MonkeyBusinessBlog: Maybe Yelling Fire at The Fatman's Convention Wasn't The Way to Go

I am sure that Hank Paulson is a smart guy. I pray that he is a smart guy. However, you have to admit, he couldn't sell a drowning man a life boat! First we had the whole GSE fiasco. Hank asked for and got the authority to take out Freddie and Fannie. His big selling point to Congress was, "Give me a big old bazooka gun in the form of a couple hundred billion dollars. As long as the world knows I got that big old gun in my pocket, they will have faith and not make me pull it out!" Unfortunately, Hank didn't realize that a lot of street smart people were going to buy up agency debt at fat spreads, and then tell him (force him) to use the bazooka so they could watch those spreads snap in and make millions. It didn't help that he didn't realize that Freddie and Fannie were carrying between $60 to $70 billion of fantasy capital. That and a late but full appreciation of how far down the credit curve the two Fredos went and how bad the housing situation really was, forced Hank to take out the bazooka. The congressmen, especially the congressmen from his administration's party felt like they got hoodwinked.

Now we come to the final mother of all crises, the situation we are in now. Paulson and Bernanke see the true horror that is coming in residential mortgages, commercial mortgages, corporate and consumer debt and we have to get to high ground pretty damn soon. Then on Wednesday and Thursday of last week, the crisis in the money market mutual fund sector brought all of us right to the edge of the abyss. Paulson and Bernanke save the day with a quick backstop to insure money market mutual fund investments. However, they know that things are deteriorating at an accelerating pace. They have to go back to Congress, the same guys who Hank just pissed off two weeks ago, with the GSE bailout (not to mention the little AIG conservatorship) and ask for at least $700 billion. How does Paulson go about doing it;

"Oh my God, FIRE.....this things gonna blow.....TOMORROW!!! Quick, here's a three page document giving me martial law over EVERYTHING FINANCIAL! I need it NOW! Don't worry how we're gonna do it, Bernanke's got a PHd, he'll come up with a methodology to price two hundred and twelve types of structured mortgage product over the weekend. W, get your head out of the baseball game and warn the Country of its impending doom! Congress, just sign the damn thing!!"

Unfortunately, two things happened.

The congressmen who feel liked they've jerked around the last month or two are pissed. A lot of the congressmen don't believe in spending all this taxpayer money and they certainly don't like having to work on something as boring as finance when there's fund raising and boondoggling to do. Additionally, Hank and Ben showed up at the hearings Monday without doing their homework on how to actually use the $700 billion.
You have now scared the country and the market out of its wits, which in turn makes the Congress and The White House feel like they have to pass the quickest bit of legislation they can, even if it is far from the best. This is the biggest piece of financial legislation in history and it's almost like debate has been outlawed.

Paulson and Bernanke convinced a good part of the country that Armageddon is coming Monday if a piece of legislation isn't passed and now we have the buzzards swirling around Wachovia, and getting a nice whiff of Morgan Stanley. The public unfortunately, was not aware of what a slow moving trainwreck Wamu was (it could have failed anytime between last month and now) and they will associate "No-Bailout Bill" with "Largest Bank Failure in History" That's not good.

We had a small luxury of time to try to get this right. However, the hysterical way this plan was pitched has robbed us of that time.