In Paulson We Trust
Focused on the election? Might be a good idea to watch your pockets at the same time. Here's a glance at what's happening to the Wall Street bailout.
Hank Paulson is, no doubt, the most impressive of the Bush administration cabinet members, (admittedly not a high bar.) He made hundreds of millions on Wall Street, ascending to be the head of Goldman Sachs. Now, as Treasury Secretary, he has brought in colleagues from Goldman to help manage the $700 billion bailout of Wall Street banks that are in trouble, including Goldman, and... Wait one minute. Doesn't something ring false here? Hank Paulson no doubt is honorable, but even he has conflicted interests.
When the bailout bill was before Congress, a number of outside groups -- including the Campaign for America's Future which I head -- for more information go here -- pushed hard for the bailout to be managed by an independent agency, with an empowered board that included independent representatives of workers and consumers. Whatever the form of the bailout -- Paulson's initial demand for $700 billion left that undefined -- it was vital that the transactions be accountable to more than once and future bankers.
And know we know why. After initially proposing to buy toxic securities from the banks at inevitably elevated prices, Paulson sensibly decided to follow the British model and inject capital directly into the major banks in exchange for equity. $125 billion is going into the first nine -- Goldman Sachs, Morgan Stanley, Merrill Lynch, Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Bank of New York Mellon and State Street Corporation. This plus a guarantee of new debt over the next three years is designed to reassure other banks of their solvency, and hopefully get them to resume lending to one another and to businesses.
But Mr. Paulson didn't exactly cut a great deal for taxpayers. He didn't get the terms that Warren Buffett demanded, putting up a lot less cash, to invest in Goldman Sachs. And as the New York Times editorial complained, he made government a passive investor, leaving in place the boards and the directors that led their banks into crippling losses.
He made no demands that the banks begin lending again, instead of just hunkering down, girding for future losses. And remarkably -- unlike the British -- he didn't demand that the banks stop paying out dividends to shareholders. Nor is it clear that bank regulators will perform the triage needed, merging and purging the banks of excess capacity.
That failure is likely to be very costly to taxpayers and very generous to the very folks who led us into this mess. In a New York Times op ed, David S. Scharfstein and. Jeremy C. Stein show that, if paid at the current levels, the dividends will redirect more than $25 billion of the $125 billion to shareholders in the next year alone. One in five dollars will go out the door, and thus be unavailable to plug the large capital hole on the banks' balance sheets.
Will those dividends be paid? Most likely, since the directors and officers of the nine banks are leading shareholders. Scharfstein and Stein estimate their personal take will amount to $250 million in the first year, nothing to sneeze at.
Worse, Paulson does nothing to curb the bloated compensation levels that characterized Wall Street in the days of debauch. Jonathan Weil of Bloomberg News shows the effect. Morgan Stanley, for example, gets $10 billion in taxpayers, dollars. Yet this year it has racked up $10.7 billion in employee compensation -- the vast majority not yet paid out -- even as its stock market value plummeted lost 34.7 billion since the beginning of the company's fiscal year. With taxpayers help, Morgan Stanley may well pay those bonuses.
Weil reports that the " five families of Wall Street" -- Goldman, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Sterns -- lost about $83 billion in stock market value from the start of the 2004 fiscal year. At the same time, they reported about $239 billion of employee compensation. For every dollar of shareholder value destroyed, the employees pocketed almost three. And that was before they got taxpayer money.
No one doubts that the bailout is needed to prop up the global economy. But under Paulson's plan, we may end up, in Weil's words, "throwing money at an industry that pays too many people more than they're worth, to perform services the world has too much of already."
What's needed is an independent agency with summary powers and an independent board, to work with the FDIC and other agencies to sort out the solvent banks from the broke, those that need to be saved from those that should fail. And, as in the Chrysler bailout, a suspension of dividends to shareholders until the government has been repaid.
Now maybe Paulson is making the best choices possible given the extent of the crisis. He's got more information and is far better banker than the rest of us. But with $700 billion in taxpayers' money at stake, surely it would be wise to have an independent board that can hold him accountable.
