Okay. So now I reveal myself for what I am. A conspiracy theorist, a nutcase, a crank.
But tell me, why did Friday come early this week?
Isn't it a tradition for bank reorganizations to be announced after market close on Friday nights? Isn't part of the reason for that to give markets time to chill out, think a bit, notice that the ATMs still work and the branches have not been demolished, to let the sun rise and shine for a whole two days, in order to diminish the possibility of people freaking out?
So, here is today's news cycle. Red State Republicans react to a unprecedented popular outrage among their constituents and refuse to get with the program. It is leaked that President Bush solemnly opined, “If money isn't loosened up, this sucker could go down.”
Was he standing at the teller window with a note about a bomb when he said that?
And, for good measure, the government announces "by far the largest bank failure in American history" with less than 16 hours to market open.
That loud noise, was that the sound of a single gunshot? Have the robbers killed a hostage, to show that they mean business?
Yes, the irony is delicious that Paulson's plan has for the moment been scuttled by the ideologues that his party has cynically nurtured, by the base that the business wing of the party always thought they could play. And yes, the House Republicans' alternatives, as reported by Justin Fox, are laughable.
But that doesn't explain the sequence of events this evening. Nor does it excuse the fact, that if a legislative response to the crisis was so critical, a single deeply flawed proposal was thrown at the Congress a week before adjournment, under terms that basically said "pass this, or else". It is surely coincidental that the plan was the most generous and least disruptive policy possible to industry from which Secretary Paulson hails.
No, I am a nutcase. These are all public servants doing their very best for the American people in a difficult situation. We need to pull together, rise above politics. Our leaders would never manipulate markets to frighten and punish the public so that we fall into line. That could never happen in the United States of America.
I am dark. Secretary Paulson could have offered any number of proposals to help ensure that this collapsing house of cards is a controlled demolition. He and Dr. Bernanke had months to put together policy options, long months between the fall of Bear and the fall of Lehman to create orderly processes for disorderly events they knew could come. At the last moment, they offered one option, a particularly unpersuasive plan imperiously presented as a fait accompli. When Congress balked, they relented and offered a few crumbs so that the people we elected could nibble at the edges without altering the core. And today, when it looks like those crumbs might not have been enough, we have the largest bank failure in American history, announced, oddly, on a Thursday night.
| Steve Randy Waldman — Friday September 26, 2008 at 2:43am | permalink |
1. Legal Liability for Goldman Sachs and Other Financial Institutions – investors (hedge funds, foreign financial institutions, and many others) were sold these toxic mortgage backed securities while some, primarily Goldman Sachs, were making bets that these securities would fall in value.
This situation is similar to the problems that were uncovered surrounding Auction Rate Securities (ARS). Investment banks were accused of selling ARSs to investors while liquidating their own positions. The banks agreed to pay off the investors and pay a fine.
Complaint filed regarding Auction Rate Securities
The Complaint charges Goldman Sachs with violations of federal securities laws. Among other things, plaintiff claims that defendants' material omissions and dissemination of materially false and misleading statements concerning auction rate securities caused those securities to be overvalued and artificially inflated, inflicting damages on investors.
Goldman settled by paying investors par and paying a fine.
2. Legal Liability for Fraudulent Activities in the Mortgage Pipeline – If there was fraud in any part of the process, and it is becoming more apparent there was, and anybody at the banks knew of the fraud or could have been reasonably expected to know, the banks would also be liable for losses to investors.
3. Hedge Funds are Part of the Problem – If hedge funds are also now too important to be allowed to fail, an FDIC style bailout will not work. However, it is difficult to sell a plan that bails out wealthy, foreign hedge fund investors.
Although the Treasury claims it will not be purchasing these securities directly from hedge funds, there is nothing that prevents the hedge funds from selling to a bank and the bank selling to Treasury. So, the banks will simply act as a conduit for the hedge funds.
If I am correct, it would explain the need to go with a plan other than a Swedish style intervention. It would also explain the reluctance to agree to equity and restrictions on compensation.
Questions that Paulson Needs to be Asked?
1. Did Goldman Sachs invest in securities that would increase in value at the same time that it was selling those securities to others? What would be the consequences for Goldman if it had to purchase those securities back from investors due to misrepresentation? How much Goldman stock and options do you own? Do you think it is wise to have someone with so many conflicts of interest in charge of this process?
2. Are you aware of any fraudulent activities that occurred at Goldman in the issuing process of MBSs prior to selling the securities to investors?
3. Will you restrict the purchase of securities to those that the bank has owned for more than one year, preventing them from being a conduit for hedge funds?