Hank Paulson Launched The Big Lie Campaign On September 15, 2008
Like most doublespeak artists, he couched his message with empty platitudes and vague insinuations. He was never so blunt as the Steve Carell character in The Big Short, who prophesized that, "the banks will blame poor people and immigrants." Paulson's message, conveyed in coded references, was precisely that. His agenda was to reassign the failures of private label securitizations on to affordable housing goals and the GSEs.
At first blush, his answers seemed to go off on tangents. Or maybe they were non sequiturs. To finance ministers across the globe, he must have sounded utterly clueless, if not mendacious. With hindsight, it seems obvious that Paulson wanted to leave the press corps with two big fat lies.
Many remember the more famous one, since it made a good soundbite. "I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers," he said. Scores of professionals at Britain's Financial Services Administration, at Bank of America, at Barclays, at Treasury and at the New York Fed must have wondered if Paulson had been struck with amnesia. The other falsehood, about the "root cause" of increasingly fragile credit markets, was more oblique.
Paulson keeps referring to a "root cause" that has nothing to do with Wall Street turmoil.
Paulson repeated the same false meme five times during his 12-minute press briefing. His technique was encapsulated by one exchange with a reporter who asked a very astute and cogent question:
Q: Mr. Secretary, it seems like your policy right now is that of a triaging some of the investment banks and hoping that that will solve the situation. Nevertheless, there are a lot of commercial banks that have their investment banking also probably exposed in many of the debt that is represented by the investment houses. Isn't the problem really much bigger than simply the investment banks? And isn't it really impossible to try and bail out that? And that if you go in that direction for the commercial banks, that you're still going to be facing the same problems in spite of what you do today?This reporter nailed it. The securities and trading arms of Citigroup and JPMorgan and Bank of America, set to acquire Merrill, had the exact same problems that afflicted Bear Stearns and Lehman and would soon threaten Morgan Stanley. The problem was much bigger than Lehman, which, by the way, had limited exposure to CDOs. Yet Paulson's response was utterly disconnected from the problems afflicting Wall Street:
SECRETARY PAULSON: Let me -- your question says, "Where is the root of the problem?" And I think I've consistently said that when we looked at our financial institutions the root of the problem lies in this housing correction. And until we stem the housing correction, until the biggest part of that is behind us and we have more stability in housing prices, we're going to continue to have turmoil in the financial markets.And that is why the actions with respect to Freddie Mac and Fannie Mae are so extraordinarily important, not only to our capital markets, but to making sure we have plenty of financing in housing, because that, in my judgment, is going to be the key to turning the corner here.
False. The turmoil was not caused by mortgages or by the housing correction; it was caused by private label mortgage securitizations, more specifically, the deeply subordinated tranches of private label securitizations, which were at the heart of The Big Short. Those bonds, which were mostly repackaged into CDOs totalling about $640 billion, were a tiny sliver of the $11 trillion mortgage market, and a very small percentage of the total risk exposures held by Citigroup, AIG, UBS, AMBAC, MBIA, Merrill, and others. But these subordinated bonds were very toxic because they could get wiped out in a heartbeat. Moreover, these CDO risk exposures were highly concentrated among a relative handful of global institutions. By September 2008, almost all of those deeply subordinated bonds were worthless. A housing recovery would never save those CDOs.
Put another way, the turmoil had nothing to do with Fannie and Freddie, except for the fact that these two mortgage behemoths stabilized the mortgage markets that were frozen because fraud had gone viral among mortgage originators and private label securitizers.
Here is my executive summary of the financial crisis, written a few weeks ago.
An Executive Summary of Financial Crisis: Here’s what really happened.
In the summer of 2007, almost immediately after the rating agencies began assigning long-overdue downgrades to subprime bonds, the market for private label residential mortgage-backed securitizations shut down. Trading in cash RMBS bonds almost ceased. Over the subsequent 14 months, a number of entities holding significant exposure to private label RMBS faced liquidity crises. Many of those entities collapsed. First it was some hedge funds. Then it was the $400 billion market for SIVs (structured investment vehicles). Then it was some banks in Germany. Then it was the broader ABCP (asset backed commercial paper) market. Then it was Bear Stearns. Then it was Lehman. Then it was AIG. The near-collapse of all these institutions was exacerbated by the inconvenient truth about modern credit markets; credit default swaps have undermined, if not eliminated, transparency.
Mortgage loans did not cause the crisis. Mortgage securities caused the crisis. Specifically private label RMBS caused the crisis. Why? Because, as I’ve written before, the non-triple-A-rated tranches, which were subordinated to 95% of a 100% debt-financed capital structure, can get wiped out overnight. That’s not my opinion, that’s just math.
Also, by September 2008, virtually all of those subordinated tranches had already been wiped out. Those tranches may not have yet experienced a payment default, because no principal was due and payable prior to the 30-year final maturity date. But the net present values of those tranches, under any plausible scenarios, showed that principal recovery was zilch.
