naked capitalism: The Paulson Plan = MLEC Version 2.0

Clipping

Hank Paulson attempted to ride to the rescue with an idea, the so called Master Liquidity Enhancement Conduit, that we said virtually from the get-go would not work. He wanted to set up a vehicle, to be managed by a third party that would buy the junky SIV holdings, which included risky real estate assets and murky stuff like collateralized debt obligations, and be funded by private investors. The problem was that there was no price which would solve the basic conundrum: investors were not willing to pay above market prices, and the banks were unwilling to sell at market. Paulson & Co. wasted nearly two months trying to breathe life into this stillborn idea, then abandoned the effort. Ah, but the MLEC lives! It's been retooled into the Paulson plan We still have a fund that will be managed by third parties. We still have the buying of drecky, hard to value assets, with emphasis on mortgage-related paper. And the taxpayer is being told that it is an investor, that it might actually make a profit on this venture. And as with the MLEC, the big issue will be how to price the paper or at least some commentators treat that as an open question. But by foisting this on to chumps taxpayers, the problem goes away. It is clear now that the intent is to pay over whatever the book value of the paper is, both to recapitalize the banks and to generate high valuations that let other financial firms use these phony favorable prices for preparing their financial statements. But the MLEC was designed to address the pressing problems of a year ago. The crisis has advanced considerably since then. Remaining fixated on a solution that is badly out of date is tantamount to fortifying the Maginot Line when the blitzkrieg has rolled into the fields of France and the British are beating a retreat to Dunkirk. And I expect it will prove every bit as effective.