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Paulson Should Resign:

Hank Paulson knows a lot about Wall Street. But he also knows a lot of the guys on Wall Street. And I fear that is the problem. From the beginning this whole bailout smelled more like welfare for his Wall Street billionaire cronies rather than for the good of the country. Not a single Wall Street guy has come forward and offered to do anything to make the bailout work but instead the attitude that has emanated from those quarters has been one of entitlement and arrogance.

While his experience is obviously valuable, I believe that Paulson's close relationship with Wall Street has provided a skepticism about the bailout. His opening offer to Congress was so arrogant and so lopsided in favor of Wall Street and his own powers, that it basically smacked of bad faith. Perhaps he was acting in good faith--but I think that Congress and the American people were skeptical. I sure as heck know I was. He did nothing to demonstrate that he was any different in character or integrity from the guys who got us into this and now want us to bail them out. We now know enough about the integrity of these guys to be skeptical about anything that they touch.

Hank Paulson is not an economist. He has not explained why he believed the blunderbuss bailout was the only option that would work. As the President of BB&T noted in his letter on the bailout, it appears that he knows nothing about commercial banking or exactly how or when the credit problems would trickle down to "Main Street."

Paulson should resign. If the same deal were negotiated with someone other than an old Wall Street crony, I think that many people would look on it differently. But as things stand, I think he is fatally flawed. If he really thinks that a bailout is what is best for the country, then he should resign. And let someone with greater independence from Wall Street come in and study the issue and see if this massive bailout plan is still necessary.

JB:
Well said. I've been trying to explain to my friends and family why -something- must be done but the Paulson plan isn't it, but I haven't been really able to articulate it.

The truth is, I think, that any plan requires lots of discretion--535 Senators and Representatives can't identify what should be bought and for how much, and certainly them trying is a poor use of their time. But who should be trusted with that discretion? Ultimately, not Paulson.

So thanks for a very clear statement of why that is.
9.29.2008 5:41pm
smitty1e:
Resign? We live in an age of Hope and Change, not an Age of Responsibility.
Wonderfully retro sentiment, yours.
9.29.2008 5:41pm
Tyrone Slothrop (mail) (www):
Bush knows Paulson. Is there anyone else who could fill Paulson's shoes who would have the same credibility with the White House? That seems important in a crisis.
9.29.2008 5:44pm
A Law Dawg:
Bush knows Paulson. Is there anyone else who could fill Paulson's shoes who would have the same credibility with the White House?


I'm a Republican, and even I can't see how that's a good argument after the past 8 years. If anything, it's a counter-argument.
9.29.2008 5:46pm
Jimo (mail):
What a brilliant idea!

Today's 700+ point drop is nothing in percentage terms to the 1987 or 1929 crashes. Why not undermine confidence more and leave the Treasury leaderless? Even at the lower base of today's closing level of 10,365, why not double down and see if we can drop that sucker below 9,000 in a single day? Heck, maybe instead of relying up surrogates (Paulson, Petreus, et al.) to do everything in the "unitary executive" maybe W will personally take over the Treasury Secretary function. Or better yet ... appoint Palin!!
9.29.2008 5:47pm
donaldk2 (mail):
The idea that he is bailing out his pals is repugnant.
I have no idea what the merits are. But I have to believe that his proposal was made conscientiously. I must retain belief in the good faith of our public officials.

If you are correct, then all is lost, and I mean all.
9.29.2008 5:48pm
CDU (mail) (www):
If Paulson resigns, who's going to want the job at this point? Lame duck administration, in the middle of a crisis, and the last guy in the job just quit.

If Paulson goes, we'll probably end up with the current Deputy Secretary, Robert Kimmitt, as the acting secretary (he held the job between Snow and Paulson). He seems to suffer from pretty much the same shortcomings you criticize Paulson for: he worked at Lehman Brothers and a Wall Street law firm.
9.29.2008 5:49pm
PC:
Harriet Miers for Treasury Secretary!
9.29.2008 5:49pm
john (mail):
This is unbelievably misguided. People are focused far too much on "Wall Street" and not at all on the credit markets in general. Yes there are some that make a lot of money on the capital markets. Yes some of them are knaves that do not deserve to be rewarded for this. Yes Paulson used to work at Goldman. It does not follow that he is not right.