Moreover, those deeply subordinated tranches were not distributed broadly throughout the vast universe of institutional investors. There was a huge concentration of that toxic risk exposure held by a relative handful of global institutions. AIG, Citigroup, UBS, Merrill Lynch, MBIA and AMBAC all faced the specter of insolvency because their collective risk exposure to subprime CDOs exceeded $250 billion. The ripple effects were huge.
(It’s certainly true that mortgage loans did in Wachovia and Washington Mutual; though the law and, precedent set a clear path for the government takeovers of those banks.)
The foregoing summary is not my interpretation of events. That’s what happened. Anyone who says otherwise—anyone who says that New Century, or Bear Stearns, or the SIV market, or the ABCP market, or Lehman Brothers, or AIG, or Merrill Lynch, or Citigroup, or MBIA, or AMBAC faced collapse because of anything related to Fannie’s or Freddie’s business model—is lying. All of those companies faced collapse because of their exposure to private label RMBS. The September 2008 meltdown was not caused by mortgages; it was caused by private label mortgage securities. Anyone who fails to make that critical distinction is either ignorant or disingenuous.
Moreover, the GSEs never faced any kind of liquidity crisis. They continually had unfettered access to the unsecured debt markets, and their mortgage securitizations were continually sold without disruption. Anyone who says otherwise is lying.
Paulson's Remarks On September 15, 2008
Which is why saying that the GSEs were the root cause of Lehman's collapse or of the fragility throughout the system was flat out false. But Paulson kept repeating this point over and over. He mentioned Fannie and Freddie five times over 12 minutes. He uttered thev word,"Lehman," thrice.
Below is the entire transcript of Paulson's remarks given just after 1:42 p.m. on September 15, 2008. The references to housing policy and the GSEs are in bold, and my comments are highlighted in blue.
1:42 P.M. EDT
MS. PERINO: Good afternoon. Obviously, one of the biggest stories of the day is what's happening in our financial market. Secretary Paulson has graciously given us some of his time today -- he doesn't have an endless supply of it, so please keep that in mind, and we'll try to let him answer as many questions as he can before he needs to go. And then I'll come back up and finish up the briefing.
4 comments - Hank Paulson Launched The Big Lie Campaign On September 15, 2008
1. most powerful Gov in the world
2. most powerful media in the world
3. most powerful Central Bank, currency, interest rates and economy in the world
4. legal system
How can common citizen make truth prevail and win in such situation?
Can you write more about below topic? TH717 posting:
Did HANK sieze FnF and put under C’ship to benefit foreign Govs at the expense US taxpayers and FnF shareholders?
Ref: YMB: peebles0899 • Nov 26, 2015 12:53 PM
In his book “On the Brink”, Hank tells of the close relationship he had with China’s equivalent. He states that in the Spring and Summer of 2008, China was pressuring him for assurances on the debt they held of FNMA/FMCC. note (China and Russia together held $1.4T worth of GSE debt)….
There are SO many behind the scenes back door dealings that took place in the decisions that led to the seizure of GSE’s that had nothing to do with true / real finanical health of FNMA/FMCC ……… Hank even makes it known that his own team of forensic accounting team did not even review FNMA/FMCC books till
AFTER they took them over.
Were FnF seized and put them under conservatorship to benefit Chinese?
This may also mean that massive private risks and liabilities were transfered to US taxpayers to benefit foreign Govs. This was done surreptitiously without explicit congressional approval (or is it in the privileged documents).
Did not Chinese know that FnF debts were private company debts and are not guaranteed by US Gov? These things are very well documented in FnF and US Gov disclosure documents.
Does this not amount to “Chinese profits and US taxpayer losses”?
How does the “Public losses and Private gains” the most often repeated propaganda slogan apply to FnF shareholders?
Did not public officials take the oath to serve the country faithfully?
How accurate are the official narratives used to justify seizures of FnF and Conservatorship?
Are not true narratives keep on changing as time passes and more discoveries are made?
FnF share are listed in many different countries and shareholders have different nationalities. Is it ok for Chineese to get favorable financial treatment compared to other nationalities because personal friendships of officials?
Is it ok to risk US taxpayers?
Here we are talking of trillions and not millions and
reputation of US capital markets.
This is an attempt your question: "How did Chinese concerns about the creditworthiness of the GSEs impact the decision to place them in conservatorship?"
I'm sure the Chinese and others were concerned about the creditworthiness of the GSEs. They and other sovereign investors held trillions in GSE securities, and any failure to meet GSE debt obligations on a timely basis would have been catastrophic to the global debt markets and to the U.S. housing market. Too Big To Fail means about four or five different things, all of which are applicable to the GSEs.
However, there was never a moment when the GSEs came close to reaching that threshold of illiquidity or insolvency, and HERA was drafted for the specific purpose preempting the need for conservatorship. Treasury could have backstopped GSE debt without any conservatorship.
To claim that Chinese concerns necessitated the government takeover is false. The story has been used as a red herring.
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