Atlas Shrugged: A Reaction to the Paulson Plan (From A Former Goldman Partner)
In case you missed it, whatever semblance the United States had of being a free market economy has died. Last night Hank Paulson, Secretary of the Treasury, announced a ban on all short selling of US Financial Stocks. The talking heads are heralding this, along with the other measures, as the panacea for the woes in the financial markets, but what this really signals is the beginning of the end of the United States as the financial capital of the world. Should you worry? Yes.
Before I present my argument, let me state this clearly, I have never naked shorted a stock in my life. I have done other things naked, but that is not the subject of this post.
Ayn Rand warned us this would happen. In the classic, Atlas Shrugged, she wrote about governmental powers manipulating markets in order to advance political concerns. Like the book, we do not seem to have the political will to take the correct, but painful, road to recovery. By propping up the financial system with the band-aids of trading restrictions and an explosion of the government's already untenable balance sheet, the necessary adjustments to the financial system are prevented from occurring.
Let's break it down: the investment banks and some insurance companies have invested in long-term risky assets, levered 30 to 1, and funded their purchases in the overnight markets. This is akin to me buying the home I plan to live in for 30 years with only 3% down and funding my purchase with a series of one-day loans rather than taking out a long-term mortgage. Even worse, because I am convinced that real estate prices will continue to go up, I don't bother to get an appraisal or a home inspection. So, when the price of my home goes down and the banks, as financial logic would correctly dictate, will no longer lend, I lose my house and my 3% equity stake. I may think that my home will go back up in value, but at the end of the day, this is irrelevant because my leverage does not enable me to weather the financial storm. Similarly, as the homeowner loses his equity, so should the investment banks. Out of greed, they took on too much risk and funded it too short term. That's their mistake, not the U.S. taxpayer's, and they should not be protected by changing the rules of trading.
The free markets are meant to function as a corrective mechanism for companies, and for governments for that matter too. When a company is doing well, its stock is meant to rise, when it does poorly, the opposite should happen. The change in short selling rules has circumvented that feedback mechanism. Financial companies are now insulated against market discipline. The consequences could be disastrous because the global markets will ultimately provide the discipline that the US authorities lack the courage to administer. The result will be nothing short of the destruction of the US dollar as a reserve currency.
People have thought, and rightly so, that the US was a safe haven to pour money into in difficult times. But, if the rules can be changed so quickly, then who's to say that the authorities do not change them again when they can't fund their ever increasing budget deficit? I shutter to think about capital controls, but this thought now crosses my mind. The US government, long the preserver of capitalism, has just thrown the free markets out the window without a rope. All bets are off and all things are possible.
Are financial institutions sounder today than they were yesterday? Nothing has changed in the amount of unpriceable, illiquid assets that are being held. Nothing has changed in size of the bad commercial real estate loans. Nothing has reduced the counterparty exposure of off-balance sheet, unregulated swaps. What the Fed, Treasury, and SEC should have done was to let the chips fall as they may by allowing healthy financial institutions survive and the weak ones go bankrupt or be forced to merge. They should have let free markets function while protecting the innocent by raising the FDIC limit of deposit insurance from $100,000 to something significantly higher. I commend their protection of money market funds but, at the same time, they must allow the owners of the irresponsible financial institutions, the equity holders, to suffer the consequences of their imprudent practices.
Our strength as a country, has always been to address problems head on, take the medicine no matter how distasteful, and emerge stronger than ever. Sadly, times have changed. Our government has shown that it will change the rules of the markets whenever it seems expedient. Simply put, it will curtail the free markets when it doesn't like what the free markets are saying. In the long run, this will lead to a disaster of unprecedented proportions. It would not be surprising to hear people walking the streets of New York asking "Who is John Galt?"
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I agree with Mr. Zehner and could not disagree more with those who blame the free markets. Reality keeps debunking the myth that regulation can solve problems.
Keep in mind when the eras of regulation and deregulation have been; there is a very clear story. Deregulation came into fashion in the late 70s, when stagflation had made it clear that regulation was a dead-end. The partial deregulation of the late 70s, 80s, and early 90s led to a significant boom time for America. Huge amounts of capital were free to fuel--among other things--the entire rise of the PC and internet. Further, new businesses in areas like communication and air travel were only possible then. Keep that in mind the next time you ride JetBlue.
What we are experiencing now is a result of the unprecedented new government action of the Bush administration. He is not a free-marketer, and those of us who study economics have been angry at him over the prescription drug expansion of Social Security, the Fed action toward interest rates, the Fannie Mae action. What is happening now is Bush's chickens coming to roost.
Those who pine for regulation, the world you asked for is here, and it's going to get worse.
