THE BLOG
11/30/2008 05:12 am ET Updated May 25, 2011

Paulson Deal Cheats American Taxpayers

Are you feeling depressed, dogged by daily bad news about the effects of reckless, unregulated Wall Street speculators sinking the economy? Well, U.S. Treasury Secretary Hank Paulson has decided to take this opportunity to kick you while you're down. And use your money to do it.

Paulson cheated American taxpayers with his initial expenditure from that $700 billion Wall Street bailout fund -- the $125 billion he gave to nine financial institutions.

That's right. He paid twice what the securities were worth. That means he gave the CEOs and stockholders of these firms a $62.5 billion gift. From taxpayers.

Now Paulson is no rube. He's a former Goldman Sachs CEO, who has surrounded himself with former Goldman Sachs executives for advice.

Oh, and by the way, one of the nine firms that received this gift from American taxpayers is Goldman Sachs.

You can find the financial analysis of Paulson's deal here, on the USW web site.

I've written Paulson to demand an explanation for his profligate ways with taxpayer dollars. I'm copying it here to encourage you to write him as well. We need to stop him from spending the rest of the money as if he were still a Wall Street speculator.

October 28, 2008
Henry M. Paulson, Jr.
Secretary of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Dear Secretary Paulson,

While I am sure that you face no shortage of advice regarding the crisis that continues to engulf the world's capital markets, I did want to share with you some questions and concerns regarding your decision to invest $125 billion of the taxpayers' money into nine financial institutions, including the securities firm which until recently you headed, Goldman Sachs.
While the media was filled with the usual breathless "behind-the-scenes" reports of your "High Noon" bargaining, what seems to have escaped their notice was your decision, on behalf of the taxpayers, to pay roughly twice as much as you needed to for the securities that you purchased.

To me, at least, this is far more important than whether you gave the assembled CEOs two hours, two weeks or two minutes to sign up; whether, as the New York Times helpfully tells us, you have seen Butch Cassidy and the Sundance Kid; whether you have worked long hours in the last few months; or what brand of cell phone you use.
While Wells Fargo Chairman Kovacevich, who was forced to get by on only $300 million over the past ten years, may or may not have actually pretended to resist the deal, if he had in fact turned you down, he should have been fired, given the extraordinary deal he was being offered.

I have enclosed with this letter a copy of the analysis that we prepared which values the investment of the taxpayers' money in Goldman Sachs at only 50% of what was actually paid. Perhaps one of your former colleagues at Goldman could take a minute away from their busy day shorting mortgages to see if we are correct.

Mr. Secretary, this analysis is not rocket science. Just twenty days before Goldman announced that it would "accept" the Treasury's investment, Warren Buffett invested $5 billion into Goldman Sachs and acquired the very same type of security -- preferred stock -- with the very same form of "upside" -- warrants to purchase common stock. For some reason, however, per dollar invested, Mr. Buffett received at least seven and perhaps up to fourteen times more warrants than the Treasury did and his warrants have more favorable terms. In addition, Mr. Buffett's preferred stock has a higher dividend rate and can only be bought away from him at a premium, while the Treasury's investment of taxpayers' money pays a lower dividend and can be repurchased at par.

Now I know that you have a lot on your plate, but I am sure that someone at the Treasury saw the terms of Buffett's investment. In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal -- 50% invested and 50% as a gift -- is quite consistent with the Republican version of the "spread-the-wealth-around" philosophy that seems so much in vogue.

If the result of our analysis is applied to the deals that you made at the other eight institutions -- which on average most would view as being less well positioned than Goldman and therefore requiring an even greater rate of return -- you paid $125 billion for securities for which a disinterested party would have paid $62.5 billion. This means that you gifted the other $62.5 billion to the shareholders of these nine institutions.

This is no different than if you paid me $10,000 for a car for which no one else would pay more than $5,000. You bought it for $5,000 and gifted me the other $5,000. In my world such gifts are rarely offered to working people.

It's hard to list all of the ways in which this is disturbing, but let me note just a few:

• If this deal is the model for how you intend to spend the whole $700 billion that you got from the Congress, then it would appear that you intend to reward the institutions that have driven our nation, and it now appears the whole world, into its most serious economic crisis in 75 years with a gift of $350 billion from the American taxpayers, who have watched 760,000 of their jobs disappear over just the past nine months.

• The recipients of the first wave of gift-giving include Goldman Sachs. It has been widely reported that you have surrounded yourself with former Goldman employees as well as individuals from other Wall Street firms. Yet it has never been revealed whether in fact you and they have fully divested yourselves of your Wall Street holdings. Doesn't it seem just a wee-bit of a conflict of interest for those setting the price of the investment to be either so directly linked to the firms receiving the investments or, even worse, direct beneficiaries of the decision to overpay with taxpayer money?

• Your investments do nothing to deal with the causes of the current crisis. Now that even Chairman Greenspan has discovered a "flaw" in his theories, wouldn't it make sense to have some reason to believe that the recipients of this government largesse won't just take the money and do it all again? Perhaps there is some reason I do not understand that you have seemingly handed this chicken coop back to the very same foxes who have been pillaging it for the last two decades?

• It has been reported in the media that these firms have no intention of using this money for its intended purpose. Don't we deserve a commitment that the money will in fact be used for either loans to the companies which are groaning under the weight of the credit crisis and being forced to shed tens of thousands of more jobs or to help the millions of Americans struggling with their troubled mortgages? Does it really seem too much to demand that we get a commitment that our gifts to these firms be used to help revive the economy that they have driven into the ditch?

• Your terms also undercut the more stringent restrictions that the Brits imposed, thus making it clear that not only are you fronting for American wastrels, but European ones as well.

Now I do not doubt for a minute that the irresponsible and fraudulent actions of Wall Street have indeed put the world financial system and now the real economy at grave risk. And I also do not doubt that the literally hundreds of billions of dollars of undeserved bonuses ($38 billion in 2007 alone), reckless speculating and dividends to shareholders have left many of these institutions woefully under-capitalized and in need of new equity dollars. Where I get a little lost is why you think that the system or the American taxpayer is better off if the government gets half as much for its investment as Mr. Buffett did.

Let's agree that America's nine largest banks need $125 billion of new money and let's further agree that no one else, not even Warren Buffett, has that kind of money lying around. That still does not explain why our $125 billion should buy us securities worth half of what we paid for them. Nor does it explain why the nearly $25 billion per year that the firms pay out in dividends to their shareholders should continue. At current levels, dividends to shareholders will distribute all of our money that you invested in just five years.

Secretary Paulson, out in the real economy, the unbridled pursuit of greed that you and your friends on Wall Street have celebrated as a national religion has taken a terrible toll on ordinary Americans. Jobs with stagnant real wages have now given way to massive lay-offs, home foreclosures and real suffering.

Out in the real economy, we need to once and for all bury the philosophy that worships only business, free markets, deregulation and free trade, and replace it with an economic program that restores the balance of power between workers and business, rebuilds the middle class and curbs corporate excesses.

Out in the real economy, we need our government to invest in creating sustainable shared prosperity -- not play Santa Claus to the scoundrels who have laid waste to the American Dream.

I eagerly await your response.

Sincerely,
Leo W. Gerard
International President