When is a bail out a Swindle?

from The Nation

http://www.thenation.com/doc/20081110/greider2

Paulson's Swindle Revealed
By William Greider

October 29, 2008

The swindle of American taxpayers is proceeding more or less in broad
daylight, as the unwitting voters are preoccupied with the national
election. Treasury Secretary Hank Paulson agreed to invest $125
billion in the nine largest banks, including $10 billion for Goldman
Sachs, his old firm. But, if you look more closely at Paulson's
transaction, the taxpayers were taken for a ride--a very expensive
ride. They paid $125 billion for bank stock that a private investor
could purchase for $62.5 billion. That means half of the public's
money was a straight-out gift to Wall Street, for which taxpayers got
nothing in return.

These are dynamite facts that demand immediate action to halt the
bailout deal and correct its giveaway terms. Stop payment on the
Treasury checks before the bankers can cash them. Open an immediate
Congressional investigation into how Paulson and his staff determined
such a sweetheart deal for leading players in the financial sector and
for their own former employer. Paulson's bailout staff is heavily
populated with Goldman Sachs veterans and individuals from other Wall
Street firms. Yet we do not know whether these financiers have fully
divested their own Wall Street holdings. Were they perhaps enriching
themselves as they engineered this generous distribution of public
wealth to embattled private banks and their shareholders?

Leo W. Gerard, president of the United Steelworkers, raised these
explosive questions in a stinging letter sent to Paulson this week.
The union did what any private investor would do. Its finance experts
vetted the terms of the bailout investment and calculated the real
value of what Treasury bought with the public's money. In the case of
Goldman Sachs, the analysis could conveniently rely on a comparable
sale twenty days earlier. Billionaire Warren Buffett invested $5
billion in Goldman Sachs and bought the same types of
securities--preferred stock and warrants to purchase common stock in
the future. Only Buffett's preferred shares pay a 10 percent dividend,
while the public gets only 5 percent. Dollar for dollar, Buffett
"received at least seven and perhaps up to 14 times more warrants than
Treasury did and his warrants have more favorable terms," Gerard
pointed out.

"I am sure that someone at Treasury saw the terms of Buffett's
investment," the union president wrote. "In fact, my suspicion is that
you studied it pretty closely and knew exactly what you were doing.
The 50-50 deal--50 percent invested and 50 percent as a gift--is quite
consistent with the Republican version of spread-the-wealth-around
philosophy."

The Steelworkers' close analysis was done by Ron W. Bloom, director of
the union's corporate research and a Wall Street veteran himself who
worked at Larzard Freres, the investment house. Bloom applied standard
valuation techniques to establish the market price Buffett paid per
share compared to Treasury's price. "The analysis is based on the
assumption that Warren Buffett is an intelligent third party investor
who paid no more for his investment than he had to," Bloom's report
explained. "It also assumes that Gold Sachs' job is to protect its
existing shareholders so that it extracted from Mr. Buffett the most
that it could.... Further, it is assumed that Henry Paulson is
likewise an intelligent man and that if he paid any more than Mr.
Buffett--if he paid $1 for something for which Mr. Buffett would have
paid 50 cents--that the difference is a gift from the taxpayers of the
United States to the shareholders of Goldman Sachs."

The implications are staggering. Leo Gerard told Paulson: "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 a$125 billion for securities for
which a disinterested party would have paid $62.5 billion. That means
you gifted the other $62.5 billion to the shareholders of these nine
institutions."

If the same rule of thumb is applied to Paulson's grand $700 billion
bailout fund, Gerard said this will constitute a gift of $350 billion
from the American taxpayers "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."

Is anyone angry? Will anyone look into these very serious accusations?
Congress is off campaigning. The financiers at Treasury probably
assume any public outrage will be lost in the election returns. I hope
they are mistaken.

National affairs correspondent William Greider has been a political
journalist for more than thirty-five years. A former Rolling Stone and
Washington Post editor, he is the author of the national bestsellers
One World, Ready or Not, Secrets of the Temple, Who Will Tell The
People, The Soul of Capitalism (Simon & Schuster) and--due out in
February from Rodale--Come Home, America.
__._,_.___

Who is protecting us?

