The AIG Bailout Scandal -Grieder

The AIG Bailout Scandal.

The government’s $182 billion bailout of insurance giant AIG should be seen as the Rosetta Stone for understanding the financial crisis and its costly aftermath. The story of American International Group explains the larger catastrophe not because this was the biggest corporate bailout in history but because AIG’s collapse and subsequent rescue involved nearly all the critical elements, including delusion and deception. These financial dealings are monstrously complicated, but this account focuses on something mere mortals can understand—moral confusion in high places, and the failure of governing institutions to fulfill their obligations to the public.

http://www.thenation.com/article/153929/aig-bailout-scandal?
Excellent article. 

The other plot to Wreck the U.S.

The Other Plot to Wreck America

By FRANK RICH

Published: January 9, 2010

THERE may not be a person in America without a strong opinion about what coulda, shoulda been done to prevent the underwear bomber from boarding that Christmas flight to Detroit. In the years since 9/11, we’ve all become counterterrorists. But in the 16 months since that other calamity in downtown New York — the crash precipitated by the 9/15 failure of Lehman Brothers — most of us are still ignorant about what Warren Buffett called the “financial weapons of mass destruction” that wrecked our economy. Fluent as we are in Al Qaeda and body scanners, when it comes to synthetic C.D.O.’s and credit-default swaps, not so much.

Fred R. Conrad/The New York Times

Frank Rich

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What we don’t know will hurt us, and quite possibly on a more devastating scale than any Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin. Without that reckoning, there will be no public clamor for serious reform of a financial system that was as cunningly breached as airline security at the Amsterdam airport. And without reform, another massive attack on our economic security is guaranteed. Now that it can count on government bailouts, Wall Street has more incentive than ever to pump up its risks — secure that it can keep the bonanzas while we get stuck with the losses.
The window for change is rapidly closing. Health care, Afghanistan and the terrorism panic may have exhausted Washington’s already limited capacity for heavy lifting, especially in an election year. The White House’s chief economic hand, Lawrence Summers, has repeatedlyannounced that “everybody agrees that the recession is over” — which is technically true from an economist’s perspective and certainly true on Wall Street, where bailed-out banks are reporting record profits and bonuses. The contrary voices of Americans who have lost pay, jobs, homes and savings are either patronized or drowned out entirely by a political system where the banking lobby rules in both parties and the revolving door between finance and government never stops spinning.

