Diary

The Paulson Bailout Plan

What evidence convinced the Senate that the Paulson Plan was that something “that needed to be done?”1-Paulson argued vigorously, but not convincingly that “it needed to be done or everything would crash” Why did the Senate find him so credible? He is a deal maker. What is his track record in foreseeing the future? 2-His Bear Stearns deal was great for JP Morgan, bad for taxpayers. Which of his bailouts have proved good? In today’s Wall Street Journal they question the wisdom of his AIG deal.3-Under his plan, who can be trusted to buy these “toxic” securities?Will those chosen put taxpayers first or the sellers? For their own reasons or ours? How can we be sure?In any business transaction, the seller always knows more than the buyer. Why will that be different in the case of these CDOs and other securities, which, so far, nobody has understood? If the government offers twenty-five cents on the dollar, they’ll get sold only those securities worth twenty cents or less? Strengthening government regulation has meant hiring people with low IQs to protect the public against people with high IQs.

If the government steps in at all, let it be as financier of second mortgages offered to distressed homeowners able to keep making payments.Let the holders of such mortgages defer a set amount, e.g. $150/ month. Let the government match that in a payment to the mortgage holder and let $300/month go into a fixed term second mortgage payable at the back end of the homeowner’s current mortgage, half to the government, half to the mortgage holder. If the homeowner defaults, let the government be in first position on liquidation.In that way the homeowner would finance his own bailout helped by contributions from the mortgage holder and the government. The mortgage holder avoids foreclosure and maintains cash flow. The government advances far less money over a far longer term, gets its money back with more interest than it pays, and with far greater certainty than in the Paulson Plan. Fewer houses will be thrown onto the market and the market will reestablish itself from bottom up rather than top down. Even toxic securities will regain value. Vulture investors will quickly see that and begin to buy them, reestablishing that market too.