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Warren Graham's Legal Blog: Never Fear, Paulson's Here!
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Location: New York, New York, United States

I am a practicing lawyer who lives and works in Manhattan, and specializes in Bankruptcy, Corporate Restructuring and Creditors' Rights, Commercial Litigation and Real Estate Law. I grew up in the New York City Area, and am a graduate of the University at Buffalo (B.A. 1976) and Fordham University School of Law (J.D. 1980). I have a wide variety of interests, but am particularly interested in history, politics, economics/finance and religious affairs, and am a frequent writer on a variety of those topics, and others. On a personal note, I'm a 54 year old man, married for 27 years, with two daughters, ages 24 and 20, respectively. Legal topics of interest may be found on my blogsite,, while non-legal commentary may be found at The content of these sites will be centralized and easily accessed locations for both legal and non-legal analysis and commentary, as well as a description of my legal practice for clients and potential clients. Keep checking back, as I expect the content to change and grow regularly.

Friday, September 19, 2008

Never Fear, Paulson's Here!

Imagine the following scenario: You’re in the “high limit” room of a Las Vegas casino, shooting craps. The table is hot, hot, hot! You’ve got a pile of black hundred dollar chips spread out over the pass line, and the numbers 5, 6, 8, 9 and 10, all with full double odds. The point is 4. The numbers keep hitting, and the pile keeps growing. You continue pressing your bets. Now, you’ve got thousands of dollars riding on every roll of the dice. More numbers hit, more money piles up, and the bets increase. “Press the bets,” you tell the croupier. .“Yes, sir,” says he. “You’ve got a bet.”

“C’mon, little Joe from Kokamo,” you pray, to the gods of chance.

Then, OOPS, the inevitable happens: “Seven out!” says the boxman. “Take the line, pay the don’ts.” The croupier, reaching over the table with his dreaded rake, takes all your chips off the table. After a long hot run, suddenly you’ve given back all your winnings and lost your entire stake.

But, fear not: your luck hasn’t yet run out. You turn around, and there, standing right behind you is Treasury Secretary Hank Paulson. He is beaming with a beatific smile. He reaches into his jacket pocket and pulls out a checkbook.“How much have you lost, my friend, he asks?” When you tell him, he says: “No problem. Here’s a check, courtesy of the United States of America. If you are able, pay it back someday. If you can’t, no worries! Your losses are covered in any case. In fact, why don’t you go back to the table, and play some more? I’ll stick around, just in case you need me again.”

A full understanding of the intricacies of the dice table might make this a more vivid illustration, but I’m “betting” that you get the picture.

Let’s see: Bear Stearns, Freddie Mac, Fannie Mae, AIG and now, the ultimate: your benevolent Uncle Sam is about to backstop all those troubling, nasty, panic-inducing, balance sheet-wrecking, impossible-to-value, junk-rated, securitized pools of sewage, which have generally become known as “subprime mortgages.” At the same time, Sugar Daddy Hank issues orders from on high to those nasty, hateful short sellers: “OK, now there’ll be no more of that! After all, short selling might make the Stock Market go down, and worse, engender public pessimism about the economy. And on the eve of an election, no less.”

Isn’t this all wonderful news?

Remember those Gen-Y, 30 year old investment banking captains of industry who made tens of millions, plus or minus, in each of the last couple of years? They did so, in large measure by packaging as “securities,” pools of subprime mortgages, built on a house of easy money cards, sold by hucksters and bought by people gullible enough to believe that “[y]es, Virginia, there is a Santa Clause;” that they, too, could realize the American dream of owning a home without the pesky nuisance of having to accumulate savings for a downpayment, and earning an income sufficient to support their debt service when the sucker-teaser rates reset. Those same young’uns then sold those gift-wrapped-with-a-pretty-bow securities to financial institutions, who were, in turn, too greedy and stupid to do what financial institutions are expected to do: sell their most valueless assets out to an unsuspecting public.

How about those other barely-old-enough-to-shave hedge fund managers, raking 40% off the top, plus a very handsome management fee, in exchange for producing enormous profits in a spiraling bull market for their well-heeled clients, in the expectation of endlessly appreciating home values and stock prices? Remember how those guys ended up paying taxes on those towering stacks of money at the capital gains rate of 15%? Remember how, at the same time, the sanitation worker continued to pay his taxes at the fully indexed federal income tax level, got socked with a “marriage penalty,” and teetered on the yawning abyss generally known as “Alternate Minimum Tax,” so that his meager and pitiful itemized deductions might be disallowed by that same Sugar Daddy Hank?

Well, folks, the government would certainly love, on the eve of election, to return us to those halcyon days of yore, but it can’t. The housing values won’t support the subprime mortgages, those beautiful gift-wrapped pools of those same mortgages (belying the pieces of coal within) are depriving the financial institutions (who are largely responsible for this financial “Pearl Harbor”) of the capital requirements to allow them to continue in business, and the coupon clipping investors won’t stand for their fund managers taking those big chunks of their money in a foundering market.

