Looks like Paulson agrees with Greenspan: Markets can’t be trusted to do anything useful. He tells the Financial Times
… in the years leading up to the crisis, savings from nations such as China and oil exporters — at a time of low inflation and booming trade and capital flows — exerted downward pressure on yields everywhere.
This pushed down interest rates and drove investors to riskier assets, sowing the seeds of a global credit bubble that extended beyond the US subprime or high-risk home loan market and eventually burst.
This statement of the obvious cost us a couple of trillion dollars. Can you remember Economics 101? Increased supply without a change in demand results in lower prices. I passed this class 40 years ago and I still remember. It isn’t the kind of insight that would get the guy a job in the mailroom at Goldman Sachs, but it’s enough to get him a job as George Bush’s Secretary of the Treasury.
Paulson and Greenspan, following Milton Friedman and Ayn Rand, persuaded too many people that the market was great at risk evaluation, especially the credit default swap market. The whole point of the CDS market, it’s sole social justification, is that it is so fantastic at pricing risk. Now they tell us it didn’t work? Really?
Not only are markets truly supreme at risk evaluation, even more emphatically, markets are just fabulous at capital allocation. Paulson, Greenspan and their true believing repub buddies insisted that the market was the be-all and end-all when it came to capital allocation, the process of providing money to start new businesses, bringing out new technologies, and creating a better future. Government, they screamed, had no right to interfere with the free flow of capital, mediated by the sacred market.
Wrong again. In the rabid search for more income, whipped on by the Financial Elites, the "market" moved money into building houses, and selling related debt instruments to greater fools. Now Paulson and Greenspan tell us maybe that wasn’t the best use of trillions of dollars.
Paulson and Greenspan agree the markets they worship failed, and failed spectacularly. The difference is where they put the blame. Greenspan points at the Financial Elites:
The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer.
The industry created excess demand for securitized instruments. This was coupled with a misapprehension of the degree of risk inherent in these instruments, leading investors to buy in increasing amounts.
Greenspan doesn’t say who caused the “misapprehension of risk”, or how it was done (credit default swaps, ineffective hedging, outright lying about safety) but a fair reading of his statement is that the industry is responsible.
Paulson puts the blame solely and squarely on investors:
"Excesses … built up for a long time, (with) investors looking for yield, mis-pricing risk," Paulson told the FT.
In the securities business, investors who "… consider only yield in examining investments and ignore other issues such as safety, liquidity, and tax implications"* are called Yield Hogs. Paulson puts all of the blame on yield hog investors, people who just couldn’t live with the reasonable returns available when the supply of capital was historically high; people whose greed was so intense they believed they were entitled to more than the blessed markets could honestly deliver; people who “mis-priced risk” by ignoring it completely.
Paulson doesn’t mention the possibility that Financial Elites, like the ex-CEO of Goldman Sachs, could have any responsibility for the disaster. He cannot conceive of the possibility that someone from Goldman Sachs might have told an investor that the risk was insignificant, or that it was completely hedged, or that this time everything was different.
These are the most naïve people we have ever had in government. From the President on down, not a one of them was able to think outside their ideology, until reality smacked the credit markets silly.
At least Greenspan is honest enough to point to the real culprits. It wasn’t the poor people of developing nations trying to save for the future. It wasn’t the suckers who listened to their stockbrokers. It was the leaders of the securities industry who did it. They lied, cheated and stole. They unraveled the regulatory system so they could get away with it. They did it on purpose, solely for the money.
Too bad there isn’t anyone to hold them accountable.
______________
*Bonds, The Unbeaten Path to Secure Investment Growth, by Hildy Richelson and Stan Richelson, (Bloomberg Press, 2007).
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Fighting foreclosure – the other end of the battlefield. Maybe their are some heros.
http://www.folioweekly.com/doc…..123008.pdf
Paulson sounds like a total addict. “It was someone else’s fault”
I have been amazed by how many ways they have referred to this theft of the U.S. Treasury “bailout, rescue, investment (did not stay with that one for very long), recovery”. Not once did I hear the word “restructure” during the Wall Street “bailout”. Heard it thousands of times during the auto industry hearings.
