September 28, 2008

Hank Paulson’s Blackmail? (Bernanke, Too?)

Filed under: Economy,Taxes & Government — Tom @ 1:11 pm

(Carried to the top, likely for the rest of the day)

Are the following events coincidences? I don’t think so.

More like 2 + 2 = 4.

As in, two ….

Bailout Failure ‘Will Cause US Crash‘”

The US stock market could suffer a devastating crash with shares losing a third of their value this week if Hank Paulson’s financial bailout plan fails, US Treasury officials have warned.

….. plus two …..

WaMu Bondholders are ‘Stranded’ in Thrift Seizure

“It seems that WaMu’s major debt holders have been stranded by regulatory intervention,” David Hendler, an analyst at bond research firm CreditSights in New York wrote in a report today. “The deal structure seems to be unprecedented in that it excludes bondholders at the holdco and bank levels from the major assets and liabilities of the operating bank.”

….. equals four:

Lawmakers Reach Tentative Bailout Deal

WASHINGTON — Top U.S. policymakers emerged from hours of tense negotiations with a clear message just after midnight on Sunday morning: A deal to bail out U.S. financial markets has been agreed on and all that remains to be done is to commit the legislation to paper.

My take: The way the WaMu bondholders are being treated is unprecedented (I also read that at another link), and is a major and again (sorry for the tired word) unprecedented threat to the markets’ confidence.

I think that Hank Paulson threatened to tank the markets himself if the bailout deal didn’t get done very quickly. Maybe Ben Bernanke, too.

If the government changes its position on the treatment of WaMu bondholders and makes them whole or almost whole, you will know that I was right. If the government treats future situations as it did pre-WaMu, you will know that I was right.

You have no idea how much I want to be wrong.

This is sickening.


UPDATE: More on this from the UK Times Online (where is the US Press?) –

The broader debt markets were crippled by fears on Friday after the sale of WaMu. Unlike other recent bank deals, this one saw senior creditors wiped out alongside shareholders – an unexpected blow.

The wipeout of WaMu bonds is likely to make it much more difficult for any struggling US bank to raise new finance. If bondholders can be wiped out so easily, there is little point in extending debt to struggling firms. The added uncertainty is likely to make it harder for all companies to renew their debt facilities, and put a further squeeze on the price.

Chances are very great that the uncertainty will bleed into the equity markets, perhaps even giving Paulson & Co. the 1/3 meltdown “Treasury officials have warned of.”

I detect a whiff of financial sedition.


UPDATE 2: Thanks to Michelle Malkin for linking to this post. Her entries today are here, here (with the bailout bill), and here.

UPDATE 3, Sept. 29: Related, from

Did FDIC Sabotage WaMu Management And Erode Investor Confidence?

FDIC Chairwoman Sheila C. Bair, together with JPMorgan Chase (JPM) CEO Jamie Dimon shared the spotlight for saving Washington Mutual (WM) depositors without costing the government a dime. The story is old by now; JPM got the good and the bad of the bank without the holding company’s ugly debt. (Think Clint Eastwood.)

After the glory fades, the reality will come out that the FDIC cannot be trusted. JPM and others were conducting real negotiations with the FDIC at the same time they were conducting fake negotiations with WaMu’s management.

….. (did) FDIC undercut WaMu’s management ….. before or after the fall of Lehman? WaMu started to face a bank run on September 15 – the day Lehman filed for Chapter 11.

The FDIC alone could be proud of its accomplishment, but in the overall context they further eroded investor confidence. Now the moral hazard has spread beyond equity holders to bond holders.

….. The Paulson/Bernanke team has not been very pragmatic in creating value in the form of investor confidence for their bailout money. Punishing or killing shareholders and now bond holders have proved very expensive to the government. With each new implementation of moral hazard, the government has to lay out more money to lift investor confidence

….. If the government lets another large financial or insurance institution fail, or severely punishes their shareholders, Paulson $700B slush fund would be the same as you know what in the wind.



  1. [...] Blumer at BizzyBlog smells blackmail. Posted in: Subprime crisis Send to a Friend Printer Friendly comments [...]

    Pingback by Michelle Malkin » All aboard the bailout bandwagon? Hell, no! — September 28, 2008 @ 2:06 pm

  2. This will most likely be quite painful for all. I none the less vote for KILL THE BILL!!! I prefer to face the storm with less national debt than more.

    Comment by George Dunham — September 28, 2008 @ 3:09 pm

  3. Wa Mu is not the name of the latest Oriental food craze.

    It is bankspeak for Washington MUTUAL. An organization where profits and losses are shared MUTUALLY by all parties investing in the deal. If stockholders lose money, bondholder share MUTUALLY in the losses. If there is equity, the bondholders get paid. If there is no equity the bondholders share in that too. Buying bonds does not guarantee coupon clipping unless the bonds are bought in an organization that makes money. How hard is that to understand?

