FacebookTwitterGoogle+RedditEmail

When Will Henry Paulson Learn?

by PETER MORICI

Once again, we have good news and bad from Wall Street.

Henry Paulson has announced Citigroup and three other banks will begin issuing covered bond in an effort to rejuvenate commercial bank mortgage lending and the housing market.

Concurrently, Merrill Lynch announced it is taking yet another big write down on its subprime securities, selling paper with a face value of $30.6 billion to private equity firm Lone Star for $6.7 billion. It will dilute its common stock 38 percent through the sale of additional shares to make up the losses.

Paulson’s covered bonds would be backed by specific mortgages held by the banks. In essence, these would be large certificates of deposit. Though not necessarily insured, the bonds would be back by specific assets on the banks books, and the banks would to take steps to ensure these mortgages were good—not the junk Merrill Lynch, Citigroup and others have been hoisting on investors.

Whether the bond market accepts these securities—essentially whether insurance companies, pension funds and other fixed income investors take the plunge—comes down to trust in the banks. Recent events at Merrill Lynch, Citigroup and others indicate that such trust will require a bold leap of faith.

The basic problem at the big banks is compensation schemes that encourage bank executives to make risky bets that allow them to profit when things go well and to push the losses on bond and stockholders when things go sour. Upon taking over Merrill Lynch, John Thain increased executive bonuses, but established a risk management scheme. That hasn’t worked.

At Citigroup, CEO Vikram Pandit is selling off assets to cover losses, but he has not given back the $165 million he took from shareholders in his sale of the Old Lane hedge fund to his employer. The bank subsequently took more than $200 million in losses, yet the Citigroup bonus machine continues to payout to its executives.

USB is under investigation for fraud in the sale of auction rate securities.

It seems hard to find a major bank without some a record of sharp practices.

Mr. Paulson is trying to sell trust in the banks with his new covered bonds. It’s tough to sell trust in a Wall Street bank these days, because there is not much to trust.

An insurance company that buys Paulson’s covered bonds will likely be all right, but it is taking an imprudent risk. That should tell you something about the competence of its management, and it would be signal to dump its stock.

Paulson’s scheme to reopen the bond market to banks for mortgage lending will only work, if the commercial banks clean up the management practices that caused the subprime crisis, and massive losses imposed on shareholders and bond customers.

The federal government is imposing new a regulator on Fannie Mae and Freddie Mac, which will have authority to regulate executive compensation. The Federal Reserve has loaned hundreds of billions to Wall Street banks and securities companies without any real commitments for management reform. The asymmetry is puzzling.

Mr. Paulson will only get the mortgage market, housing crisis and economy turned around when he resolves the confidence gap on Wall Street. That requires systemic reform in the business practices and compensation structures. What’s good Fannie and Freddie would be good for Citigroup, Merrill Lynch and the others.

PETER MORICI is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

 

 

 

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

More articles by:
Weekend Edition
May 27, 2016
Friday - Sunday
John Pilger
Silencing America as It Prepares for War
Rob Urie
By the Numbers: Hillary Clinton and Donald Trump are Fringe Candidates
Andrew Levine
Hillary’s Gun Gambit
Paul Street
Feel the Hate
Daniel Raventós - Julie Wark
Basic Income Gathers Steam Across Europe
Gunnar Westberg
Close Calls: We Were Much Closer to Nuclear Annihilation Than We Ever Knew
Jeffrey St. Clair
Hand Jobs: Heidegger, Hitler and Trump
S. Brian Willson
Remembering All the Deaths From All of Our Wars
Dave Lindorff
With Clinton’s Nixonian Email Scandal Deepening, Sanders Must Demand Answers
Pete Dolack
Millions for the Boss, Cuts for You!
Peter Lee
To Hell and Back: Hiroshima and Nagasaki
Karl Grossman
Long Island as a Nuclear Park
Binoy Kampmark
Sweden’s Assange Problem: The District Court Ruling
Robert Fisk
Why the US Dropped Its Demand That Assad Must Go
Martha Rosenberg – Ronnie Cummins
Bayer and Monsanto: a Marriage Made in Hell
Brian Cloughley
Pivoting to War
Stavros Mavroudeas
Blatant Hypocrisy: the Latest Late-Night Bailout of Greece
Arun Gupta
A War of All Against All
Dan Kovalik
NPR, Yemen & the Downplaying of U.S. War Crimes
Randy Blazak
Thugs, Bullies, and Donald J. Trump: The Perils of Wounded Masculinity
Murray Dobbin
Are We Witnessing the Beginning of the End of Globalization?
Daniel Falcone
Urban Injustice: How Ghettos Happen, an Interview with David Hilfiker
Gloria Jimenez
In Honduras, USAID Was in Bed with Berta Cáceres’ Accused Killers
Kent Paterson
The Old Braceros Fight On
Lawrence Reichard
The Seemingly Endless Indignities of Air Travel: Report from the Losing Side of Class Warfare
Peter Berllios
Bernie and Utopia
Stan Cox – Paul Cox
Indonesia’s Unnatural Mud Disaster Turns Ten
Linda Pentz Gunter
Obama in Hiroshima: Time to Say “Sorry” and “Ban the Bomb”
George Souvlis
How the West Came to Rule: an Interview with Alexander Anievas
Julian Vigo
The Government and Your i-Phone: the Latest Threat to Privacy
Stratos Ramoglou
Why the Greek Economic Crisis Won’t be Ending Anytime Soon
David Price
The 2016 Tour of California: Notes on a Big Pharma Bike Race
Dmitry Mickiewicz
Barbarous Deforestation in Western Ukraine
Rev. William Alberts
The United Methodist Church Up to Its Old Trick: Kicking the Can of Real Inclusion Down the Road
Patrick Bond
Imperialism’s Junior Partners
Mark Hand
The Trouble with Fracking Fiction
Priti Gulati Cox
Broken Green: Two Years of Modi
Marc Levy
Sitrep: Hometown Unwelcomes Vietnam Vets
Lorenzo Raymond
Why Nonviolent Civil Resistance Doesn’t Work (Unless You Have Lots of Bombs)
Ed Kemmick
New Book Full of Amazing Montana Women
Michael Dickinson
Bye Bye Legal High in Backwards Britain
Missy Comley Beattie
Wanted: Daddy or Mommy in Chief
Ed Meek
The Republic of Fear
Charles R. Larson
Russian Women, Then and Now
David Yearsley
Elgar’s Hegemony: the Pomp of Empire
FacebookTwitterGoogle+RedditEmail