This economic situation was created by Ayn Rand fans who failed, thoroughly, to understand the difference between free markets and competitive markets. Sometimes, free markets produce competition that benefits us all--see the shelves at your local Wal-Mart. But free markets also free people to damage us all.
In sports, we have governing bodies who write the rules and rules officials who enforce them. We paint lines on the ground. When the rules are known, enforced, and followed, we can have competition, often with many competitors. Check out your local PGA Tour event.
Which suggests that there is a role for government, a role that it abandoned with Senator Gramm's ill-fated bill in 1999.
Rand is hardly who I'd rely on at this point.
If we bail out these companies with taxpayer money aren't the executives then answerable to the American people? I say no to all bonuses, no to helping those who were driven by blind greed to make unwise choices and a resounding NO to Secretary Paulson having unfettered control over this process. I am not in support of a bailout unless it is tightly regulated and ordinary citizens receive the same help. They certainly showed no compassion for Americans all over this country who lost their homes, why do these people deserve special treatment now?
I am really beginning to despise the free market fundamentalists who pushed us in this direction for so long that now claim that the free market wasn't "pure" enough to function the way they imagine it should. Isn't it obvious by now to them that we simply have no way of getting to their utopia? Isn't it obvious that the markets correct by failure and sometimes that failure is complete and utter destruction? What will it take to penetrate their thick skulls that free markets simply do not work they way they say they "should".
"I shutter to think about capital controls"
... should be shudder.
In listening to Paulson on the Sunday talk shows, why should I believe that if they seemingly hadn't a clue to this unraveling, that I should say, fine, bail them out. I think the taxpayer deserves an explaination as to why they act as if they know what's going on now, but didn't when the shenanigans that put us in this position was happening. During the heyday of subprime mortgages, the republican congress did nothing to regulate. It's easy to blame the subprime mortgages as the sole culprit, the reason for this bailout, but I foresee the derivatives market as the hidden culprit. The government knows that if hedge fund trading, the renting out of CEO's shares for short selling, the American people would revolt.
Talk, talk, talk, from one of the con-men who has been perpetrating the con.
When you buy stock in order to receive a dividend, you are investing.
When you buy stock in order to sell it for a profit, you are speculating. This is also known as 'gambling'.
We have become a nation of gamblers, led by gamblers. Gambling does not create wealth; it just moves it from one pocket to another. Investing does create wealth.
Wall Street is run by a bunch of gamblers who push money around in circles while they siphon off their percentage.
It's time we put a tax on stock sales, large enough to discourage gambling, and small enough to encourage investing. It's time we became an 'ownership' society, instead of a 'trading' society.
Expand Ayn Rand's financial fascism & picture the future if McCain gets two terms and Palin succeeds him.
-Antisedition Act of 2025 signed by President Palin.
-Supreme Court ends reproductive rights.
-Abortion is a capital crime.
-English is official language. Christianity the preferred religion.
-Social Security, Medicare and Medicaid terminated.
-Dept of Ownership established in John Keating Building.
-28th Amendment abolishes Bill of Rights & removes Presidential term limits.
-Civil Service outsourced to Halliburton-Cheney Corp.
-Darwinian theory excluded from schools in favor of Creationism.
-All born or entering US after 2022 have an ident chip implanted.
-Prayer in schools mandatory.
-School children required to wear uniforms(Brown shirt, khaki pants and band with Old Glory)
-UN expelled from New York.
-FBI, DEA, & ICE combined into Federated State Police.
-6 years compulsury military service.
-National Protection Department (former DoD with $2.1 Trillion annual budget.
-US in 39th year of war against the Moslem Caliphate.
-25th surge recaptures Tehran. We are winning!
Socialism by any other name...is bailouts.
The myth of the "free market economy" has been debunked by reality on a regular basis, roughly every generation. The mythology depends strongly on the idea that "there's a sucker born every minute". We non-elite have no education and so no collective memory, and therefore we are set up and ripped off every generation.
Only the middle-aged and elderly can recall from personal experience the meltdown of the "saving and loan" industry under Ronald Reagan, which directly cost taxpayers $125 billion in those much more vaulable 1980's dollars.
As Ronny would say, "There you go again"!
Thanks, noam4prez. I have been trying to make the same point for two days with regard to this post, but despite being less combative than a 2004 John Kerry campaign adviser, it keeps getting blocked. Reagan (and Ayn Rand) are the progenitors of this mess, not a source of solutions to it.
