Anti.Hero
10-21-2008, 07:38 PM
http://www.guardian.co.uk/business/2008/oct/18/banking-useconomy
So long, suckers. Millionaire hedge fund boss thanks 'idiot' traders and retires at 37
The boss of a successful US hedge fund has quit the industry with an extraordinary farewell letter dismissing his rivals as over-privileged "idiots" and thanking "stupid" traders for making him rich.
Andrew Lahde's $80m Los Angeles-based firm Lahde Capital Management in Los Angeles made a huge return last year by betting against subprime mortgages.
Yesterday the 37-year-old told his clients that he had hated the business and had only been in it for the money. And after declaring he would no longer manage money for other people, because he had enough of his own, Lahde said that instead he intended to repair his stress-damaged health; he made it clear he would not miss the financial world.
"The low-hanging fruit, ie idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking," he wrote. "These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government," he said.
"All of this behaviour supporting the aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America."
Lahde became one of the biggest names in the investment industry when one of his funds produced a return of 866% last year, largely by forecasting the US home loans industry would collapse.
In his farewell letter, which concluded with an appeal for the legislation of marijuana, Lahde said he was happy with his rewards and did not envy those who had made even more money.
"I will let others try to amass nine, 10 or 11 figure net worths. Meanwhile, their lives suck," he wrote, citing a life of back-to-back business appointments relieved only by a two-week annual holiday in which financiers are still "glued to their Blackberries".
Lahde's retirement came amid an implosion among the hedge fund industry - some 350 of the funds have liquidated this year, according to Hedge Fund Research.
His final words of advice? "Throw the Blackberry away and enjoy life."
boutons_
10-21-2008, 08:46 PM
Also to file under "how the tiny capitalist club of plutocrats and keptocrats rip off America without restraint"
http://graphics8.nytimes.com/images/misc/logoprinter.gif (http://www.nytimes.com/)
http://graphics8.nytimes.com/ads/spacer.gifhttp://graphics8.nytimes.com/ads/fox/printerfriendly.gifhttp://graphics8.nytimes.com/adx/images/ADS/18/46/ad.184642/SLOB_banner_88x31_NOW.gif (http://www.nytimes.com/adx/bin/adx_click.html?type=goto&page=www.nytimes.com/printer-friendly&pos=Position1&sn2=336c557e/4f3dd5d2&sn1=e5e630bd/7b36c01f&camp=foxsearch2008_emailtools_810908e_nyt5&ad=Bees_88x31_NOW&goto=http://www.foxsearchlight.com/thesecretlifeofbees/)
October 19, 2008
The Guys From ‘Government Sachs’
http://graphics8.nytimes.com/images/2008/10/19/business/19gold.xlarge1.jpg
By JULIE CRESWELL (http://topics.nytimes.com/top/reference/timestopics/people/c/julie_creswell/index.html?inline=nyt-per) and BEN WHITE
THIS summer, when the Treasury secretary, Henry M. Paulson Jr. (http://topics.nytimes.com/top/reference/timestopics/people/p/henry_m_jr_paulson/index.html?inline=nyt-per), sought help navigating the Wall Street meltdown, he turned to his old firm, Goldman Sachs (http://topics.nytimes.com/top/news/business/companies/goldman_sachs_group_inc/index.html?inline=nyt-org), snagging a handful of former bankers and other experts in corporate restructurings.
In September, after the government bailed out the American International Group (http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html?inline=nyt-org), the faltering insurance giant, for $85 billion, Mr. Paulson helped select a director from Goldman’s own board to lead A.I.G.
And earlier this month, when Mr. Paulson needed someone to oversee the government’s proposed $700 billion bailout (http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/bailout_plan/index.html?inline=nyt-classifier) fund, he again recruited someone with a Goldman pedigree, giving the post to a 35-year-old former investment banker who, before coming to the Treasury Department, had little background in housing finance.
Indeed, Goldman’s presence in the department and around the federal response to the financial crisis (http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.html?inline=nyt-classifier) is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.
The power and influence that Goldman wields at the nexus of politics and finance is no accident. Long regarded as the savviest and most admired firm among the ranks — now decimated — of Wall Street investment banks, it has a history and culture of encouraging its partners to take leadership roles in public service.
It is a widely held view within the bank that no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere. While Goldman sees this as little more than giving back to the financial world, outside executives and analysts wonder about potential conflicts of interest presented by the firm’s unique perch.
They note that decisions that Mr. Paulson and other Goldman alumni make at Treasury directly affect the firm’s own fortunes. They also question why Goldman, which with other firms may have helped fuel the financial crisis through the use of exotic securities, has such a strong hand in trying to resolve the problem.
The very scale of the financial calamity and the historic government response to it have spawned a host of other questions about Goldman’s role.
Analysts wonder why Mr. Paulson hasn’t hired more individuals from other banks to limit the appearance that the Treasury Department has become a de facto Goldman division. Others ask whose interests Mr. Paulson and his coterie of former Goldman executives have in mind: those overseeing tottering financial services firms, or average homeowners squeezed by the crisis?
Still others question whether Goldman alumni leading the federal bailout have the breadth and depth of experience needed to tackle financial problems of such complexity — and whether Mr. Paulson has cast his net widely enough to ensure that innovative responses are pursued.
