# Bailout Backout



## communique (13 November 2008)

Paulson changed the rules today and is now not bailing out mortgages - now he is bailing out the rest of the economy.  Does anyone feel that an IQ test is required before anyone should enter politics or political administration.


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## chops_a_must (13 November 2008)

I don't actually disagree though...

The housing market is stuffed. There is not anything they can really do about it.

Largely it is the fault of those people involved, and those companies involved.

The money then surely has to be spent on the areas that are effected that had nothing to do with it.

Buy mortgages here, and all you have is a price floor on houses that people will not be able to afford for another 25 years. The worst outcome for those not involved in the stupidity, and for those in the housing industry.


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## Aussiejeff (13 November 2008)

communique said:


> Paulson changed the rules today and is now not bailing out mortgages - now he is bailing out the rest of the economy.  Does anyone feel that an IQ test is required before anyone should enter politics or political administration.




Apart from the IQ test, maybe a full psychological assessment as well!!

So, NOW who has confidence that the Great Leaders Of The Free World have any answers to the Crisis Of Confidence Tsunami battering our economies?

Me? An emphatic NOPE. 

Why?

(1)  The US admin suddenly changes it's mind and is going to punt most of its bailout money in an already shaky stock market, buying up controlling interests in companies it wants to get its grubby fingers into. This will be akin to creating a whole raft of the OLD-style "Telstra-like" entities and will result in the US government having a significant corrupting influence on the supposed "free" US stock market. 

Remember the arguments for the Oz government to SELL ITS CONTROLLING SHARES IN TELSTRA? Essentially, THERE IS A MASSIVE CONFLICT OF INTEREST WHEN GOVERNMENTS AWARD MAJOR CONTRACTS TO MONOPOLISTIC COMPANIES THAT ENJOY SIGNIFICANT SHARE HOLDINGS BY THOSE SAME GOVERNMENTS! You can imagine how this scenario is going to sit with any companies who have to compete with these now US Guv-Mint funded and controlled companies. I can see a whole raft of "unfair trade restriction" and "government corruption" law suits already bubbling away as a result of this wacky announcement.

(2) This move ensures that any notion of FREE MARKETS will be put to the sword. Kaput.

(3) Given items (1) & (2), World Confidence will plummet further, into an ever deepening cess-pit of gloom.



Have a lovely day, ASF'ers.


aj


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## chops_a_must (13 November 2008)

Aussiejeff said:


> Remember the arguments for the Oz government to SELL ITS CONTROLLING SHARES IN TELSTRA? Essentially, THERE IS A MASSIVE CONFLICT OF INTEREST WHEN GOVERNMENTS AWARD MAJOR CONTRACTS TO MONOPOLISTIC COMPANIES THAT ENJOY SIGNIFICANT SHARE HOLDINGS BY THOSE SAME GOVERNMENTS! You can imagine how this scenario is going to sit with any companies who have to compete with these now US Guv-Mint funded and controlled companies. I can see a whole raft of "unfair trade restriction" and "government corruption" law suits already bubbling away as a result of this wacky announcement.



Not really any different to Halliburton over the last few years then is it?


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## cuttlefish (13 November 2008)

It sounds like the banks that have been getting the funds haven't been passing them on in the way of fresh lending, but hoarding them instead, so the liquidity benefit that was expected to flow on from buying the troubled assets hasn't eventuated.  This might have something to do with the reason they are not continuing down this path.

I think the risk of continued investment in non-productive housing is low due to the big change in sentiment towards housing.  What they need to do is try to preserve productive housing investment while allowing the rest to fade away.   

Fresh funds need to be directed to productive purposes. I suspect business investment may start to get more attention down the track but they need to be careful here as well - but if they can stop productive businesses from failing due to lack of funding, and instead nurse them through the mess, it will probably be beneficial in the long run.   

I'm not sure US car manufacturers fall into this category but I'm sure plenty of other US businesses do.


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## cuttlefish (13 November 2008)

I don't know why, but I'm actually starting to think Paulson may actually have some idea what he's doing.  Doesn't mean its going to work of course and judging by the DOW's performance overnight the US market isn't that convinced either.