So, what is our gang of merry pranksters in Washington to do? The Wall Street “houses” are burning, threatening high six and seven figure bonuses, and in many instances, even jobs themselves, the quasi-governmental “corporations” who had backed up these garbage mortgages are teetering on the verge of bankruptcy, insurance companies, ostensibly in the business of {gasp} selling insurance (a highly profitable business), are discovered to be, instead, in the business of making foolish investments, at the expense of trusting stockholders, not to mention policyholders. So Sugar Daddy Hank fires up the printing presses, opens up the public wallet and agrees to backstop the collapse of Bear Stearns, Freddie Mac, Fannie Mae and AIG. Somehow, poor old venerable Lehman Brothers fell between the cracks and, for some reason was, alas, not “too big to fail.”

Nevertheless, and notwithstanding Hank’s commitment of John Q. Taxpayer to untold billions (and maybe trillions) of dollars to rescue these mismanaged businesses, the infection simply could not, and would not be contained. The Stock Market appeared to be in free fall, and every investment house looked like easy pickings for other investment houses, corporate LBO raiders or vulture funds.So Hank, hankering for more, has apparently agreed to put the national weal behind the entire subprime debacle, thus relieving investment bankers, brokerage houses, banks, insurance companies, and other houses of ill repute, of the inconvenience of having to explain their foolish decisions, or to suffer their punitive consequences. In most cases, it is the unwitting shareholder who will have his or her asset erased. But have no fear. The CEO of AIG is walking away with a $7 Million severance package.

And yet, it gets even better. Now, our kindly own uncle has decided to nip this virus right in the bud: It will shoulder the entire burden of all these reams of valueless paper. The cost of this, as of this writing, is estimated to be in the trillions. The Stock Market is euphoric with the news that its most illustrious (and negligent) denizens will be freed of the shackles of these problem assets.

Still better yet, the cast of characters who brought us this national debacle will be able to hide under Uncle Sam’s skirts, while Americans, already overburdened with soaring fuel and energy costs, will surely foot the bill. Of course, there is another alternative: the government can float more bonds (which might or might sell, given the unattractive interest coupon that all these machinations have engendered), or continue to sell off pieces of our national treasure to such “friends” as Dubai and China.

What a country, eh?

Well, friends, lest this all sound like the rantings of a socialist, don’t be misled; it is, in fact, exactly the opposite. I am a capitalist to the core, and a conservative. Where I come from, those values suggest that risk takers are sometimes rewarded, and sometimes punished. The bigger the risk, the bigger the reward (or loss). Regrettably, our “Republican” administration has forgotten all about that and, instead, has abandoned its “shrink the government and keep its damned hands out of my pocket” mantra in favor of government-as-guarantor of all private losses. This government, which has steadfastly refused to intervene (via the SEC) in enforcing laws already on the books and neglected to seek some oversight over opaque hedge fund shenanigans (remember those capital gains rate tax loopholes?), has now decided to jump into the fray, by lending a parachute to the mismanagers and coddling the malfeasors. In addition, because “a rising tide lifts all boats,” Hank has, yet again, engaged in naked market manipulation by seeking to prohibit short selling (particularly in financial stocks), and releasing news at the end of nearly every trading day, designed to promote glee in the trading pits. Such activity, if engaged in by a private individual, would have the SEC seizing computers and pursuing federal investigations in a New York minute.

If all of these increasingly desperate efforts to prevent Darwinian inevitability in the financial world prove unavailing, as they likely will (after, in passing, tripling the national debt), the government might consider, for example, prohibiting ANY selling of stock, so as to ensure endless price rises. Perhaps, our government will, as the Democrats in Congress are urging, will place a moratorium on foreclosures. This will enable people to continue to live in their homes they cannot afford, and which have no equity without paying for them, while those with better credit ratings and “prime” mortgages continue to meet their obligations, month in and month out. While this moratorium is underway, of course, the government, which will have, one assumes, have bought this paper at a discount, will derive no income whatever from them, thus having laid out trillions for no return. It’s a good thing that Hank doesn’t have to answer to shareholders and a board of directors for his actions as CEO, for he’d surely be canned for that level of non-performance of his loan portfolio; rather, he reports only to the President (and he, in turn, is no longer running for anything).

We are surely on the path of virtual nationalization of each company that is about to fall in the row of dominoes that is our ill-used financial services industry. The solution lies elsewhere, and it’s not pretty and it will hurt. Sick companies must be allowed to sink or swim. Otherwise the concept of any vestige of a free economy is an illusion. It will be painful, indeed. People will lose jobs, the Stock Market will fall (quite a lot, perhaps), shareholders (many of them, sadly, relying on their holdings for retirement) will absorb serious losses and people will have to give up homes they can’t afford. But the government cannot and must not try to solve every problem, stem every loss and plug every hole in a leaky dike. We will pull out of this by mostly letting nature take its ugly course. The current policy of “shifting the deck chairs on the Titanic” will only prolong the agony.

Alas, that is not how Hank sees it. Remember the crap table metaphor? Hank will bankroll you endlessly, but you better not play the don’t pass line. “Wrong” bettors are not welcome here.

Warren R. Graham
Copyright 2008


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