December 11, 2008
Everything you want to know about the bailout (but were afraid to ask)By Jim H. Ainsworth
Here are a few questions from a typical man on the street (me) to Treasury Secretary Hank Paulson, and the answers I believe he would give, based on his public positions to date.
Man on the street question: How much did you say you needed?
Paulson answer: $700 Billion
Q: When do you need it?
Q: What are you going to do with it?
A: Save the country.
Q: Could you be more specific?
A: Just trust me.
Q: If you don't know what you're going to do with it, how can you know how much you need?
A: I could be off a few billion, but I am very close.
Q: Let's see now, you don't know exactly how much you need, and you don't know what you are going to do with it, but you have to have it right away. Correct?
A: That sums it up nicely.
Q: And what happens if you don't get it?
A: The world as we know it ends. The sky will fall.
Q: Could you be more specific?
A: The credit markets will freeze.
Q: So how will you thaw the credit markets? Just trying to understand.
A: (Impatient) We will buy troubled assets from troubled banks and they will be able to lend again.
After Bailout Approval
Q: Ok. You have the money. Did you buy the troubled assets?
A: Not exactly.
Q: Why not?
A: Well, we could not figure out what they were worth.
Q: Why not?
A: There does not seem to be a market for them.
Q: Aren't banks required to mark them to market value?
Q: Then why not just pay the value shown on the banks' balance sheets?
A: (Long pause) Er...it seems that some of them have almost no value and of course, no buyers.
Q: Sounds like a good price. Why not pay that?
A: (Exasperated) Because that would not help the banks.
Q: It would get the bad assets off the banks' books. I thought that was the idea.
A: The credit markets are frozen. Besides, we could not figure out which troubled assets to buy.
Q: So what did you do with the money?
A: We're still considering various options.
Q: I thought you had to have it right away or the world would come to an end.
A: We had to have approval to spend it to shore up market confidence.
Q: So how did that work? Has the market stabilized?
A: Wall Street has confidence that we stand ready to invest the money to free up credit markets.
Q: Does the Treasury Secretary, President and Congress shouting that we are heading off a cliff scare the markets?
A: We must free up credit markets to head off another Great Depression.
Q: So have you spent any of the money?
A: Yes, we are taking equity positions in financial institutions. In other cases, we may just give them the money.
Q: So, we taxpayers are investing in failing banks' stock?
A: We are finding various ways to inject capital into troubled banks. We even have a name for our new program. It's called TARP. Troubled Asset Relief Program. That should make everyone feel better.
Q: Relief. Isn't that what they called welfare during the Great Depression?
A: Next question.
Q: So, if the bank fails anyway, won't our stock go to zero?
A: The banks are too big to fail.
Q: Couldn't they undo some of the mergers and acquisitions and foreign investments that made them so big? Maybe that would make them more efficient.
A: These banks are too big to fail. You have no idea of the financial Armageddon that would cause.
Q: After this capital injection, infusion, investment, have the banks started lending?
A: Credit markets remain frozen. Nobody, absolutely nobody, can borrow money.
Q: I borrowed money for a new car just last week.
A: You don't fit the definition of nobody. Nobody means big players.
Q: I have a friend who bought three distressed houses for rent property last week. Financed them all. A real high-roller. Does he qualify as one of the nobodies?
A: If he can borrow money, of course not.
Q: My bank says they are awash in cash and ready to lend it. The president says they are making good loans every day, just like they did before the sky fell. They say profits are good.
A. Your bank is too unsophisticated to understand complicated financial instruments such as collateralized default swaps or the concept of leveraging. It took great brains such as mine when I headed Goldman Sachs to devise such securities. (Head lifting, neck straining). I expect that the president of your bank makes less than a million a year and gets bonuses based on profits or some such antiquated arrangement. He could not possibly understand what it takes to run a real investment bank.
Q: So, how are you going to get the banks to start lending?
A: As I said, we are taking equity positions in the banks. We will make them lend money or know the reason why. We may have to put some members of Congress on their boards. That way, the banks will be run in the same efficient manner that the country is.
Q: Isn't that what caused this mess to begin with?
A: No further questions.
Jim H. Ainsworth-former CPA, CFP, CLU, Registered Investment Advisor, Licensed Securities Principal, was twice named one of the most influential accountants in America by Accounting Today magazine. He welcomes comments at jimainsworth.com.