Paulson's Claim Of "No Government Sponsorship" Reviewed

Inquiring minds are reviewing Paulson "adamant" no government funds for Lehman.

Treasury Secretary Henry Paulson is "adamant" that no government money be used in any deal that resolves the crisis at Wall Street investment bank Lehman Brothers, a source familiar with his thinking said on Friday.

"There are two things that make this different from Bear Stearns. The market's been aware of the situation for a long time and has had time to prepare. Second, the Primary Dealer Credit Facility was created by the Fed to allow time for an orderly process," the source told Reuters.

Stop right there. Do you see the lie? The Primary Dealer Credit Facility (PDCF) is the lie.

The PDCF is a government sponsored swap of funding for crappy collateral that broker dealers are holding. If and when the Fed swaps cash or treasuries for crappy not marked to market collateral, the Fed is at risk. While it is true that the Fed may be able to cover its loan by selling the assets, the odds are long against it.

The reality is that the Fed is acting as pawn broker with one huge difference. A normal pawnbroker does not pay out at fair value and especially does not pay out at above fair value. The Fed does. And this puts the Fed at risk.

Note the above holds true even if no such swap takes place. That the PDCF exists at all and that it is on the table in a discussion of a Lehman bailout is enough to make those who suggest no government sponsorship do not know what the hell they are talking about at best, or are openly and blatantly telling lies at worst.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List