Global Investing

What do you think of the ‘Paulson Doctrine’ ?

September 17, 2008

Some financial firms, but not all, will be saved. The pattern was set with Bear Stearns in March and repeated with Fannie,¬† Freddie and AIG this month — but not Lehman Brothers. Information Arbitrage lays it out this morning here.

“Unwittingly or not, Treasury Secretary Paulson has effectively created the Paulson Doctrine. The doctrine states that firms that he deems too big to fail (but we’re not exactly sure where the line is drawn: LEH? No. BSC? Kind of. MER? Maybe. AIG, FNM and FRE? Definitely.) get the U.S. Government (and the U.S. taxpayer) as new senior shareholders, while the others are either left to execute an orderly private markets Good Bank/Bad Bank restructuring (if they can, like Mellon in the late 1980s) or a hurried Chapter 11 Good Bank/Bad Bank restructuring (if they can’t: see BCS/LEH circa 2008).

Sure, the headline reads that the Fed bailed out AIG, but was anyone other than Mr. Paulson pulling the strings? I doubt it. So what of this doctrine, and what does it mean for the global financial markets, the integrity of the U.S. regulatory regime and the U.S. taxpayer?

As for the Federal Reserve-backed rescue ofAIG, Reuters’ Emily Kaiser says that the “US central bank may have wiped out what credibility it won resisting Lehman Brothers’ rescue plea, and opened its door to countless other companies to come calling for cash.”

What do you make of the ‘Paulson Doctrine’?

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Picture: Treasury Sec. Paulson/REUTERS/Paul Szep 

 

 

 

Comments
23 comments so far | RSS Comments RSS

Just would like to know the names and salary & bonus package of the top executives running Bear Sterns, Fannie Mae, Freddie Mac, AIG and Lehman Bros. How have these people been affected by the financial problems they were supposed to be aware of and should certainly have been doing something about long before the taxpayers had to start forking over money to bail them out. How many of them got buyout packages? Why isn’t the news media giving us any information on what theses people were doing while their companies were going down the tubes? Come on Journalists – give us some info.

Posted by KATHY PEAK | Report as abusive
 

who says who?? and whose “god” complex decides it?

Posted by dappy | Report as abusive
 

If you think of the US economy as of this moment as the Titanic, and of the deeply flawed set of assumptions around mortgages and housing as the iceberg, then the US taxpayer was definitely traveling in steerage and unlikely to even have a possibility of making it to one of the lifeboats. Continuing the analogy, if Paulson is deciding who makes it to a lifeboat and who does not, the decision to relegate Lehman to the icy waters but give AIG a new lease on life certainly makes one wonder whether the criteria governing such decisions are being changed on the fly, or at the very least, leaves the door open to speculation as to why the criteria appear to have been inconsistently applied.

Posted by G. Philip Rogers | Report as abusive
 

Dear Mr. Paulson

Would you please bail me out of my student loans?

Thanks :)

Posted by anonymous coward | Report as abusive
 

My thoughts have been mixed. However, worldwide confidence in our bank system is very important and I don’t see where Mr. Paulson has much of a choice.

Bank failures across our Nation would be devasting, but I want to see accontability of all involved in MER,LEH, FRE,FNM and it appears soon WM, I want to see CEO’s and Government Officials in anyone tied to misuse of public money, entrusted accounts and exessive salaries called on the carpet and prosecuted to the fullest when appropriate.

Posted by Frank Michael | Report as abusive
 

The sky is falling!!! Panic now beat the rush!

Posted by Jim | Report as abusive
 

What do I make the Paulson Doctrine? It means the government hasn’t the slightest idea of how to handle this crisis. It is just reacting, and reacting badly.

Good Riddance to Herbert Hoover Bush! I am going to go buy a bushel of apples so I can start selling them on the corner.

Posted by Merrill Grinch | Report as abusive
 

Fascist.

Posted by jason | Report as abusive
 

That’s easy. If you did good business with Goldman Sachs, you’re safe, if you dared to compete or resist, you’re meat for the market lions…

Next question please.

Posted by Nic Fulton | Report as abusive
 

We already have a procedure for dealing with companies that are in default: it is called Chapter 11 bankruptcy protection. I think that the pattern you will find here is that the government did not want these companies to go into Chapter 11 because of the derivative covenants that would be triggered if they did. So this is a way to tiptoe around Chapter 11 and unwind those derivatives. The repercussions should ultimately be about the same and in some cases are more harsh. Common stock loses most of its value. CEOs and boards have to leave. (In Chapter 11, CEOs usually stick around.) If you want to guess who will be bailed out next, all you have to do is ask what kind of derivative positions they have. If they are small in derivatives, then Chapter 11 is the answer. I don’t usually like Paulson or Bernanke but I see some method in the madness here.

