Paulson says troubled assets will not be purchased (11/12/08)

[daveakl]

http://news.yahoo.com/s/ap/20081112/ap_on_bi_ge/financial_meltdown;_ylt=AiwVFlnycQ11XWbUBeUylzVv24cA

Can someone explain to me exactly what this means?

WASHINGTON – Treasury Secretary Henry Paulson said Wednesday the $700 billion government rescue program will not be used to purchase troubled assets as originally planned.

Paulson said the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending.

He announced a new goal for the program to support financial markets, which supply consumer credit in such areas as credit card debt, auto loans and student loans.

Paulson said that 40 percent of U.S. consumer credit is provided through selling securities that are backed by pools of auto loans and other such debt. He said these markets need support.

"This market, which is vital for lending and growth, has for all practical purposes ground to a halt," Paulson said.

The administration decided that using billions of dollars to buy troubled assets of financial institutions at the current time was "not the most effective way" to use the $700 billion bailout package, he said.

The announcement marked a major shift for the administration which had talked only about purchasing troubled assets as it lobbied Congress to pass the massive bailout bill.

Paulson said the administration is exploring other options, including injecting more capital into banks on a matching basis, in which government funds would be supplied to banks that were able to raise capital on their own.

[dockeryfan]

I've said it before. Paulson should not be trusted, and he only has Wall Streets best interests inmind. It's where he came from, and He has a lot of friends still there. When he leaves Gov't, he'll be right back on Wall Street.

It's theft. Borderline treason.

[Prosperity]

It sounds shady, it is out of our hands now, but we should take down the names of those making the decisions and if after the dust settles we can have a clearer idea of what is going on we should decide then. Maybe it is corruption, or maybe it is better decision making... but if it is corruption I want these people punished as harshly as possible after we get the facts straightened out.

[SkinsOrlando]

The credit market has completely haulted, lending institutions do not have the money to lend. I believe the intentions are to funnel the money back into the lending market, freeing up credit and purchasing power in the economy for the consumer. However, if there are not strict guidelines written for the money being "lent" to the banks and institutions this will not happen. We cannot just right free checks to these people without set rules and regulations for what its purpose is for. If the lending markets don't free up soon larger purchase retail, auto's and such is dead, small business America will also falter and cease to be, borrowing capital in a small business is essential during slow times, when theres none to borrow, it's the end of the road.

[TimmySmith]

I've said it before. Paulson should not be trusted, and he only has Wall Streets best interests inmind. It's where he came from, and He has a lot of friends still there. When he leaves Gov't, he'll be right back on Wall Street.

It's theft. Borderline treason.

Same with Buffett. These guys will profit from our money. The plight of the country will only get worse. And Congress is contemplating another one.

[PeterMP]

The proposed solution to the problem was flawed in several ways:

1. There was concern that the buying of the securities would make the situation worse. If the goverment set a value much less then the value companies had set to them, essentially overnight some companies would go bankrupt that if given time would be able to balance their sheets w/ respect to the real value of the securities. If the goverment set a value much more than the value of the securities, then the goverment would take a beating and issues w/ respect to the ownership and management of the companies that sold them would become an issue based on the proposal pass.

2. Since there was a possible connection between taking the money (i.e. selling the securities the goverment) and future profits, it only encouraged troubled banks/companies to take the money. This did nothing for the credit crunch. These companies would essentially be going from insolvent to slightly solvent and since there would still be issues out there in terms of who could really afford what, they wouldn't likely use their newly acquired slightly solvent status to give out loans.

What Paulson's done is side step both these issues and essentially give money to the banks by buying their stock. As part of that, he pressured what appear to be well managed companies to take the money so you didn't identify/single out the ones that weren't in trouble. What is less clear now, is how does the goverment get its money back, what role does the goverment have in CEO bonuses (If I'm a good company, but took the money under pressure, does my CEO have forfeit a bonus due to PR issues), and how does the goverment divest itself of the situation.

