Comment So the TARP has been transformed into a capital injection plan. This is a far better plan, and is more like the U.K. plan (story below).
However, this goes to Paulson’s credibility. He sold the TARP as an asset purchase plan involving reverse auctions to establish a floor on mortgage securities. Now, as his statement says, this is of secondary importance. Also noted below, when asked during the Congressional hearings about capital injection Paulson said, “Putting capital into institutions is about failure,” he said. “This is about success.”
We have been very critical of Hank Paulson for many months. We have challenged anyone to point out what he has done correctly during the credit crisis. So far, no one has attempted to give us an example.
It is now widely understood that letting Lehman fail was a colossal mistake. Back on September 15, the Wall Street Journal noted:
Mr. Paulson was also irked that Wall Street saw him as someone who would always ride to the rescue. And because Lehman’s troubles have been known for a while, Mr. Paulson felt the market had had time to prepare. In addition, Lehman had access to special emergency lending from the Fed — something Bear Stearns didn’t have when it was struggling. This was another reason Mr. Paulson there shouldn’t be a Bear-like rescue for Lehman.
Is it now painfully obvious that Paulson and the Treasury had no idea how much havoc the Lehman failure would unleash on the market. If they missed so badly on this call, why should we give them the benefit of the doubt on all their other moves?
Yesterday we had a conference call and discussed this in great deal.
Audio
Handout
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U.S. Treasury – Statement by Secretary Henry M. Paulson, Jr. on Financial Markets Update
Specifically, the EESA empowers Treasury to use up to $700 billion to inject capital into financial institutions, to purchase or insure mortgage assets, and to purchase any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability. The new law also gives the Federal Reserve the authority to pay interest on reserves, and temporarily increases FDIC and NCUA deposit insurance from $100,000 up to $250,000. Two days ago the members of the President’s Working Group on Financial Markets, the PWG, made clear that we will coordinate the use of our existing and new authorities to restore market confidence by strengthening financial institutions, preventing systemic impact from bank failures, increasing liquidity to financial markets and keeping mortgage credit available and affordable. -
CQ Politics – CQ Transcript: Treasury Secretary Henry Paulson Holds a News Conference
QUESTION: The EESA program, do you think it will help — the purchasing program, troubled asset relief program, will it help much to rebuild the capital base of the financial institutions?
PAULSON: Yes. Yes, that is — that’s what’s — what’s critical. There is — capital has been reluctant to come into certain financial institutions, because a lack of visibility, in terms of the uncertainty, in terms of the value of — of some of these assets. So the — the — the prime motivation is to lead to the recapitalization and the stronger capitalization of the — of the industry.
QUESTION: Mr. Secretary … Is it conceivable … that the Treasury might have to take far more far-reaching measures and, in particular, might that include the U.S. do some sort of recapitalization of its banking system?
PAULSON: Yes, I’m not going to speculate on all the things we — we may have to do. I would simply say we have a broad range of authorities and tools in the — in the TARP. And so we — we’ve emphasized the purchase of the liquid assets, but we have a broad range of authorities. And I’m confident we have the authorities we need to — to work with going forward here. -
The Curious Capitalist (Blog) – Treasury prepares for a TARP-and-switch. And it’s a good thing, too
Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was “to inject capital into financial institutions”? That wasn’t how Treasury initially advertised its Troubled Asset Relief Program. It was sold as a way to get the market for mortgage securities moving (or, to use the jargon, liquid). Lots of academic economists objected that liquidity wasn’t the problem, it was insolvency. What Treasury needed to do was recapitalize financial institutions and take equity stakes in return. When members of the Senate Banking Committee pressed Paulson on this two weeks ago, he pushed back. “Putting capital into institutions is about failure,” he said. “This is about success.” . . . Yesterday Ben Bernanke hinted that a change in emphasis might be in the offing for the TARP. And today Paulson seemed to confirm it. -
The New York Times – Britain Takes a Different Route to Rescue Its Banks
In a bold move to restore confidence, Britain announced an unprecedented £50 billion government lifeline for the nation’s banks Wednesday that it hailed as a quicker solution to the credit crisis than a $700 billion American plan to buy impaired mortgage assets from troubled financial institutions. Britain offered banks like Royal Bank of Scotland, Barclays and HSBC Holdings up to £50 billion, or $88 billion, to shore up their capital in exchange for preferred shares. It will also provide a guarantee of about £250 billion ($438 billion) to help banks refinance debt. The Bank of England will double the amount it lends to banks under its special liquidity plan to £200 billion ($350 billion). -
The New York Times – U.S. May Take Ownership Stake in Banks
Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials. Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones. The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks. -
The Wall Street Journal – Editorial: Progress Amid the Ruins
The London move goes to the heart of the problem, which is the capital hole in the financial system that is fueling the global panic. Private capital won’t fill that hole with fear so rampant, so some public capital is going to have to serve as a temporary life preserver — in the U.S. and Europe…Meanwhile, in the U.S., Treasury Secretary Hank Paulson signaled that his new rescue power includes the ability to do something similar. “It is the policy of the federal government to use all resources at its disposal to make our financial system stronger,” Mr. Paulson said, “including strengthening the capitalization of financial institutions of every size.” We take — and hope — that this means Mr. Paulson is willing to use some of his new $700 billion Troubled Asset Relief Program (Tarp) to inject capital into individual banks if needed to prevent failures. Treasury would still move ahead with its auctions to purchase toxic bank securities, but amid a panic more urgent action may be necessary. Mr. Paulson is right to interpret his mandate broadly, and to show that he is willing to use it. In essence, he is saying the Tarp could be used as a larger, better capitalized version of the Federal Deposit Insurance Corp., injecting capital into banks in return for preferred stock to protect the taxpayer. This is a policy breakthrough.