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## Aussiejeff (13 November 2008)

cuttlefish said:


> I don't know why, but I'm actually starting to think Paulson may actually have some idea what he's doing.  Doesn't mean its going to work of course and judging by the DOW's performance overnight the US market isn't that convinced either.




Rapid changes (read - overnight) in economic strategies don't usually bode well for "confidence" in markets do they?

I thought Paulson thought he was "on the right track" an interview or two ago?

Now he is on a different track?

Please explain?

Wot?

I'm confused. My confidence must be slipping.....


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## Spek (13 November 2008)

The bailout announcement did stabilise the ever so foolish markets.  But now the iminent crisis has been averted, why throw good money after bad? Nice work Paulson.


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## cuttlefish (13 November 2008)

Aussiejeff said:
			
		

> Rapid changes (read - overnight) in economic strategies don't usually bode well for "confidence" in markets do they?
> 
> I thought Paulson thought he was "on the right track" an interview or two ago?
> 
> ...



Aussie I wrote a more detailed reply but I lost is somehow.

But in summary - I think Paulson is showing that he does have his eye on the real goal - which is to unclog credit in such a way that it is directed to productive purposes without reigniting the unproductive areas. In adjusting the plan he is showing a willingness to think on his feet and adapt to the changing situation while addressing an unprecedented crisis.

This explains to some extent his desire to have a lot of flexibility in the way the bailout funds are applied.

Whether the changes will ultimately work or not is another matter but to me it indicates he does appear to be trying to tackle the problem and isn't just out to line his own nest or bail out his banker mates.


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## Julia (13 November 2008)

What has Paulson actually decided to do with the funds?


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## cuttlefish (13 November 2008)

This article here gives a summary of the situation.

http://money.cnn.com/2008/11/12/news/economy/paulson/index.htm?postversion=2008111218

On re-reading it I'm not as convinced of my comments above - I think I may have extrapolated too much from some of the comments.

I was under the impression they'd already done a wave of purchases of mortage backed securities and were now looking at ways to push funds more directly towards consumers and business because it wasn't working via the banks.   But on re-reading it looks like maybe they have actually just injected capital into the banks, taking equity stakes?

My view is that they should only buy as many dud assets as they need to to stabilise the credit markets and the banking system.  The next step is to direct funding to prevent 'failure' of productive debt.   My laymans view of 'productive debt' is for example (i) a stable family with a history of employment paying off the family home, or (ii) a succesful and growing business that needs a line of credit to fund new projects or expansion, or (iii) a medical student that is funding their study using a student loan and is succesfully passing their course.

As opposed to unproductive debt - funding the construction of a home in an area where there is little demand for accomodation to sell to an investor who won't be able to pay off the loan.

So they should let as many of the 'bad debts' fail as they can whilst avoiding significant systemic failure within the banking system and direct as much funding as they can towards productive debt.

This is my extrapolation of the goals of the exercise but its a big extrapolation I'll admit.


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## Boggo (13 November 2008)

This was copied from Nick Radges site a while ago...


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## skc (13 November 2008)

Julia said:


> What has Paulson actually decided to do with the funds?




I think Paulson is taking a page out of Sarah Palin's view on the bailout...Ultimately, what the bailout does is help those who are concerned about the health care reform that is needed to help shore up the economy– Oh, it’s got to be about job creation too.


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## cuttlefish (13 November 2008)

Boggo said:


> This was copied from Nick Radges site a while ago...





I don't know how Paulson or his efforts will ultimately turn out, but given his involvement in the creation of the problem it is quite possible he might also well be placed to formulate and implement solutions to it.

I suspect that Paulson would argue that the problem wasn't with the concept of lending against risk based models but with the assessment and oversight of those risk based models.   I could see some argument in that  but a big factor to me is that the marginal risk in the system was effectively viewed as unimportant which is evident in the careless way it was offloaded.  That has been a very big issue in the whole situation imo because that is where some of the systemic problems have been created (e.g. AIG, CDS's etc.).


