The Empire Starts Up?

It’s déjà vu all over again. Washington rides to the rescue of Wall Street and their customers. The House and Senate are cobbling together another labyrinthine bureaucracy with only secretary Paulsen as Emperor. Only the players in the rarified air of high finance will know how to navigate – er, I mean manipulate this new Emperor's court.

And of course the finger-pointing is going on at election year warp speed, with the talking heads in the media doing their level best to spread fear, uncertainty and doubt while they try and make it look like they understand any of it.

Let Ol’ Bean make this short and simple – the folks who got incredibly wealthy and have taken this hit aren’t about to just walk away from the gaming tables they’ve been playing at over the years. If Washington wants to keep the financial services casino open (and they desperately do), then Washington will have to cover the gambler’s markers – again.

This legalized gambling-house they called securitization spread an incredible amount of wealth among the players. So much that there was soon more hubris than real wealth. Creativity finally got the better of them.

Now Paulsen thinks they’re going to hand him some “troubled loans” so they can get on with the business of making better loans.

What Paulsen is going to buy aren’t just “troubled loans.” He’s buying (with our money) pools of mortgages at a price that will have nothing to do with reality. And what no one wants to talk about is the fact that the really bad loans are already on the books of the special servicers at huge discounts from their face value. I can see where this will be going:

Paulsen: How much do you want for that pool?

Servicer: $50 million should do the trick.

Paulsen: Ah, well we have to know the cost basis – we’re working under the Credit Reform Act.

Servicer: $50 million. That’s what the pool is worth.

Paulsen: How much did you buy it for?

Servicer: None of your beeswax.

Paulsen: OK. Here’s the $50 million.

Servicer: Thanks, have a nice day.

A few months later Paulsen tries to sell the pool.

Paulsen: I have a deal for you. I have this pool of mortgages for sale.

Servicer: I know. One of the companies I worked for sold it to you.

Paulsen: We’re working under the Credit Reform Act rules for costing. I can sell this to you for $35 million.

Servicer: I’ll give you $10 million. Today only.

Paulsen: But we both know you got more than twice what it was worth when we bought it. You’ve already cleared $25 million.

Servicer: Aw, shucks.

Paulsen: OK. We’ll take the $10 million for it.

Servicer: Thanks, have a nice day.

It won’t take long to burn through $700 billion.

The Honorable Judge Roy Bean