Paulson Sanity Check

Sorry to be a bit heavy on Fannie and Freddie, but this is a historic event.

These statements came in a five paragraph section in a New York Times article:

Mr. Paulson added a mantra of his own: he privately said he didn’t want to “kick the can down the road” and leave the problems for a future administration and Congress to solve….

As possibilities were debated, Treasury officials eventually concluded that if they had to act, the best choice was a conservatorship…

“They called it ‘sticking the companies in a timeout,’ ” said one person with firsthand knowledge of the conversations. “It protects the safety and soundness of the economy but also gives everyone breathing space.”

Now most commentators see a conservatorship as a good bit more radical than the depiction above. But let’s take the quotes at face value. Paulson said he didn’t want to “kick the can down the road” but settles on a plan that his team called a “timeout”.

Wow. No wonder this Administration is so good at Orwellian tactics. They practice them at home.

Print Friendly, PDF & Email


  1. Anonymous

    Must see video over at Market Ticker
    about this bailout. Also, it looks
    like Sen. Dodd might be holding hearings on this too. Things are
    getting interesting.

  2. Yves Smith

    I don’t have hope that the hearings will add up to much. The post-Bear hearing were form over substance, no pushback at all on the fact that the Fed had made a fiscal commitment without authorization.

  3. bg

    “Orwellian tactics”

    I could not figure out your reference. I think this phrase means “ways the government controls people”. Yet it still feels to me like the government is not quite sure what it is doing as opposed to trying to screw the little people.

    Thanks for the extra coverage on this curious and confusing history-in-the-making.

  4. Vox Sanus

    re: Orwellian

    Paulson is using “newspeak” or “doublethink” saying that he wasn’t kicking the can down the road, while explicitly stating that that was exactly what he was doing.

  5. Dick Durata

    This opening graf in a NYT article also deserves a sanity check:
    “The Bush administration seized control of the nation’s two largest mortgage finance companies on Sunday, seeking to shrink drastically their outsize influence on Wall Street and on Capitol Hill while at the same time counting on them to pull the nation out of its worst housing crisis in decades.”
    I mean, what!

  6. bg

    Thx for the clarification on orwellian. I just read about doublethink on wikipedia, and my core question remains.

    How can you distinguish between doublethink and confusion? Also doesn’t doublethink require that you practice it at home?

    One thing is clear to me. We are getting more government.

  7. a

    “Sorry to be a bit heavy on Fannie and Freddie…” What? My all means write all you want – write *more* than you want. We’re all ears.

  8. a

    “Sorry to be a bit heavy on Fannie and Freddie…” What? By all means write all you want – write *more* than you want. We’re all ears.

  9. Anonymous

    Something the blogosphere and the rest of the nation has to get to the bottom of, is whether Paulson will use his newly acquired Freddie and Fannie as a super-SIV.

    If the rumors and speculation are true that the GSEs will be stuffed full of “new” MBSs bundled by the failing IBs and other banks, then this will be the scandal of the century. It is already bad enough that the GSEs were saved without the creditors experiencing any pain, it is quite another to have the taxpayers bailout the US banking system under the cover of darkness. If the GSEs no longer have to do any public reporting, will anyone even know if they have become the graveyard for all of the crap held by LEH, BAC, et. al.?

  10. Anonymous

    Very suspicious trading on Friday. All news pointed to a big dump in the markets/flight to quality yet the USTs SOLD OFF and the markets actually closed UP.

    Who would trade against the grain with such conviction? Bberg had an article stating:
    “Paulson, 62, hired Morgan Stanley a month ago to probe the
    companies’ finances. The investment bank concluded that the
    accounting, while legal, enabled Freddie, and to a lesser extent
    Fannie, to overstate the value of their reserves, according to
    the people who declined to be identified because the findings
    were confidential.”

    Remember at the time apppointed, MS said they would do it for FREE? I’m not saying they were the ones who bot the market on Friday. I am just trying to understand how it happened. Does anyone have any ideas?

    One guess Id like to make– it wasn’t the little guy. They never seemed to be tipped off ahead of the pack… .

  11. Anonymous

    Working all that time and spending all that the best the Tsy could come up with was nationalizing FNM and FRE and have the Treasury buy MBS?