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## Julia (13 November 2008)

Thanks for the link and your comments, Cuttlefish.   Perhaps I lack trust in our fearless leaders, but somehow reading that hasn't exactly reassured me.
Rather the reverse.  Doesn't sound as though anyone actually has a clear plan and they're fumbling around.

Another thing I'd like to know, both as it applies in the US and here:
when banks or companies, e.g. ABC Learning and the automotive industry in Australia, are 'bailed out' by the government, what form does this take?
Is it a loan at market interest rates, or just a straight hand-out, no repayment required?


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## Aussiejeff (13 November 2008)

Looks like our market loved the Bailout Backout.

Tomorrow shaping up even better.... if you're into dead ducks, that is.


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## mayk (13 November 2008)

I think Paulson is doing all this to get the rest of $350B out of the scared democratic congress, before this party is over and it becomes clear that unless government buys out the whole Wall street, it is unlikely their interventions can bring any short term relief.


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## dhukka (13 November 2008)

Boggo said:


> This was copied from Nick Radges site a while ago...




Paulson has proven himself to be utterly inept. As late as July last year he was pronouncing that subprime would be contained. He worked on a program for months that got widespread condemnation from the financial community but he plowed ahead anyway. Now he says it's not the best idea. Anyone remember the Super SIV that never was?This guy is making it up as he goes along. If you think there is some grand plan here I have a bridge I'd like to sell you.  He'll be back in congress soon to ask for the other *$350* billion (the first $350 b has almost all been spent) but what is he going to say? I need another $350billion to save the US banking system, I just don't know what it is yet.


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## Geoff (13 November 2008)

I don't agree with bailing out the banks.  When an individual makes a poor financial choice like buying a house they can't afford, the price drops they default and they lose everything.  All the interest payments just vanish in a puff of smoke because you don't have a house to show for it any more.

These credit default swaps and so on, the way they rolled risky loans together and bundled them as a higher rating product, is gross negligence and fraud in my mind.  Let the banks suffer for their mistake (I realise that some harm minimisation is required to stop the whole world imploding but don't make it easy for the pricks, they take all our money every other day of the year!).


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## aleckara (13 November 2008)

Boggo said:


> This was copied from Nick Radges site a while ago...




Value-at-risk models use standard deviations and the like to try to predict within a confidence intervals some sort of maximum loss.

I have heard criticism that VAR uses a normal distribution - not sure why though. In any event I doubt that statistics allows for cross-failure of this magnitude.


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## skyQuake (13 November 2008)

Yeh... VaR is textbook knowledge which means it doesnt work...

Distributions are more likely to be leptokurtic than lognormal. Late last year we had some 25 standard deviation events lol. Was it really the magical 100,000 th year or did we see some fat tails?


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## cuttlefish (14 November 2008)

Hopefully this trend will continue ... (fed lending less to banks through the discount window).  It might also explain why Paulson is saying stability is starting to return to the financial system and is starting focus effort elsewhere. 


http://money.cnn.com/2008/11/13/news/economy/fed_balance_sheet/index.htm?postversion=2008111317

*Fed lends less to banks* 

_Government lent financial institutions $160 billion over the past week in emergency lending window, down significantly from prior week. AIG begins to borrow more._

Last Updated: November 13, 2008: 5:32 PM ET

AMERICA'S MONEY CRISIS
Fed lends less to banks 
_NEW YORK (CNNMoney.com) -- Financial institutions borrowed a bit less from the Federal Reserve for the second-straight week, according to a report released Thursday.

The Federal Reserve reported that commercial banks borrowed $95.4 billion a day, on average, during the past week. That's down 13.3% from the $110 billion a day they borrowed from the emergency lending window in the previous week, and the record $111.9 billion per day a week earlier._... etc.


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## Aussiejeff (16 November 2008)

Well, well. Unsurprisingly, The Bailout B$ keeps on keepin' on.

The GeeWhizz20 GabFe$t has wrapped up with an "agreement" to set an end of March deadline for "concrete proposals" on tightening global financial regulation and oversight while boosting market transparency. Essentially, calling for a list of financial institutions which pose a risk to the global economy by March 31. How insightful.

