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Latest Bailout Plan Spin: Its a Money Maker!

Most people are unfamiliar with the evolution of financial management over the years. It began as a clubby old boys network, who you knew mattered more than what you knew. It evolved over time. Starting in the late 1970s, retail stock brokerage became a telemarketing sales business. Although that model is clearly changing, there is still trillions of assets under management today that got that way via the cold call.

The cold calling sales approach was developed and refined at Lehman Brothers (perhaps their collapse was Karma). It was encapsulated by a man named Martin D. Shafiroff, who wrote up, refined and perfected various phone techniques. These include the straight line, the first trade, the trust close. All of his various techniques were published in the book "Successful Telephone Selling in the '80s" and subsequent editions ('90s, etc.)

Having worked on the Sell side for the first decade of my Wall Street career, I am intimately familiar with the various pitches the retail world uses to obtain clients and assets. There is not a single retail broker of my acquaintance that does not have Shafiroff's how-to on his bookshelf.

The reason I bring this up today is due to the latest sales pitch from various people, aggressively pushing the bailout plan. The newest spin on the massively expensive plan is "Hey, its a jumbo money maker!"

The spin reminds me of the classic retail stock jockey. The guy has buried his clients in a series of bad trades, bad judgment, poor risk management -- all motivated by his self-interested, commission-generating trades. The only way out of the money losing mess, pitches the broker,  is a big, Hail Mary trade.

Sound familiar?

This technique is one of the last ones in the the Shafiroff book. Once an aggressive retail broker is upside down, the plea goes out for raising more money from the mark client. "Believe me, I hate being under water more than you. I pulled in some favors, this is the trade that makes it all back for us and then some. I could even get in trouble telling you this, so don't mention this to your pals. This is the one -- but I need you to send in more capital so we can recoup the prior trades that went bad on us."

I guess Paulson read the book in the early days of his career. That line of bullshit is identical to what the public is now being fed. A series of OpEds in the Washington Post and the Wall Street Journal (and who knows where else) are all pushing the same nonsensical line: The bailout plan is a big money maker:

Andy Kessler in the WSJ:

"My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury...

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.

Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion."

Bill Gross (who just volunteered to manage the bailout for free) in the Washington Post:

"The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that."

Now, I have a few question for Messrs. Kessler & Gross: What does this say about the private sector? Why can't the all of the private equity funds, sovereign wealth funds, and enormous pools of capital do this themselves? There are trillions of dollars sitting around in cash, yet none of it that sees any value here?

I guess that Hank Paulson, George Bush and Ben Bernanke -- all of whom have been been unequivocally, expensively, tyrannically wrong about the entire crisis from the beginning -- are smarter than both the markets, and all of the private equity pools, about this paper?

Does that sound right to you? The guys who missed this from day one -- despite many many admonitions from many people -- only they see the value in this paper, whereas the smart guys who saw the shitstorm coming in advance, and bet against it, don't?

I am in the same camp as Michal Lewis, who writes at Bloomberg "the Treasury plan also creates this wonderful hidden opportunity for Goldman Sachs to make a killing, and thus preserve its bonus pool for a long time to come."

Put me down as sympatico with Anatole Kaletsky, who writes in the London Times:

"Mr Paulson may be a former chairman of Goldman Sachs, but as US Treasury Secretary he does not know what he is doing. His recent blunders, starting with the “rescue” of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a “comprehensive and fundamental” solution to the global financial crisis, without apparently having any idea of what he would actually do."

Agreed.

I have a 10 year bet for those folks now pushing the "Trust me, we will make it all back on this one trade" spin. If you who think the Paulson plan is a money maker, a cash winner, and a net after-fees taxpayer surplus creator, put your money where your mouth is. I bet you one million dollars, to the charity of the winner's choice, that the current plan is ginormous money loser.

Any takers?

>

Previously:
Fixing Housing & Finance: 30/20/10 Proposal (September 2008)
http://bigpicture.typepad.com/comments/2008/09/fixing-housing.html

CEO Clawback Provisions in the Bailout? (September 2008)
http://bigpicture.typepad.com/comments/2008/09/ceo-clawback-pr.html

Sources:
How Main Street Will Profit
William H. Gross
Washington Post, September 24, 2008; Page A23   
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/23/AR2008092302322.html

The Paulson Plan Will Make Money For Taxpayers
ANDY KESSLER
WSJ, SEPTEMBER 25, 2008
http://online.wsj.com/article/SB122230704116773989.html

America Must Rescue the Bonuses at Goldman Sachs
Michael Lewis
Bloomberg, Sept. 24 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6a6nqXGVdZY

Save the world? Hank just didn't have a clue   
Anatole Kaletsky
Times, September 25, 2008
http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article4820549.ece

Thursday, September 25, 2008 | 07:18 AM | Permalink | Comments (92) | TrackBack (5)
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Comments

USD 1m may not be such a big hit in 10 years' time. How about USD 1m worth of gold (priced in 2008 dollars)

Actually I think I'll still give it a miss.