    Comment by Jim in SE Texas — September 28, 2008 @ 3:39 pm

  4. #3, I understand, and have understood how it’s “supposed” to work out. But I believe analogous situations in the past have NOT worked out that way, and that bondholders have either received preference, or bondholders and shareholders got SOMETHING.

    For you to be right:
    - Those who are saying that the action is “unexpected” and “unprecedented” have to be wrong. There seem to be a lot of them for all of them to be wrong.
    - Previous “mutual” situations as described didn’t give favorable treatment to bondholders.

    So if the Feds (Paulson, Bernanke, or both, I don’t know) decided to “go by the book” this time after previously having NOT done so for years with other mutual situations, it is STILL something that you would expect to tank the markets.

    Comment by TBlumer — September 28, 2008 @ 4:04 pm

  5. The president is being given bad advice by Svengali Paulson

    Comment by Mark McNally — September 28, 2008 @ 5:45 pm

  6. Not no, HELL NO!
    Bailout Bill Text – First (not final) version received by Porkbusters from a reliable Hill source Sunday afternoon

    Pages 21 & 22


    19 ї

    20 ш(1) DEPOSITS.—Not less than 20 percent of

    21 any profit realized on the sale of each troubled asset

    22 purchased under this Act shall be deposited as pro23

    vided in paragraph (2).ї

    24 ш(2) USE OF DEPOSITS.—Of the amount re25

    ferred to in paragraph (1)—ї


    O:\AYO\AYO08B94.xml [Discussion Draft]

    1 ш(A) 65 percent shall be deposited into the

    2 Housing Trust Fund established under section

    3 1338 of the Federal Housing Enterprises Regu4

    latory Reform Act of 1992 (12 U.S.C. 4568);

    5 andї

    6 ш(B) 35 percent shall be deposited into the

    7 Capital Magnet Fund established under section

    8 1339 of that Act (12 U.S.C. 4569).ї

    9 ш(3) TRANSFER TO TREASURY.—Revenues of,

    10 and proceeds from the sale of troubled assets pur11

    chased under this Act, шor fromї the sale, exercise,

    12 or surrender of warrants or senior debt acquired

    13 under section ш113ї shall be paid into the general

    14 fund of the Treasury for reduction of the public

    15 debt.ї

    Comment by Joyce Miller — September 28, 2008 @ 7:19 pm

  7. #3, I should add that we would need to find out whether the bondholders of the holding company were subject to the “mutual” strictures you are referring to.

    Comment by TBlumer — September 28, 2008 @ 8:30 pm

  8. [...] Tom Blumer at BizzyBlog smells blackmail. [...]

    Pingback by Scroll for updates: Bailout Deal Reached With ACORN, And Other Pork Removed | Right Voices — September 28, 2008 @ 9:36 pm

  9. If bondholders can be wiped out so easily, there is little point in extending debt to struggling firms.

    Yeah, gosh forbid risk should be priced accurately. Lets all just trade paper as if there was no risk at all and when it turns out there actually is risk, go crying to Uncle Sugar.

    Comment by Hermit Dave — September 28, 2008 @ 10:36 pm

  10. #9, points well taken. IIRC, FDIC and other bank-backstop mechanisms eliminated that decades ago, for better or worse. I think mostly worse; but Hank and Ben picked an awfully convenient time to get religion.

    Comment by TBlumer — September 28, 2008 @ 10:49 pm

  11. #10 Not going to argue with your points, you’re right, although you could go farther and point to a number of other mechanisms. However, we’re seeing both a massive deleveraging and a risk repricing right now (they tend to go together, but it’s not a given).

    With all the nastiness coming down the pipe in the next few years (Alt-A could easily be twice as large as subprime for example), I expect this to continue. Either risk will be taken into account once again, or the givernment will be stuck with more and more junk until we’re completely underwater.

    Comment by Hermit Dave — September 28, 2008 @ 10:58 pm

  12. [...] the American people give them a blank check, saying, “Do this, or else.” Last Sunday, I called it blackmail. I stand by [...]

    Pingback by Pajamas Media » Bailout Saga Proves that Elites Don’t Care What We Think — October 4, 2008 @ 12:04 pm

  13. [...] and the American people give them a blank check, saying, “Do this, or else.” Last Sunday, I called it blackmail. I stand by [...]

    Pingback by » Not That They Ever Did — October 5, 2008 @ 7:43 pm

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