday, October 4, 2008

Not Really Free Market After All

Paulson's stimulus plan:

"Treasury Secretary Henry Paulson’s plan, which is now law, is fiscal stimulus that will be injected directly into the banking system to supplement almost nonexistent private-sector lending with government cash and determination. Mr. Paulson may be shooting the right weapon at the right time because it will help rescue the banks while restarting corporate and consumer lending.

But Mr. Paulson’s fiscal-stimulus work didn’t end with the bailout bill.

With hardly anyone noticing, on Wednesday he pushed through very technical and obscure changes to tax regulations that provide a “tax subsidy” for acquirers of troubled banks. Just as automakers stimulate car sales through rebate checks, the Treasury is providing a form of tax rebate to acquirers of troubled banks. Everyone can thank Hank Paulson and his stealth tax-driven fiscal stimulus for the astonishing news that Wachovia was being acquired by Wells Fargo and not Citigroup. It was Mr. Paulson’s tax subsidy to Wells Fargo that provided the fiscal grease to make this deal happen. Pundits who point to the deal and proclaim that the “free markets work without government help” don’t understand the motivating effect of several billion dollars of tax benefits to Wells Fargo."

Your government's dollars at work.

And this post:

Saturday, October 4, 2008

Are Regulators Always Wise?

On the Wachovia sale:

"Lawyers not involved in the battle said that Wachovia could defend the Wells Fargo deal by arguing that it is better for its shareholders. Wachovia is likely to claim that its fiduciary obligations — its responsibility to protect the interests of its investors — required it to consider the Wells Fargo bid and, given its higher price, to accept that bid.

The litigation could put regulators in a difficult spot. The Wells Fargo deal may be better for taxpayers, but if it succeeds, in the future other financial institutions may not be willing to help the government, as Citigroup did, because of the risk that they might not reap the anticipated benefit."

You think?

And this post:

Monday, October 20, 2008

“One purpose of this plan is to drive consolidation.”

Score one for Surowiecki. From the NY Times:

"As the Treasury embarks on its unprecedented recapitalization, it is becoming clear that the government wants not only to stabilize the industry, but also to reshape it. Two senior officials said the selection criteria would include banks that need more capital to finance acquisitions.

“Treasury doesn’t want to prop up weak banks,” said an official who spoke on condition of anonymity, because of the sensitivity of the matter. “One purpose of this plan is to drive consolidation.”

I understand this as a temporary move, but don't find consolidation, or creating very large banks, a positive development in the long run.

As well, I don't think that a credit stimulus plan that doesn't stimulate lending to be very useful.


Okay. These three posts explain everything. Citigroup had a deal to buy Wachovia brokered by the government. When the TARP was passed, which included the provisions that I knew about at the time, and that people are claiming were hidden, Wells Fargo took advantage of the new law to put a better bid in to buy Wachovia. This put the government in the odd situation of brokering a deal with Citigroup, only then to pass tax subsidies that led to Wells Fargo making a better deal. A suit by Citigroup then ensued.

Also, the TARP plan was designed to acquire toxic assets from banks, not recapitalize them as happened. So, the original plan for recapitalization was to pass these tax subsidies so that banks could merge, making recapitalization easier, and, hopefully, making the banks more profitable, hence more able to pay us back and survive, since there was less competition.

Now, if you followed the Wachovia deal, or tried to understand how TARP could actually work and what it said, these provisions were obvious from the beginning. So, these stories are not news. The only news I can find is that some people claim that it's unconstitutional. But, I believe that is was in the bill that passed, so I'm missing something about this argument. It could be correct, but I need to understand it better.

But, if an amateur blogger like me knew this, how could all these experts not know it?

2 comments:

Sean DeCoursey said...

Those are some prescient posts my friend.

Donald Pretari said...

Sean, Thank you. I love your blog. I tried to post you a message before I posted this, but I had trouble logging in to your service. Take care, Don