Folks, I woke up this morning and the pieces all-of-a-sudden fit together. Henry Paulson must be one of the biggest con artists in the history of mankind. There is no way that Congress ought to approve anything like the bailout which Henry Paulson has proposed. Let me explain why.
If you listen to people like Barney Frank, you would think that what Henry Paulson wants to buy is mortgages. People generally know what mortgages are, and they generally recognize that, while there can be some loss of value if the property turns out to be worth less than the amount of the mortgage, there are really very few circumstances when the mortgage turns out to be worth nothing at all. The history of the Resolution Trust Corporation (RTC) is that it acquired about $400 billion worth of assets from failed savings and loans and, after liquidating all of the mortgages and other assets, it was left with a net loss of about $125 billion, or roughly a third. And this is the sort of model that people are mentally visualizing for this proposed Wall Street bailout. And in fact, this is a key part of the con: make people think that Henry Paulson wants to buy $700 billion worth of mortgages.
However, what makes the con obvious is this: we (the US taxpayer) already own three of the largest mortgage-owning companies in the world. After taking over Fannie Mae and Freddie Mac, and with always owning Ginnie Mae, we have three companies that already own over half of the roughly $12 trillion US mortgage market. If the idea was to purchase $700 billion worth of mortgages, then the right thing to do would be to give the $700 billion to Fannie Mae, Freddie Mac, and Ginnie Mae and let them do their jobs of owning mortgages over the long haul.
But that obviously isn’t what Henry Paulson really wants to do. Instead, if you carefully read the actual legislation, the authority which he is asking for ends with “other,” meaning that, while the list of things to buy using the $700 billion of taxpayer dollars begins with mortgages, in fact Henry Paulson could buy literally anything, including chains of Chinese restaurants. But even Chinese restaurants have intrinsic value, and that isn’t what we, the US taxpayers, ought to be worried about. No, the con game is actually far worse than anybody can possibly imagine.
In the middle of the list of things to buy with our $700 billion is “mortgage-backed securities.” Now that is itself a term which can mean many things. After all, Fannie Mae, Freddie Mac, and Ginnie Mae all issue “mortgage-backed securities,” so what can possibly go wrong with those? And the answer to that is embedded in a single word: “derivatives.” Derivatives can be literally anything. In essence, they are casino bets that can end up where you either pay out money or collect money based upon a complex formula. Derivatives are what sent Orange County, California into bankruptcy. According to one report I read, there are somewhere around $40 trillion to $80 trillion of these “mortgage-backed securities” (derivatives) floating around out there. The total US mortgage market is only around $12 trillion, and the total value of US real estate is only around $25 trillion, so there are far more of these derivative bets out there than there are actual mortgages. What Hank Paulson obviously wants to do is to have the US taxpayer purchase $700 billion worth of these derivative bets at the Wall Street casino. Our response, and the response of Congress on our behalf, needs to be: no, no, a trillion times NO!
Again, it is obvious that Henry Paulson doesn’t want to actually buy mortgages because if that were the case the right thing to do would be to give the money to Fannie Mae, Freddie Mac, and Ginnie Mae. Those companies buy and sell blocks of mortgages all the time, and they are our experts in making markets in mortgages. Instead, Henry Paulson wants to take the US Treasury, which doesn’t have the necessary expertise to deal in derivatives, and have it buy derivatives just like Orange County, California once did. It doesn't take a genius to know that Wall Street will want to unload its worst casino bets onto the US taxpayer. And eventually, just like Orange County, California, those bets will need to be paid off and, when you can’t pay, you declare bankruptcy. There is just one problem: we are talking about the US Treasury here!So once again, if it is really mortgages that need to be purchased here, then give the money to the companies we already own that buy and sell mortgages all the time. And if it is derivatives that are under discussion here, then the answer is not now, not ever, no way! So, please call your Senators and Representatives in Congress and tell them that you’ve figured out the scam and you don’t want any part of it. I don’t care if you give me credit or not. Just make them stop this scam right now!