Saturday, January 03, 2009

Naked Henry Paulson: Not Very Pretty

Market Ticker finds a real lulu from Henry Paulson, who is now competing with the former FEMA Director for "Jackass of the Decade".

“Excesses . . . built up for a long time, [with] investors looking for yield, mis-pricing risk,” he said. “It could take different forms. For some of the European banks it was eastern Europe. Spain and the UK were much more like the US with housing being the biggest bubble. With Japan it may be banks continuing to invest in equities.”

This argument – already advanced by a number of economists and largely endorsed by Federal Reserve chairman Ben Bernanke – suggests that the roots of the crisis do not simply lie in failures within the financial system."

--quoth Henry. (At this point it is useful to recall that Henry is from Chicago. "FIB" applies.)

Ticker has a memory.

Investors mis-priced risk?

Or did you mis-price risk Henry? Perhaps on purpose?

Why would your company, for example, short something it was selling to investors unless it thought it was overpriced? (This would be Goldman, Sachs...)

Now there's nothing wrong with shorting a stock or bond, of course. Its the expression of an opinion that the price is too high. You believe it will decline in value, so you short it.

Except for one problem - in this case you were one peddling the stuff you were shorting!

So on the one hand we have you telling your customers that this is "Grade AAA mortgage paper", and on the other hand your firm was shorting that very same paper, implying rather strongly that you thought your customers were paying too much for it.

The "Press" in the room nodded, and resumed scarfing up the free noshes...

Now let's talk about what else happened Mr. Paulson.

In 2000 you do recall that you went to the SEC and Congress to request that the leverage limits that bound Goldman Sachs (your company) and the other investment banks be removed, right?

You also remember that in 2004, following that failed attempt, you tried again, and this time your request was granted, right?

You do recall that every one of the failed firms - Lehman, Bear, Fannie, Freddie and AIG - all had leverage more than double that of the previous limits when they blew up, right?

The FIB also had other wisdom to impart!

May 2007: "We think it is near the bottom. It will take a while to work its way through (the system). Fortunately for us, we have a very diverse, healthy economy. ..... housing will be contained......

March 2008: "The worst is likely to be behind us." (In reference to Bear Stearns going under.)

Not only wisdom, but you had ACTIONS!!

September 15th 2008: You congratulated yourself (and Treasury) for not rescuing Lehman - but the very next day you committed the taxpayer to an eighty five billion dollars rescue for AIG, and less than 72 hours after that you threatened martial law and a total collapse of the entire financial system if you were not given $700 billion more to spend in any way your heart desired.

Oh, there's an "imbalance", alright.

It's in Henry's mind.

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