Last week there were no investment grade issuances. At several points in the past 2 weeks therehas been no commercial paper sold. That means that the best-managed, best capitalized, most-creditworthy companies in America are having difficulty borrowing. If Microsoft and Coca-Cola can't borrow, what does that mean for a small business owner trying to lease a new refrigeration unit for his bodega in the Bronx?

Perhaps Paulson should resign in an attempt to get the process on track, although no fault at all should be attributed to him. Any fault is entirely due to Congress's inability to understand the problem and their unwillingness to attempt to do so. The press, outside of the financial press, doesn't get it either.
9.29.2008 5:53pm
Mohamed:
I think we shouldn't lose sight of the fact that even if Paulson is bailing out his cronies he may also be doing it in the interest of the American people. Paulson knows Wall St., he knows those folks are smart people even though they made stupid choices, and maybe he thinks that if he hits the reset button and gives them another chance to restart the cash machine (in terms of tax revenue) that maybe things will get better. Don't forget that We may end up making money on this deal in the end...
9.29.2008 5:54pm
Somedude127 (mail):
If he resigned, I say we conscript Alan Greenspan.
9.29.2008 5:55pm
Nunzio:
If Ben Bernanke, an economist with apparently no Wall Street ties, is also pushing it, doesn't that give Paulson quite a bit of cover?

And what does Paulson need to know about commercial banking other than the fact that commercial banks loaned the investment houses quite a lot of the money they used to buy the mortgage-backed bonds, so they'll be neck-deep in this pretty soon as well?
9.29.2008 6:10pm
Dionysius (mail):
The post is right on target. It doesn't matter why Paulson did what he did; it matters that it looks like Paulson represents the "fat cats" against the "little guy". It might be an interesting move to grab a conservative academic economist and hand the ball to that person.
9.29.2008 6:10pm
Curt Fischer:

john: Last week there were no investment grade issuances. At several points in the past 2 weeks therehas been no commercial paper sold. That means that the best-managed, best capitalized, most-creditworthy companies in America are having difficulty borrowing. If Microsoft and Coca-Cola can't borrow, what does that mean for a small business owner trying to lease a new refrigeration unit for his bodega in the Bronx?


John, you sound knowledgeable about credit markets. I have lamented that the poor reporting I have seen on the "credit crisis" has not gone into more details. I myself know little about credit markets, and wish I knew more.

What percentage of "main street" corporate activities are financed by big Wall Street investment houses? What percentage is financed by hedge funds, sovereign wealth funds, certain local and regional banks, and other entities that don't seem quite so in thrall to the current crisis?

How quickly can a monied institution of whatever type apply for and receive any permits needed to finance large-scale corporate projects?

When is someone going to start a "prosper.com" web site for corporate finance?

And, regarding your hypothetical Bronx small businessman, aren't the now thriving regional banks well positioned to make him loans?
9.29.2008 6:11pm
Cactus Jack:
"Hank Paulson is not an economist."

True. And agreed that he and the politicians have each done a terrible job of explaining, in significant detail, what the problem is and how the bailout solves it.

Thing is, I'm not sure this is a job for an economist either. As a Goldman guy, Paulson presumably knows (or knows people who know) the details: what all the many and varied credit markets are, who the players are and how the operate. Plus, as a business guy, he knows how to negotiate. He's got negatives, don't get me wrong. He's the i-banker tendency to set aggressive, unachievable deadlines and his asks in the first draft were offensive.

That said, the economists I've known know the system well, but have generally been short on the day to day details and didn't seem like they'd be much for negotiations. But maybe I just know the wrong economists.

Maybe what the country needs now is a half-man, half-banker, half-economist.
9.29.2008 6:12pm
Order of the Coif:
Paulson is the guy who saved $100 million in capital gains taxes by "allowing" himself to appointed as Treasury Secretary. He does know how to help himself.

At this point no plan drawn up be any Wall Streeter is likely to be trusted. They (the whole bunch of them) have stood by, buying the best Congress in town, while the levee burst. The American public is saying (justifiably so) "let 'em drown."

A new plan that CLEARLY makes Wall Street not only "feel" but "take on" most of the economic pain is needed.
9.29.2008 6:19pm
lostmycookies (mail):

john: Last week there were no investment grade issuances. At several points in the past 2 weeks therehas been no commercial paper sold. That means that the best-managed, best capitalized, most-creditworthy companies in America are having difficulty borrowing. If Microsoft and Coca-Cola can't borrow, what does that mean for a small business owner trying to lease a new refrigeration unit for his bodega in the Bronx?


