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.
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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.

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