Tuesday, September 23, 2008

Paulson/Bernanke Testimony

I heard the first half of Paulson and Bernanke's Senate testimony.

1. Bernanke clearly sees this as a price setting exercise. I suppose he thinks that a real market price would allow institutions to properly account for their holdings and thus establish mutual confidence.

But we don't have market largely because there is no liquidity for any buyer, and/or sales at available prices would force recognition of losses that put the holders into insolvency. If the only bidder is Treasury, that isn't a market. Perhaps they think using a reverse auction allows price setting? But aren't the marginal sellers going to be that set of institutions best balancing a need for capital with an expectation of prices at which they can mark the rest of their portfolio? Isn't there a grave danger of collusion among sellers here? And given the diversity of these securities' features, what does the price of one really tell you about the price of another?

And I'm not sure transparency helps. A lot of players would appear short-term insolvent, how is that going to help them borrow?

2. Bernanke and Paulson view equity stakes and comp limits as "punitive". They want players to participate, I guess so they can get their accuracy in pricing and get this stuff out of the system. I see the point that you shouldn't punish someone for selling if they sell at the "right" price, but that depends on getting the right price in the first place.

3. Paulson says this is a plan, but I think Shelby is right when he says that Paulson basically wants latitude to continue reacting to circumstances as he sees fit. He would direct this at a large class of assets, but his approach to that class would continue to vary as he works through this. Flexibility is a fine thing but I don't see a persuasive diagnosis of the root problems supporting a pathway out of this.

4. It is very, very clear that Lockhart views his job as gettting the GSEs back to business as usual. He clearly views their problems as products of past management and bad practices, and not fundamental to their nature. No one in the Congress or the Administration seems to disagree.

5. A better than usual performance by the Senators, with less parochialism and preening than I'm accustomed to. [...snip...] In general, maybe a third of the committee seems competent to meet their responsibilities.

Not a confidence inspiring session, though I do think they'll muddle through without blowing up the markets. But this thing is going to have a lot problems, and while it might forestall a meltdown, I'm not sure this thing will get the financial system functioning properly, absent a complete bailout of the institutions.

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