Wednesday, October 29, 2008

When is a bail out a Swindle?

from The Nation

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

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

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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