Who? The ones who save their chips for a rainy day. That's who. Imagine that, the market rewarding those make the right decision (including bodega owners who saved for maintenance and replacement costs, and bankers who refused to buy into the housing bubble) and letting losers reap what they sowed...
9.29.2008 6:21pm
Green:
Well, Paulson can resign and become one of the new financial gurus on the Dartmouth board of trustees.
9.29.2008 6:21pm
Calderon:
Second what Nunzio said. Paulson already had Bernanke, an academic economist with greater independence give his support to the plan. The problems with the bailout are deeper than just Paulson's credibility.

Also, as for bringing Greenspan back, while he did well over the course of his tenure, I believe when we look back on the housing bubble years from now a large degree of blame will rightfully be placed on him for keeping interest rates too low in 2003 and 2004 leading to the housing bubble precipitating the current problems.
9.29.2008 6:23pm
ejo:
that is true. did anyone of the Wall Street biggies say in any forum that we deserve to take a hit? the initial three page plan appears to have numbers plucked out of thin air-that started the whole downward spiral in the debate and was a huge miscalculation. Wall Street, which heard only that it was getting 700 billion, went into a spin when not rewarded for its misconduct.
9.29.2008 6:24pm
Rhode Island Lawyer:
John has hit the nail on the head. Credit has dried up throughout the economy. Banks will be shutting off lines of credit to everyone, since their liquidiy is being squeezed, which will put pressure on solid businesses that rely on these lines as a source of operating capital. Next, home equity lines of credit will be capped - if you need to tap your line to pay your kid's college tuition better do it soon. Those with money to lend are sitting on the sidelines with their funds stashed in short term treasury bills, getting less than 1% return, waiting to see how this all plays out. It may get ugly.
9.29.2008 6:27pm
Anderson (mail):
If he resigned, I say we conscript Alan Greenspan.

Good lord.
9.29.2008 6:28pm
c.gray (mail):
What would be the point of Paulson resigning now? He's going to be gone in 90 days anyway, and would probably wind up doing exactly the same caretaker roll if he made a formal resignation. It'd be a stunt.
9.29.2008 6:30pm
Randy R. (mail):
Finally, an issue we can all agree on!

What's even more strange is that the figure of $700 billion was pulled out from a hat. No one knows if it's enough, or not enough, or if it will solve the problem. Heck, let's just throw money at the problem, and maybe it will go away!

I think Paulson is in such a bubble that he really severly underestimated the hatred towards the huge bonuses these fat cats have racked up over the years. Perhaps if he spent just one day out in fly over country, he would have realized that his plan was DOA. And he wants no review and full immunity for himself and all his buddies!
9.29.2008 6:31pm
john (mail):
Here are three articles on the credit crisis and bailout which I consider to be reasonably well-written, clear-headed and fair:

economist

pearlstine

norris

http://www.nytimes.com/2008/09/26/business/26norris.html
9.29.2008 6:35pm
wooga:
700 billion?
Why not just let the federal government buy $100,000 stakes in 7 million homes? That would pretty much end all foreclosures in the US, and give the mortgage holders a ton of cash to restore "liquidity faith" or whatever.

That seems like a solution that Tom Coburn and Barney Frank could both agree on.
9.29.2008 6:47pm
wooga:
Also, having 7 million homes partially owned by the feds would allow the federal government to artificially manipulate home prices (up and down) to their hearts content.
9.29.2008 6:48pm
Silly:

Paulson should resign. If the same deal were negotiated with someone other than an old Wall Street crony, I think that many people would look on it differently.


If Paulson resigns, then what? You understand that in the middle of a crisis isn't the time to try to get a new secretary confirmed, right? And you understand that means that Treasury will be leaderless, with the next-in-line being other Wall Street types, right? Should they all resign, and keep resigning? Until what? Some middle-manager is left as acting secretary, who was hired for their skill managing people, not money?