These has become very much like Iraq to me. Before the invasion of Iraq, Gen. Shenseki said that post-Saddam Iraq might require as many as 300,000 troops. Essentially, nobody seemed to take that in and say, 'Hey, we need to slow down and think this through a little more because we don't have that many people.' The director of the CBO raised both issues (1 and 2) above before the bail out, but essentially nobody seems to have said, 'Hey, we need to slow down and think this through because our proposed solution (according to a guy that is presumably really knowledgable on these things) has said our solution might make things worse and isn't likely to actually make them better.'

The only positive I actually see here is that Paulson switched plans pretty quickly. I wonder if that wasn't the plan the whole time. People in trouble w/ their mortgages would like the idea of the goverment owning their mortgage and working with them to stay in their houses. Also in terms of recouping the goverment money, its pretty easy to explain. For houses in default, the goverment holds onto them long enough for the market to turn around and doesn't take a beating. The idea of the goverment "loaning" money to banks by increasing their capitial via buying stock just seems more complicated and I think would have even been further to get voters to buy into.

[daveakl]

Peter, thanks for that, thats more of what I was wondering.

The idea of the gov't owning 250 billion worth of stocks in banks is a little scary. But if they are planning on using the 450 billion that was going to be used fro troubled assets to purchase bank stock as well, well that is Dallas hitting the fan scary.

[HOF44]

I wonder if those credit securities are backed by the same vehicle the mortgage securities were?? Maybe trying to avoid hit #2 on the banking system.

[PeterMP]

Peter, thanks for that, thats more of what I was wondering.

The idea of the gov't owning 250 billion worth of stocks in banks is a little scary. But if they are planning on using the 450 billion that was going to be used fro troubled assets to purchase bank stock as well, well that is Dallas hitting the fan scary.

Well, there was a limit to how much Paulson could spend w/o more congressional approval. I believe he has access to 250 (or 350) billion now, but needs approval for more so he is spending much of what he can w/o going back to congress. It wouldn't surprise me if later he comes back and ask for more to start to buy up some of the securities.

There really are three pretty much independent issues at this point in time:

1. Companies don't have money to loan out. He's helped that issue.

2. Because nobody really knows who owns what securities and what their value is, nobody knows what the real value of any other company is so even for people that have money, they are being cautious lending it out because you don't want to lend money to a company that goes bankrupt in 6 months or for an asset whose value is really much less than the loan. Buying the troubled securities (if the value assigned by the goverment is close to the value that is currently assigned by the companies currently holding them) will fix that in the short term (and in the long term if the above paranthetical comment is true (i.e. the value assigned by the goverment is actually close to the value currently assigned by the companies holding them)).

3. The housing market collapse is causing problems through out the economy because so much of our economy and people's net value was based on building, buying, selling, and the value of the house. Addressing 1 and 2 isn't likely go fix that.

[HOF44]

well that is Dallas hitting the fan scary.

This made me LOL! :applause:

[GibbsFactor]

Yet another example of the American people having NO AUTHORITY in the very Government that is elected to serve us.

Our founders would be rolling over in their graves.

"Give us one story, change it a month later" It doesn't matter because no one is privvy to the info so no one actually knows. Besides, what are the people going to do about it anyways?

[Mad Mike]

The whole thing is stupid.

In effect the Government is paying off the debt to the lenders but the consumer still owe what they did before the bailout and they still have no money to spend. If they had paid off the debt THROUGH the consumers it would have become an economic stimulus package and sent cash flowing through the economy rather than into the vaults of corporations who will sit on it, pay their executives huge bonuses, and charge struggling consumers huge interest rates to loan them more money so we can do this all over again.

And that's another thing. You want to know one of the things that lead to the collapse and no one talks about? Monster interest rates. Miniscule interest rates for the rich and super high interest rates for the poor are insane. Sure they will lend a poor man money, as long as they can make it harder for the poor man to pay it back and take more money from him. Meanwhile the guy who has the money can get more loaned to him for next to nothing. Banks will say it's insurance against a higher credit risk. So tell me Mr. Banker, how did that work out for you?

:finger:

[dockeryfan]

Yet another example of the American people having NO AUTHORITY in the very Government that is elected to serve us.

Chris Van Hollen was quoted saying that even if 100% of his electorate was against the bailout bill, he would still vote for it.

He lost my vote.

Now he still won with 75% of the vote, so he basically gets to give me the big FU finger.