10/25/2008 05:12 am ET Updated May 25, 2011

Paulson says "Just Trust Me"

Yesterday, we bore witness to an amazing event. The Secretary of the Treasury and the Chairman of the Federal Reserve appeared in Congress, hustling a financial system bailout plan of enormous size. The subject and the scope of this rescue package are amazing in themselves. The speed with which it has been drafted and the attempt to push it through Congress with little review is disconcerting to say the least. But, one thing really stood out to me in the testimony. That was the degree of skepticism expressed by the Senators about the potential effectiveness of the Paulson Plan. The response, pretty much, was "You just have to trust us."

Trust them! Why? Performance? Come on. Neither the Treasury nor the Federal Reserve has done a particularly good job at handling the economy, the financial system, or regulation. If most of us had their track record, we would not be taken seriously. Nevertheless, they ask us to trust the valuations they are going to pay for hundreds of billions of dollars of complex, distressed assets. It is hard to accept.

However, in this case, maybe there is one objective yardstick. In the bailout of Bear Stearns, the Federal Reserve agreed to buy $30 billion of Bear Stearns assets. The Fed has held these assets for over six months. Perhaps they could tell us the current market value of these holdings so we could could judge their trading acumen. If I was a betting man and you asked me to take the over or under at $15 billion, I would go for the under. And if I am right about this, I would go for the under on the price the Treasury would pay for every security offered to it under the Paulson proposal. It's sort of like the old Life Cereal commercial: "Let's sell it to Hank, he'll buy it."