Prescience

Even if I do not have a magic mirror to look back across the decades, I am sure it does not take great erudition to declare the following:

Forbes magazine President and CEO Steve Forbes called Treasury Secretary Henry Paulson “the worst treasury secretary we’ve had in modern times”, citing, among other things, the government’s handling of the housing crisis.

And they are planning on bailing out Citi tomorrow. If prescience is anything, Peter Schiff had it right quite some time back. The scary scenario is that he does not project a very reassuring future ahead... (via The Dish).

Is Goldman Sachs pulling the wool over our eyes?

Today, Goldman Sachs, the bank that vacuumed in 10 billion dollars of taxpayer bailout money made a pathetic announcement: They said that they were trimming the bonuses of 7 employees. Here is what they said:

Our senior executive officers made this decision because they believe it is the right thing to do. We cannot ignore the fact that we are part of an industry that is directly associated with the ongoing economic problems.

I guess they could not have made it sound more condescending. Of course, other than the seven people singled out as 'top management', the rest of the firm is set to receive 7 billion dollars in bonuses (per last week’s news). Each of the firm's 443 partners is set to pocket an average of more than 5 million dollars as part of the annual Christmas windfall this year.

It might be better if the people at Goldman try not to pull the wool over the public eye with contrite sounding statements like ‘the top management at the firm are getting no bonuses’ – when it amounts to just 7 individuals. Individuals who might more than likely have some left over change from last years bonus packages that totaled more than 17 billion dollars.

Bonus pools of Wall Street firms up until 2006. In 2007, the total bonus pool was a whooping 36 billion dollars. 36 billion dollars would not have fit into the vertcal axis of the above graph. Source: The Washington Post - December 20, 2006

The great monthly flip flopping ritual

Former Goldman Sachs CEO and current Treasury Secretary Henry 'FlipFlop' Paulson is caught in a curious case of shape shifting. We are now able to soundly predict with a large degree of confidence the frequency with which the Treasury Secretary performs the flips and flops on the bailout package. Yes, the predictable recurrence pattern on plans to use bailout funds now happens monthly. See below.

In September: The $700,000,000,000.00 bailout bill was called TARP (or Troubled Assets Relief Program). It was sold to lawmakers as a mechanism to buy off troubled and toxic securitized assets off banks and lending institutions and thus ease the credit crisis sparked by the mortgage meltdown.

In October: Buying troubled assets was cast by the wayside and the Treasury decided to flip and put out a plan to buy equity stakes in American banks of their choice. Hank's alma mater Goldman Sachs saw a cash injection of $10 billion. Morgan Stanley got another $10 billion. Is it a matter of coincidence that both of them announced bonus pools of 7 billion dollars. No, I would not dare suggest that they used taxpayer money to pay their bonuses.

In November: Treasury flopped and now announces that they have decided that buying up equity stakes in banks are not working (or maybe worked just well enough for those banks to declare bonuses). The wizards yesterday announced that they are planning on using the remaining bailout funds to help companies that issue credit cards, make student loans and finance car purchases.

In December: Plans to unveil disbursement of as yet unknown cash injections to as yet unknown set of companies as Christmas gifts. Consumer retail stores, bodegas and kiosks might need to behave properly in line as they queue up to get a part of the largesse.

Curiously missing from the whole bailout equation was help for troubled and distressed homeowners.

United States Senator from the state of NJ Robert Menendez summed it up best:

In the month of August, over 9,800 homes entered foreclosure every day, if this statistic was that there were over 9,800 Wall Street executives that lost their jobs every day in August, we would have ended this a long time ago.

Sad but true...

On what we could learn from the Chinese regarding bailouts

Today was yet another great day for bailouts. Firstly, there was yet another bailout of the beleaguered insurance giant AIG, then there was news that the Treasury Department on the sly decided to give American banks a tax windfall of $140 billion and thirdly, there was news of a half a trillion dollar Chinese bailout. OK, now why am I mixing the Chinese bailout with similar measures taking place here? Well, it is indeed interesting to see how these monies are being put to use. To get a quick idea on the differences between the plans hatched by the Treasury as opposed to the Chinese in bailing out, it is instructive to see the details. Or, maybe it is even time to learn from the Chinese.

On what the Chinese would do with their bailout:

At a time when major infrastructure projects are being put off around the world, China said it would spend an estimated $586 billion over the next two years — roughly 7 percent of its gross domestic product each year — to construct new railways, subways and airports and to rebuild communities devastated by an earthquake in the southwest in May.

On the sly tax windfall to US banks:

Late September, the Treasury Department issued a five-sentence notice that attracted almost no public attention. Administration officials had just given American banks a windfall of as much as $140 billion. The change to Section 382 of the tax code came after a two-decade effort by the Republican administration to eliminate or overhaul the law. Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

On bailing out AIG again and yet again:

The government created an $85 billion emergency credit line in September to keep A.I.G. from toppling and added $38 billion more in early October when it became clear that the original amount was not enough. As part of the new revision announced today, the Federal Reserve said it would reduce that credit line to $60 billion. When the reorganized deal is complete, taxpayers will have invested and lent a total of $150 billion to A.I.G., the most the government has ever directed to a single private enterprise.

So just to get this clear:

• China spends its bailout money on actual projects like infrastructure additions that benefit its citizens and in turn keep the economy humming and productive.
• In the United States, the Treasury decides to award tax write-offs to banks that shelter their profits from taxation by acquiring shell companies whose real value indicates losses on their books, but then manage to offset imaginary losses with actual capital gains to avoid any payment of taxes.

Huge cow patty with a marshmallow in the middle fails

Looks like the debate will go on in earnest. I heard a little while back that the bailout failed to clear the House. My view is that unless the bill contains clear provisions for the taxpayer to get some money back, unless there are clear provisions for a sane re-purchase price of distressed assets from banks eager to unload their toxicity and unless there are clear rules to limit CEO pay, we will be in limboland for some time. Just my view, but a lot of these lawmakers are going home to get re-elected in a couple of months and it will be the little taxpayer that they will be meeting there. And judging from reactions online and off, the taxpayer does not like what they see - a clear bailout with little to no regulation or oversight...

“A huge cow patty with a marshmallow in the middle of it.” – Rep. Paul Broun’s (R-Ga.) description of the bailout plan. (From Politico)

I guess this is the cue for Mr. McCain to again dramatically suspend his campaign and then - dramatically do nothing...

King Henry's powers

Mr. Henry Paulson, the Treasury Secretary had originally submitted a bailout plan to the Congress that was all of three pages long and asked Congress to give him explicit authority to do what he seems fit with an arbitrary of amount of $700,000,000,000.00. Specific wording in the three page plan that amounted to hubris included the following:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Congress said that Mr. Paulson overreached and asked for too much and spent about a week crafting legislation that aims to curtail Mr. Paulson’s powers.

Well, here is what we have after the exercise. From here.

• Mr. Paulson can choose to buy from any financial institution that does business in the United States, or from pension funds, with wide discretion over what he will buy and how much he will pay.
• Under some conditions, Mr. Paulson can choose to bail out foreign central banks.
• Under the bill, Mr. Paulson is to buy the securities at prices he deems appropriate. Mr. Paulson may set prices through auctions but is not required to do so.
• Mr. Paulson is directed to “make such purchases at the lowest price” that is “consistent with the purposes of this act.”
• Mr. Paulson does not need the approval of the Fed chairman or the oversight board to buy financial assets not linked to mortgages.

Here is the kicker:

• Mr. Paulson is to be one of the five members of the board watching over his own actions...

That sure is a fine recasting of King Henry's powers...