It’s against this backdrop that this week’s long-awaited initial public hearings of the Financial Crisis Inquiry Commission are so critical. This is the bipartisan panel that Congress mandated last spring to investigate the still murky story of what happened in the meltdown. Phil Angelides, the former California treasurer who is the inquiry’s chairman, told me in interviews late last year that he has been busy deploying a tough investigative staff and will not allow the proceedings to devolve into a typical blue-ribbon Beltway exercise in toothless bloviation.
He wants to examine the financial sector’s “greed, stupidity, hubris and outright corruption” — from traders on the ground to the board room. “It’s important that we deliver new information,” he said. “We can’t just rehash what we’ve known to date.” He understands that if he fails to make news or to tell the story in a way that is comprehensible and compelling enough to arouse Americans to demand action, Wall Street and Washington will both keep moving on, unchallenged and unchastened.
Angelides gets it. But he has a tough act to follow: Ferdinand Pecora, the legendary prosecutor who served as chief counsel to the Senate committee that investigated the 1929 crash as F.D.R. took office. Pecora was a master of detail and drama. He riveted America even without the aid of television. His investigation led to indictments, jail sentences and, ultimately, key New Deal reforms — the creation of the Securities and Exchange Commission and the Glass-Steagall Act, designed to prevent the formation of banks too big to fail.
As it happened, a major Pecora target was the chief executive of National City Bank, the institution that would grow up to be Citigroup. Among other transgressions, National City had repackaged bad Latin American debt as new securities that it then sold to easily suckered investors during the frenzied 1920s boom. Once disaster struck, the bank’s executives helped themselves to millions of dollars in interest-free loans. Yet their own employees had to keep ponying up salary deductions for decimated National City stock purchased at a heady precrash price.
Trade bad Latin American debt for bad mortgage debt, and you have a partial portrait of Citigroup at the height of the housing bubble. The reckless Citi executives of our day may not have given themselves interest-free loans, but they often walked away with the short-term, illusionary profits while their employees were left with shredded jobs and 401(k)’s. Among those Citi executives was Robert Rubin, who, as the Clinton Treasury secretary,helped repeal the last vestiges of Glass-Steagall after years of Wall Street assault. Somewhere Pecora is turning in his grave
Rubin has never apologized, let alone been held accountable. But he’s hardly alone. Even after all the country has gone through, the titans who fueled the bubble are heedless. In last Sunday’s Times, Sandy Weill, the former chief executive who built Citigroup (and recruited Rubin to its ranks), gave a remarkable interview to Katrina Brooker blaming his own hand-picked successor, Charles Prince, for his bank’s implosion. Weill said he preferred to be remembered for his philanthropy. Good luck with that.
Among his causes is Carnegie Hall, where he is chairman of the board. To see how far American capitalism has fallen, contrast Weill with the giant who built Carnegie Hall. Not only is Andrew Carnegie remembered for far more epic and generous philanthropy than Weill’s — some 1,600 public libraries, just for starters — but also for creating a steel empire that actually helped build America’s industrial infrastructure in the late 19th century. At Citi, Weill built little more than a bloated gambling casino. As Paul Volcker, the regrettablypowerless chairman of Obama’s Economic Recovery Advisory Board, said recently, there is not “one shred of neutral evidence” that any financial innovation of the past 20 years has led to economic growth. Citi, that “innovative” banking supermarket, destroyed far more wealth than Weill can or will ever give away.
Even now — despite its near-death experience, despite the departures of Weill, Prince and Rubin — Citi remains as imperious as it was before 9/15. Its current chairman, Richard Parsons, was one of three executives (along with Lloyd Blankfein of Goldman Sachs and John Mack of Morgan Stanley) who failed to show up at the mid-December White House meeting where President Obama implored bankers to increase lending. (The trio blamed fog for forcing them to participate by speakerphone, but the weather hadn’t grounded their peers or Amtrak.) Last week, ABC World News was also stiffed by Citi, which refused to answer questions about its latest round of outrageous credit card rate increases and instead e-mailed a statement blaming its customers for “not paying back their loans.” This from a bank that still owes taxpayers $25 billion of its $45 billion handout!
If Citi, among the most egregious of Wall Street reprobates, feels it can get away with business as usual, it’s because it fears no retribution. And it got more good news last week. Now that Chris Dodd is vacating the Senate, his chairmanship of the Banking Committeemay fall next year to Tim Johnson of South Dakota, home to Citi’s credit card operation. Johnson was the only Senate Democrat to vote against Congress’s recent bill policing credit card abuses.
Though bad history shows every sign of repeating itself on Wall Street, it will take a near-miracle for Angelides to repeat Pecora’s triumph. Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s. The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009. The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report.
More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private. The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties. Last week, a Republican congressman, Darrell Issa of California, released e-mail showing that officials at the New York Fed, then led by Timothy Geithner, pressured A.I.G. to delay disclosing to the S.E.C. and the public the details on the billions of bailout dollars it was funneling to its trading partners. In this backdoor rescue, taxpayers unknowingly awarded banks like Goldman 100 cents on the dollar for their bets on mortgage-backed securities.
Why was our money used to make these high-flying gamblers whole while ordinary Americans received no such beneficence? Nothing less than complete transparency will connect the dots. Among the big-name witnesses that the Angelides commission has called for next week is Goldman’s Blankfein. Geithner, Henry Paulson and Ben Bernanke should be next.
If they all skate away yet again by deflecting blame or mouthing pro forma mea culpas, it will be a sign that this inquiry, like so many other promises of reform since 9/15, is likely to leave Wall Street’s status quo largely intact. That’s the ticking-bomb scenario that truly imperils us all.

From: the New York Times.

Safety Nets for the Rich

by Bob Herbert Op-Ed Columnist
New York Times - October 20, 2009

The headlines that ran side by side on the front page
of Saturday's New York Times summed up, inadvertently,
the terrible fix that we've allowed our country to fall
into.

The lead headline, in the upper right-hand corner,
said: "U.S. Deficit Rises to $1.4 Trillion; Biggest
Since '45."

The headline next to it said: "Bailout Helps Revive
Banks, And Bonuses."

We've spent the last few decades shoveling money at the
rich like there was no tomorrow. We abandoned the poor,
put an economic stranglehold on the middle class and
all but bankrupted the federal government - while
giving the banks and megacorporations and the rest of
the swells at the top of the economic pyramid just
about everything they've wanted.

Read the entire piece; http://www.nytimes.com/2009/10/20/opinion/20herbert.html

The AIG Debacle

The AIG Saga: A Brief Primer
By Dean Baker

The awarding of $165 million in bonuses to AIG executives has dominated the news in the last week. There has been widespread outrage over the idea that taxpayers' dollars are being used to reward the people who effectively bankrupted AIG and cost the government more than $160 billion in bailout funds to meet the company's obligations. This primer addresses some of the issues raised by both the bonuses and the much larger sum going toward the AIG bailout.
The Bonuses: What Did They Know and When Did They Know It?
One of the silliest distractions in the AIG saga has been the various accounts of when AIG told Treasury Secretary Geithner of the bonuses and when Geithner passed the information along to President Obama. This discussion is silly because Geithner almost certainly knew of the bonuses ever since the initial takeover on September 15th. He just didn't think they were important.

