Fascinating excerpts in the WSJ from a new paper to be presented tomorrow by a former senior Treasury official. Here are a few, all of which makes Paulson seem more than a little like a rogue Treasury trader:
- The ill-fated 2007 Treasury proposal to create a privately funded entity — called MLEC, or Master Liquidity Enhancement Conduit – to buy up toxic assets from the banks was developed by the Treasury’s Office of Domestic Finance and shared with market participants without involvement from other Treasury senior staff. “The MLEC episode looked to the world and to many within Treasury like a basketball player going up in the air to pass without an open teammate in mind — a rough and awkward situation,” he said.
- The surprises to the Treasury on Monday, September 15, after Lehman Brothers filed for bankruptcy, were two-fold: “the breaking of the buck by the Reserve Fund [a money market fund] and the reaction of foreign investors to the failure of Lehman.” Swagel says it was impossible for the Treasury to anticipate that the Reserve Fund had so much Lehman paper, but, “We could have known better that foreign investors were not prepared for Lehman to collapse.”
- Paulson “truly meant” to the use the $700 billion in TARP money to buy assets from the banks, not to buy shares in the banks, because he saw it as “a fundamentally bad idea to have the government involved in the ownership of banks.” He changed his mind when markets deteriorated and “he well understood that directly adding capital to the banking system provided much greater leverage.”
More here.
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