Fire Paulson; Hire Thain. Paulsen Has No Credibility

In an interview with Larry Kudlow yesterday, Hank Paulsen again showed why he should be fired as the Secretary of the Treasury.  Paulson is behind buying preferred stock at subsidized prices (very low dividend rates).  when confronted by problems he had no answers.

1) Question: Will not banks use the cash to pay down their existing debt (to foreign investors, among others) and not loan the new money out as you want?  In other words, banks may have a duty to their shareholders to take cash from preferred stock sales and pay off debt that has interest rates that are higher than 5% (the dividend payment rate). [Thain predicts banks will "sit on the money"; so far, he is correct.]  Paulson's answer, in essence:  "They will not because they know it will offend me."  But see 2), below.

2)  Question: Some banks do not want the new money because of the "strings" attached, is this government management?  You are affecting their executive salary arrangements and pushing them to change mortgage renegotiation policies.  Paulson answer, in essence:  "No we are a passive investor with no voting rights on their the preferred or the common underlying the warrants."  But see 1), above.

3) Question: Some banks (I.e., Wells Fargo) do not need the money and do not want the money, why force them to take it?  Paulson's answer, in essence: "All banks need to take the money so we do not stigmatize those banks that need the money and will take it."  But see 4), below.

4) Question:  Will taxpayers be on the hook for these payments?  Paulsen's answer, in essence:  "No, the banks that can will have an incentive to redeem the preferred stock within one year."  But see 3) above. [Will not the redemption of preferred by some banks and not others stigmatize those that cannot redeem?]

5)  Question: The market has fallen 25% since you refused to bail out Lehman Bros., did you make a mistake? Paulsen's answer: "There was no buyer in the wings to set up a JP Morgan style deal."  But see Barclay's immediate purchase of brokerage business once Lehman took Chapter 11.

6) Questions:  You said you would do ["X"] on [insert date] yet later you did [not "X"], how can the markets have confidence in what you say.  Paulson's answer:  "[Double Talk]".

He does not know what he is doing.  This is a disaster. Time to try Thain.