Hank Paulson

Can we start with Henry Paulson?!?

In this interview with Larry Kudlow yesterday, Dick Cheney said about TARP:

KUDLOW: But did you anticipate the degree of government control over the banks? No question throwing a safety net from Federal Reserve liquidity was appropriate. I don’t think any economist left or right disagrees with that. On the other hand, what we’ve seen now is that this Congress has moved in to declare, for example, compensation and pay limits, repurchase agreements, dividend policies, merger and acquisition policies. You yourself know these things because you were a CEO of a big company once upon a time. Did you anticipate how Congress would move in to take control of the banks when you made these initial loans?CHENEY: No, I don’t believe we did. I don’t recall any debate within the administration. There may have been some over at Treasury or someplace that focused on the extent of which government would try to control these institutions once they provided financing for them. You know, I’ve got experiences going back to the wage price controls in the Nixon administration where, in effect, we had what I think was a terrible mistake, in that case a Republican administration, where moved in and tried to control the wages, prices and profits of every enterprise in America. It was a huge mistake. We finally got out of it, but it took a long time to do it, and it does a lot of damage.

If you liked that, just wait, it gets better:

CHENEY: Well, some of us at the time wanted GM to go bankrupt, go to Chapter 11.KUDLOW: Were you in that camp?CHENEY: I was.

Essentially, Cheney is saying that he was against bailout nation and Bush overruled him.  I'm not surprised.  Cheney has always been a much more genuine small-govt. guy than Bush ever was.

That said, maybe Quinn Hillyer was right: Cheney, not Bush, should have been President!!!

I was discussing the recent financial crisis with a friend tonight.  He said: "The Problem with the GOP is that they deregulated until the banks became too big to fail." BULLSHIT!!! Had our political leaders had a pair of brass balls last year, they would have realized letting the banks fail would benefit America.  We could have re-built a solid banking system instead of the politicized BS we have now.

Unfortunately, the Republican President and Treasury Secretary didn't have the courage of their alleged free market convictions.  Thus, we're stuck with a politicized banking system for the next decade.

And some people are trying to say the GOP has moved too far to the right...ha!

Given his pathos; it seems safe to start the Timothy Geithner Death Watch.

Moving forward, after the disastrous duo of Henry Paulson and Timothy Geithner, this country desperately needs a top notch Secretary of it's Treasury.  On that note, I would nominate former General Electric (GE) Chief Executive Officer (CEO) Jack Welch.

Why is Jack Welch the Strongest Potential Candidate for Treasury Secretary?

1) His Record Inspires Confidence -- Jack Welch is, along with Andrew Carnegie, one of the best Corporate Executives in American History.  During his tenure as CEO, GE became the most valuble company in the world.  While the skillset of a wildly successful CEO doesn't translate perfectly to a Treasury Secretary, Jack Welch, on his laziest day, sure as heck knows a lot more about the Global Economy than Timothy Geithner on his most perfect day.

Furthermore, Jack Welch knows how to make other people want to follow when he leads.

2) GE's Business Stretches Across Many Business Sectors -- From Financial Services, to Manufacturing, to Defense, to the Media Jack Welch's business experience stretches across many different sectors of the American Economy.  While Jack Welch understands financial markets better than almost anyone, he's not just a Wall Street guy.  Jack Welch understands, and can explain, the relationship between financial markets and the so-called "real" economy.

3) The Obama Administration DESPERATELY Needs Business Leaders -- Right Now, the Obama Administration has exactly ZERO business leaders serving it.  That needs to change if they want any credibility.  Who fits the credibility bill better than Jack Welch?

The biggest question, of course, is why Jack Welch would accept such a thankless task?  I can't come up with a good reason.  Maybe an appeal to patriotism?

I hope this helps.

That is all.

Cahnman out.

Dear Senators Dodd and Schumer and Congressman Frank,

First things first, let me congratulate you for reaching a level of hypocritical grandstanding I thought impossible even for the United States' Congress.

Congressman Frank, you blocked oversight at Fannie and Freddie while you were dating a high ranking Fannie official.

Senator Dodd, you took a bribe from Angelo Mozillo to filibuster George W. Bush's attempts to reign in criminal excesses at Fannie and Freddie.

Senator Schumer, the 100% tax rate you propose on Wall Street bonuses violates the ex post facto clause in the United States Constitution.  Not that you care when you're up for re-election this cycle....

Furthermore, all three of you were crucial players in the decision to bailout Wall Street.  While you may personally disagree with some of the decisions those firms have made, the fact remains you had an oppotunity to let said firms fail six months ago.  Instead of letting Wall Street fail; you failed.

Once you decided to bail these firms out, you implicitly accepted responsibility for any unpopular business decisions said firms made.

Against that backdrop, I find your grandstanding over the compensation paid by the American International Group (AIG) utterly nauseating.  Said compensation, while perhaps unwise from a narrowly defined business perspective, is standard practice in the financial services industry.  Gentlemen, if you didn't want AIG engaging in standard business practices; THEN YOU SHOULDN'T HAVE BAILED THEM OUT IN THE FIRST PLACE!!!