Posted by: Richard Smith | Sep 25, 2008 7:27:44 AM

Paulson and Bernanke will take that bet, so long as they can cover it using other people's money.

Posted by: Mr. Flibble | Sep 25, 2008 7:30:14 AM

Paulson would not take that bet.

Posted by: JL | Sep 25, 2008 7:30:43 AM

Excellent analysis. Now, close the loop.

A couple of days ago you wrote of socialism and I pointed out that it was really a distraction effort. Of course there's scam in there somewhere .. maybe several. That doesn't mean it's not a good idea in concept. It only needs to have the loopholes identified and closed up.

Now, the challenge.

Brainstorm this everyone ... even bad and ridiculous ideas are acceptable.

Identify the potential scam(s). How can they be headed off while still allowing the plan to work at some reasonable level?

Posted by: dead hobo | Sep 25, 2008 7:37:40 AM

What pisses me off is this line above from Kessler "his $700 billion" refering to Paulson... Isn't it OUR/YOUR money? Dammit.

By the way, who's next in line for a hand out... GM, Ford, housing construction companies.

Posted by: Mattinhalifax | Sep 25, 2008 7:39:29 AM

BR, I'll take your side of the Bet and help you Double the Wager.

Sadly, though, this is another instance of: "Somebody's got to eat the Dog Food", as opposed to: "We eat in our own Kitchens."

Posted by: Mark E Hoffer | Sep 25, 2008 7:40:56 AM

Identify the potential scam(s). How can they be headed off while still allowing the plan to work at some reasonable level?

Posted by: dead hobo | Sep 25, 2008 7:37:40 AM

Absolute Transpancy, and the Public Identification of every 'asset', seller, and price paid.

With complete descriptions of all three--and, about the 'seller', his place in the chain of custody, the history of ownership of said 'asset', his chain of command--the management he works for, and the 'management's of all the firms that held the 'asset', again, since inception.

With that type of disclosure, at least the American People will be able to get an education in exchange for their 'money', b/c they'll get little else.

Posted by: Mark E Hoffer | Sep 25, 2008 7:50:18 AM

Talk about putting your money where your mouth is. Nicely done, and my thanks to you. I hope this gets widely noted and discussed.

And I'm ready to short the firm of whomever takes the bet... oh, uh, nevermind.

Posted by: pmorrisonfl | Sep 25, 2008 7:52:30 AM

There is no way Paulson & Bernanke are going to be using this $700B as a discriminating buyer. They will be using it as a financial sauve for their Wall Street buddies.

And furthermore, they will have the audacity to come back before the end of the year and ask for more!!!

Posted by: BG | Sep 25, 2008 7:52:52 AM

wow... did anyone tell Kessler that when you buy $2T notional of debt it doesn't mean that you actually get to collect $2T?

Posted by: Kid Dynamite | Sep 25, 2008 8:03:09 AM

Is it time to send members of Congress a TEA bag?

Posted by: Toni | Sep 25, 2008 8:07:15 AM

BR -

THIS IS THE SCAM - P&B CAN NOW BLAME CONGRESS AND SENATE FOR WAITING TOO LONG TO APPROVE BAILOUT AND CAUSE THE RECESSION.

They have warned us - Bush warned us - our 401K's are in jeopardy, our jobs are in jeopardy.

You know what they will do - they will say "Yeah, thanks for the bailout, but since it took so long - the economy has just fallen off the cliff." "If you just would have listened to us and acted quicker, we could have prevented this."

Sickening

Posted by: Maj Tom | Sep 25, 2008 8:09:15 AM

How specifically can Gross claim the programme is designed to reduce the number of foreclosures? As far as I can see it does nothing toward this. His valuation depends on an assumption of the default rate, which is an unknown and dependent on future unemployment and the accuracy of the income, collateral and valuation material provided all of which may be dubious and difficult to readily establish over a large proportion of the what 350,000 mortgages at say an average of 300,000.

Posted by: chris_gee | Sep 25, 2008 8:10:56 AM

You're probably right. The chances that this thing makes money are dubious at best. However, the alternatives, which are admittedly unknown by most, could likely be much, much worse. And while the nominal profit or loss on this package will be historically evaluated, the loss (if) averted will be unknown.

So while the criticism on the outcome is valid, is not the bigger question one of which alternative we prefer?