I want equal treatment of all white rich fat cats demanding (actually the auto industry fat cats actually seemed to be asking) welfare
Thanks masaccio
digg
it was fault of the ex Fed chairman Alan Greenspan
Currently among the stack of books on my nightstand is “Other People’s Money” — and the data in that tome makes my hair stand on end.
And just think, all those tax-deductible campaign contributions that Wall Street bankers and investors wrote to PACs — and then wrote off their taxes! — helped fuel the lunacy. That part of the problem continues unabated.
I suspect Paulson will go to his grave in denial.
Talk about letting the nutjobs run the Lunatic Asylum — Paulson at Treasury is an economic example of that dynamic.
Quadrillion trades a year in these instruments…each paid a trade fee or commission. It was a party for the traders. SEC Chairman did not make a peep. The bubbles base on bad mortgages and betting on whether credit was good or bad…credit DEFAULT…swaps.
Credit…a loan on a promise to pay
Default..no pay
Swap trading bets on whether the debt was good enhanced with time qualifications and probably a lot more varieties. So speculative and risky and leveraged. Nothing sound about it. That is our financial industry.
Hank Paulson should be in prison.
If you want to know what’s going to happen to financial markets in 2009, just listen to Pat Robertson, who recently had a conversation with God (or David Rockefeller), who provided him with access to the 2009 (Zionist/Globalist) script:
http://www.youtube.com/watch?v=w5VrJmgzItM&e
You have to watch it.
Investing and owning shares is immoral.
I thought campaign contributions were not tax deductable.
And someone posted here awhile ago that Obama’s campaign got 60% of contributions from Wall St.
i love this. china and oil nations made money and saved so it is their fault. the poor investors had no choice but to try and squeeze another 1.5% from the mortgage market by any means necessary.
In the world of con-men, the mark is always wrong. The con man never admits fault. Paulson is just following standard operating procedure.
A strong economic recovery! From his lips to God’s ears. Or is it the other way around? I get sooo confused by this religion stuff.
All hail Pat Robertson, one of the Armageddonists ruling the asylum…
http://www.cc-vw.org/articles/history1.html
This next war will fulfill Prophesy, the dominionist radio preachers in America never tire of hollering. And they are correct on that point, though morally, I believe, they are on shaky ground, both because the power brokers among them, as “God’s little helpers” – and the power elite with whom these cadres are allied – have done their damnedest to bloody well make this next war happen, and also because they, collectively, are already complicit in the blood-guilt that the on-going war in Iraq has engendered, because they fully approve of the Crusade aspect of Bush’s War On (of) Terror, casualties be damned. On this point, check out the book [published in 1983] by the late Grace Halsell, “Prophesy and Politics – Militant Evangelicals On the Road to Armageddon.”
http://www.geocities.com/alaba…..round.html
Ooops. Still listening to Robertson on the economy. Now he sez hyperinflation (using Zaire as an analogy) right around the bend.
the guy is nuts.
I can’t stand any more of Robertson. Gotta make dinner. BBL.
If it were the other way round- then someone would end up with divine earwax on their lips- seems unsanitary- of course Plato could never figure out if there were divine forms for mud and hair.
Wait a minute — with the “bailouts” the monied interests were able to engineer, it looks like they really did know how to evaluate risk.
Or how to make it irrelevant to themselves, at any rate.
Robertson says God (Rockefeller) told him to expect a strong economic recovery in the second quarter, yet despite this, sees the American people accepting socialism as the solution to their economic woes, sees a full blown dollar collapse, wide spread misery, gold reaching $1,900 per ounce, oil going to $300 per barrel and rampant hyperinflation.
So the market is going to recover in the second quarter along with the economy, just before all hell breaks loose.
Better get to church to see how this one turns out!
People must really believe Robertson = Jesus or something.
Praise the Lord and pass the ammo – things are going to get ugly.
It was simply not enough the BushCo and Friends looted the government of cash and assets. It was not enough for them to also take all the bank money and stick the taxpayers with the bill.
Now they want to rehabilitate Bush, BushCo and Friends.
I am not buying, not that I have anything to spend.
While it’s true everyone should have known that the housing market was a bubble, there are degrees of culpability. Small investors put their trust in experts precisely because they themselves were not. But when you get to the level of the experts, originating banks, investment banks, institutional investors, sovereign wealth funds, hedge funds, foreign banks, they all should have known and avoided these investments like the plague. CDOs with no clear ownership of the underlying equity, sold with bought and paid for ratings, covered by CDSs made up of smoke and mirrors, everything about this screamed con. But everyone went along because on the upside of a bubble everyone makes money.
