Hank Paulson saves the global economy

All of a sudden, the US government effectively owns the world’s largest SWF (Sovereign Wealth Fund) with a nearly 80% stake in mortgage finance companies, Fannie Mae and Freddie Mac, and for the world’s largest insurance company, AIG. In addition, the US government loaned $24 billion to JP Morgan to buyout a battered Bear Sterns.

Any private equity fund would drool over the terms for the AIG deal. The US government will be paid 11.5% interest on its $85 billion 2-year loan in addition to an equity stake nearing 80%, courtesy of AIG’s reckless management, whose bet on mortgage derivatives took on massive losses. There’s a very slim chance of AIG defaulting on this government loan. It’s problem was illiquidity, not insolvency. AIG has more than a trillion dollars of assets from which to sell and $78 billion in stockholder equity. More importantly to global stability, AIG is a major counter party for CDS (Credit Default Swaps) trades. CDS is an invisible giant of a market to the masses. It’s market size is an inconceivable $62 trillion. CDS are derivatives which bet on the default risk of debt. If a huge counter party like AIG fails to honor all its positions on trades, the mammoth market for CDS would implode.

Without a takeover of the GSEs (Government Sponsored Enterprises — Fannie Mae and Freddie Mac), housing would have fallen into a much deeper crisis and flush the global economy down the toilet with it.

The idea of GSEs was ill conceived to begin with. Two masters cannot be served…in this case, the masters being shareholders who want profits maximized and Congress with its political objective of more home ownership.

Socialization of capitalism was needed to stabilize the global economy. However, I suspect much of AIG’s assets will be sold back to the private sector. America at heart is a capitalist society and only turns to socialistic measures during desperate times. The question is…Will this massive US government intervention repeat the same mistake as its RTC (Resolution Trust Corp.), which bailed out the Savings and Loan industry in the late 1980s and early 1990s? RTC had cost taxpayers billions with its bulk sales of assets, which essentially subsidized real estate investors.

I doubt the federal government will be so stupid this time to sell its newfound, enviable assets at fire sale prices. U.S. Treasurer Hank Paulson, who is the former Chairman of Goldman Sachs, is shifting the thinking in Washington from bailout at taxpayers’ tremendous loss to development of a shrewd SWF (Sovereign Wealth Fund), which only a topnotch Investment Banker can inspire.*

The irony of it all is the US government enriched itself with these acquisitions (or confiscations?) because it had lacked oversight to regulate an anything goes capitalism which got us into this fine mess.

These are truly historic times.

*Read my comment for an updated opinion

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2 Responses to “Hank Paulson saves the global economy”

  1. pastamanvibration Says:

    I was wrong about this: “U.S. Treasurer Hank Paulson, who is the former Chairman of Goldman Sachs, is shifting the thinking in Washington from bailout at taxpayers’ tremendous loss to development of a shrewd SWF (Sovereign Wealth Fund), which only a topnotch Investment Banker can inspire.”

    The bailouts are already out of control and will expand further. Next can be GM, or credit card debt…. The total bill for taxpayers will probably exceed $2 trillion by the time they announce the last bailout.

    Bernanke and Paulson, fearful of repeating the mistake of inaction which led to the great depression, are overextending the debt burden on the American people.

  2. pastamanvibration Says:

    http://www.nytimes.com/2009/03/08/business/08gret.html?hp

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