Paulson's Bail-Out Plan Will Benefit Rich Hedge Fund Investors with Taxpayers Footing the Bill

Treasury Secretary Hank Paulson was CEO of Goldman Sachs before he became Treasury Secretary. When he left Goldman he had $500 million worth of Goldman stock with a $200 million basis. Due to a technicality he didn't have to pay capital gains on his $300 million profit when he disgorged himself of the stock. Goldman was the only company on Wall St that wasn't brought down by the sub-prime mortgage mess. Why? Because they bet that the sub-prime market would fail and that bet saved their ass because the sub-prime market did fail. The bet was made after they sold their own investors billions of dollars worth of worthless sub-prime "tranches." So they bet against their own investors. They shorted an index. Paulson oversaw this mess. Does that tell us anything about his veracity? Which brings us to the heart of the problem. Paulson wants $700 billion of taxpayer money with no strings attached to spend as he pleases "bailing out" banks. By the way it was tried by Herbert Hoover in 1931 and the depression happened anyway. So bailing out banks didn't work for Hoover nor did it work for the Japanese in the 90s. But getting back to Paulson, he doesn't want any oversight or liability. He wants to spend taxpayer money as he sees fit buying and selling financial "assets."

New York Times, October 8, 1931

Real Estate Men On Hoover Plan

Skepticism as to President Hoover's plan to liquidate frozen bank assets was expressed yesterday by Charles G. Edwards, president of the Real Estate Securities Exchange. The exchange deals almost exclusively in real estate bonds, of which it is estimated that $1,500,000,000 at par value are in default throughout the country.
[...]
"President Hoover's financial plan," Joseph P. Day said in part, "is a step in the right direction towards making real estate investment more liquid. The system will make it possible for the Federal Reserve Bank to issue acceptance notes against sound real estate securities, thus stabilizing their values. Real estate mortgages are commonly regarded in banking as frozen assets. The Hoover plan seeks to take these substantial investments from the frozen asset class and give them a recognized value."

Should we trust Paulson? Hell, no! Anyone who made a tidy profit of $500 million on Wall St with Goldman Sachs should not be in charge of bailing out Wall St. because he's just going to hand it out to his rich friends on the Bush administration's way out the door. It's just one last money grab for the wealthy. Now the fact that Goldman stayed solvent by betting the sub-prime market would fail offers a little clue as to what the real problem is. It's derivatives. And they're a bottomless pit. When Goldman bet the sub-prime market would fail, they used a derivative. They shorted an index. There are $1000 trillion of derivatives out there. The GDP of the whole world is only $60 trillion! Derivatives are a financial black hole that will suck in Paulson's $700 billion of tax payer money and keep on sucking! This bail-out is not about mortgages or loan liquidity. It's about derivatives, and who has used derivatives to the greatest possible extent? Hedge funds. It's what they're all about. Now to get into a hedge fund you have to have a net worth of millions of dollars so you know there are no poor or middle class in there. When Paulson talks about buying and selling assets, he's really talking about buying and selling derivatives in order to bail out his rich friends who are invested in hedge funds who have lost their shirts. Putting this guy in charge of the bail-out is like putting a fox in charge of the henhouse.

The Bush bail-out is a corporate give-away, with no quid-pro-quos requiring companies to act responsibly in the future, limit outrageous executive compensation, or help ordinary homeowners to keep their homes. For example, Goldman Sachs recently paid out $16.5 billion in year-end bonuses to its employees. That worked out to over $620,000 per employee. The Bush plan will give the administration a $700 billion check with no strings attached, which they'll hand over to the Wall Street firms that got us into this mess.

But actually, who better to pay for the bail-out than the rich investors in hedge funds who largely caused it in in the first place. During the last 8 years the 400 richest families in the US have added $670 billion to their net worth while the poor and middle class have  lost ground.  Rather than middle class taxpayers bailing them out, let the rich hedge fund investors bail out the banking system by losing the hundreds of millions they bet using derivatives. Maybe the bets were good. Maybe they were bad. Makes no difference. If the banks can't make good on them, why should the taxpayers? If they were bad, why should the taxpayers buy these "assets"? It's not about liquidity. The Fed has opened its discount window to everyone. What more liquidity do you want than that? Where the system is illiquid is in bad debt from derivatives, and of course they are illiquid because only a fool would want to buy a bad debt. But that is exactly what Paulson is proposing that he will do with taxpayer money. He says the taxpayers might even make money because of his prowess in buying and selling assets. Snake oil!