Geithner was the chair of the New York Fed at the time of the original takeover. In that capacity, he was the person directly overseeing the takeover. As the chairman of the New York Fed, Mr. Geithner was undoubtedly familiar with the Wall Street culture and knew that financial firms paid out large bonuses each year to their most-valued employees. Since he did not issue any directives to AIG telling them not to pay bonuses, it was reasonable to expect that AIG would do so, just like it always did.

In other words, Geithner had every reason to believe that AIG would continue to pay out bonuses even after it was bailed out by the government, because he did not tell it stop paying bonuses. He may not have considered this issue important until the last week. And, he may not have known the exact size and the structure of the bonuses, but for all practical purposes he has known for six months that AIG would be issuing million dollar bonuses to certain employees, in spite of the fact that it was dependent on massive infusions of government money to stay alive.
Should the Government Have Gotten Something in Return for Giving Tens of Billions to the Banks?
When the government lent hundreds of billions of dollars to the banks through TARP, it got preferred shares of stock in return, in addition to placing conditions on the banks' conduct. By contrast, the government received absolutely nothing for the tens of billions of dollars that it passed on to the banks through AIG. It may have been desirable to ensure that AIG's defaults did not lead to the collapse of the major banks that were its counterparties, but this could have been accomplished by directly giving these banks capital through TARP or some equivalent mechanism. There is no obvious reason why it was necessary to give the money through AIG without getting anything in return.

It is worth noting that if the government had instead lent the AIG money to the banks through TARP, and under similar conditions, it would own an even larger share of these banks. Obviously the banks prefer that the money instead pass through AIG without conditions, but there is no reason that the taxpayers should prefer this route.

It is also worth noting that several of the recipients of AIG money were foreign banks. While the public has an interest in the stability of the world economy, which means preventing major foreign banks from going bankrupt, there is no obvious reason that American taxpayers should be forced to bail out foreign banks of wealthy countries. It is possible that there is some quid pro quo under which foreign governments are bailing out U.S. banks on losses suffered in their countries, but there has been no public acknowledgement of such an arrangement.

There is a possible alternative explanation. The government may have made these payments in order to preserve the international reputation of the U.S. financial industry. If that is the case, then this is a rather expensive subsidy to the financial industry. To date there has been no explanation as to the reason for making these payments.

U.S. Banks claim they need more money

Please read articles below on how the major U.S. banks took the bail out money and spent it on themselves and to buy other banks.

Now, they claim they need more money.

New York Times:
January 14, 2009
NEWS ANALYSIS
Banks Are in Need of Even More Bailout Money

By EDMUND L. ANDREWS and ERIC DASH
WASHINGTON — Even before word came on Tuesday that Citigroup might split into pieces to shore up its finances, an unpleasant message was moving through Congress and President-elect Barack Obama’s transition team: the banks need more taxpayer money.

In all likelihood, a lot more money.

Mr. Obama seems to know it; a week before his swearing-in, he is lobbying Congress to release the other half of the financial industry bailout fund. Democratic leaders in Congress seem to know it, too; they are urging their rank and file to act quickly to release the rescue money. And Ben S. Bernanke, the chairman of the Federal Reserve, certainly knows it.

On Tuesday, Mr. Bernanke publicly made the case that one of the most unpopular and most scorned programs in Washington — the $700 billion bailout program — needs to pour hundreds of billions more into the very banks and financial institutions that already received federal money and caused much of the credit crisis in the first place.

The most glaring example that the banking system needs even more help is Citigroup. Though it already has received $45 billion from the Treasury, it is in such dire straits that it is breaking itself into parts.

Like many banks, Citi is finding that its finances keep deteriorating as the economy continues to weaken.

Even some of the bailout program’s harshest critics acknowledge that things most likely would be even worse without it, and that the bailout had accomplished its most important goal, which was to prevent a complete collapse of the financial system.

Since last September, no major banks have failed and the credit markets have thawed somewhat.

But analysts said the problems are still acute, if less apparent on the surface. Banks have received $200 billion in fresh capital from the Treasury since last fall and have borrowed hundreds of billions of dollars more from the Fed. But in the meantime, the economy fell into a severe downturn last fall that is likely to continue until at least this summer.

Bail outs and Wall Street

Wall St, Autos:
Cyclical Crisis
or Structural?

By Robert Reich

First prediction for 2009: A widening gap between the public's view of the bailouts of Wall Street and Detroit, and the views of the direct beneficiaries. The public believes the bailouts will permanently change these industries, but industry insiders don't really want to change.