Whoopee! Is that the best they could do? A proposal to have "concrete proposals" and "a list of dodgy institutions" ready for submission at another gab-fest in 18 weeks time? That should re-assure the world populace no end. Merry Xma$, folks!!

In the meantime, it appears the "Big Bailout" has stalled for US car makers. The White House has (for now - who knows what tomorrow may bring?) knocked back any further massive handouts to save them. Good luck, GM, Ford & Chrysler... that goes for the Oz variety as well.

All in all, I don't see any earth-shattering results emanating from the GeeWhizz20 GabFe$t. Just what you might expect when a group of so-called "World Leaders" with massively divergent self-interest get together to crap on about "working together". 

Clearly, Mass Debating is their forte.


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## Glen48 (16 November 2008)

In the late 20's a block of land was worth 15k and in no time it hit 300K people were buying a block and putting it back on the market before the ink had dried and selling it all was rosy until a storm hit and wiped every thing out by then it was the 30's and away we went.
I am sure this is growing so fast no one know how bad it is, Today the Paki's have put their hand up for a bail out, apparently Monday is a deadline for the Hedge funds to pay up and they have no $$$ so they will flood the market with stock.
We are left to fend for ourselves and to try and read teh markets and survive good luck fellow boat members.


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## Aussiejeff (16 November 2008)

Glen48 said:


> ...
> We are left to fend for ourselves and to try and read teh markets and survive good luck *fellow boat members*....




What price a swimming lesson?


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## Julia (16 November 2008)

The very fact that the members of the G20 have resolved to meet again in 18 weeks (having solved sweet nothing during this talkfest) will increase negativity and pessimism in that clearly they are expecting no improvement before then.

Btw AJ, sorry to hear about the additional accident to the poor foot.
That was bad luck.  Hope it improves rapidly.


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## nick2fish (16 November 2008)

Aussiejeff said:


> What price a swimming lesson?




Cheaper than the price of a paddle it seems.......


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## Hyperion (16 November 2008)

communique said:


> Does anyone feel that an IQ test is required before anyone should enter politics or political administration.




Hmmm, it seems to me that people on this forum are excessively harsh on the abilities of the leaders during this crisis.  Its just too tempting to use the leaders as scapegoats.  Sure, I can understand that you may disagree with some of their policies, and have other ideas on how the situation should be handled.

However, I just have a few points which I think are useful to keep in mind.

1. The majority of politicians, CEOs and other leaders are very highly educated.  Many of them have been to the elite education institutions (e.g. Harvard, Yale, Princeton, Oxford, Cambridge).  Some are Rhode Scholars.  I think the vast majority of them would have far superior IQs and more impressive resumes than the people on this forum.  The world generally sees these guys as the best and brightest.  I believe Henry Paulson was the ex-CEO of Goldman Sachs.  I don't think anyone less than exceptionally talented would ever get to that position.

2. Many of the leaders have either studied economics, or have access to top economic advisors.  From what I can see, I suspect many of the people on this forum have never studied economics.  Not saying you shouldn't voice your opinions, but just keep in mind these guys have had a lot more experience than you in this area.

3. These guys are spending long hours, and working hard to try to fix this crisis.  Yes, it might not be perfect, and you may disagree with some aspects of their policies.  But remember, they have done a great deal of good as well, which isn't always that easy to notice.


However, I know its much easier to whinge and blame people.  Just saying, don't need to be too harsh on them...


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## sinner (16 November 2008)

Since when does having qualifications at Harvard or Yale mean **** except you have rich well connected parents. Bush went to Yale and got his MBA from Harvard, would you trust him to run YOUR business? He certainly couldn't run the oil company handed to him on a silver platter by his betters.

My father is a PhD in economics, teaches economics, finance and accounting subjects to undergraduate and postgraduate students, has authored enough cited papers to have significant international tenure, is a senior lecturer at his university, etc etc bla bla ****in bla.

As I mentioned previously in another thread, one of my cousins is a "successful" financial consultant for Macquarie Group including work in London and elsewhere.

When I told them **** was to hit the fan they laughed in my face! 