Posted by W P Gardner | Report as abusive
 

Paulson is a Wall Street insider, enough said .

Posted by Ira the loser | Report as abusive
 

What a bunch of boobs – both corporate boobs and government boobs. I’m pretty much a “hands off” person when it comes to government regulation/meddling in the economy. However, after 25 years of de-regulation of the banking/finance/investment industry and one scandal after another it’s time to meddle. When money is put on the table morality goes right out the window.

Posted by AllIsNotAsItSeems | Report as abusive
 

Why is my comment awaiting moderation?

Posted by AllIsNotAsItSeems | Report as abusive
 

“I am more concerned about the return of my money than the return on my money.” –Mark Twain

The Paulson Doctrine exemplifies how the interest system operates, i.e., it operates by fiat and by fiat only. There is no rule of law, i.e., the rock. The interest system, i.e., i-system is build on the sinking derivative swamp, and The Paulson Doctrine with all of its authority is armless, powerless or regulationless to stop from implosion. This implosion cannot be stopped. But the new perfected system – created by fiat too – is possible! Paradox! Yes it is!. Let’s Reuters do the due diligence on perfect economy. Yahoo it! & Google it! And let’s get going and fix The Paulson Doctrine, and let it be to a man. mms

Posted by Mario Sikorski | Report as abusive
 

As a Katrina “Survivor” and an MBA, I am advising all my clients to invest in shotgun shells and “mobile capital”. The current market environment will call for firm collections and liquidation tactics applied to your local grocery and drug stores. We cal it Phase II of the “Paulson Doctrine”. Of course Phase I was isolated to the Gulf Coast area, now you can share in our wealth!

 

If there is such a thing, the Paulson Doctrine should also be noted to include the replacement of private shareholders with an 80% public stake and high-interest liquidity loans.

Given that AIG is solvent but illiquid, I would say the public may actually benefit long-term from that takeover.

We’ve reached such a state of panic that the only profitable trade on the street is shorting investment banks with the intent to kill. Get enough panic going and you might just topple an otherwise liquid, solvent firm (eg Morgan Stanley).

The SEC should kill shorts if they want this to end, not wait until the damage is done.

Posted by Bernard Haven | Report as abusive
 

When you use the phrase “Paulson doctrine”, you really should put a date qualifier on it, as it changes from crisis to crisis (if you don’t believe me, just ask the Lermer Bros.). His problem is that he really wants to be the Grand Savior, but he knows if he “spends” too much (actually, he already has spent too much–like maybe 5 trillion dollars on F&F), that US bonds will become worthless financial instruments that nobody will want to buy. So when he gets in a bind, he is really torn between what he wants to do (as the Grand Savior), and as to what he’s afraid will happen if he does it. Note that all his decisions have been made under great pressure and in a rush.

Of course, I could be wrong. Maybe he’s just testing the proposition that central banks can’t go bust.

 

When Bazooka is used it really means you don’t really know
the target !

Posted by KL Teo | Report as abusive
 

It looks like the trend is that you’ll be saved if you have any footing in retail, which AIG certainly has. Fannie and Freddie have, indirectly. Investment banks, no.

Posted by Dane | Report as abusive
 

Paulson Doctrine = Bernanke doctrine:
Whenever the stock market in general and financial stocks in particular make new lows, HIT THE PANIC BUTTON.

Posted by Marvel | Report as abusive
 

My only comment to all of this is that the United States now has its own version of National Socialism. Heil Bush.

Posted by Paula Tschauner | Report as abusive
 

The guy was an offensive lineman and he is running true to his background. He is saying give me the ball I CAN make the score… but this is more than one man’s save. Where the hell is Bernanke? in fact where is anyone who actually gives the public confidence? This problem is being exacerbated by a corrupt and ham fisted regime, that is now reaping the rewards of it’s ignorant policys. It must be humbling to realize that they are now about to be washed away like ants down a drain. The conservative doctrine suggests that it is survival of the best adapted and fittest, how do you argue for that when you are going to be relegated to the dump yard of history. Of course there are many examples of this sort of folly over time, and it would be comical if it wasn’t so tragic. I just keep thinking what would Paulson and Bernanke be like running a school trip? Useless??

Posted by Matt | Report as abusive
 

I personally think welfare is a necessary evil that should be reserved for those whose children might go hungry without it. This welfare for the rich makes my stomache turn. Paulson and the rest of the “old boys club” will be laughing all the way to their off shore bank accounts if they get what they are asking for on this.

Posted by Sky | Report as abusive
 

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