Paulson’s $700 billion boondoggle

How did Treasury Secretary Paulson figure out that recapitalizing the banking system would cost $700 billion? Or did he just estimate the amount of money that could be loaded on the back of the Treasury’s flatbed truck when it sputters off to shower his buddies at G-Sax with freshly minted greenbacks? The point is that Paulson’s calculations were not assisted by any economists at all, and they cannot be trusted. It is a purely arbitrary, “back of the envelope” type figuring.

According to Bloomberg: Swiss investor Marc Faber, known for a long track record of good calls, believes the damage may come to $5 trillion: “Marc Faber, managing director of Marc Faber Ltd. in Hong Kong, said the U.S. government’s rescue package for the financial system may require as much as $5 trillion, seven times the amount Treasury Secretary Henry Paulson has requested . . .

“’The $700 billion is really nothing,’ Faber said in a television interview. ‘The treasury is just giving out this figure when the end figure may be $5 trillion.’” (Bloomberg News)

Most people who follow these matters would trust Faber’s assessment way over Paulson’s. In his latest blog entry, economist Nouriel Roubini said that “no professional economist was consulted by Congress or invited to present his/her views at the congressional hearings on the Treasury rescue plan.”

Roubini added, “The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.”

Roubini is right on all counts. So far, more than a 190 prominent economists have urged Congress not to pass the $700 bailout bill. There is growing consensus that the so-called “rescue package” does not address the central economic issues and has the potential to make a bad situation even worse.

Banker’s coup?

Paulson’s impressive interest conflicts

Source: OnlineJournal.com

The actions of Treasury Secretary Paulson since the first outbreak of the financial tsunami in August of 2007 have been directed with one apparent guiding aim -- to save the obscene gains of his Wall Street and banking cronies. In the process he has taken steps which suggest more than a mild possible conflict of interest. Paulson, who had been chairman of Goldman Sachs from the time of the 1999 Glass-Steagall repeal to his appointment in 2006 as Treasury head, had been one of the most involved Wall Street players in the new securitization revolution of Greenspan. Under Paulson, according to City of London financial sources familiar with it, Goldman Sachs drove the securitization revolution with an endless rollout of new products. As one London banker put it in an off-record remark to this author, “Paulson’s really the guilty one in this securitization mess but no one brings it up because of the extraordinary influence Goldmans seems to have, a bit like the Knights Templar order of old.” Naming Goldman chairman Henry Paulson to head the government agency now responsible for cleaning up the mess left by Wall Street greed and stupidity was tantamount to putting the wolf in charge of guarding the hen house as some see it.

Paulson showed where his interests lay. He is by law the chairman of something called the President’s Working Group on Financial Markets, the government’s financial crisis management group that also includes Fed Chairman Bernanke, the Securities & Exchange Commission head, and the head of the Commodity Futures Exchange Commission (CFTC). That is the reason Paulson, the ex-Wall Street Goldman Sachs banker, is always the person announcing new emergency decisions since last August.

Two weeks ago, for example, Paulson announced the government would make an unprecedented $85 billion nationalization rescue of an insurance group, AIG. True, AIG is the world’s largest insurer and has a huge global involvement in financial markets.

AIG’s former chairman, Hank Greenberg -- a close friend of Henry Kissinger, a former sirector of the New York Fed, former vice chairman of the elite New York Council on Foreign Relations and of David Rockefeller’s select Trilateral Commission, trustee emeritus of Rockefeller University -- was for more than 40 years chairman of AIG. His AIG career ended in March 2005 when AIG’s board forced Greenberg to resign from his post as chairman and CEO under the shadow of criticism and legal action for cooking the books, in a prosecution brought by Eliot Spitzer, then Attorney General of New York State. [1]

In mid September, in between other dramatic failures, including Lehman Bros. and the bailout of Fannie Mae and Freddie Mac, Paulson announced that the US Treasury, as agent for the United States government, was to bail out the troubled AIG with a staggering $85 billion. The announcement came a day after Paulson announced the government would let the 150-year old investment bank, Lehman Brothers, fail without government aid. Why AIG and not Lehman?