The peak/end of the real estate bubble coincided with the intentional fleecing of the poorest among us using madison avenue’s shadiest tactics. Fannie was running feel good commercials with young or old black families and the smoky voice of a wise old woman telling them that everyone’s god given right was home ownership, and Fannie Mae was there to help them achieve their own piece of the American Dream.
It was total unadulterated theft.
This was specifically designed to target the greater fools to fill out the bottom row of the pyramid through predatory schemes, knowing full well that more than half of those entering the game at this late stage were doomed to fail, not for their own fault, but because the pyramid scheme had run its course and there were no greater fools to lure into the scheme.
All of this was known by government officials, and it was all planned and orchestrated by the FED, whose bankster clients gamed it all the way up, then flipped sides before causing it to implode and collapse, making money in both directions while professing: “who could have foreseen?”
Paulson (It’s not my fault), Gramm (you whiners!), etc. should all be put on trial with Madoff. They are as guilty of fraud as Bush, Cheney and all the rest.
I agree with this. Joseph Nocera has a good article on the risk management tactics of the big guys in the NYT magazine. He seems to say that the big problem was overreliance on mathematical models of risk evaluation, which are designed to ignore the possibility of disaster. Of course, the mistakes made in the Madoff case, and in related cases, are strictly the result of outright incompetence, and lying about the due diligence they were doing.
These people are a bunch of failures. Too bad we can’t find anybody to prosecute them.
Back in 2000, when Hank Paulson was CEO of Goldman Sachs, he testified in front of the Security and Exchange Commission. Among other things, he lobbied the SEC to enact a “change to self-regulation” for Wall Street. He also urged them to change the “net capital rule” which governed the amount of leverage investment banks could use. The net capital rule was indeed changed in 2004, and is now blamed for the investment banks’ collapse.
PAULSON: The Challenge of Technology and Change to Self-Regulation in the United States: “The third area for re-examination and reform is the structure of broker/dealer regulation, a function now shared by the SEC and the self regulatory organizations (”SROs”), principally the New York Stock Exchange and NASD Regulation Inc.”
“We and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place.”
“For these reasons we think it is time to seriously consider the creation of a single, independent SRO to adopt, examine and enforce a core body of financial responsibility, customer protection and margin rules. We hope and expect that there would be savings generated by economies of scale.”
How did Paulson’s recommendation to let investment banks borrow much, much more work out?
The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says “a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.” The SEC allowed five firms – the three that have collapsed plus Goldman Sachs and Morgan Stanley – to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.
The net capital rule was created in 1975 to allow the SEC to oversee broker-dealers…The net capital rule also requires that broker dealers limit their debt-to-net capital ratio to 12-to-1. In 2004, the European Union passed a rule allowing the SEC’s European counterpart to manage the risk both of broker dealers and their investment banking holding companies. In response, the SEC instituted a similar, voluntary program for broker dealers with capital of at least $5 billion, enabling the agency to oversee both the broker dealers and the holding companies.
This alternative approach, which all five broker-dealers that qualified – Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley – voluntarily joined, altered the way the SEC measured their capital. Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed the broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1. It also removed the method for applying haircuts, relying instead on another math-based model for calculating risk that led to a much smaller discount.
So when you hear Paulson and Bush tell you that the reason for the problem we are in is the sub-prime mortgage market, please realize they are lying to you. They are not just mistaken. They are lying to you. They know better. Any investment can drop 20, 30, 40% without causing catastrophe. It is the leveraging up of these declining assets that causes the problem. Hank Paulson was the pointman in creating this leverage…and no one seems to care. And no one seems to care that he is now in charge of fixing this problem by creating the largest hedge fund in history…managed by who? Goldman Sachs!
Goldman Sachs is now taking everything over…all brought to you by Hank Paulson. I still don’t get how this guy, who came from leverage land, could persuade so many to vote for a bill so quickly. All I keep hearing is that the markets would have been much worse without the passing of the bill. Who is convincing these people of this? Hank Paulson. So my question to Mr. Paulson is this- Which greedy investors is he referring to?