Posted by: Dazednconfused | Sep 25, 2008 8:11:49 AM

dead hobo wants scams ...
Hiring a single paper pushing firm from the MIC inkind

We have got to close this system down, I'm tired of paying for police'g.

I know everyone needs a job in this world, but we gotta get away from paper pushing service sector jobs, increasing my costs for everything.

Posted by: Greg0658 | Sep 25, 2008 8:14:34 AM

If the original administration plan was a 'blank check' is the updated congressional plan 'blank checks and balances'?

Posted by: pmorrisonfl | Sep 25, 2008 8:18:00 AM

One of the best blog posts on this fukk up, kinda reminds me of Willie Sutton, the bank robber. When asked why he robs banks, he responds, because that's where the money is.

Posted by: Mel | Sep 25, 2008 8:20:32 AM

dazedandconfused
> However, the alternatives, which are admittedly unknown by most, could likely be much, much worse.

When pressed on this point in the hearings yesterday ('why this, why now'), Paulson and Bernanke gave the same reasons Bush did last night: less credit = less borrowing = harder, more expensive to get a car/student/house/business loan = lower GDP.

But if 'worse' = 'harder to get a loan', didn't we already try making it easy to get these loans, and isn't that why we're in the fix we are in? How is this even an alternative, isn't it really more of the same, just more directly government sponsored?

Posted by: pmorrisonfl | Sep 25, 2008 8:22:32 AM

Here's a suggestion - rather than have the government spend $700bn on these instruments and carry them at "hold to maturity" prices, why not just let the banks carry them at hold to maturity, rather than have to mark them to market every month? This constant markdown has contributed to the downward spiral, if the government can carry them to maturity, why can't the banks and save us all $700B?

Posted by: keefer | Sep 25, 2008 8:23:25 AM

There are several scams here.
The first is the obvious: bad money drives out good. What is offered to the US will obviously be the worst of the worst.
Second is that - even under the Dodd/Frank versions thie is government incentivization toward short-term behavior. So what if you will owe stock to the US when the final losses are tallied? It ain't today and it ain't YOUR stock.

No, no, no to any and all version of this 'plan'. No. Just no, come what may. NO.

Posted by: wally | Sep 25, 2008 8:24:42 AM

Wow...I think Bush finally found those "weapons of mass destruction."

And to think, they were in New York all this time.

Posted by: Lois Denominator | Sep 25, 2008 8:28:29 AM

ACK!?!?! just because something was worth 2 trillion dollars at one time doesn't mean that is what it is worth now. have people gone mad, is this delusional belief that asset prices always keep going up?

the problem is that Paulson's method only world if he doesn't show his hand and he already did. the way the scam works is that you walk int a collapsed market and start buying up stock at 100-300% over the fire sale price. other traders see what you are doing and think you know something they don't and they start bidding it up to. pretty soon prices start climbing. but this is short lived because people remember what the asset values are distressed in the first place and the key is you exit before the market crashes again.

so how do you get everyone to believe that the prices you are buying are legitimate. everyone knows that they are not because the current psychology is distrustful. to establish trust you have to give someone the ability to capitalize on these products. that means not the $700 billion from the fed but open public auctions by private investors who bid up what they think it is worth. if they are able to make a profit on them they will roll that money into the next auction to buy more securities.

wall street has to suffer in this model, the firms have to suffer some downsizing. maybe the fed can lend them some cash after the auctions to float them until they are solvent, but they should not be given the opportunity to wipe the slate clean. if they don't want to participate int he auctions then they risk imploding their firms.

Posted by: andrzej | Sep 25, 2008 8:28:35 AM

How 'bout they use 1 or 2 billion to raze a few thousand homes. Hire the homebuilders, finance a few thousand Cat machines via CIT. What a boost it would be for the economy! De-construction coupled with De-leveraging.
Tell me if I'm wrong but one mathematical model that still holds true is that two negatives equal a positive.

Posted by: Fred S. | Sep 25, 2008 8:29:37 AM

All the GOP spin-doctoring to make this sound like a moneymaker is sickening. Maybe America should raise their citizen's marginal tax rate to 100% for all earned income over $30K annually so that they can turn their money over to the government to make more "excellent" investments. The only way this will ever make munney is if they manage to pancake the USD to about 25% of it's current value. That might be on tap...

Posted by: BillD | Sep 25, 2008 8:32:31 AM

A lot of dire, doomsday scenarios being thrown around out here if the Bill doesn't pass. So really, what will happen?

Will the credit market freeze shut, preventing businesses from cutting checks for payroll?

Will Americans loose their savings?

Will the dollar be worthless?

Will store inventories crash?

This sounds like the Book of Revelation so will somebody please enlighten me as to what the hell is going on!

Posted by: ChristopherPaul | Sep 25, 2008 8:32:44 AM

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