Paulson Moves On to Nuts and Bolts of Rescue
Saturday, October 4, 2008
With the political battle over the Bush administration's $700 billion financial rescue package at an end and the real work of rescuing the financial markets just beginning, all eyes are turning to Treasury Secretary Henry M. Paulson Jr.
The bill gave him unprecedented powers to shore up the ailing financial system. With few constraints, Paulson will make all the key decisions on who to hire, when to launch the program and perhaps most importantly how much the government will pay for troubled assets from ailing Wall Street firms. A misstep could mean hundreds of billions in losses for taxpayers or a cascade of failures for banks.
Speculation was rampant on Wall Street yesterday about who Treasury would hire to manage the assets that the government plans to buy. Industry sources say the department has asked leading Wall Street firms for feedback and that Legg Mason, Pimco, BlackRock and MKP Capital Management were recommended to Treasury.
These firms rose to the top of the list because of their expertise in mortgage-related assets. But hiring them as asset managers for the government would raise the potential for conflicts of interest, particularly because they would be managing the assets while also selling their own troubled securities to the government.
Treasury spokeswoman Michele Davis said the department plans to develop and publish guidance on "how to manage any conflicts." It is planning to put out a formal request for services Monday.
Besides hiring five to 10 asset managers, Paulson is seeking a top executive to oversee the program with the rank of assistant secretary of the Treasury as well as about two dozen bankers, lawyers and accountants.
Paulson urged Congress to pass the bailout plan quickly because credit markets were freezing up. Banks and investors were reluctant to make even overnight loans for fear that they would not get their money repaid. But the passage of the plan yesterday did not immediately ease the credit crunch.
Mohamed A. el-Erian, co-chief executive of the giant asset management firm Pimco, said that short-term credit trading for anyone other than the federal government remained at a "virtually nonexistent level."
"While constituting a necessary condition," he said, "the rescue package is not sufficient to radically counter the immediate disruptions."
Investors continued to pour money into Treasury bills, the banking equivalent closest to sticking money in a mattress, driving down the yield on short-term Treasuries to close to zero.
Paulson never claimed the bailout package would solve all of Wall Street's woes or prevent the economy from falling into a deep recession. Treasury officials even warned banking groups this week that firms may collapse before the program launches, which likely will take place in mid-November.
Well aware of the pressures on him, Paulson feels "the weight of the world on his shoulders," according to source close to him who talked to him recently and spoke on condition of anonymity because the conversation was private.