Exhibit one is Goldman Sach's CEO Lloyd Blankfein, who says the firm's business strategy doesn't need to change.

What? Goldman got $10 billion of taxpayer money precisely because it and other big banks were so over-leveraged they threatened the whole financial system. I can understand why Blankfein doesn’t want to change. He took home $54 million last year. (He has foregone a bonus this year and is taking home a piddling $600,000.) But the public expects real reform for its $10 billion at Goldman and tens of billions more in other major banks.

Blankfein isn't alone. I've heard the same thing from CEOs and directors all over the Street. They see the problem as cyclical, not structural. "The economy stinks," they tell me, "but it'll turn around in 18 months, and then we're back to the same business."

Or take the Big Three. They've agreed to become far more fuel efficient, as a condition for their bailout. But they promised this before -- during the oil crisis of the 1970s, when Congress threatened higher fuel-economy standards. But after the crisis passed, they never delivered. Why? Because their biggest profits were in gas guzzlers that consumers wanted to buy as soon as the first oil crisis was over.

Will history repeat itself? Now that gas prices are half what they were six months ago, consumers who can afford it are suddenly less interested in fuel efficiency. They're buying fewer hybrids and showing renewed interest in SUVs. So why should we think Detroit will revolutionize itself?

I'm not so cynical as to accuse anyone of bad faith. It's just that both Wall Street and Detroit earned big bucks from their old strategies, before the bottom fell out of the economy. So it’s natural they’d view the bailouts as ways to hold on until the economy rebounds. And it's clear they see their problem as cyclical, not structural.

Right now, Wall Street and Detroit are willing to say whatever they need to say to keep the taxpayer money coming. But when the economy begins turning up, my betting is that their Washington lobbyists will push back hard against any major restructurings the government wants to impose on them. New regulations of Wall Street will be watered down and circumvented; new requirements on the Big Three for green technologies will be resisted.

Yet the bailouts have been sold to the public as means toward fundamental change in finance and autos. If the bailouts are to do what they're supposed to – stop Wall Street from wild risk-taking with piles of borrowed money, and push the auto industry into making fundamentally new products that conserve energy -- Washington will not only have to set strict standards now and in the months ahead when the bailout money flows, but also hang tough when the economy begins to revive.

The emerging debate over Wall Street's and the Big Three's ongoing obligations to reform themselves is but one part of a much larger national debate we'll be entering upon in 2009 and beyond -- whether the economic crisis we're experiencing is basically cyclical (in which case, nothing really needs to change over the long term, after the economy gets back on track) or structural (in which case, many aspects of our economy and society will needs to change permanently).
Robert Reich was Secretary of Labor in the Clinton Administration

Why our schools will not have funds :AP

AP study finds $1.6B went to bailed-out bank execs

FRANK BASS AND RITA BEAMISH | December 21, 2008 10:07 PM EST |

Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits in the calendar year 2007, an Associated Press analysis reveals.

The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.

Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.

The total amount given to nearly 600 executives would cover bailout costs for 53 of the 116 banks that have so far accepted tax dollars to boost their bottom lines.

Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount to a bribe "to get them to do the jobs for which they are well paid in the first place.

"Most of us sign on to do jobs and we do them best we can," said Frank, a Massachusetts Democrat. "We're told that some of the most highly paid people in executive positions are different. They need extra money to be motivated!"

The AP compiled total compensation based on annual reports that the banks file with the Securities and Exchange Commission. The 116 banks have so far received $188 billion in taxpayer help. Among the findings:

_The average paid to each of the banks' top executives was $2.6 million in salary, bonuses and benefits.

Story continues below
_Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home nearly $54 million in compensation last year. The company's top five executives received a total of $242 million.

This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan last spring as essential to retain and motivate executives "whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels." Goldman spokesman Ed Canaday declined to comment beyond that written report.

The New York-based company on Dec. 16 reported its first quarterly loss since it went public in 1999. It received $10 billion in taxpayer money on Oct. 28.

_Even where banks cut back on pay, some executives were left with seven- or eight-figure compensation that most people can only dream about. Richard D. Fairbank, the chairman of Capital One Financial Corp., took a $1 million hit in compensation after his company had a disappointing year, but still got $17 million in stock options. The McLean, Va.-based company received $3.56 billion in bailout money on Nov. 14.

_John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank bosses with $83 million in earnings last year. Thain, a former chief operating officer for Goldman Sachs, took the reins of the company in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he earned $57,692 in salary, a $15 million signing bonus and an additional $68 million in stock options.

Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28.

The AP review comes amid sharp questions about the banks' commitment to the goals of the Troubled Assets Relief Program (TARP), a law designed to buy bad mortgages and other troubled assets. Last month, the Bush administration changed the program's goals, instructing the Treasury Department to pump tax dollars directly into banks in a bid to prevent wholesale economic collapse.