I don't think anyone who would make this statement in July 2008 is exceptionally talented

“it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.” -Paulson

That is a verbatim quote. What a joke of a statement your post is Hyperion, Paulson was hired just like the rest of GWBushes crew, from the ranks of his fathers and friends "good old boys" where not merit, but ideology and level on the social strata are the requisite criteria.


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## Whiskers (16 November 2008)

Yeah. I have to agree to a large extent with sinner... the solution to this problem is little to do with IQ, education and experience... it's everything to do with ideology. 

The Bush administration is just so loaded with vested interest in NOT regualting the markets further. Don't get me wrong, the Dem's have vested interests too, but their ideology is opposite to the Rep's and Bush and often while we can't get a perfect solution, it sometimes takes a dose of the opposite ideology to get things back on a more even keel.

Over the weekend GWB stated that the cause of the problem is not the US and free markets, cos some EU countries have bigger problems... the solution isn't more regulation, but leting the 'free' (a cliche for US controled) market sort itself out.

The Congress sub-committee including Rep's and Dem's expressed concern and questioned why there has been no regulatory changes, which they thought was the intent of the bill, but plenty of handing out loans and a little buying equity. One congressman cited an example of if his child was spending beyound his means, the first thing he would do is cut up his credit cards and instigate some rule changes.


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## Glen48 (16 November 2008)

If I was an Economist/ Mortgage broker/ sub prime broker/ R E agent or worked for S & P and been to Harvard and some one asked me my occupation I would be telling them I was an adviser to Alan Bond or Skase at least you would have some creditability.


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## Glen48 (16 November 2008)

P S stay in the boat its sailing on a sea of debt with out a chart, rudder, captain, nav. aids and going no where FAST.


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## chops_a_must (16 November 2008)

Whiskers said:


> Yeah. I have to agree to a large extent with sinner... the solution to this problem is little to do with IQ, education and experience... it's everything to do with ideology.



Could it be the best thing you have said on this forum? :

It has nothing to do with the level of intelligence, it is largely misguided. It also seems to be too narrow an intelligence type.

The fields of economics and management seem to have a distinct lack of alternate/ lateral thinkers and natural questioners... it is almost unreal.

It's been like witnessing the world's biggest group-think exercise on a massive scale.


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## communique (16 November 2008)

I just cannot believe that we can attribute ideology to the reactive political see sawing that you see coming out of the States at the moment.   Unless years of greed, lack of regulation, apathy is considered ideology.  They genuinely don't know what they are doing from day to day.  For too long Bush was saying how sound their banking system  was just weeks before the so called systemic collapse.   

Then tonight he says as a part of the G20 that a severe depression is likely.     Please tell me why now he says this just before he leaves office.  Why bother. We are not talking about education, qualifications or political persuasion here we are just talking about logic and common sense.  I'd love to know what his IQ is.


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## Macquack (16 November 2008)

Hyperion said:


> I believe Henry Paulson was the ex-CEO of Goldman Sachs.  I don't think anyone less than *exceptionally talented *would ever get to that position.




One thing Hank Paulson is *exceptionally talented *at is rorting the system. He did that with distinction in his role at Goldman Sachs to accumulate a personal net worth in excess of $700 million USD ( Forbes 2006 ).


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## Hyperion (16 November 2008)

sinner said:


> “it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.” -Paulson
> 
> That is a verbatim quote. What a joke of a statement your post is Hyperion, Paulson was hired just like the rest of GWBushes crew, from the ranks of his fathers and friends "good old boys" where not merit, but ideology and level on the social strata are the requisite criteria.





When you are in the public, there are certain things you can't say.  Paulson can't very well go "our banks are all in severe trouble" - thats just asking for a bank run.  He has to say that the system is going well regardless of what he actually thinks.  His job isn't to say his truthful opinion, its to ensure the stability of the system.

While I'll concede that nepotism does have some influence in politics, I think you'll find GS is quite a meritocracy, even more so than some other IBs.

Also, some people have commented that the politicians/bureaucrats have vested interests.  I agree some of them do.  Which is why they aren't as stupid as some of you make them out to be...