And while we're remembering past fleeces -- let's remember the Keating 5, and the fact that McCain was a charter member or it.
noam. we haven't had a free market in 95 years. one can not exist within a fiat monetary system, period. we've had corporatism. the left has argued against free markets (regulate) and the right has argued for them (deregulate). these f*cktards are both at the trough of the federal reserve via lobby and wall street and doling out the crumbs to us on loan with high interest.....meanwhile convincing the public that wearing a red or blue cape will save them. they are both two heads of the same vulture....New World Order Globalists.
a little known fact is that only 3 presidents since the invention of the fed have not been CFR supporters. Ike, Kennedy and Reagan. btw, reaganomics would have worked on a gold standard. herbert thwarted reagan's efforts to audit the fed and our gold reserves and his desire to go back on a gold standard. since that didn't happen, his economic policies fully opened up the globalist agenda, something the bushes really want. but, dems on the hill are complicit too. cra with carter, nafta with clinton, dukakis/bush with presidential commission on debates. electing repubs to balance the budget and electing the dems to stop the war. they're CROOKS and DO NOT REPRESENT THE MAJORITY OF VOTERS, whether they are dems, repubs or indies. PERIOD.
Please view:
http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&tID=5&src=atom&atom=todays_events.xml&products_id=281024-1
When Paulson became Sec of the Tres. he did not exactly get rave reviews from anchors at CNBC. Goldman Sachs was getting ready to jettison him because clients of the firm were dissatisfied with his performance, i.e., they got screwed by this guy.
Now we are going to give this guy a free hand in taking care of this "crisis of trust". Looks to me like the solution looks an awful like the problem.
One can only hope that the jerks in D.C. actually read the proposal before they give this guy the go ahead!!
BTW why is the American Public being asked to buy stuff from foreign banks?? I guess they didn't do their due diligence either.
Hope is all we can do, and it doesn't do us one bit of good.
The bushwhacking continues and gives us yet another way the bush presidency has eroded our freedom and our rights. I say let the bastards go broke... we will have over one trillion dollars of debt, I can not even imagine how big a trillion is.. what a legacy. and just who is John Galt?
Q. Can we remain the financial capital if we reverse course and begin recovery of fraudulent, wasted and looted funds from responsible parties and complicit beneficiaries?
(Continued from before)
3. No officer or director of any entity availing itself of the Fund can sell stock in that entity until the Fund recoups 100% of the amounts advanced to that entity, together with interest.
4. No dividends may be paid by any entity availing itself of the Fund until the Fund recoups 100% of the amounts advanced by the Fund to that entity, together with interest.
5. In the event the Fund does not recoup 100% of the amounts advanced to an entity within a reasonable period (i.e. 3-5 years), the Fund will receive warrants equal to 79.9% of equity securities of such entity.
6. All amounts advanced by the Fund to an entity must be placed in a segregated account and LOANED to customers of that entity at commercially reasonable rates and terms. Such amounts can not be used by the entity for trading or investment purposes (remember were doing this for Mainstreet, not to create the next bubble.)
7. The costs of the Fund(i.e. the temporary federal agency) will be ratably paid for by Fund participants by issuance of warrants in the participating entities or by cash payment.
If an entity is not willing to comply with the above, then they are not eligible to participate.
As it appears that the "Fund" is a done deal, it would be great if we came up with a list of conditions to protect the U.S. taxpayer.
These seem like a good starting point for negotiation -- note they imply a greater regulatory role -- in contrast to Ms. Rand's philosophy.
What these do is assure that help is spread beyond the companies that cause the problem -- at root, this is a result of potential bad debt (subprimes and other now risky paper) -- so I believe the solution should go to the root -- the holders of that paper -- not to the banks that multiplied the problem by creating various derivatives out of thin air, then traded them as if they had value.
Since the money does not go to households, therefor households should not pay the tax for this bailout. For the new special assessment tax to pay for this, force the businesses to pay including their profiteers. Tax money should come from an increase in unearned income ... not earned income. It is the only way forward without the "moral hazard" these kleptomaniacs are always talking about.
A friend of mine sent this to me. Maybe we (of ALL political persuasions) should pass this along – to our “e-mail lists” AND to our senators and representatives.
Hundreds of billions of dollars have already walked out the door with the people responsible for this, but we don’t have to set them and ourselves up for them to do it again!
Although the U.S. taxpayers will be paying for the funding of the Toxic Waste Dump Fund, we won't have anybody at the table representing our interests when the bill gets drafted ( however, lobbyists for BAC, Goldman,Morgan,Pimco etc. will all be there). Here are some suggestions for what ought to be in the bill (please add your own):
1. Only U.S. domesticated banks are eligble to participate- - no foreign banks or U.S. subsidiaries or affiliates of foreign banks are eligible. No entity that holds MBS for investment purposes only(i.e. hedge funds and mutual funds) are eligible to participate. (The purpose of the Fund is to free up capital to loan to U.S. borrowers- - not to bail out speculative investors.)
2. Any entity availing itself of the Fund can not pay any officer, director or employee more than the annual pay of the highest paid U.S. government civil servant until the Fund recoups 100% of the amounts advanced by the Fund to that entity, together with interest.
(continued)
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