Paul Kedrosky: Barney Frank: Paulson Plan Gets Newfie Funding

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September 25, 2008

Barney Frank: Paulson Plan Gets Newfie Funding

From comments by Barney Frank tonight, a deal has been reached by House and Senate Democrats to create legislation to pass the U.S. Treasury financial market rescue plan. Here is the money quote (literally):

There is conceptual agreement, including I think with Treasury -- people understand it's not going to be a straight $700 billion.

[via Bloomberg]

While the market may end up impressed, depending on the final wording, there are at least two worrisome things in Frank's statement (or three if you hate the whole idea of a rescue plan).

Frank says "I think" with respect to Treasury understanding that it's not going to be the amount of money it asked for. That "I think" rankles, because it suggests that Frank et al., think Treasury was high-balling Congress with respect to the amount of money it contemplates requiring. Granted, the $700-billion didn't come from a series of Fast Fourier Transforms, but any number materially below $700-billion is going to be taken poorly by the markets. (And no, I'm not arguing that $700-billion is some Platonic correct figure, merely that expectations are expectations, and pretending they don't exist is stupid.)
Tranching out the money -- committing to $700-billion, but doling out the money to Treasury in dribs and drabs -- is dodgey, depending on the number and the size of the tranches. Too many and you end up with what the private investing business calls "Newfie funding". It is when you fund something partway to the goal, then have to fund it again when the first money predictably runs out, and then again and again and again -- usually to the point that the company in question spends most of its time begging for money rather than doing business. It is common among dumb and unprofessional investors who don't trust their own instincts, and who don't understand that some things just take as much money as they take.