Out of interest:

1. Anyone here think they have a higher IQ than Paulson? (regardless of your opinion on how important an IQ is)

2. Anyone think they can do a better job in saving the world financial system than Paulson? (regardless of whether you want to be in that position)


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## Aussiejeff (17 November 2008)

Superb news today, fellow Ozziephiles!

Our Great Leader's seem to be in a state of GREAT EXCITEMENT following their long, drawn-out, back-slapping MASS DEBATING session!!

They EXCITEDLY talk of apparently endless "STIMULATION" as a means to get all of US consumers all EXCITED too!!!

They have agreed forthwith to start an ORGY of "SPEND, SPEND, SPEND" in an attempt to bring the un-mentionable world *ecession to a CLIMAX - it's gonna be a massive money-shot!!!!

Ohhhh. Now I'M EXCITED and STIMULATED too!!!!!


:bananasmi  :bananasmi  :bananasmi


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## communique (17 November 2008)

Hyperion said:


> ...
> 
> Out of interest:
> 
> ...




What is Paulson's IQ?  On your second question, I am not an economist so probably not but I would think that a good economist in charge of the American economy would have recognised their weaknesses and threats years ago and proactively modified regulation to avert a future crisis. i.e subprime


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## cuttlefish (17 November 2008)

Hyperion said:


> When you are in the public, there are certain things you can't say.  Paulson can't very well go "our banks are all in severe trouble" - thats just asking for a bank run.  He has to say that the system is going well regardless of what he actually thinks.  His job isn't to say his truthful opinion, its to ensure the stability of the system.




Exactly




			
				Macquack said:
			
		

> One thing Hank Paulson is exceptionally talented at is rorting the system. He did that with distinction in his role at Goldman Sachs to accumulate a personal net worth in excess of $700 million USD ( Forbes 2006 ).




To me that just demonstrates his credentials.  Would you really trust the advice of somebody who had worked as an investment banker for decades, yet HADN'T accumulated a fortune?  His profession is to understand money and make money ... by accumulating personal wealth he's shown he's good at his job.  I bet the vast majority of that wealth is in USD based assets as well, and he probably likes living in America, so he has a personal vested interest in getting the US through this mess without a systemic collapse.


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## Aussiejeff (19 November 2008)

Paulson and Bernanke were grilled heatedly by US Congress again overnight. The US markets don't appear to have responded positively to Paulson's defense of why he changed tack with The Bailout without first consulting with Congress.

Clearly, there is a "Crisis of Confidence" here, which does not bode well for the hoped for success of the US Bailout.


aj


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## Aussiejeff (26 November 2008)

HAHAHA!!!

The Bailout-Backout has itself been Backed-out.

The eminent Mr Pullsone has decided to chuck a mighty backflip and buy those dirty mortgages again! Hee, hee....

Ooooh, I love these dailly GuvMint Bailout Blurbs. They are sooo comforting. I dread to think what might happen to the Shock Markets if a day should pass without another big PLAN being announced! *HORROR*

This is getting ridiculous.....


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## mayk (26 November 2008)

Aussiejeff said:


> HAHAHA!!!
> 
> The Bailout-Backout has itself been Backed-out.
> 
> ...



I don't know why they created such a huge drama of passing the original bailout through congress? FED can operate independently and has *unlimited* funds. 


I think no one wants the market to hit the bottom, at least not on their watch!


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## communique (26 November 2008)

Can't remember the content but yesterday I saw Poorson and George on the bottom of some steps somewhere giving an impromtu press statement. Both looked forlorn and lost.  Compare that to the statesman like press conference Obama gave overnight in relation to his economic team.  Bring on inauguration.


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## Julia (26 November 2008)

Aussiejeff said:


> HAHAHA!!!
> 
> The Bailout-Backout has itself been Backed-out.
> 
> ...



Are you sure that's what's happening?  I thought what Paulson announced was additional funding?


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## chops_a_must (26 November 2008)

Aussiejeff said:


> HAHAHA!!!
> 
> The Bailout-Backout has itself been Backed-out.
> 
> ...



Thought it was different AJ. It sounded like they were going into the traditional mortgage market, not the CDO arena.


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