What has since emerged are details of a meeting at the New York Federal Reserve bank chaired by Paulson, to discuss the risk of letting AIG fail. There was only one active Wall Street banker present at the meeting -- Lloyd Blankfein, chairman of Paulson’s old firm, Goldman Sachs.

Blankfein later claimed he was present at the fateful meeting not to protect his firm’s interests but to ‘safeguard the entire financial system.’ His claim was put in doubt when it later emerged that Blankfein’s Goldman Sachs was AIG’s largest trading partner and stood to lose $20 billion in a bankruptcy of AIG. [2] Were Goldman Sachs to go down with AIG, Secretary Paulson would have reportedly lost $700 million in Goldman Sachs stock options he had, an interesting fact.

That is a tiny glimpse into the man who crafted the largest bailout in US or world financial history some days ago, the failed TARP -- Troubled Asset Relief Program -- a proposed $700 billion financial stabilization scheme which, in Paulson’s original version would have allowed him or his Treasury successor to use $700 billion, with no oversight or accountability, to buy bad or worthless assets from financial institutions he deems worthy of help.

As respected economist, Nouriel Roubini pointed out, in almost every case of recent banking crises in which emergency action was needed to save the financial system, the most economical (to taxpayers) method was to have the government, as in Sweden or Finland in the early 1990s, nationalize the troubled banks, take over their management and assets, and inject public capital to recapitalize the banks to allow them to continue doing business, lending to normal clients. In the Swedish case, the government held the assets, mostly real estate, for several years until the economy again improved at which point they could sell them onto the market and the banks could gradually buy the state ownership shares back into private hands. In the Swedish case, the end cost to taxpayers was estimated to have been almost nil. The state never did as Paulson proposed, to buy the toxic waste of the banks, leaving them to get off free from their follies of securitization and speculation abuses. [3]

Paulson’s plan, the one essentially rejected on September 29 by the House of Representatives, would have done nothing to recapitalize the troubled banks. That recapitalization could cost an added hundreds of billions on top of the $700 billion toxic waste disposal.

Serious bankers I know who went through the Scandinavian crisis of the 1990s are scratching their heads trying to imagine how crass the Paulson TARP scheme is. That politically obvious bailout of Wall Street by the taxpayers, what some refer to as ‘Bankers’ Socialism -- socialize the costs of failure onto the public, and privatize the profits to the bankers -- is a major factor behind the defeat of the TARP compromise version. Under Paulson’s scheme, which seems likely to get very little alteration by Congress in coming days, the Treasury secretary, initially Paulson, would have sole discretion, with minimal oversight, to use a $700 billion checkbook, courtesy of taxpayer generosity, to buy various Asset Backed Securities held not only by Federal Reserve regulated banks like JP Morgan Chase or Citicorp, or Goldman Sachs, but also by hedge funds, by insurance companies and whomever he decides needs a boost.

‘The Paulson plan is unworkable,’ noted Stephen Lewis, chief economist with the London-based Monument Securities. ‘No one has an idea how to set a price on these toxic securities held by the banks, and in the present market a lot of them likely would be marked to zero.’ Lewis like many others who have examined the example of the temporary Swedish bank nationalization, called Securum, during their real estate collapse in the early 1990s, stresses that ultimately only a similar solution would be able to resolve the crisis with a minimum of taxpayer cost. ‘The US authorities know very well the Swedish model, but it seems in the US nationalization is a dirty word.’

But there is an added element. John McCain decided to boost his flagging presidential campaign by trying to portray himself as a ‘political Maverick,’ one who opposes the powerful Washington vested interests. He flew into Washington days before the TARP was to be approved by a panicked Congress and conspired with a handful of influential Republican Senate friends, including Banking Committee ranking member, Senator Shelby, to oppose the Paulson TARP. What emerged, with McCain’s backing, was a political power play that may well have brought the United States financial system to its knees, and McCain’s presidential hopes with it.

Power and greed are the only visible juice driving the decision-makers in Washington today. Acting in the long-range US national interest seems to have gotten lost in the scramble. As I wrote last November in my Financial Tsunami five part series on the background to today’s crisis, all this could be foreseen. It is what happens when elected governments abandon their public trust or responsibility to a cabal of private financial interests. It will be interesting to see if anyone in Washington realizes that lesson.

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