This occurred to me a couple of weeks ago while watching CSPAN and I submitt it for your consideration.
Hank Paulson was testifying in the house about what has been going on with the financial bailout plan and I was impressed by the adroit way he was standing up to the grilling from the democrats. More to the point, I realized he is a very smart man.
A little history on Hank- He began his career in politics back in 1970 as staff assistant to the Assistant Secretary of Defense under Nixon.
In 74 he began working for Goldman Sachs, became a partner in 82, worked his way up to COO in 94, CEO in 98 and eventually ascending to Secretary of the Treasury in 06.
With all this time in the banking industry, it is impossible to believe that he failed to grasp the effects that words can have on the market, particularly the words of people in positions of power.
Now, back in October when he ran to congress spouting doom and gloom about the economic situation I thought “Jesus Christ! Someone needs to lock that guy in a basement till this is all over.” Up to that point the market was proceeding to adjust downward in a fairly orderly manner. The weekly losses were consistent, but there were no huge drops.
Then Hammerin’ Hank says, in essence, pass a bailout or we are all doomed. The bill he brought with him was a staggering, three pages short. It was voted down, the markets responded to his prognostication and promptly took a huge dump.
The bill was reworked, bloated, and pitched to the senate with the implication that Hank intended to buy up the “Toxic Debt” that was bogging down lending between banks. Fed Chairman Bernanke was against this course of action, but it was a popular notion with congressional democrats. The Senate took the 700bn proposal and tacked on another 110bn of fat and passed it. Meanwhile, Ben and George were in the background hemming and hawing and disagreeing then agreeing, and ultimately supporting the bailout.
The bill was sent to the house where it likewise passed.
So now Hank has a check book. What he does with it is not as important as what he did not do. He did not buy any “Toxic Debt.” He instead, has bought shares in banks. He provided capital that some banks needed to help them work out the poison in their systems. In return for this capital, he secured for the taxpayer, shares in these banks with guaranteed dividends, a time horizon for those investments to end, and provisions for the Treasury to inject more capital in return for more shares at a sizeable market discount.
Why did events transpire this way?
I figure the head mucky mucks in the republican party realized they would definitely not be driving the bus come January. Best case scenario, a republican president with a democratic house and senate, or the perfect storm of a democratic house, senate and president. Either way, someone decided that the best course of action would be to hedge the bet and make sure that the critical early stages of a government intervention in financial markets was in the hands of people appointed by a republican president.
So Hank went in with a bill he must have known did not have a snowballs chance in hell of passing. Democrats nodded smugly, said, in effect, “We got this” and handed the republicans exactly what they wanted, control. What did it cost republicans? Nothing but a little lost face for Hank(I HAZ A BILL!!!), who is on his way out when Obama takes office anyway
I think history will look on this as a cunning piece of maneuvering. It’s really a no lose proposition for the republicans, if it works, they get the credit. If it fails they can claim the democrats messed it up.