The program set restrictions on some executive compensation for participating banks, but did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from giving golden parachutes to departing executives and deducting some executive pay for tax purposes.

Banks that got bailout funds also paid out millions for home security systems, private chauffeured cars, and club dues. Some banks even paid for financial advisers. Wells Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top executives up to $20,000 each to pay personal financial planners.

At Bank of New York Mellon Corp., chief executive Robert P. Kelly's stipend for financial planning services came to $66,748, on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said.

Goldman Sachs' tab for leased cars and drivers ran as high as $233,000 per executive. The firm told its shareholders this year that financial counseling and chauffeurs are important in giving executives more time to focus on their jobs.

JPMorgan Chase chairman James Dimon ran up a $211,182 private jet travel tab last year when his family lived in Chicago and he was commuting to New York. The company got $25 billion in bailout funds.

Banks cite security to justify personal use of company aircraft for some executives. But Rep. Brad Sherman, D-Calif., questioned that rationale, saying executives visit many locations more vulnerable than the nation's security-conscious commercial air terminals.

Sherman, a member of the House Financial Services Committee, said pay excesses undermine development of good bank economic policies and promote an escalating pay spiral among competing financial institutions _ something particularly hard to take when banks then ask for rescue money.

He wants them to come before Congress, like the automakers did, and spell out their spending plans for bailout funds.

"The tougher we are on the executives that come to Washington, the fewer will come for a bailout," he said.

Past and Future Economics: Greider

Past and Future

by WILLIAM GREIDER

November 24, 2008

A year ago, when Barack Obama said it was time to turn the page, his campaign declaration seemed to promise a fresh start for Washington. I, for one, failed to foresee Obama would turn the page backward. The president-elect's lineup for key governing positions has opted for continuity, not change. Virtually all of his leading appointments are restoring the Clinton presidency, only without Mr. Bill. In some important ways, Obama's selections seem designed to sustain the failing policies of George W. Bush.

This is not the last word and things are changing rapidly. But Obama's choices have begun to define him. His victory, it appears, was a triumph for the cautious center-right politics that has described the Democratic party for several decades. Those of us who expected more were duped, not so much by Obama but by our own wishful thinking.
Let us stipulate that these are all honorable people, smart and experienced veterans of Washington combat. But they represent the Democratic party that mainly sees itself as managerial--making government work better. The long era of conservative dominance has taught them to keep their distance from big reform ideas that promise fundamental change of the system. Their operating style is incremental and cautiously practical. They conscientiously avoid (or actively block) propositions that sound too liberal or radical. Alas, Obama is coming to power at a critical moment when incrementalism is irrelevant. The system is in collapse. Financial chaos won't wait for patient deliberations.

Events have confronted Obama with a fearful symmetry between past and present, illustrated by his choice of economic advisers. On Friday, we learned that Timothy Geithner, president of the New York Federal Reserve, would become his new treasury secretary and Larry Summers, who held the same position in the Clinton administration, would be the White House overseer of economic policy. On Monday, Geithner was busy executing the government's massive rescue of Citicorp--the very banking behemoth that Geithner and Summers helped to create back in the Clinton years, along with Federal Reserve chairman Alan Greenspan and Robert Rubin, Clinton's economics guru. Now Rubin is himself a Citicorp executive and his bank is now being saved by his old protégé (Geithner) with the taxpayers' money.

The connections go way beyond irony. They raise very serious questions about where the new president intends to lead and whether he has the nerve to break from the weak and haphazard strategy of the Bush administration. It has dumped piles of public money on the largest financial institutions and demanded little or nothing in return, hoping for the best. Geithner has been a central player in the deal-making, from Bear Stearns to AIG to Citi. The strategy has not only failed, it has arguably made things worse as savvy market players saw through the contradictions and rushed out to dump more bank stocks.

On Wall Street, Geithner is known as a highly competent technocrat, well versed in the financial complexities. But he has also been seen as a weak and compliant regulator of Wall Street firms, someone who did not seem the storm coming. Occasionally, Geithner would anguish publicly about the accumulating time bombs like credit derivatives and urge bankers to do something, but he did not use his supervisory powers to compel action. In bailout negotiations with Wall Street titans, Geithner and the Federal Reserve were spun around like a top more than once.

No wonder the stock markets rallied explosively when they heard Geithner would be their new boss in Washington. They think he is their guy. Summers may be a brilliant economist--everyone says so--but he, too, is a club member in good standing and now manages a huge hedge fund while he advises Obama. The president-elect needs to get a "second opinion"--someone from outside the financial club who can explain the flaws in the rescue strategy preached by Bush's treasury secretary Henry Paulson and Tim Geithner at the New York Fed.

