Hank Paulson – National Hero

WSJ’s Evan Newmark writes an amusing article … It’s Time to Enshrine Hank Paulson as National Hero (and he seems to be serious):

I said it last October and I’m sticking by it. And now, there’s actual evidence to back me up. The TARP bailout worked. The Wall Street crisis is over.

At least, the market thinks so. At around 30, the VIX, the market’s volatility barometer, is trading at less than half the average level of last autumn. A share of Morgan Stanley is trading more than 400% higher than its October low.

And by this coming Sept. 15, the first anniversary of the fall of Lehman Brothers, five of the original eight TARP banks will have repaid the American taxpayer $50 billion plus interest.

Don’t get me wrong. The economy is still in crummy shape. But, at least it’s functioning. Not too long ago, we fretted over TARP banks collapsing. Now, we worry about getting full value for our warrants in the same banks.

In an excellent piece published today, my WSJ colleague Peter Eavis grumbles about the measly 5.6% returns earned by taxpayers off their investment in the top 16 TARP banks.

But Paulson’s intent for TARP wasn’t just to make money for the taxpayer. It was to stabilize the credit markets and save the banks at the lowest possible cost.

And that’s exactly what TARP has done. Who can doubt the amazing recovery of the credit markets? The best performing asset class so far in 2009 has been distressed debt, up by nearly 40%.

And the banking system? Investors are now throwing money at it. In May, $85 billion of fresh capital was raised by TARP banks. Bank of America alone has raised $33 billion in capital since the start of the year.

All of this is not to suggest that TARP alone made all these good things happen. Certainly, Ben Bernanke’s Fed has been pretty forgiving with its monetary policy.

Nor is it to suggest that Hank Paulson knew exactly what he was doing in the frenzied days of last fall. He didn’t. The TARP as originally conceived was to buy up toxic assets off the bank balance sheets. To this day, those assets are still sitting there.

But TARP was the beginning of the end of the crisis. And it was Paulson’s baby.

He got the Treasury its $700 billion blank-check, in spite of furious opposition from his own party. He got all the big banks — the good (J.P. Morgan), the bad (Bank of America) and the ugly (Citi) — to go along with TARP.

And by structuring the Treasury’s investments with repayable preferred equity and warrants, he gave both the taxpayer and the banks a workable exit strategy.

Of course, everybody in Washington and on Wall Street, got all excited when Obama came to town. The collective wisdom was that both Paulson and his TARP were failures. And the incoming Treasury Secretary duly promised all sorts of new-fangled programs like the PPIP.

But what did Geithner end up doing?

Basically, what Paulson had done before. The TARP. Yes, the Treasury dressed the TARP up with the rigor of the “stress tests,” but at its core Geithner’s primary policy is the TARP.

Nothing wrong with that. If something works, it works. Just give credit where it’s due. And that would be with Hank Paulson, national hero.

There is no need to dignify clowns like these and nonsense like this with rebuttals or to explain the Economics of Corporate Bailouts yet again. There is also no point in delving into Newmark’s past as a managing director at Goldman Sachs under Hank Paulson. All this nonsense will be proven wrong sooner or later.

Hm … what does this remind me of … ah right …

… Mission Accomplished!

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Time to Investigate Paulson’s & Bernanke’s Crimes

New York Attorney General Andrew Coumo wrote a letter to congressional committee and oversight leaders and the SEC chairman, It contains highly incriminating information about former Secretary Treasury Hank Paulson and Federal Reserve Chairman Ben Bernanke:

On September 15,2008, Merrill Lynch entered into a merger agreement with Bank of America. The merger was negotiated and due diligence was conducted over the course of a tumultuous September 13-14 weekend. Time was of the essence for Merrill Lynch, as the company was not likely to survive the following week without a merger. The merger was approved by shareholders on December 5, 2008, and became effective on January 1,2009.

The week after the shareholder vote -and days after Merrill Lynch set its bonuses Merrill
Lynch quickly and quietly booked billions of dollars of additional losses
. Merrill Lynch’s fourth quarter 2008 losses turned out to be $7 billion worse than it had projected prior to the merger vote and finalizing its bonuses. These additional losses, some of which had become known to Bank of America executives prior to the merger vote, were not disclosed to shareholders until mid-January 2009, two weeks after the merger had closed on January 1,2009.

On Sunday, December 14,2008, Bank of America’s CFO advised Ken Lewis, Bank of America’s CEO, that Merrill Lynch’s financial condition had seriously deteriorated at an alarming rate. Indeed, Lewis was advised that Merrill Lynch had lost several billion dollars since December 8, 2008. In six days, Merrill Lynch’s projected fourth quarter losses skyrocketed from $9 billion to $12 billion, and fourth quarter losses ultimately exceeded $15 billion.

Immediately after learning on December 14,2008 of what Lewis described as the “staggering amount of deterioration” at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event (“MAC”) occurred. After a series of internal consultations and consultations with counsel, on December 17,2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.

At a meeting that evening Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Lewis, Bank of America’s CFO, and other officials discussed the issues surrounding invocation of the MAC clause by Bank of America. The Federal officials asked Bank of America not to invoke the MAC until there was further consultation. There were follow-up calls with various Treasury and Federal Reserve officials, including with Treasury Secretary Paulson and Chairman Bernanke. During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement. We do not yet have a complete picture of the Federal Reserve’s role in these matters because the Federal Reserve has invoked the bank examination privilege.

My comment: No problem, all that needs to happen is for Congress to vote the Audit the Fed bill into law so we can once and for all put an end to these silly games.

Bank of America’s attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced:

[W]e wanted to follow up and he said, ‘I’m going to be very blunt, we’re very supportive on Bank of America and we want to be of help, but’ –as I recall him saying “the government,” but that mayor may not be the case -“does not feel it’s in your best interest for you to call a MAC, and that we feel so strongly,” –I can’t recall ifhe said “we would remove the board and management if you called it” or ifhe said “we would do it if you intended to.” I don’t remember which one it was, before or after, and I said, “Hank, let’s deescalate this for a while. Let me talk to our board.” And the board’s reaction was of “That threat, okay, do it. That would be systemic risk.”

In an interview with this Office, Secretary Paulson largely corroborated Lewis’s account. On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management. Secretary Paulson told Lewis a series of concerns, including that Bank of America’s invocation of the MAC would create systemic risk and that Bank of America did not have a legal basis to invoke the MAC (though Secretary Paulson’s basis for the opinion was e,ntirely based on what he was told by Federal Reserve officials).

Secretary Paulson’s threat swayed Lewis. According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, “that makes it simple. Let’s deescalate.” Lewis admits that Secretary Paulson’s threat changed his mind about invoking that MAC clause and terminating the deal.

Secretary Paulson has informed us that he made the threat at the request of Chairman Bernanke. After the threat, the conversation between Secretary Paulson and Lewis turned to receiving additional government assistance in light of the staggering Merrill Lynch losses.

For all I know, this means that Paulson all but admitted to performing securities fraud, at the behest of Ben Bernanke. Bank of America shareholders have a clear case here. It’s time to let the indictments begin…

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