The illiquid "assets" Paulson is talking about in reality are just bad debts. He will only lose tax payer money in the process of bailing out his rich hedge fund investor friends who can't bear the thought of having lost their millions. The banks can't pay off on the derivative bets the hedge funds made. Now Paulson wants the taxpayers to pay off on them. But who better to lose millions than the greedy rich people that invested in hedge funds in the first place. People like Paulson himself who made hundreds of millions on Wall St and paid no taxes on it. What a sweetener for becoming Treasury Secrtetary! Instead, Paulson wants the taxpayers to bear that brunt while the rich folk walk away with the money they invested. He wants to "make them whole."I say you can't trust a former CEO of Goldman Sachs who walked away with $700 million in Goldman stock when he became Treasury Secretary to be looking out for the interests of the average American taxpayer.

Here's a better solution. Don't pay off on derivative bets. If the hedge funds fail, the rich folks end up paying for the bail-out and that's simple justice. They and their hedge fund managers got the banking system into this bind. Solution #2: To the extent that Wall St is bailed out at all, and I can see that there might be a case for bailing out non-derivative assets, the taxpayers will be paid back by the banks themselves when they become profitable again. This can happen by the government taking an equity stake in the banks or it can be set up in such a way that the taxpayers take 10% of the profits year after year until the entire amount of the bail-out is paid off. During this period no bonuses should be paid to any CEO or employee of these companies and this includes stock options, and CEO salary should be capped at $1 million a year. Also no lobbying activity will be permitted by any of these financial instituions that get taxpayer bail-outs. And put a 0.25% tax on every stock tansaction with 0.50% on every derivative transaction like short selling. Make Wall St pay for its own bail-out! Tax the Speculators!

Now I understand that banks will not loan money to other banks so they have to borrow directly from the Fed. So what? The point is that they are getting liquidity whether from other banks or from the Fed. It makes no difference. There's still liquidity in the system for legitimate loans contrary to what Paulson would have the American people believe. The Fed has become a de facto central bank which makes my case that the government should formalize a de facto situation and create a real central bank since it has nationalized Wall St already and the Fed is acting like a real central bank already. Combine the two and formalize a de facto reality.

Comments

[John Lawrence]

You make 1000% sense , John! This is exactly what Dodd, Barney, Obama and others should be considering hard and fast. They are ignoring alternatives such as yours.

I'm very, very nervous of the huge risks lurking behind the DERIVIATIVE market! The $700 billion Bailout is a drop in the bucket in relation to these risks.

We haven't got this Bailout plan right yet.

We're simply MOVING TOO FAST and Paulson has HUGE conflicts of interest. Don't trust the situation at all with his intermingling Goldman background. I never realized how deep his conflicts of interest truly are.

What a dirty MESS!

Frank Thomas
Friday, 26 September, 2008

[anonymous]

Thank you, thank you, thank you for telling it how it is. Why is there no mainstream reporting about who is responsible for the financial mess and how government officials have been complicit? Will there be any transparency in this bailout to see exactly what junk the taxpayers will be buying and from who? Will hedge funds be unloading their worthless paper onto bank books to get around not being to sell directly to Mr. Paulson?

[wilhelm]

People need to understand that the same army of thieves that steal from the working class are the same that run the Mainstream media. God help us if they ever get control of the Internet. These people will stop the world from turning when they get it all. they own the washington slime as well. Obama now has a new Idea to change back to the Clinton administration BIG CHANGE ? Now putting Hilary back in the drivers seat. Havent these two Bonnie and Clyde wanibies filled their pockets long enough they are also worth over 500 million and still counting. What would Ben Franklin say ?

John's reply:

Well, Wilhelm, Ben Franklin was a pretty rich guy for his day as was George Washington and a lot of the other founders. The Clintons are no doubt wealthy, but they also do a lot of good. I think the Clinton Global Initiative has raised millions for charity worldwide. Bill Gates' foundation is spending billions on health care in Africa. I don't discount these people because they're rich if they are trying to leverage their wealth to do good for others. It's the selfish, greedy rich who don't do a thing to help others or even want to pay their fair share of taxes that I have a problem with, but thanks for your comment.