Peter Fisher Is Alarmed

Justin Fox reports:

Justin Fox: Peter Fisher says Hank Paulson needs to be quicker: Peter Fisher used to run the open market desk at the New York Fed. Then he was Under Secretary of the Treasury during the Paul O'Neill years. Now he's co-head of fixed income at BlackRock, the firm that's managing those $29 billion in Bear Stearns assets the Fed took on back in March. So you could say he's kinda plugged in. Here's what he said in a Business Week interview with Maria Bartiromo (it was posted a couple of days ago but I just noticed it):

They've got to help sort out the institutions that are going to be survivors and those that aren't. One of the problems has been that when you give a speech or announce that all the banks in America have got to raise capital, you're pre-announcing dilution, and that doesn't do much for the existing equity owner's confidence. It makes them run for the exits. So I think if banks are going to raise capital, you've got to do it really quickly. Goldman Sachs raised capital in a heartbeat. You don't threaten dilution and therefore upset your shareholders. The other thing is that the authorities have got to close those firms that are not going to be survivors as quickly as possible. We can't wait around for consolidation.

This seems to now be a consensus view now among economists, Wall Streeters and a lot of policymakers in Washington. So why's it taking so long to happen? My first thought is that it's just hard to get everything lined up and figure out who lives and dies and the like. You can't do it in a day or two. But I can't shake the feeling that there's been at least a little bit of foot-dragging about this on Hank Paulson's part. Is it that he sees such triage as admitting failure? Or is he having trouble persuading bank executives that we've reached this point? Or has he had trouble persuading President Bush? Or does he just really really need a nap?

One characterization I have heard is that the Fed, the Treasury, and major U.S. financial institutions are "having a bar fight on the Titanic."

Comments

[AndrewBW]

My inclination is that he can't do this without the president signing off on it, and the president won't sign off on it. See "In Final Months in Office, Bush Is Burdened but Still Confident" (http://www.nytimes.com/2008/10/11/business/11bush.html?_r=1&partner=rssnyt&emc=rss&oref=slogin). Basically the man is out to lunch.

See also
Next President Will Take Office The Day After Election Day (http://www.capitalgainsandgames.com/blog/stan-collender/573/next-president-will-take-office-day-after-election-day).

Nothing significant is going to happen for at least 25 more days.

Yes, I know. We can't wait that long.

[Ken Houghton]

The President would have to sign off on (1) a decision that several of his future sources of income will be eliminated and (2) the elimination will be done by a man who has a horse in the race. (Credit where due: GS has raised capital and should be safe. Suspicion where Undue: GS raised capital because Paulson told them that the banks that survive will be the ones who raise capital. Whether he did this before telling everyone else is left as an exercise to the reader.)

$700B in capital is, as I noted at AB, greater than the market value (a week ago) of four of the largest banks (C, JPMC, BAC, Wells Fargo) and the three remaining IBs combined. So the Fed could probably buy the 5th/3rds and any other superregionals a few times over.

The current scene is the Bank Run in _It's a Wonderful Life_, except that Jimmy "Henry Paulson" Stewart is still trying to get on the train.

[bakho]

There is still some debate whether GW Bush or James Buchanan is the "Worst President Ever". Buchanan gets low marks for failure to act during the secession crisis that led to civil war. One more round of inaction in the face of crisis and Bush will be the clear winner of the "Worst President Ever" vote. The Bush presidency is unlikely to win any positive awards so he might as well strive for the negative ones.

Bush still has a chance to beat out Herbert Hoover for the "Worst Economic Performance by a President" award.

Perhaps the Bush does not yet feel it in his gut. Maybe someone can feed him some hot peppers.

The US is supposed to be a meritocracy that prevents functional morons (like the idiot son of the previous King) from rising to the presidency. Modern presidential politics has found a way to breech that barrier.

Where is Howard Baker when we need him?

[Patrick]

Given that we know a lot more about the macroeconomy, the role of fiscal policy and it's impact than we did in 1930, I don't see how Bush is not worse than Hoover on economic policy.

[PghMike]

Paulson was CEO of Goldman, right? He comes from a world where the people he worked with have a lot of shares these large banks, and yet the only reasonable plan that can be implemented before the credit freeze kills off the economy is to simply mark to market these toxic securities, recapitalize the banks and wipe out a lot of current shareholder equity.

Can you say conflict of interest?

He needs to get over it.

[Blissex]

«The other thing is that the authorities have got to close those firms that are not going to be survivors as quickly as possible. We can't wait around for consolidation.» So Peter Fisher is effectively confirming this comment by a very realistic guy: http://londonbanker.blogspot.com/2008/10/financial-eugenics-paulson-plan-for.html «The most cynical moment in the call is when the Treasury official confirms, ”our preference would be to help the healthy banks become even healthier” rather than helping troubled banks or illiquid banks. America is now a centrally planned economy where the Treasury will determine which firms survive and prosper through allocation of scarce capital to an undercapitalised financial sector.» «Favoured private equity and insiders who swap US dollars for equity in the banking system will presumably be aware of the survivor bias being engineered on their behalf. Sovereign wealth funds, investment funds and private equity investors ripped off in the first round of recapitalisation may be willing to come back in once it is clear to them that the next round will benefit from official favouritism. Warren Buffett’s timely stake in Goldman Sachs is clearly linked to his confidence the Paulson Plan will benefit them disproportionately. A factor which is probably critical but has received little discussion is that literally thousands of Bush administration apparatchiks will need jobs come January, and a fair selection of GOP House and Senate legislators and their aides too. What better way to enahance their CVs in their final months in power than to distribute $700 billion or so in pre-Christmas largesse to the most remunerative employers in the world? And what better way to ensure the corporate largesse is returned to the GOP to win back the White House and Congress in 2012 as the recession fuels public anger? And then there is a huge arbitrage opportunity as well so that everyone makes money for years to come. According to the conference call, the pricing on offer from the Treasury will be a bit below Level 3 pricing. The toxic assets will be repackaged and resold with a new AAA wrapper, possibly priced well below what the Treasury paid, assuring a huge profit on both immediate liquidation by the banks and ultimate maturity by investors. The Fed gets its cash and Treasuries back; the banks make huge profits; the foreigners and off-shore tax avoiders get disguised ownership of the American financial system; the taxpayer gets ripped off. What’s not to love?»