Nov. 21 -- The name doesn't exactly trip off the tongue. The entity is called the master liquidity enhancement conduit, or M-LEC. Henry Paulson hopes it will help the banking system contain a debacle.
Paulson, the former Goldman Sachs Group Inc. chief executive who took office as U.S. Treasury Secretary in July 2006, led the effort to create M-LEC, whose purpose is to stem the tide of defaults by a group of financial companies called structured investment vehicles, or SIVs, which are packed with mortgage-backed loans.
The idea is to have a group of big banks -- Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. have already signed on -- provide back-up financing to the SIVs and buy their higher-rated long-term assets, using money raised through the sale of short-term commercial paper.
``If Paulson succeeds, he'll have a very strong legacy,'' says Vin Weber, a former Republican Congressman and party strategist who is policy chairman for presidential candidate Mitt Romney. ``If not, it means we're headed for a serious economic downturn, and we'll all pay a price.''
Paulson is not a man used to failure. In the seven years he ran Goldman Sachs, revenue and profits tripled. Washington has been a harder nut to crack. He has stumbled on the two issues he identified as top priorities -- shoring up Social Security and persuading China to redirect its export-driven economy. And Paulson's assertion that he supports a strong dollar has done nothing to prevent the greenback's sharp fall.
Bankers At Work
As of late-November, the superfund Paulson helped conceive had not yet begun buying up SIV assets, though bankers working on M-LEC at Bank of America's New York offices had settled on a structure for the superfund, according to a person familiar with the talks. Meanwhile, the SIVs were losing value.
There are 30 SIVs that held securities worth $400 billion when the mortgage meltdown began in July, according to Moody's Investors Service. Their net asset value fell more than 30 percent from July to mid-November. As of the first week of November, SIVs had been forced to sell at least $75 billion of assets as investors retreated from all but the safest bets.
Paulson, 61, has tried to be reassuring. ``I view the housing and mortgage market decline as the most significant current risk to our economy,'' he told reporters in Washington on Oct. 31. ``Even so, we have a healthy, diversified economy that will continue to grow.''
Nouriel Roubini, chairman of Roubini Global Economics LLC in New York and a former director of the Treasury Department's Office of Policy Development and Review, says Paulson has already failed -- by acting too late to blunt the crisis and by proposing an unworkable solution.
`Wrong Solution'
``Paulson got it wrong in assessing how severe the housing recession would be,'' Roubini says. ``The superfund is just a wrong solution and it's not going to work.'' He says the fund will simply artificially prop up asset prices.
A former Dartmouth College football star, the 6-foot-1-inch (185-centimeter) Paulson earned a reputation on Wall Street as a consummate dealmaker. In Washington, despite extensive talks with the Democratic leadership in Congress, he's been unable to make a deal on Social Security. In his four trips to China through November, he has run into a formidable foe in China's chief negotiator, 5-foot-tall Vice Premier Wu Yi.
Increasingly, it looks like Paulson's government report card will be marked with his grade for handling the squall in the credit markets.
Paulson started preparing for market gyrations on the day he moved to Washington from Wall Street, colleagues say. ``He began working on financial preparedness from the start,'' says Robert Steel, the Treasury's undersecretary for domestic finance. ``And he decided early on that a key mechanism for doing that was the President's Working Group.''
Plunge Protection
Nicknamed the Plunge Protection Team, the group brings together officials from the Commodity Futures Trading Commission, Federal Reserve, Securities and Exchange Commission and Treasury Department for what have become regular meetings.
When the markets began to shudder in July, Paulson used the address book he had built up during 32 years at Goldman Sachs to seek information and advice from Wall Street's elite. Among those he called, people familiar with his handling of the crisis say, were former Treasury Secretary and Goldman alumnus Robert Rubin, now chairman of Citigroup, and Jamie Dimon, CEO of JPMorgan Chase.
Calls to Bernanke
He was on the phone daily through August and into September with Fed Chairman Ben S. Bernanke and was also in frequent touch with New York Fed President Timothy Geithner, the central bank's eyes and ears on Wall Street. ``He kept reminding us that the capital markets are the lifeblood of the economy and asking market participants, 'What do you hear? What should we be doing?''' Steel says.
In mid-September, Paulson and his team summoned bankers to the Treasury building adjacent to the White House. The result was M-LEC. ``It was a wise decision,'' says Stuart Eizenstat, a former deputy Treasury secretary under President Bill Clinton and now head of international practice at Washington-based law firm Covington & Burling LLP. ``He's close to banks and has a feel for the pulse of the markets.''
The idea -- and Treasury's involvement -- has been controversial from the get-go. Soon after the plan's announcement, former Fed Chairman Alan Greenspan and billionaire investor Warren Buffett questioned its practicality, saying investors would not be fooled by a shuffling around of unpalatable assets.
Hard Sell
``The big question in my mind, and in many people's minds, is how taking a bunch of assets it's been difficult to sell is going to be improved by throwing them together,'' says Douglas Elmendorf, a senior fellow at the Brookings Institution in Washington and a former official at both the Treasury and the Fed.
The goal, supporters say, is to avoid panicked selling of assets by financially stretched SIVs. ``A firesale is in nobody's interest,'' says Louis Crandall, chief economist at Jersey City, New Jersey-based bond research firm Wrightson ICAP LLC.
Paulson's predecessor at Treasury, John Snow, agrees it was right to get involved. ``Nobody wants to see institutions that have basically healthy businesses taken down by a panic,'' says Snow, 68, now chairman of private equity firm Cerberus Capital Management. ``Paulson's response seems to me to be perfectly appropriate.''
Kevin Hassett, director of economic policy studies at the American Enterprise Institute in Washington and a columnist for Bloomberg News, says the superfund is both a national and a personal gamble. ``Paulson has staked his legacy on M-LEC,'' Hassett says. ``If it works out, then he'll be remembered as a Treasury secretary who delivered in a time of crisis.''
If not, he will be one more successful businessman who left a piece of his reputation in Washington.
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