A Fox to Protect the Henhouse?

Posted on Sep 23, 2008

By Robert Scheer

Does it really matter which party is in charge when it comes to bailing out the Wall Street hustlers whose shenanigans have bankrupted so many ordinary folks? Not if the Democrats roll over and cede power to the former head of Goldman Sachs, the investment bank at the center of our economic meltdown.

What arrogance for Treasury Secretary Henry Paulson—who the year before President Bush appointed him treasury secretary was paid $16.4 million for heading the company that did as much as any to engineer this financial travesty—to now insist we must blindly trust him to solve the problem. Paulson is demanding the power to act with “absolute impunity,” said Sen. Christopher Dodd, D-Conn., who admonished the treasury chief: “After reading this proposal, it is not only our economy that is at risk, Mr. Secretary, but our Constitution as well.”

Clearly, it’s a vast improvement to have Dodd in the chairman’s seat of the Senate Banking Committee, asking the right questions, rather than his predecessor, Texas Republican Phil Gramm, who presided over the committee in the years when the American economy, long the envy of the world, was viciously sabotaged by radical deregulation legislation.

Gramm, whom Sen. John McCain backed for president in 1996, pushed through the financial market deregulation that has brought the American economy to its knees. Maybe this time Congress won’t give the financial moguls everything they want, including a bailout for foreign-owned banks like Swiss-based UBS, where Gramm now hangs out as a very well paid executive when he’s not advising the presidential campaign of McCain, his old buddy and partner in crime. Oops, sorry, no crimes were committed because the deregulation laws Gramm pursued and McCain faithfully supported decriminalized the financial scams that have proved so costly.

Just check out the language of Gramm’s pet projects, the Gramm-Leach-Bliley Act of 1999 and the Commodity Futures Modernization Act of 2000. By preventing mergers between the various branches of Wall Street, the former act reversed basic Depression-era legislation passed to prevent the sort of collapse we are now experiencing. The latter legitimized the “swap agreements” and other “hybrid instruments” that are at the core of the crisis.

The legislation’s “Legal Certainty for Bank Products Act of 2000,” Title IV of the law—a law that Gramm snuck in without hearings hours before the Christmas recess—provided Wall Street with an unbridled license to steal. It made certain that financiers could legally get away with a whole new array of financial rip-off schemes.

One of those provisions, summarized by the heading of Title III, ensured the “Legal Certainty for Swap Agreements,” which successfully divorced the granters of subprime mortgage loans from any obligation to ever collect on them. That provision of Gramm’s law is at the very heart of the problem. But the law went even further, prohibiting regulation of any of the new financial instruments permitted after the financial industry mergers: “No provision of the Commodity Exchange Act shall apply to, and the Commodity Futures Trading Commission shall not exercise regulatory authority with respect to, an identified banking product which had not been commonly offered, entered into, or provided in the United States by any bank on or before December 5, 2000. …”

Even some Republicans on the Senate committee expressed exasperation Monday with the swindles that they had voted for with such enthusiasm in the past, as well as with giving Wall Street yet another blank check. Sen. Jim Bunning, R-Ky., condemned Paulson’s proposal as an effort to “take Wall Street’s pain and spread it to the taxpayers.” He added, “It’s financial socialism and it’s un-American.”

He’s wrong on that last point, for what is proposed is not the nationalization of private corporations but rather a corporate takeover of government. The marriage of highly concentrated corporate power with an authoritarian state that services the politico-economic elite at the expense of the people is more accurately referred to as “financial fascism.” After all, even Hitler never nationalized the Mercedes-Benz company but rather entered into a very profitable partnership with the current car company’s corporate ancestor, which made out quite well until Hitler’s bubble burst.

Smell a rat if Congress approves the Paulson plan without severely curtailing CEO pay and putting a freeze on the mortgage foreclosures that are threatening to destroy the homes of millions of Americans.

Robert Scheer is author of a new book, “The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America.”


Treasury Secretary Henry Paulson briefs reporters on the economy earlier this month at the White House.

A Progressive Journal of News and Opinion. Editor, Robert Scheer. Publisher, Zuade Kaufman.
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