Dirty Little Secret

No, I'm not talking about the song by the All-American Rejects, though I must admit it's catchy and clever. I'm talking about Hank Paulson's latest about-face. Before, I've always thought his deft reversals of direction were born of mere confusion as to the appropriate policy actions.

This latest one, though, appears to have been very well-planned, and most sinister.

I've complained before about the lack of checks and balances in all this bailout mania, and this latest move is just one more example of the abuse of power by Paulson.

Early last week, Paulson told Bubblevision that he didn't plan to request the second half of the TARP money, saying, "We've got what we need right now." He said this even as his boss was working on plans to give the last $14 billion of the $350 billion first tranche to Chrysler and GM, in the form of bridge loans to get them through the first quarter of next year, when they will become the next administration's problem.

(As an aside, the $9 billion of those loans that GM will get is only sufficient to cover the company's $67 million daily cash burn for 134 days, assuming it doesn't get worse.)

So, knowing the administration's plan to spend the last of the first round of TARP money, Paulson told America, via CNBC, that Treasury didn't need the remaining $350 billion.

On Friday, however, he reversed course - surprising no one who's been paying attention to his antics since September - saying, "It is clear ... that Congress will need to release the remainder of the TARP to support financial market stability."

Most observers took this as yet another signal of Paulson's indecision and lack of clarity regarding just what is required to salvage the US financial system. Former FDIC Chairman William Isaac, who gave us the FICO scoring system that helped create the housing melt-down, said, "My conclusion is that they don't have a long-term strategy, and they're bouncing along from crisis to crisis."

On that, you'll get no argument from me. But it doesn't take a rocket scientist to figure out what Paulson was doing.

Congress was still in session as late as December 10, when they voted down the proposed bailout of the automakers. But by last week US senators and representatives were in recess for the holidays. Paulson waited until they were unlikely to return, then called for the money on Friday.

According to the terms of the TARP, Paulson had free rein (reign?) over the first $350 billion, but then had to ask Congress for the second half. But the request requires only negative consent; if Congress doesn't decline the request within 15 days after it's formally made, Paulson automatically gets the money.

Paulson could be reasonably certain, as of Friday, that Congress wouldn't re-convene - yet again - to consider the request, so he would have only to wait until the first week of the New Year to get the funds.

Fortunately, it now appears that the administration won't push for the money. An article today in American Banker reports that fears of political backlash have the Bush camp shortening Paulson's leash. So now it will be up to Tim Geithner, the Obama administration, and the new Congress to deal with.

One thing is certain: Paulson's request on Friday raises serious questions as to the true health of the US financial system. It also offers some insight into how the remainder of the TARP funds will be used, as everyone from states reeling from huge budget shortfalls to commercial real estate developers have their hands out for a piece of the second tranche. And with some of the first tranche being given to Detroit - after Paulson staunchly state that the money was reserved for the financial sector - who can blame them?

One last point, somewhat related to the TARP. The Obama administration's proposed stimulus package, which the President-elect hopes to have ready for his signature when he's sworn in on January 20, is now $775 billion. Why that number?

Well, it's been reported in the Washington Post that he'd like $850 billion. But fears of resistance from the few fiscal conservatives in Congress have pared back the number: "An Obama adviser said the team has settled for now on $775 billion as the highest figure likely to win congressional approval."

Remember when I reported that a Treasury official said the TARP figure was set at $700 billion, not because there was any calculated basis for that amount, but that Treasury just wanted to "throw out a really big number?" This smacks of the same.

Change we can believe in?