Their approach has clearly been designed to preserve what's left of the Wall Street establishment and maintain the supremacy of the largest financial firms while the taxpayers pick up their losses. That model has failed and too many smart people know why. The bailouts have been too little too late and aimed at an impossible objective--persuading private capital investors to believe in the phony assurances proffered by the bankers. AIG, the insurance giant taken over by the feds, has turned into a bloody hemorrhage. Citigroup will be another and may soon be joined by other major banks demanding the same favorable terms. Wasting more public money on insolvent mastodons is the least of it. The real scandal is it doesn't work. It can't work because the black hole is too large even for Washington to fill. Government should take over the failing institutions or force them into bankruptcy, break them up and sell them off or mercifully relieve everyone, including the taxpayers.

Stock markets rallied again with the salvage of Citigroup. But not everyone in Wall Street was cheering. Christopher Whalen of Institutional Risk Analytics, the bank monitoring firm that has repeatedly been right about the banks when the government officials were wrong, had harsh words for the deal. "Pretending that Citi is going to be a going concern I think is silly," Whalen said. "We should be thinking about breaking this company up and redistributing the assets into stronger hands."

Will Timothy Geithner or Larry Summers advise the next president to face reality and throw in the towel? One hopes so, because Whalen warns: "By embracing Geithner, President-elect Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner.... This scheme to stay AIG's resolution cannot possibly work and, when it does collapse, Barack Obama and his administration will wear the blame."

Barack Obama is too smart and perceptive to let this happen to his yet-unborn presidency. Maybe he should find out what Whalen knows.

About William Greider
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. more...
Copyright © 2008 The Nation

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.
__._,_.___

A bailout for us all

A Call for Common Sense

Every man, woman, and child in America is now being told
to ante up $2,000 - an estimated $700 billion in all -
to bail out Wall Street's recklessness, or the very
people who created this crisis are telling us that they
will bring down our entire economy.

The Treasury Department's proposal that the Secretary be
given essentially unlimited authority to spend $700
billion to bail out any financial institution across the
world is irresponsible and unacceptable.

We urge the Congress to insist on some basic conditions
for any bailout.

1. Public Oversight. This kind of power can never be
centralized in a single individual - much less one who
did not even stand for election. Any funds must be
controlled by an independent entity, with consumers and
workers given seats on its board. Congress should be
empowered to name independent monitors and to approve
all board members.

2. Protect the Taxpayer. The Treasury bill would have
taxpayers buying paper that nobody else wants at prices
far above its current value. If a firm wants to auction
off its toxic paper to the US Government, taxpayers
should get equity in that firm equal to any amount paid
in excess of the paper's value. This will deter
profitable firms from using the government as a dumpster
for their toxic paper. And it will insure that if the
bailout works and the firms become profitable,
taxpayers, not simply bankers, benefit from the upside.

3. Curb the casino. This crisis was caused because
sensible regulations of the banking system that worked
for dozens of years were dismantled or went unenforced.
No bailout can go forward without requiring the
necessary regulation to insure this does not happen
again. Any institution, which receives assistance,
should agree to come under a microscope going forward in
terms of disclosure requirements, and it should have
stringent capital requirement imposed upon it.

4. Invest in the real economy. Ending the bankers strike
is not sufficient enough to avoid the recession into
which we have been driven. Major public investment in
new energy and conservation, rebuilding schools and
infrastructure, extending unemployment and food stamps,
helping states avoid crippling cuts in police and health
services - is vital to get the real economy moving and
put people back to work. No bailout should proceed
without being linked to support for a major public
investment plan to get the economy going.

5. Hold CEOs and Boards of Directors Accountable. Wall
Street CEOs shouldn't be pocketing millions while
taxpayers are forced to bail them out. Any firm that
applies for relief must agree to cancel all stock option
programs and CEOs should have stringent limits placed on
their compensation until the Company has repaid all
taxpayer assistance.

6. Aid the victims, not just the predators. Both bankers
and home owners made foolish bets that home prices would
keep rising. Many homeowners, however, were misled by
predatory lenders into taking mortgages that they didn't
understand and couldn't afford. It would be simply
obscene to help the predators and not those that they
preyed upon. No bail out of the banks should take place
without measures to help people in trouble stay in their
homes. Explicit provisions should ensure use of the full
array of financial and legal tools available to the
government to stop foreclosures and restructure home
mortgage loans for ordinary Americans, including
amending the bankruptcy code to allow judges to modify
mortgages. Where workouts are not feasible, people
should be allowed to stay in their homes as renters.

