Wednesday, October 8, 2008

Paulson, CEO of the US and A

Paulson and his performance as the CEO of the $50 trillion behemoth called the USA. Looking at if the privatized profits and socialized gains theory holds!

Bear Stearns:
Bear came way before the current crisis, and at that time was thought of as a bad apple which would impact the whole system. The stockholders lost their shirts, the only people who were saved were the employees (as many) and the bondholders (which I agree is not ideal). The fed did backstop $30 billion worth of looses, which some of this I think the fed would never see again! Again, the reason they saved Bear was so that they could restore confidence and be like there there, its been taken care of, get on with your business..
Stockholder 0; Bondholder 1; Taxpayer 0

GSE's:
FRE/FNM bondholders HAD to be protected, what did the stockholders get? nothing! Now the good thing about this is that he might be able to make the taxpayer money on that too, these GSE's have huge earning power. The problem here were that they were too levered, and the stockholders loved it until the music stopped. Now the GSE's under the government will be operating at moderate leverage, the government has the holding power to ride the storm and this should ultimately end up making money for the taxpayer.
Stockholders 0; Bondholders 1; Taxpayer 1

Lehman Brothers:
I believe, Paulson did exactly the right thing with LEH, making sure the moral hazard side of the equation is being taken care of. The stockholders were wiped out and the bondholders will be getting pennies on the dollar. The stockholders and bondholders going forward will demand more from their companies, expect better disclosure and not just expect a government put. It is a shame that LEH had to go, but now going forward firms will know and investors will know that the downside is zero. This is akin to a professor who only asks 2 big questions on a final exam, so you have to study everything..Its good that people are aware of RISK
Stockholders 0; Bondholders 0; Taxpayer 1

AIG:
Wow what a deal! Paulson is a loan shark!! AIG is a wonderful company and was solvent (given that there is a very fine line between liquidity and solvency in these markets). Paulson wrote a $85 billion check and got 80% of the company with a 8.5%+3 month LIBOR interest rate (8.5% on the unused portion)! The loan is secured by all the assets of the firm. Warren Buffet himself said that he wants to know who made the deal, he wants people like that at Berkshire.
Stockholders 0; Bondholders 0; Taxpayer 1

Bailout:
And now the 'bailout', and the word bailout is in quotes because its not really a bailout; and because this is one mistake (if you can call it that) that Paulson made - He dint sell it properly! Warren Buffet, Bill Gross and Larry Fink have all come out and said it will be a fantastic deal for the government IF the securities are bought at market. Warren Buffet said he'll personally buy 1% of what the government buys (and he does not swing unless he sees a really fat pitch). Again, theres a big IF here, if they start buying these things at inflated prices, then there are bound to be losses. But prudent buying of these securities would again help the taxpayer.
Taxpayer 1, Economy 1

Paulson is an investment banker, a really top notch investment banker and the US taxpayer is his client. I believe, he is doing exactly what he should be doing. The financial system is so convoluted and intertwined (derivatives of derivatives anyone?) that it is the perfect example of a real world domino. In all this there is one risk, the risk of executives who absolutely made the worst decisions and were grossly incompetent still have their jobs. Yes, their stock options are way under water, but they'll find ways to issue themselves cheaper options as soon as the clouds clear. I just hope the shareholders can see through all this. The other con is that everyone from the auto industry to the governments of California are asking for a bailout! Furthermore, although the government is not in the business of owning enterprises and making money (at least not in the US) this might set a bad precedent. But in summary, Paulson is absolutely doing the best he can with the cards hes been dealt!


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