Paulson Credit Push Earns Jeers From Free-Marketers

Discussion in 'Wall St. News' started by rubibond007, Oct 17, 2007.


    Oct. 16 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's plan to shore up asset-backed commercial paper is drawing criticism from free-market advocates, who say it risks shielding banks from the consequences of poor decisions.

    Paulson's team brokered negotiations between the country's biggest banks that led to the creation yesterday of a fund to help revive the asset-backed commercial paper market. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to establish the fund after a month of talks with Treasury aides.

    ``It is disappointing,'' said William Niskanen, chairman of the Cato Institute in Washington and a former member of President Ronald Reagan's Council of Economic Advisers. ``It does go against the Bush administration's preferences. Like all bailouts, it creates a moral hazard problem. I'm unhappy with situations like these.''

    President George W. Bush came into office in 2001, laying out principles of ``free markets, free trade'' and ``limited government'' in his inaugural address. Events since then have softened that line, with the administration aiding industries from airlines to steel when political and economic pressures increased.

    Bush's Treasury also helped organize International Monetary Fund bailouts for Argentina, Brazil and Turkey in 2001 and 2002 after faulting similar packages for Asian nations under President Bill Clinton.

    Jump-Start Talks

    The Treasury initiated discussions between the financial institutions at a meeting of Wall Street executives in Washington on Sept. 16, said a person with knowledge of the deliberations. Robert Steel, the department's top domestic finance official, brought the lenders together and prodded the competitors to keep working through the following weeks. Paulson also made calls.

    ``I've been surprised by the extent to which the administration has been willing to be involved in markets,'' said Allan Meltzer, who Republican lawmakers commissioned in 1998 for a review of the IMF and World Bank. ``Nobody in government is ever as pure as their statements may lead you to believe,'' said Meltzer, a professor at Carnegie Mellon University in Pittsburgh.

    The new company will buy assets from structured investment vehicles, units set up to purchase securities such as bank bonds and subprime mortgage debt, the banks said today in a joint statement. Other finance companies may join, the banks said.

    $320 Billion

    The plan would help SIVs avoid dumping their $320 billion in holdings, further roiling the credit markets and deepening the worst housing slump in 16 years. The banks would instead create a fund to absorb the debt, using the proceeds of new commercial paper sales to finance the purchases.

    Treasury officials' involvement was panned by the Wall Street Journal in an editorial today. ``The less-good news is that Hank Paulson and the Treasury seem to have gone out of their way to leave their fingerprints'' on the plan, the Journal said. Paulson ``better make sure the banks aren't using him to delay their day of reckoning,'' the paper said.

    Paulson said in a speech in Washington today that he has ``no interest in bailing out lenders or property speculators'' and announced that the Bush administration will review accounting rules for banks' off-balance sheet units.

    Steel stressed in an interview in Washington that no federal money was involved in the fund, which he described as a temporary solution to help markets recover.

    ``Nothing in free-market theology says markets always work properly,'' said J.D. Foster, a senior fellow at the Heritage Foundation in Washington and former Bush administration official. ``If there's something that can be done of a temporary nature to help markets, then that seems perfectly appropriate.''

    Market Meddling

    Still, the fund is the latest example of the Bush administration's willingness to meddle with markets, and most of its interventions are unjustified, said Dan Mitchell, a former Republican Senate Finance Committee economist and adviser to the Bush-Quayle transition team in 1988 and 1989.

    In March 2002, eight months before congressional elections, Bush imposed levies ranging from 8 percent to 30 percent on steel imports, an effort to protect domestic mills during a global glut of the metal.

    ``This White House has too often put political concerns above economic principles,'' said Mitchell, who now works at the Cato Institute.

    In the early days of the administration, Bush's first Treasury secretary, Paul O'Neill, warned of ``the dangers associated with bailing out the private sector.'' He cautioned in January 2001 against aiding any developing country that ``willfully decides to run itself into the ground.''

    The Clinton administration credited aid packages that went to Mexico, Russia, Brazil, South Korea and other Asian countries for protecting the health of the global economy.

    By August 2001, the U.S. supported an IMF bailout that included $8 billion in loans to Argentina to try to forestall default, which occurred four months later. In 2002, the U.S. backed $30 billion in IMF aid to Brazil.
  2. Daal


    this is a private agreement, there is no force being used. there is nothing anti free market on this
  3. its a private agreement in what should be a public market...the commercial paper market is a huge shell game and this new company they created is just going to delay the inevitable...their plan is to finance the purchase of assets from SIVs by issuing new commercial paper??? pffftt...this mess is going to make the s&l scandal look like a cakewalk...