-- Robert Borosage, co-director, Campaign for America's
Future
-- John Sweeney, president, AFL-CIO
-- Andy Stern, president, Service Employees
International Union (SEIU)
-- Gerald McEntee, president, Am. Fed. of State, County
and Municipal Employees (AFSCME)
-- Randi Weingarten, president, American Federation of
Teachers (AFT)
-- Larry Cohen, president, Communications Workers of
America (CWA)
-- Dennis Van Roekel, president, National Education
Association (NEA)
-- Leo Gerard, president, United Steelworkers (USW)
-- Maude Hurd, national president, ACORN
-- Nan Aron, president, Alliance for Justice
-- Amy Issacs, national director, Americans for
Democratic Action
-- Kevin Zeese, executive director, Campaign for Fresh
Air & Clean Politics
-- John Podesta, president, Center for American Progress
Action Fund
-- Deepak Bhargava, president, Center for Community
Change
-- Deborah Weinstein, executive director, Coalition for
Human Needs
-- Donald Mathis, president, Community Action
Partnership
-- Jane Hamsher, firedoglake.com
-- James D. Weill, president, Food Research & Action
Center (FRAC)
-- Brent Blackwelder, president, Friends of the Earth
-- John Cavanagh, director, Institute for Policy Studies
-- Sarita Gupta, executive director, Jobs with Justice
-- Wade Henderson, president, Leadership Conference on
Civil Rights
-- Carissa Picard, esq., president, Military Spouses for
Change
-- Sally Greenberg, executive director, National
Consumers League
-- Christine L. Owens, executive director, National
Employment Law Project
-- Gary Bass, executive director, OMB Watch
-- Adam Lioz, program director, Progressive Future
-- Joanne Carter, executive director, RESULTS
-- William McNary, president, USAction
-- Paula Brantner, executive director, Workplace
Fairness
-- Dan Cantor, executive director, Working Families
Party
-- Mark Lotwis, executive director, 21st Century
Democrats

The Campaign for America's Future (CAF) is a center of
progressive strategy, organizing and issue campaigns.
CAF anchors a progressive leadership network, enlisting
leaders at the national, state and local levels to build
a more just and democratic society. The Campaign is
leading the fight about America's priorities - against
privatization of Social Security, for investment in
energy independence, good jobs and a sustainable
economy, for affordable health care and more.

_______________

Bailout Plan a Historic Swindle

Paulson Bailout Plan A Historic Swindle
By William Greider
The Nation
September 19, 2008
http://www.thenation.com/doc/20081006/greider

Financial-market wise guys, who had been seized with
fear, are suddenly drunk with hope. They are rallying
explosively because they think they have successfully
stampeded Washington into accepting the Wall Street
Journal solution to the crisis: dump it all on the
taxpayers. That is the meaning of the massive bailout
Treasury Secretary Henry Paulson has shopped around
Congress. It would relieve the major banks and
investment firms of their mountainous rotten assets and
make the public swallow their losses--many hundreds of
billions, maybe much more. What's not to like if you are
a financial titan threatened with extinction?

If Wall Street gets away with this, it will represent an
historic swindle of the American public--all sugar for
the villains, lasting pain and damage for the victims.
My advice to Washington politicians: Stop, take a deep
breath and examine what you are being told to do by so-
called "responsible opinion." If this deal succeeds, I
predict it will become a transforming event in American
politics--exposing the deep deformities in our democracy
and launching a tidal wave of righteous anger and
popular rebellion. As I have been saying for several
months, this crisis has the potential to bring down one
or both political parties, take your choice.

Christopher Whalen of Institutional Risk Analytics, a
brave conservative critic, put it plainly: "The joyous
reception from Congressional Democrats to Paulson's
latest massive bailout proposal smells an awful lot like
yet another corporatist lovefest between Washington's
one-party government and the Sell Side investment
banks."

A kindred critic, Josh Rosner of Graham Fisher in New
York, defined the sponsors of this stampede to action:
"Let us be clear, it is not citizen groups, private
investors, equity investors or institutional investors
broadly who are calling for this government purchase
fund. It is almost exclusively being lobbied for by
precisely those institutions that believed they were
'smarter than the rest of us,' institutions who need to
get those assets off their balance sheet at an inflated
value lest they be at risk of large losses or worse."

Let me be clear. The scandal is not that government is
acting. The scandal is that government is not acting
forcefully enough--using its ultimate emergency powers
to take full control of the financial system and impose
order on banks, firms and markets. Stop the music, so to
speak, instead of allowing individual financiers and
traders to take opportunistic moves to save themselves
at the expense of the system. The step-by-step rescues
that the Federal Reserve and Treasury have executed to
date have failed utterly to reverse the flight of
investors and banks worldwide from lending or buying in
doubtful times. There is no obvious reason to assume
this bailout proposal will change their minds, though it
will certainly feel good to the financial houses that
get to dump their bad paper on the government.

