Emperor Paulson: Bankmaster with absolute power
Posted
Sep 22 2008, 10:30 AM
by
Andrew Horowitz
Rating:
Reckless, gluttonous, disgusting and shocking are only a few of the words used over the weekend to describe the amazing bailout of the financial sector. A "mere" $700 billion is what we're told is needed to stabilize the sector. Unfortunately, it does not end there. Ponder the number again for a moment: $700,000,000,000.
Anyway you look at it, it is an enormous sum of money and the problem is that you and I will ultimately be responsible for the repayment. Of course this is on top of an already stretched deficit that will very soon balloon to at least $11.3 trillion if the bailout package is passed into law.
Many people seem bewildered and confused as to how this got so bad. A friend asked me at dinner last night, "How is it that we can help out and provide relief to companies that caused their own problems?" My response was simple. It is all because everyone is a winner and everyone gets a trophy.
Have we really turned into a nation that believes that there is no longer a distinction between winners and losers? Apparently someone will be there to bail out the losers. Now, more than ever, we have created an environment that fosters and endorses moral risks with little or no accountability.
It starts out when we (myself included) raise our children to believe that even if they come in last place on the Little League baseball team that it is okay and they still deserve to get a trophy, simply because they showed up and put forth effort. We want to believe that everyone is a winner so badly that we no longer worry about making it on our own. Children are living with their parents longer than ever and are even coming back home as there is no longer the stigma associated with self-made failure. We have become too tolerant of wrongdoers (Martha Stewart) that idolizes criminal behavior (Rap music), accepts the biased views of the media as truth and now seems to be on the verge of allowing one man to wield way too much power.
Why does it seem that lately our religious shrine has become an IPO certificate that we pay homage to at the Wall Street Church of Stocks and Bonds? Why do we seem comfortable allowing our government to clean up this mess without questioning where the money is going to come from?
Frankly, if we allow for this bailout to get away from us in size and scope, it could be the straw that broke the free market's back. As I see it, now we have the perfect opportunity to fix all that is wrong with the system rather than patching the leaks. As unpleasant as it may seem, in order to do so, we will have to accept that failure is the solution. In this case, failure is the success, but failure will not be allowed to occur. No, Emperor Paulson will surely rule with an iron fist and an open wallet. Already he is ensuring that his beloved Goldman Sachs will not fail as the company is both well positioned and approved to run as a full-fledged bank with the full protection of the United States government. (Washington Goldman Mutual?)
I'm sorry, but effort is not enough this time and companies that are unable to exist due to the harsh economic conditions should be allowed to fail. This is the way in nature and the way of business. We all know that forests must burn down every so often to clear the way for a healthier undergrowth. Without that cycle, one day the fire will surely be so deadly that it will totally extinguish any life and stands the chance of becoming permanently uninhabitable.
Bloomberg is reporting that Treasury Secretary Paulson has asked Congress for, "unfettered authority to buy devalued mortgage-related securities from investment firms in an effort to keep the financial system from coming to a standstill. The proposal would prevent courts from reviewing the Treasury's actions while raising the nation's debt ceiling." Fortunately there are still a few in our government that realize that this may not be a good idea:
"I think that may be illegal, not to be able to challenge things,'' Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told reporters. "I'm not sure that would hold up anyway.''
The actual proposal to Congress is relatively short, considering the amount of money that is on the line and given the fact that this is designed to provide relief to so many institutions. But again, there are serious concerns that need to be addressed. When the dust settles, heads will surely roll and our financial markets will be much less repected than they already are.
Below are some of the areas of the proposal that illustrate the incredible amount of power Paulson will have if passed:
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
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Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