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You can track Hank and Co's effort here.
www.inpaul
Under the present financial crisis, to nationalize the banks and other such institutions as much of as possible seems quite necessary. Those who loudly protest that nationalization is a great evil, must also believe it is a great evil to nationalize criminals by putting them behind bars where the state regulates their conduct.
Trust Paulson? Not even a little bit.
I thought that a independent broad was part of the bailout package. Please don't tell me that one man is in charge.
Everyone in Washington has a hammer, so the economy must be a nail and if there is a problem they just need to swing their hammers together and harder. The new Congress will be a ship of fools instead of a ship of pirates.
As the CEO of Bank of America alluded to on 60 Minutes, the Merril Lynch traders in NYC are in for a surprise regarding their salaries and commissions. A North Carolina based bank is not going to apy those failed traders what they were getting before.
"In Paulson We Trust" - ABSOLUTELY NOT!
Paulson has acted to protect his long time client China's interest more so than the folks on Main Street.
FOLLOW THE PAPER TRAIL - China had fared better than American under Paulson's stewardship of this bailout.
Secretary of the Treasury Paulson is the proverbial fox guarding the chicken coop. He knows the bubble has burst and is passing out 'chickens to his Wall Street buddies.
He is presiding over an outsized heist of U.S.Treasu
We need a Secretary of the Treasury who will keep the vault locked when distressed fat cats come begging.
If your read the entire article, maybe take a shot at this one, published over a week ago.
http://mon
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"No one doubts that the bailout is needed to prop up the global economy. "
No one?
Some believe that it will not work as intended and it will simply transfer more weath to the ultra-rich.
The trickle-down theory doesn't work because the ultra-wealthy don't want to share their wealth.
The ones who do not have any doubt about the bailout being needed are those who either know that the trickle down theory is going to make them wealthier or those who believe that it will.
We needed to keep lines of credit opened with banks so businesses would survive. Alot of companies rely on lines of credit for payroll until they are paid. One big example is pharmacies and doctors who have to wait for insurance to pay, so they use and pay back lines of credit to keep their business going and pay their employees. If established lines of credit disappeared, that would put alot of people out of work.
And the $700 billion dollar bailout is the only way to keep lines of credit open?
No other options? No other way to do this?
Even Paulson "compromised" on the no-oversig
Why stop at $700 billion? Why not make it an even trillion? Or two?
And let's go back to the statement: "No one doubts that ..."
You want others to be in agreement and to be quiet while what's left of our democracy and way of life is undermined? No thank you.
Is the recent Paulson “bailout/rescue” of Wall St. and Big Finance an example of “privatizing government,” or is it “nationalizing the banking industry”?
When you think about it, doesn’t it put sizeable servings of both on our plate?
Then who is advantaged by such a blurring of these policy approaches? For someone surely had something to gain, judging by Paulson’s peremptory insistence, by the leverage (bordering almost on political blackmail) exerted upon members of Congress to support his plan, and by the non-debatable, non-negotiable nature of that plan both before money was voted for it and afterward, when heads of nine leading banks were gathered and told they HAD to take the taxpayers’ money (even if they didn’t want it, according to Bank of America CEO Ken Lewis).
What kind of America results when boundaries between business interests (accountable to corporate boards more than to modest shareholders) and public interests (theoretically represented by their government) are so effaced and remixed? What’s ahead on this path?
I refuse to buy into the notion that the bailout was necessary. The money would have been better spent if we'd given every American 18 years or older $100,000 to bail themselves out. The money would have been pumped into the economy, homes would have been saved, etc. This was nothing more than a transfer of wealth (the irony). We took money from the masses and gave it to the top 1% that holds the wealth.
Exactly right, blondecuban! I read one bullshit article after another about the situation, and I can't see one solid reason for giving taxpayer money to banks rather than to people.
The whole thing is nothing but a scam. We working people are being robbed right before our eyes. Because of the bailout, I will NEVER vote for Chris Dodd again. I used to have some respect for him, but now I know he's just another member of the 'club.'
If one looks at history, it is easy to see that robbing the people to support the rich elite leads inevitably to revolution.
