Wednesday, October 17, 2007

Paulson Is A Day Late And A Dollar Short

Treasury Secretary Paulson and the White House have repeatedly tried to instill confidence into the markets over the past few months. When the entire White House economic team shows up for an impromptu interview on CNBC to do nothing other than tell us how great the global economy is, something is seriously wrong and they know it. That subtlety was lost on many but it shouldn't have been because it was followed up with repeated attempts of confidence by even the President. What does any leader do in a time of perceived or real crisis? They attempt to provide a beacon. A calming voice of confidence in the storm. Just as Moses did standing before the masses as he parted the Red Sea. One flaw with that perspective. Paulson isn't Moses. And we need a miracle greater than parting the Red Sea to save the global economy from a major reset. That said, this has been one of the best cycles ever for professional investors participating in the right themes. Especially if one used leverage, derivatives or futures as Paulson's former employer did in spades. At his behest.

Now, Paulson is attempting to pull another confidence coup by publicly proclaiming regulators will look at off balance sheet games in the banking industry.

If this isn't incredibly silly, then I don't know what is. But as silly as it is, I hope by some form of miracle, attempts to mitigate many outcomes are successful. I'm not holding my breath. Central planning doesn't work be it the five year plan of the Communist politburo or central banking attempts to steer the economy. Where were regulators five or ten years ago when we needed them? Paulson might as well send the regulators to the beach now. The damage is done. To the contrary, now it's time to send in The Cleaner. All of this taken from a broad perspective seems eerily similar to comments by public officials and bankers during the 1929 mess and I must say that worries me greatly. Not primarily because of macro factors but more importantly because of eroding confidence. Wait till that erosion spreads to global markets. It will. And, this at a time when a bevy of Wall Street bullish sentiment data points are off of the chart. Wall Street out of touch with reality? That is why we have had such significant financial messes on a regular basis since the inception of Wall Street two hundred plus years ago.

In a bit of irony, Paulson should have thought about these types of outcomes when he was running Goldman and helping to create the mess we are now facing. Goldman's current business strategy was surely dreamed up during Paulson's tenure. Strategies that are pervasive across the global financial industry. Strategies of which he benefited to the tune of hundred of millions of dollars. Strategies that likely involved lobbying public officials for favorable regulation or lack thereof. Now I don't fault any entrepreneur or business owner for sitting sideways on their wallet. But, then he is not an entrepreneur or business owner either. He was a hired steward of a publicly owned company. While Goldman shareholders might be jumping for joy today, as we discussed earlier, I'm extremely dubious of that being the case on a go forward basis. Manias involving Goldman has been a harbinger of doom in its two prior incarnations of 1929 and 2000. This will likely be no different. Forget the use of likely. This will be no different. Now, Wall Street and banks perform an invaluable service so I'm not trashing financial capitalism but I am trashing the lack of regulation/enforcement and complete disregard for risk in this industry. An environment Paulson likely helped create. Of course, there is always the possibility that Paulson was pleading with Goldman and other financial companies that their methods would ultimately create madness. Uh, okay, I haven't been to fantasy land in a while and it was a fleeting thought.

I feel like I'm watching a Royal Bank of Scotland commercial. Here's the problem. The Confidence Game, ipso facto, is not about more talk as Wall Street and politicians have attempted to make it over the last decade. This instills less confidence. It's about less talk and more action. It's about doing what is right. It's about policies that encourage confidence. It's about policies that encourage strong governance and oversight. It's about policies that show true concern for citizens. It's about honesty and integrity. It's not about bailouts and shenanigans. It's not about lax SEC enforcement for a myriad of seamy reasons. It's not about deregulating the banking system because of political payback or campaign contributions. It's not about Hank Paulson's babbling and the general baloney perpetrated on society that we are witnessing today.

If Paulson wants to restore confidence, he should announce regulation of hedge funds, modernize banking regulation, re-institute Glass-Steagall, forbid any off balance sheet accounting by money center banks, put some teeth back in SEC enforcement, go after rampant insider trading by hedge funds, increase shareholder transparency, step up to a strong dollar policy and on and on. Otherwise, personally I believe Paulson should refrain from incoherent public ramblings until he has an announcement involving beneficial policy as he isn't helping matters. People realize his actions are an attempt at pacifying markets because of flawed policy based initially on greed and now based on fear. That will make matters of confidence even worse. Frankly, I'm surprised a former CEO of Goldman doesn't seem to understand this.
posted by TimingLogic at 7:32 AM

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