Look, I can see you're frustrated. We all are. But calling for the head of someone in this instance isn't good for anything (unless it helps you sleep to call for it, then I can see it). Once we get through the waters, no matter how he performs, then he can resign for this happening under his nose.
9.29.2008 6:50pm
Hoosier:
What's John Connally up to these days?
9.29.2008 6:56pm
SenatorX (mail):
I was kind of getting worried he might retire "the hard way" with a heart attack. Did anyone read the thing where he had shortness of breath yesteday and had to be helped to walk? I'm no fan of Hanky Panky but I don't want him to die from the stress/work either. It's questionable if he will make it to the end of his job. Hank, you can't take it with you!
9.29.2008 7:02pm
Tom952 (mail):
Isn't any proposal that does not firm up real estate prices just a stopgap measure? If real estate values continue to fall, all mortgage securities will continue to lose value leading to another crisis.
9.29.2008 7:14pm
JunkYardLawDog (mail):
Totally agree. Paulson should go and so should Chris Cox.

Says the "Dog"
9.29.2008 7:21pm
24AheadDotCom (mail) (www):
Paulson's acting job on 60 Minutes didn't exactly fill me with confidence that this isn't a scam.

While I'm sure many would disagree, someone who might inspire more confidence would be Mitt Romney.
9.29.2008 7:28pm
JB:
Those who are saying Paulson should stay miss the degree to which trust is, from top to bottom, the problem with this crisis.

The crisis began with a price failure--no one in banking trusts the qualities of other bankers' assets enough to lend to them. Paulson, not trusting Congress to let him work without destructive political interference, suggested a plan that amounted to "Give me $700 billion with no oversight and trust me to solve the problem." Since no one in the country trusts Paulson, and since his plan had nothing that convinced homeowners there was anything in it for him, any plan that involved trusting him failed.

Personally, I agree with Wooga's approach. If the mortgages are good, the securities are good; if the securities are good, the banks can lend to each other and the crisis is averted. If the mortgages are bad, then someone's soaked for a lot of money.

In any event, we'll see what happens. The lower the Dow falls, the more likely we get some kind of bailout. The less it falls, the more likely the crisis resolves itself and the bailout is revealed as a Wall Street money grab.
9.29.2008 7:29pm
CDU (mail) (www):
If real estate values continue to fall, all mortgage securities will continue to lose value leading to another crisis.


Not if the federal government owns the mortgage securities that are loosing value, which was the plan for the bailout.
9.29.2008 7:37pm
LM (mail):
Paulson's biggest mistake was not bringing in Luntz to stop him from floating anything that could be associated with the word "bailout."
9.29.2008 7:46pm
Harry Helms:
"Bush knows Paulson. Is there anyone else who could fill Paulson's shoes who would have the same credibility with the White House? That seems important in a crisis."

And that, in a nutshell, is Bush's greatest failing as an executive. His biggest criterion in selecting someone for a position seems to be how long they have known the Bush family, not whether they know what they're doing. Like his father, W is oblivious to the damage he's done to his administration by relying so much "the right short of people."
9.29.2008 7:52pm
hey (mail):
This is the absolute worst thing ever published on VC, as a post or a comment. One of the best and most experienced people in the world should resign and then someone unknown schlub with no idea WTF is going on should take over? Because it's possible to nominate and confirm anyone in the last 120 day of an administration. Because we can wait months to ge a new person to run Treasury?

I'm appalled at the rampant know-nothingism amongst previously intelligent people. You're proud of your ignorance and you demand someone ignorant implement a crisis solution.

This isn't a bailout, and the $700B isn't the cost, but rather the size of a credit facility. The whole issue is a bank run, but is bing abused by so many with a hatred of the financial system (and perhaps law profs envious of private sector salaries despite their professed politics). The Wall Street people weren't abusing the system, the abuses happened on Main Street (mortgage brokers and liar-loan speculators) and in Washington (corrupt Senators blocking reform of donors and collecting cheap mortgages from fraudsters, Dem staffers scooping millions out of GSEs as they set them up to crash).

This truly is the Great Depression 2 (this time it's personal) and politicians and wonks are making the same bloody mistakes. IF you can't explain what a CDO is, you need to STFU and stop trying to get involved. The adults are busy doing important work.
9.29.2008 7:54pm
john (mail):
"Not if the federal government owns the mortgage securities that are loosing value, which was the plan for the bailout."