He is one of them! This whole deal is built on the assumptions that: if we throw enough money at it, it will fix itself, that we will have just a normal recession, that since we are not making the mistakes that Hoover did, there will be no depression, that the political system is stable enough to avoid national or international civil unrest, that the investment will return money in due time. These are some very dangerous assumption, since we are robbing Peter to pay Paul. This is one of the largest wealth redistributions in human history and it defies common wisdom. One of the major risks is the assumption that the credit market will regain trust and then lend again. The problem is that the same pin heads that created the crises are now the ones who are un tangling the mess and manage the companies as they did before. Unless heads start rolling I would not trust those people with my money. Just take an example: Joe declares bankruptcy. His credit rating is in the gutter. For the next seven years, there will be a red flag on his record. Paulson does what he needs to do for his buddies. A great opportunity to save reputation in the world will be missed, while many other nations will setup the new financial order, the US continues over paying the execs through tax money that it does not have until the last bastion comes down: the default on treasury bills.
If we were to acknowledge that we are in the early stages of a depression
If we accepted that the enormous weight of overextended credit makes certain that the stock market bubble cannot be reinflated
If we understood that to deal effectively with the hard times we confront it is necessary to reprioritize the use of scarce U.S. Treasury resources
Then, we would no longer waste such resources on fat-cat bailouts and stimulus packages in the false hope that the ecomic tidal wave now passing over us can be turned back.
Such wasteful use, not only will not avert a depression, but will destroy safety nets that would soften the damage hard times will bring. Fixed income recipients will pay dearly for the inflation that must follow the unfunded Paulson and stimulus giveaways.
The idea that the solution to problems caused by overextension of credit is outsized extension of new credit is preposterous.
It will only enlarge the size of the hole in the bag Main Street will be left holding.
We can survive a depression and emerge with our system intact, but runaway inflation means a system change.
A system change in this instance would result in a military takeover.
Agreed. Takeover is what they plan. (see http://www
There was a very good op-ed in the New York Times today by Margret Atwood which touches on this subject. She points out the differences between what we've come to think of as banking and finance and the origins of the debtor-creditor relationship. Theo highly recommends the piece. Theo remembers a time when the same bank held your car loan or your mortgage for the life of the loan. Theo remembers when the fabric of this financial arrangement began to shred. Theo remembers when the mortgage brokers sold the mortgage on his house to somebody else. It made Theo uneasy and, now, it's plain that Theo was right to feel that way. Theo thinks that Paulson and his cronies are exactly the wrong people to be trying to sort out this wreckage. Not only do they carry the appearance of conflicts across the board, but they comprise and embody and got filthy rich exploiting the very same (faulty) ideology that got us here in the first place. If we're really going to fix this, Theo says we need to listen to people like Ms. Atwood and examine the fundamentals of our approach to money and the relationships it engenders.
Regards,
Theo the theophagous monkey.
See Robert L. Borosage's Profile
No question that the fact that the brokers making mortgages weren't going to hold them -- and thus had no real incentive to make certain that the borrower could actually repay the mortgage -- was central to the debaucheries that took place. Ninja loans, etc. When the Federal Reserve still thought this crisis was simply a subprime loan problem, it issued a quaint regulation requiring that banks make certain that borrowers had the resources to repay the loans they were providing. When that has to be done by regulation, you know we are in trouble.
Point well stated!!
It might be useful to know exactly when this "quaint regulation"-- which would seem redundant if any regulations were being observed-- was promulgated. That might answer the persistent question whether the government's heads of financial oversight, Bernanke and Paulson, were blindsided by the Wall St. run or, instead, rather anticipated such a meltdown (and didn't act forcefully to forestall or contain it).
I don't see the problem with selling the crappy mortgages like they did. I do wonder who in their right mind would buy them.
Stop the dishonesty the problems on Wall Street are not a result of mortgages that were not being paid.
This is a greater problem and to attribute the failures on Wall Street to this matter is disingenious.
Wall Street has been run like a Ponzi scheme and that is the problem. A shell game eventually collapses.
I prefer the word biased over faulty for the ideology since its meaning includes "the prevention of unprejudiced consideration of a question." At least to my mind, the question at hand being the nature of our social contract. I do not want it to be a unilateral contract where I am left with no option but submission.
Here is the contract: you are equal with other citizens before the law.
Excellent point. Thanks.
Thanks for the tip, Theo! Keep posting your good stuff.
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