Paulson Claims Guaranteeing Lehman Would Have Cost Fed Massive Losses; No Mention Of Massiver Losses Coming From GSEs
The man on a book mission, who just incidentally destroyed America with his failed "bazooka threat" containment policy, is out with some new truly brilliant revelations, like for example that the consequences of Lehman's collapse were exacerbated due to the unanticipated actions of PriceWaterhouse Coopers, Lehman's receiver in the U.K., whose freezing of accounts is considered by Hank as the precipitating factor that nearly destroyed the money market system.
The former Treasury secretary said he, Geithner, and
Fed Chairman Ben S. Bernanke were well aware the bankruptcy of Lehman
would cause havoc in financial markets, although the consequences were
much worse than they had anticipated. That was in part because Lehman’s
U.K. bankruptcy receiver, PricewaterhouseCoopers, froze all of the
firm’s accounts in that country, refusing to transfer collateral back
to Lehman creditors, Paulson said.
Panicked investors then tried to withdraw funds from
other financial institutions, including Morgan Stanley and Goldman
Sachs, and credit markets froze. Concerned that publicly admitting the
government couldn’t help them would lead to a run that would bankrupt
those firms, Paulson said he maintained at the time the government
wouldn’t help because it would contribute to moral hazard, a belief the
government would always bail out investors.
So in the span of a few weeks, Paulson's (and the Treasury in general) idea of saving the economy goes from bailout (GSEs), to bankruptcy (Lehman), to bailout (AIG), to bankruptcy (WaMu), to bailout (Citi) and so forth. And while most of the "havoc" had been "anticipated," the straw that broke the camel's back ends up being PWC's decision to act prudently, not abrogate contract law, and preserve capital for Lehman's stakeholders? It is good to see that Paulson keeps living in an imaginary world ever since his departure.
And for some additional examples of dementia, here is a pure stunner:
Former U.S. Treasury Secretary Henry Paulson says in his memoir that he
was prepared to support a government backstop to prevent the bankruptcy
of Lehman Brothers Holdings Inc. until he learned the firm’s assets
were so mis-marked it would have guaranteed a loss to taxpayers. “The toxic quality of Lehman’s assets would have guaranteed the Fed a
loss,” Paulson 63, wrote, meaning the central bank couldn’t legally
make a loan.
That's interesting, because below we demonstrate the chart for the "seriously delinquent" loans held by Fannie Mae (Freddie can be seen here).
Keep in mind that according to St. Louis Fed's Bill Poole as of 2007 the total amount of GSE guaranteed liabilities on and off balance sheet was about $4.47 billion. Considering that something over 8% of this on the combined GSE balance sheet is now seriously delinquent, i.e., likely to result in a total loss to taxpayers, the question of how Paulson estimated that Lehman's CRE portfolio, which at its peak was about $50 billion, could have had a more negative impact to taxpayers (even assuming it was a total wash, which it couldn't be), than the GSE risk which through his actions he onboarded for taxpayers' safekeeping, and which even using stale numbers equates to hundreds of billions of dollars in losses. And the scariest thing is that the rate of deterioration in the GSE portfolio is not only not moderating, it is in fact accelerating.
But then again, Goldman wasn't really big in the mortgage business: what kind of benefit would the firm have had should the GSEs been forced to reorganize, and achieves something resembling a feasible balance sheet. Furthermore, as was pointed out earlier, it was all really for the benefit of foreigners, who were actively present on both the asset and liability side of the GSEs.
Certainly, these and more, are very relevant questions to ask of Mr. Paulson once he is at a local Barnes and Noble store signing his brand new book.