The Rule of Law Ain't Going to Get Me Reelected

US Government is Recklessly Raising Risk Premiums

So far the government has managed to make a few mistakes that are probably raising uncertainty in the marketplace and raising risk premiums just in the middle of a credit crisis where premiums are already high. Here's some of them

-US Congress trying to disrupt US contract law by going after bonuses after the fact

-Bernanke and Paulson lied after Lehman's bankruptcy by saying it was intentional and they had things under control. Bernanke went as far as saying LEH CDS had already priced in that possibility. Meanwhile the Friday before the bankruptcy weekend the CDS stood at 700bps, it was just the opposite, the only reason the CDS wasn’t at Icelandic levels was because the market thought they were too big to fail, Citi CDS is close to that level, I dont think Bernanke would accept that the market is pricing in Citi's failure. Paulson said at no moment he thought of putting tax payer money to save LEH, turns out that was a lie
Later on Bernanke reveled that they wanted to bail them out but they could not because by a lack of Fed authority(no good collateral) and Paulson almost certainly must have considered using the currency stabilization fund but may have decided against due fear of a political problem(This was before the presidential election), just a few days later he did use that authority which shows it was always in his radar

-Treasury bails out Citigroup by giving preferential treatment to private preferred stock holders, which include foreign government bodies, to the expense of Citi public preferred holders

-Government favors unions in debt to equity swap negotiations in the Chrysler and GM bailout. The bondholders and the union are on the same legal level as unsecured creditors but the administration tried to hand more of the new auto companies to the unions. This will be deeply worrying if political pressure is extended to the bankruptcy court that will deal with the likely bankruptcy of the autos

-Government has a clause in TARP legislation that enables them to change that contract at any time for any reason. They already used this for compensation reform and other changes. TARP Bank shareholders and creditors are probably depressing the value of their holdings but more than usual because of that

-Treasury might be trying to mislead the markets by understating the level of capital needs of US banks. This could come back to haunt them as their credibility will be depressed even further

-Paulson might have encouraged a CEO to hide material information from bank shareholders

This is a credit crisis, now creditors and capitalists need to consider more factors when they are doing their investment decisions, the fact that the government can change rules, lie about systemic events, favor certain political groups(maybe even in bankruptcy), make unconstitutional moves, etc

Since the US is going to a new world where the government will play a bigger role in the private sector(because of bailouts, nationalizations, regulation etc) the fact that they are not behaving in a way that is consistent stable markets is troubling

The Fed seems to be trying its best to lower interest rates but other arms of the government are trying to hike it even if they are not aware of it
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