Shut Up-A You Face

Yesterday, Treasury Secretary Hank Paulson (A.K.A. Mr. Flip Flop) announced that he was cancelling plans for the Treasury to buy troubled assets from banks. The markets were shocked by the sudden change of heart. I was not.

Although I was surprised by his timing (middle of a trading session with no warning, I was not surprised by the change of plans. After all, banks are not going to sell assets at 50 cents on the dollar (they may as well write them down and hope for some degree of recovery) and the Treasury was not going to pay par (or anything close to it) to assets which glow in the dark. The TARP plan was still-born. However, following the markets' negative reaction and criticism from Congress, Mr. Paulson stated today that purchasing troubled assets are not off the table.

Please Mr. Paulson, do not open your mouth until you are certain of what you speak. I appreciate that we are in uncharted territory and that Mr. Paulson and Mr. Bernanke often have to make things up as they go along, but opening one's mouth and unnerving the markets when one is not sure is counterproductive. Mr. Paulson is scaring market particpants and he must stop now!!!

I do not envy Mr. Paulson. He is dealing with the most severe financial crisis since thhe great depression, but his policy reversals (the GSEs) and inconsistencies (Bear Stearns, Lehman, AIG, etc.) have the markets frightened instead of calmed by his actions.

I am frightened. After being blown up by Mr. Paulson's handling of the GSE preferreds, I am determined not to be burned again. In my opinion, investors looking to buy into firms receiving government capital injections would be better served by buying trust preferreds or bonds rather than common equity or preferred stock. The government's level of investment is equal traditional non-cumulative preferreds and senior to common. In other words, Mr, Paulson can wipe out the dividends on common and preferred stock if he deems it necessary. He needs only to order banks not to pay the government the dividends on the government's preferreds. Securities of equal and lower ranks would also have to have dividends suspended. This coupled with the strong possibility of having the 15% tax on dividends raised makes traditonal preferreds unattarctive in my view. Trust preferreds and bonds are senior to the government's claim. Stay senior to Hank!!!