A serious intervention in which Washington takes charge
would, first, require a new central authority to
supervise the financial institutions and compel them to
support the government's actions to stabilize the
system. Government can apply killer leverage to the
financial players: accept our objectives and follow our
instructions or you are left on your own--cut off from
government lending spigots and ineligible for any direct
assistance. If they decline to cooperate, the money guys
are stuck with their own mess. If they resist the
government's orders to keep lending to the real economy
of producers and consumers, banks and brokers will be
effectively isolated, therefore doomed.

Only with these conditions, and some others, should the
federal government be willing to take ownership--
temporarily--of the rotten financial assets that are
dragging down funds, banks and brokerages. Paulson and
the Federal Reserve are trying to replay the bailout
approach used in the 1980s for the savings and loan
crisis, but this situation is utterly different. The
failed S&Ls held real assets--property, houses, shopping
centers--that could be readily resold by the Resolution
Trust Corporation at bargain prices. This crisis
involves ethereal financial instruments of unknowable
value--not just the notorious mortgage securities but
various derivative contracts and other esoteric deals
that may be virtually worthless.

Despite what the pols in Washington think, the RTC
bailout was also a Wall Street scandal. Many of the
financial firms that had financed the S&L industry's
reckless lending got to buy back the same properties for
pennies from the RTC--profiting on the upside, then
again on the downside. Guess who picked up the tab? I
suspect Wall Street is envisioning a similar bonanza--
the chance to harvest new profit from their own fraud
and criminal irresponsibility.

If government acts responsibly, it will impose some
other conditions on any broad rescue for the bankers.
First, take due bills from any financial firms that get
to hand off their spoiled assets, that is, a hard
contract that repays government from any future profits
once the crisis is over. Second, when the politicians
get around to reforming financial regulations and
dismantling the gimmicks and "too big to fail"
institutions, Wall Street firms must be prohibited from
exercising their usual manipulations of the political
system. Call off their lobbyists, bar them from the
bribery disguised as campaign contributions. Any contact
or conversations between the assisted bankers and
financial houses with government agencies or elected
politicians must be promptly reported to the public,
just as regulated industries are required to do when
they call on government regulars.

More important, if the taxpayers are compelled to
refinance the villains in this drama, then Americans at
large are entitled to equivalent treatment in their
crisis. That means the suspension of home foreclosures
and personal bankruptcies for debt-soaked families
during the duration of this crisis. The debtors will not
escape injury and loss--their situation is too dire--but
they deserve equal protection from government, the
chance to work out things gradually over some years on
reasonable terms.

The government, meanwhile, may have to create another
emergency agency, something like the New Deal, that
lends directly to the real economy--businesses, solvent
banks, buyers and sellers in consumer markets. We don't
know how much damage has been done to economic growth or
how long the cold spell will last, but I don't trust the
bankers in the meantime to provide investment capital
and credit. If necessary, Washington has to fill that
role, too.

Finally, the crisis is global, obviously, and requires
concerted global action. Robert A. Johnson, a veteran of
global finance now working with the Campaign for
America's Future, suggests that our global trading
partners may recognize the need for self-interested
cooperation and can negotiate temporary--maybe
permanent--reforms to balance the trading system and
keep it functioning, while leading nations work to put
the global financial system back in business.

The agenda is staggering. The United States is ill
equipped to deal with it smartly, not to mention wisely.
We have a brain-dead lame duck in the White House. The
two presidential candidates are trapped by events,
trying to say something relevant without getting blamed
for the disaster. The people should make themselves
heard in Washington, even if only to share their
outrage.

_____________________________________________

McCain and Crony Capitalism

Crony Capitalism
The U.S. purchase of AIG is crony capitalism at its worst. We, the tax payers are left holding the bag for bad investments. AIG has 85 billion world wide of insurance and other products. The front page story in the BEE says the U.S. gets a stake in the insurance giant. No. We get a liability. So, we now sell insurance in Thailand, Indonesia, Korea, Peru and Russia and Europe – all supported by our taxes and our bank accounts. But, John McCain says we can not afford health insurance for our own people.
AS described in a Salon.com article, this system was created and promoted by Phil Gramm, formerly John McCain’s principal economic advisor.
http://www.salon.com/tech/htww/2008/09/16/mccain_and_aig/index.html
It is accurate that Gramm had assistance from Democrats, lead by Joe Lieberman, now Mc Cain’s primary advisor.
These politicians demonstrate the examples given in the book, The Best Way to Rob a Bank is to Own One.
Public money should be used for public purposes, for schools, roads, water systems. Not for crony capitalism and to reward millionaires.
Its time to throw the bums out- the Republicans -to protect your home ,your job and your pension funds.

Duane E. Campbell
Sacramento