Not true. The plan was not necessarily for the government to buy them. It was to act principally as a price mechanism. It could offer to buy, but institutions would not be obligated to sell. The idea would be that by acting as a buyer of last resort in certain circumstances market values could be set that would allow holders of assets and potential investors a basis on which they could base their decisions to sell, buy or hold assets. The idea would be to stabilize prices. If the government were to offer 15 cents on the dollar for a set of securities, a holder could decide to sell, or it could decide to hold based on its judgment that the assets were worth more. It might also be less incented to sell now because it could gain some confidence that it would not be likely to have to mark the securities down further in the future due to mark to market accounting. Also, a third party non-governmental investor could theoretically offer more than the 15 cents the government was offering. I would expect that the treasury would not try to spend anything close to the full $700 billion if they could avoid it. That said, the reason behind the number is to calm markets and let them know that the treasury has enough dry powder to make a difference.

I agree that in the vast majority of circumstances this is a business that the government should not be in. However, circumstances are different here. We should evaluate the Paulson plan on its merits and not disparage the man (or the plan) unfairly.
9.29.2008 7:59pm
guy in the veal calf office (mail) (www):
If Microsoft and Coca-Cola can't borrow, what does that mean for a small business owner trying to lease a new refrigeration unit for his bodega in the Bronx?

Absolutely nothing. Its a completely different market. Go ahead and buy a refrigerator at Sears.
9.29.2008 8:16pm
Pippin:
Many, many companies access credit lines to fund payroll. No access, no pay for employees.
9.29.2008 8:36pm
Bill McGonigle (www):
If he resigned, I say we conscript Alan Greenspan.

Hear, hear. I have a driveway that's washed out, and Greenspan needs to start paying his due.

Back on topic, Paulson also stands a chance of going back to Wall Street when he's done. Compound interest.
9.29.2008 9:12pm
Bill McGonigle (www):
... unless of course they try to bring him up to Hanover for an open job.
9.29.2008 9:14pm
Francis Marion (mail):
"Hey" is dead right.
9.29.2008 9:21pm
MarkField (mail):

What's John Connally up to these days?


Doesn't he have a permanent role on Six Feet Under?
9.29.2008 9:22pm
FE (mail):
I do not doubt Henry Paulson's personal integrity. But Todd Zywicki is basically right: the plan failed because the little people who live on Main Street perceive it as a bailout for Paulson's friends on Wall Street. The little people may be wrong, but there's nothing Paulson can do to change their minds.

The story might be different if, going several years back, Paulson and his friends on Wall Street had built trust with the little people Main Street. But Paulson's friends could not foresee a day when they would need a favor from the little people, so they left the little people to fend for themselves.

So the House voted down the bailout because too many members received too many angry phone calls from the little people. Maybe some of those little people used to work full time for Home Depot, until Bob Nardelli cut their hours in the name of "competitiveness," before he took $200 million as his reward for failure. Paulson and his friends on Wall Street cheered on. Free markets and all that.

In the end, all Paulson could say to the little people was, "Trust me." Too late.
9.29.2008 9:28pm
Francis Marion (mail):
Only Ron Paul can save this country.
9.29.2008 10:15pm
EIDE_Interface (mail):
Fire Paulson. Impeach Bush for sheer incompetence and fear-mongering. Impeach Cheney while we're at it. I've had it with these crooks. Let the free market decide things! I don't care if we get 15% unemployment for a while. Creative destruction people!
9.29.2008 11:24pm
Alexia:
Mike Rogers (R-MI) said essentially the same thing today. Said that Paulson was really nothing more than a day trader. :)
9.29.2008 11:52pm
Pitcherbill (mail):
By this analysis, Ms Pelosi and the entire House leadership so also resign.
9.30.2008 1:13am
TCO:
The bailouts that have already been done are completely unconscionable (and WAMU was a bailout as well...govvt is swalloing liabilities instead of letting the debtors take losses.)

Paulson is a bad guy. We need him out of there. Put someone like O'Neal who let Enron crash in instead.
9.30.2008 1:26am
PDXLawyer (mail):
There may be some wisdom in the common folk's distrust of Sec'y. Paulson. I believe that he is both very smart and very knowledgable about the current structure of the finance industry. But what we need is someone who can identify and fix the parts of the system that have become unstable, not somebody who is skilled at maneuvering within the system as already set up. We need an architect, not a carpenter.