Don't get me wrong: AIG screwed up and THEY SHOULD FAIL as a result (the fact that their screw up is a direct result of Elliot Spitzer's bullying is a topic for another day).  That said, Gentlemen, you are standing in the way of AIG's creative destruction.  Until you are willing to let AIG fail, your whines about executive compensation ring hollow.

Sincerely,

Adam Cahn

Austin, TX

Are Hank Paulson's Bailouts a Bad Deal for Taxpayers?  Bloomberg wanted to find out, so they crunched the numbers and discovered that Paulson Bailout Didn’t Give Taxpayers Buffett’s Terms. 

Today on Bloomberg's Morning Call, Erik Schatzker reported the following: 

Let's say somebody came to you with an investment idea, put down twice as much as the previous guy for securities worth 75% less - you'd probably say "No Chance!" but as an exclusive report by Bloomberg shows today, that is exactly what happened to U.S. taxpayers when Congress gave Hank Paulson the authority to bail out the nation's banks.  Take the case of Goldman Sachs.  Back in October the Treasury Department invested $10B in Goldman and in exchange got warrants worth $882M.  Warrants give holders the option to buy shares at a set price by a certain date.  Compare those terms with the ones Goldman gave Warren Buffet a month earlier.  Buffet, the Berkshire Hathaway Chairman, invested $5B - half as much as the Treasury Department - and got warrants worth $3.6B - four times as much!  Now consider this:  it's not as if Goldman drove a hard bargain.  Paulson, the former Goldman CEO, set the terms for taxpayers.  Again, remember - invest twice as much as Buffet for 75% less. 

Joseph Stiglitz, the Nobel Prize-winning economist, says "If Paulson was still an employee of Goldman Sachs and he'd done this deal, he would have been fired."  The only advantage taxpayers have is our warrants are good for ten years while Buffet's expire in five.  That means we get a longer period for Goldman shares to gain value.  Treasury has invested in 174 banks since the bailout bill was passed.  Had Paulson set the same terms for all of those deals as the ones Buffet got from Goldman, taxpayers would receive $48B in dividends over the next five years.  Roger Altman, Chairman and CEO of Evercore Partners and former Deputy Secretary of the U.S. Treasury and Clinton advisor was asked if we should look at this as the American taxpayers getting a raw deal? 

"I don't think it is," replied Altman, "and the reason is that the goal that the Treasury had and the Federal Government had in establishing the TARP and investing or infusing capital into a wide range of financial institutions was and is very different from the goal Warren Buffet had in investing himself.  Buffet's goal, and it ought to be, is solely a good return from an investment point of view [for his shareholders].  But the Federal Government's goal was to stabilize the financial system. And the more onerous the terms of the Federal investments, the more difficult it would be to stabilize the financial system.  So did the Treasury get the last dime from the point of view of dividend or warrant related return that it could have gotten?  Probably not, but that wasn't the objective of the program.  The objective of the program was to stabilize the financial system and avoid, in the words of the IMF executive director, a 'systemic meltdown'.  So I don't think the two purposes are the same and I don't think it's fair to compare the two."

There are two problems with Altman's apologetics for Paulson's incompetence:

1. One of the benefits of selling this to the American taxpayers is thatthe taxpayers WOULD get a return on this money. 
2. When the Clinton Administration loaned Mexico $12.5B to ward off its 'systemic meltdown' in 1994, the terms were so "onerous" that Mexico paid the loan back three years ahead of schedule.  According to the New York Times almost exactly 12 years ago titled Mexico Repays Bailout by U.S. Ahead of Time:

In the end, Mr. Clinton said, the United States ran a profit of more than half a billion dollars on the loans.  That money, which American officials said would go toward deficit reduction in the United States, is above the interest the cash would have earned had it remained in the Federal Reserve's emergency stabilization fund, which was originally designed to steady the dollar rather than the currencies of allies.

Stiglitz is known for challenging Adam Smith's invisible hand (the principle that an individual pursuing his own self-interest tends to also promote the good of his community as a whole).  He explored the implication of information imperfections on both market economics and political economy (an area in which I tend to agree with him).  The theories that Stiglitz and others helped develop explain why unfettered markets often not only do not lead to social justice, but do not even produce efficient outcomes.  Stiglitz said:

"The real debate today is about finding the right balance between the market and government. Both are needed. They can each complement each other. This balance will differ from time to time and place to place."

It certainly does not appear that the right balance between the market and the government has been discovered in the 21st Century as of yet.  However, it does appear that Paulson decided to simply give money away to his cronies with not even as much consideration for the profitability of the transaction as was given in the Clinton Administration.  This is an abject travesty, and kudos to Bloomberg.com for having the intellectual curiosity to investigate and confirm what many of have suspected ever since the House Republicans changed their votes and the bill was rushed over to the Bush White House.