Why did Friday come early this week?

Okay. So now I reveal myself for what I am. A conspiracy theorist, a nutcase, a crank.

But tell me, why did Friday come early this week?

Isn’t it a tradition for bank reorganizations to be announced after market close on Friday nights? Isn’t part of the reason for that to give markets time to chill out, think a bit, notice that the ATMs still work and the branches have not been demolished, to let the sun rise and shine for a whole two days, in order to diminish the possibility of people freaking out?

So, here is today’s news cycle. Red State Republicans react to a unprecedented popular outrage among their constituents and refuse to get with the program. It is leaked that President Bush solemnly opined, “If money isn’t loosened up, this sucker could go down.”

Was he standing at the teller window with a note about a bomb when he said that?

And, for good measure, the government announces “by far the largest bank failure in American history” with less than 16 hours to market open.

That loud noise, was that the sound of a single gunshot? Have the robbers killed a hostage, to show that they mean business?

Yes, the irony is delicious that Paulson’s plan has for the moment been scuttled by the ideologues that his party has cynically nurtured, by the base that the business wing of the party always thought they could play. And yes, the House Republicans’ alternatives, as reported by Justin Fox, are laughable.

But that doesn’t explain the sequence of events this evening. Nor does it excuse the fact, that if a legislative response to the crisis was so critical, a single deeply flawed proposal was thrown at the Congress a week before adjournment, under terms that basically said “pass this, or else”. It is surely coincidental that the plan was the most generous and least disruptive policy possible to industry from which Secretary Paulson hails.

No, I am a nutcase. These are all public servants doing their very best for the American people in a difficult situation. We need to pull together, rise above politics. Our leaders would never manipulate markets to frighten and punish the public so that we fall into line. That could never happen in the United States of America.

I am dark. Secretary Paulson could have offered any number of proposals to help ensure that this collapsing house of cards is a controlled demolition. He and Dr. Bernanke had months to put together policy options, long months between the fall of Bear and the fall of Lehman to create orderly processes for disorderly events they knew could come. At the last moment, they offered one option, a particularly unpersuasive plan imperiously presented as a fait accompli. When Congress balked, they relented and offered a few crumbs so that the people we elected could nibble at the edges without altering the core. And today, when it looks like those crumbs might not have been enough, we have the largest bank failure in American history, announced, oddly, on a Thursday night.


10 Responses to “Why did Friday come early this week?”

  1. geee writes:

    I am a nutcase, too. I think it comes down to either legal liability for the investment banks or a need to bail out the hedge funds.

    1. Legal Liability for Goldman Sachs and Other Financial Institutions – investors (hedge funds, foreign financial institutions, and many others) were sold these toxic mortgage backed securities while some, primarily Goldman Sachs, were making bets that these securities would fall in value.

    This situation is similar to the problems that were uncovered surrounding Auction Rate Securities (ARS). Investment banks were accused of selling ARSs to investors while liquidating their own positions. The banks agreed to pay off the investors and pay a fine.

    Complaint filed regarding Auction Rate Securities

    The Complaint charges Goldman Sachs with violations of federal securities laws. Among other things, plaintiff claims that defendants’ material omissions and dissemination of materially false and misleading statements concerning auction rate securities caused those securities to be overvalued and artificially inflated, inflicting damages on investors.

    Goldman settled by paying investors par and paying a fine.

    2. Legal Liability for Fraudulent Activities in the Mortgage Pipeline – If there was fraud in any part of the process, and it is becoming more apparent there was, and anybody at the banks knew of the fraud or could have been reasonably expected to know, the banks would also be liable for losses to investors.

    3. Hedge Funds are Part of the Problem – If hedge funds are also now too important to be allowed to fail, an FDIC style bailout will not work. However, it is difficult to sell a plan that bails out wealthy, foreign hedge fund investors.

    Although the Treasury claims it will not be purchasing these securities directly from hedge funds, there is nothing that prevents the hedge funds from selling to a bank and the bank selling to Treasury. So, the banks will simply act as a conduit for the hedge funds.

    If I am correct, it would explain the need to go with a plan other than a Swedish style intervention. It would also explain the reluctance to agree to equity and restrictions on compensation.

    Questions that Paulson Needs to be Asked?