Everyone seems to agree that the problem is that the "shadow banking" system is de-leveraging from its prior, very high, levels. In the process, it is decreasing the credit supply. The present thinking in the Paulson/Bernanke camp seems to be that the solution is to stop the deleveraging, and to try to keep the shadow banking system operating at high leverage.

This is trying to change the real economy so that Wall Street doesn't have to figure out how to change its financial structure. There are tens of thousands of really bright lawyers and bankers in New York. And, there are lots of very smart, very rich people around the world who are not mainly Wall Street players. Give 'em a few weeks and they will figure out how make credit available to truly solvent borrowers.
9.30.2008 2:04am
LM (mail):
TCO:

Put someone like O'Neal who let Enron crash in instead.

If you think they'd bring back the guy who was fired for saying the Emperor's got no clothes, so he can tell Wall Street there's no free lunch, I have some mortgage backed securities to sell you.
9.30.2008 2:05am
Tom Hanna (www):
You don't change horses in midstream. If things are as bad as every pundit in the known universe is saying, this isn't the time to be calling for resignations on the basis of anything less than actual misconduct.
9.30.2008 6:22am
michelle (mail):
let's not forget Gillette......and the Sweetheart Paulson Deal...
My my what short little memories we all have. But not those of us who live in the shrinking state of Mass. Thanks to the fabulous negotiating skills of Hank Paulson via 2005 with Goldman Sachs "fairness opinion" in evaluating, or should I say "under-evaluating….the stock of the Gillette and P&G Deal...Yes, that "sweetheart Deal" to quote Warren Buffett. thousands of Mass. Jobs where lost, shareholders got screwed, employees with pension plans too.... and big CEO bonus were negotiated on that buy-out. What tax payers should be asking is why do we trust this guy? Paulson......should be fired......
Ask yourself taxpayers what is really going on here with this Paulson deal….maybe just a tiny bit of a conflict of interest......

Just the facts…..Goldman Sachs (headed by our CEO at the time..Happy Hank) values Gillette stock much lower during the P&G acquistion of Gillette....super lower than guess who….Lehman….raising big questions as to the reasons why? …..no coincidence Lehaman comes out a little short on the Paulson money train….still touchy over that one HAnk....they were the honest guys on that one.....
Who got screwed on that deal. State Of MA. lossing hundreds of jobs, tax rev's. and oh yes the little guy, stockholders much of who's employee retirement was tied to it... Big thanks to Hank on that deal... State of MA. thanks you, oh you too Barney Fife...

Warren Buffett called it the "sweetheart deal" but not for Gillette……

big CEO pay outs like that of fired CEO Kilts his package plus an extra over 11 million for staying on one more year...to be exact who incidentally help negotiate the deal carving himself a big piece of the pie…. No wonder Hank is not caving in on that one...

Who else got a big chunk of that rich pie…..Hank of course netting a salary of 37 million that year compared to the following year at 16 million….quite a difference in pay wouldn't you say....


One last thing small point where did Hank get that 700 billion price to tag the taxpayers, Well that was Hanks estimated net worth…in millions….in 2007...yes he was estimated to be worth 700 million…wonder how Hanks money is invested now and how he is feeling over his little shrinking pot Wake up America....This guy is a real parasite... ….Thank the Republican newbies…they are so dumb they happen to get it right this time..……..HANK....RESIGN.....
9.30.2008 6:38am
Clayton E. Cramer (mail) (www):
I don't entirely understand all of what is going on with credit markets--but I do know that if the government is going to bail out lenders, I expect the lenders to give up not just bad mortgages but good ones as well. If the taxpayers get the costs, they should get the benefits as well. And you can be sure that the Democrats (the party of the corporate fat cats) will never go along with that.

More importantly: until the government stops pressuring lenders to make subprime mortgages in the interests of racial equality, there is no reason to do a bailout, because that is at the heart of what caused this disaster. A bailout that leaves this problem in place means that another bailout will be required.

I'm not sure where this credit shortage claim is really coming from. I'm selling my spare house at the moment (at a rather disappointing price), and the buyer isn't having a problem getting a mortgage. Of course, he's not subprime. He has $70K to put down on a $260K house, and he has a job with HP. My realtor tells me that while mortgage lending is tighter than it was, buyers with good credit histories and a down payment are getting loans.
10.1.2008 10:35am