No one likes a sore loser and there will be plenty of those among the executives at banks and brokerage firms that will fail or be sold.
A gloating winner is harder to take. The inner pride and satisfaction of winning should be enough. That is why taunting draws a penalty in so many sports.
Henry Paulson could not help himself.
Paulson looked in the mirror and saw a man who had championed the free market system just a few days after he undermined it with the rescues or Fannie Mae (FNM) and Freddie Mac (FRE). He was chastised by libertarians and anarchists. They wanted the chaos of the dual failures of the mortgage companies. No matter how painful they argued, the markets would sort it out.
Paulson pressured Wall St. to drown Lehman like a sick puppy and then forced a sale of Merrill Lynch (MER) to Bank of America (BAC). In both cases he told all involved that the tax-payer was not going to foot the bill for mistakes made by people who had been compensated hundreds of millions of dollars for taking inappropriate risks.
The truth of the matter is he left Goldman Sachs (GS) to go to Treasury, thus avoiding any taint if the premier investment bank has made a series of bad decisions on its own.
Paulson has bet his legacy as Treasury Secretary on the belief that the free market, no matter how badly its had been bled out, can muster the capital to squeeze out a win. The Fed will make it easier for the remaining banks and brokerages to get cheap capital.
But, if the virulent strain of the housing collapse spreads unabated and for another several quarters, even the more healthy institutions may not make it out alive. Paulson’s decision is based on the assumption that the biggest players in the market have the assets to support the system even if the value of their balance sheets is further undermined by a long recession and home prices which could fall another 20% from their already depressed level.
Paulson’s decision is horrible, but it will take another year or more to see if it is right.
Douglas A. McIntyre
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