    1. Did Goldman Sachs invest in securities that would increase in value at the same time that it was selling those securities to others? What would be the consequences for Goldman if it had to purchase those securities back from investors due to misrepresentation? How much Goldman stock and options do you own? Do you think it is wise to have someone with so many conflicts of interest in charge of this process?

    2. Are you aware of any fraudulent activities that occurred at Goldman in the issuing process of MBSs prior to selling the securities to investors?

    3. Will you restrict the purchase of securities to those that the bank has owned for more than one year, preventing them from being a conduit for hedge funds?

  2. BSG writes:

    Ah, nothing like the sweet smell of sarcasm in the morning. Well put, Steve!

    Somewhat O/T, in an Opposite Day reality, Brad Setser reports a move *into* dollars (from banks to custodial accounts.) As much as the dynamic is understandable, it is also crazy considering the reasonable concerns expressed (indirectly) by those doing the moving.

    The only hope for the dollar even on a long term basis may be from the fact that the economic judgement of the powers that be in most of the rest of the world is just as screwed up as ours, but we’re so much bigger and have the reserve currency.

    What a mess indeed.

  3. BSG writes:

    More on point, did you see this:

    GOP Congressman Rips Paulson

    Paulson’s glaring conflict of interest has been taboo, until now.

  4. I have previously referred to “Engine Charlie” in the 1950s. We would do better with him back. At least he articulated the “vice versa” part.

  5. RueTheDay writes:

    Lord Acton was perhaps best noted for his quote, “power corrupts; absolute power corrupts absolutely”.

    He also wrote:

    “The issue which has swept down the centuries and which will have to be fought sooner or later is The People versus The Banks.”

    I’m having a hard time determining which quote is more apropos to the current situation. Both were written around 150 years ago. The more things change, the more they stay the same.

  6. Mises writes:

    is there a party of nutcases and i wasnt invited?

    well im here to crash the party in the least. great last couple of posts, Steve. how do we know you’re not in on it though? would be might smart to act all victim like if you were truely the conspirator! thats evidence enough for me, get em’ boys.

  7. yoyomo writes:

    Check out the poster of Bernanke and Pulson executing a bound and blindfolded hostage with a WaMu logo on his chest at Karl Denninger’s market-ticker, he actually predicted it would happen before the fact.

  8. Alessandro writes:

    Steve you are “thinking like a criminal”. So you stand a good chance to be proven right in the end.

    Congress, one hostage is gone. They want a stash of cash and a fast car. Now.

  9. livingston writes:

    Steve: You are absolutely right on this one. OTS declared while it was seizing the bank that it was well capitalized till the day of its seizure. Moreover, the outflow of $16 billion was amde the pretext…even that was thin grounds because the bank had the liquidity of $50 billion which was a quarter of its deposits and unlike Indymac, the deposit base for wamu was much stickier. Even if Wamu needed to be seized, if they had seized them on friday and buy themselves two weekend days to operationalize the branch transfer it would have been less risky, but they did it on Thursday because a firday seizure would not have had any impact on the political debate. Even if one believes that the bail out package is the right thing to do, FDIC and OTS’s political gambit ought to scare you. If we give them $700 billion without supervision and controls, we will give them control over the political process becuase they will be free to choose the outcomes with our money. FDIC, is being far more aggressive in this go around, especially with things like mortgage mods with the taxpayer’s money even when there is no political consensus that the mods are a good thing (the current proposal in congress specifically takes out the bkrpcy judge mortgage modification authority due to poltiical opposition. Give them $700 billion with no controls, as they want, they could then care less as to what you really think as a citizen and a tax payer. I am personally all for some sort of a package but the terms of the bailout ought to be spelled out in the legislation rather than be left at the discretion of the regulators. They have thei own agendas and they will hoe to their own line of thinking with my money.

  10. john jon writes:

    700 billion for GS…. the head of Bear Stearns for JP Morgan…in the grand scheme of things is this really an outrage? JFK executed in public, thats an outrage The Department of Defense is going to get 500 billion a year for as long as the U.S taxpayers have 500 billion to give. Thats an outrage. And how about the off budget cost of the WAR ON TERROR that is good for another 500 billion a year. So by all means feel outraged that big money has its claws planted firmly in the spine of the American people. Just realize that this three ring circus has been playing in a town near you for almost a century. As Robert Frost wrote…sit back and watch this end de luxe.