    That solution should have taken them at most 5 minutes and about a week for the lawyers to draw up the details.

  12. Matt Dubuque

    Paulson’s and Lockhart’s effusive praise for the GSE management yesterday struck me as VERY Orwellian.

    Looks like they fooled the vast majority of the financial press, however.

    In my book, when you change your accounting methods midstream so that no losses on mortgage payments are recognized for TWO YEARS instead of the previous practice of 90 days (according to yesterday’s NYT), that’s not excellent management, that’s an indictable offense, a FELONY to be more precise.

    But what can we expect from the press of a banana republic? I guess that’s part of the package.

    The ONLY rationale for such an accounting change is to mislead the investing public about the state of your books.

    Matt Dubuque

  13. Anonymous

    re ‘orwellian tactics’

    they are almost exclusively used at home. Even when fearmonger about external enemies, they do this for internal control. The state and its private partners use ‘orwellian tactics’ to maximize control, for their own benefit.

  14. jm

    It’s quite right not to call this “kicking the can down the road.”

    Since we’ll be borrowing the money from Asia, it should be called, “tobashi”.

    (If any reader is fluent in Chinese — please post the Chinese equivalent for completeness.)

  15. Sing Expat

    Marxist-Leninist policies are alive and well in the United States of America. Paulson is just another Politburo member protecting the ruling elite and spinning the propaganda on CNBC.

    I say try them all for high treason:Bush, Cheney, Bernanke, Greenspan, Paulson, etc. Waterboarding, stress positions and sleep deprivation should get us to the heart of the matter.

    Seriously, if I walked onto a military base and stole a base of canned peaches while shouting Allah Ahkbar, I would charged under the Patriot Acts. Yet, all these people stole or allowed others to steal hundreds of billions from the American people while humming the Battle Hymn of the Republic and they will get pensions, payouts, and free dental for the rest of their lives.

    Death to Wall Street. Death to Washington. Metaphorically, of course, since it would otherwise be a crime and I would not want to rile up the DHS and SS more than I already have. Fascists!

  16. Russ

    he privately said he didn’t want to “kick the can down the road”

    I took that to mean that he wasn't going to leave F&F in their limbo before Jan 20 2009. My cynical nature expected the bailout to happen after the election.

    So if anything Paulson was actually making sure the next POTUS has no surprise – now they can use the fact of the F&F bailout in their campaigns rather than using speculation about the bailout in the campaigns.

  17. Dean

    That’s a clever observation Yves. Perhaps, after time out is over Sarah Palin will be given the task of kicking the can down the road (with a religious spin of course – The Bend it Like Beckham version of kicking the can).

  18. Anonymous

    Yesterday I questioned the accountability of all the official personages who were assuring us, until a couple of days ago, that the GSEs were adequately capitalized. Treas Sec Paulson (as quoted by Bloomberg) is understandably rather sensitive about this point:


    Paulson said in an interview today with CNBC television that he never made assurances of sufficient reserves at Fannie Mae.

    “I never said the company was well capitalized,” Paulson said. “What I said is the regulator said they are adequately capitalized.”

    “It was only after we had gone inside with the appropriate people and the appropriate teams that it was clear to me that the layer of capital was thin,” he said.


    Well, that’s just great Hank. You didn’t say it; you just concurred with the regulator who said it.

    On the other hand, despite your vast financial knowledge and experience, you DIDN’T come out and say that the GSEs were UNDERCAPITALIZED, as some commentators have been pointing out for YEARS.

    Apply Basel II capital adequacy standards to risky GSEs, and what do you get? I’m STILL waiting for an answer to that question.

  19. Matt Dubuque

    Anonymous I am NO defender of Paulson at all (he’s in over his head), but I specifically remember the quote, I thought at the time what kind of damning with faint praise is that when he said the GSEs were “adequately capitalized”.

    And of course the cretins in the financial press were all over the quote, and it immediately became Paulson stating the GSEs were “well capitalized” when he said nothing of the sort.

    For me that was a huge indication that this was going to unravel VERY soon (less than 2 accounting periods) with his “ADEQUATELY” capitalized, but again, a banana republic press is barely literate.

    Matt Dubuque

Comments are closed.