Tuesday, September 23, 2008

Cox Vs. Paulson: Contradictory Plans?

With every US government agency frantically enacting drastic measures in the name of halting a full-blown financial crisis, it is interesting to ponder each agency's political agenda.  Predictably, Congress is hoping to save the ailing homeowners on the verge of foreclosure, an ever expanding voter block in an election year.  Bernanke is greasing the money markets, with little regard for the solvency of the institutions ("Whatever collateral they have, I'll take it!  Just give them a loan!")  The President is tasked with lifting the country's wilting morale by grinning and declaring that "Our economy is strong!" (just pull the string on his back and he'll say it again.)  The Treasury Secretary oversees bailouts, takeovers, raising capital for a government-run hedge fund, and ensuring that nobody gets confused about where he stands on the issue of moral hazard (equity is creamed but bondholders and counterparties are protected, unless you're Lehman, in which case, don't come cryin' to me, you bunch of pansies.)  The SEC Chairman, Chris Cox, is siding with equity holders by temporarily out-lawing short-selling.  The jury is out on how well any of these plans will work, save Mr. Cox's short-sale ban which is, um, not really going as planned.  Sure, the market rallied powerfully on Friday, only to give it all back on Monday, and demonstrated marked intraday volatility on both days.  Perhaps Mr. Cox should've spoken to a few market participants before enacting his plan (a singe derivatives trader? one hedge fund manager?)  If Mr. Cox is thoroughly confused as to why his plan has backfired so harshly, he might consider calling Mr. Paulson, who at least has some experience working for a Wall Street bank.  The conversation may go something like this:

Cox:  Hello Hank?  This is Chris.

Paulson:  Who?

Cox:  Chris Cox, SEC Chairman.

Paulson:  I don't know who you are, or which organization you're with, but I am a very busy man.

Cox:  Geez.  I'm head of the Securities and Exchange Commission!

Paulson:  Hmmm.  That rings a bell.  What do you want?

Cox:  I was wondering if you could maybe give me some advice on what to do about the short-sale ban.

Paulson:  A short-sale ban?  That's the dumbest thing I've ever heard.  It'll wreak havoc on the markets.  I wouldn't even consider something that foolish.

Cox:  Well, actually, it's already done.  We enacted the ban on Friday.  The ban goes until Oct 2.

Paulson:  WHAT?  

Cox:  Didn't you see the announcement in the financial press?  I was very pleased with the amount of coverage it received in the press.  Although, the response has not been as positive as I expected.  I just don't understand.

Paulson:  So you say the ban goes until Oct 2?  Can you hold on for a second? (puts Cox on hold and makes another phone call.)  Hey Bernie, I know this is supposed to be a blind trust and all since I'm Treasury Secretary but blue horseshoe says "SELL ALL OF MY STOCKS!"  You got that?


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