“He’s brought on people who have the same life experiences and ideologies as he does,” said William K. Black, an associate professor of law and economics at the University of Missouri (http://topics.nytimes.com/top/reference/timestopics/organizations/u/university_of_missouri/index.html?inline=nyt-org) and counsel to the Federal Home Loan Bank Board during the savings and loan (http://topics.nytimes.com/top/reference/timestopics/subjects/s/savings_and_loan_associations/index.html?inline=nyt-classifier) crisis of the 1980s. “These people were trained by Paulson, evaluated by Paulson so their mind-set is not just shaped in generalized group think — it’s specific Paulson group think.”
Not so fast, say Goldman’s supporters. They vehemently dismiss suggestions that Mr. Paulson’s team would elevate Goldman’s interests above those of other banks, homeowners and taxpayers. Such chatter, they say, is a paranoid theory peddled, almost always anonymously, by less successful rivals. Just add black helicopters, they joke.
“There is no conspiracy,” said Donald C. Langevoort, a law professor at Georgetown University (http://topics.nytimes.com/top/reference/timestopics/organizations/g/georgetown_university/index.html?inline=nyt-org). “Clearly if time were not a problem, you would have a committee of independent people vetting all of the potential conflicts, responding to questions whether someone ought to be involved with a particular aspect or project or not because of relationships with a former firm — but those things do take time and can’t be imposed in an emergency situation.”
In fact, Goldman’s admirers say, the firm’s ranks should be praised, not criticized, for taking a leadership role in the crisis.
“There are people at Goldman Sachs making no money, living at hotels, trying to save the financial world,” said Jes Staley, the head of JPMorgan Chase (http://topics.nytimes.com/top/news/business/companies/morgan_j_p_chase_and_company/index.html?inline=nyt-org)’s asset management division. “To indict Goldman Sachs for the people helping out Washington is wrong.”
( sniff sniff Sacrificing their wealthy asses just for us taxpayers )
Goldman concurs. “We’re proud of our alumni, but frankly, when they work in the public sector, their presence is more of a negative than a positive for us in terms of winning business,” said Lucas Van Praag, a spokesman for Goldman. “There is no mileage for them in giving Goldman Sachs the corporate equivalent of most-favored-nation status.”
MR. PAULSON himself landed atop Treasury because of a Goldman tie. Joshua B. Bolten (http://topics.nytimes.com/top/reference/timestopics/people/b/joshua_b_bolten/index.html?inline=nyt-per), a former Goldman executive and President Bush’s chief of staff, helped recruit him to the post in 2006.
Some analysts say that given the pressures Mr. Paulson faced creating a SWAT team to address the financial crisis, it was only natural for him to turn to his former firm for a capable battery.
And if there is one thing Goldman has, it is an imposing army of top-of-their-class, up-before-dawn über-achievers. The most prominent former Goldman banker now working for Mr. Paulson at Treasury is also perhaps the most unlikely.
Neel T. Kashkari (http://topics.nytimes.com/top/reference/timestopics/people/k/neel_t_kashkari/index.html?inline=nyt-per) arrived in Washington in 2006 after spending two years as a low-level technology investment banker for Goldman in San Francisco, where he advised start-up computer security companies. Before joining Goldman, Mr. Kashkari, who has two engineering degrees in addition to an M.B.A. from the Wharton School of the University of Pennsylvania, worked on satellite projects for TRW, the space company that now belongs to Northrop Grumman.
He was originally appointed to oversee a $700 billion fund that Mr. Paulson orchestrated to buy toxic and complex bank assets, but the role evolved as his boss decided to invest taxpayer money directly in troubled financial institutions.
Mr. Kashkari, who met Mr. Paulson only briefly before going to the Treasury Department, is also in charge of selecting the staff to run the bailout program. One of his early picks was Reuben Jeffrey, a former Goldman executive, to serve as interim chief investment officer.
Mr. Kashkari is considered highly intelligent and talented. He has also been Mr. Paulson’s right-hand man — and constant public shadow — during the financial crisis.
He played a main role in the emergency sale of Bear Stearns (http://topics.nytimes.com/top/news/business/companies/bear_stearns_companies/index.html?inline=nyt-org) to JPMorgan Chase in March, sitting in a Park Avenue conference room as details of the acquisition were hammered out. He often exited the room to funnel information to Mr. Paulson about the progress.
Despite Mr. Kashkari’s talents in deal-making, there are widespread questions about whether he has the experience or expertise to manage such a project.
“Mr. Kashkari may be the most brilliant, talented person in the United States, but the optics of putting a 35-year-old Paulson protégé in charge of what, at least at one point, was supposed to be the most important part of the recovery effort are just very damaging,” said Michael Greenberger, a University of Maryland (http://topics.nytimes.com/top/reference/timestopics/organizations/u/university_of_maryland/index.html?inline=nyt-org) law professor and a former senior official with the Commodity Futures Trading Commission (http://topics.nytimes.com/top/reference/timestopics/organizations/c/commodity_futures_trading_commission/index.html?inline=nyt-org).
“The American people are fed up with Wall Street, and there are plenty of people around who could have been brought in here to offer broader judgment on these problems,” Mr. Greenberger added. “All wisdom about financial matters does not reside on Wall Street.”
Mr. Kashkari won’t directly manage the bailout fund. More than 200 firms submitted bids to oversee pieces of the program, and Treasury has winnowed the list to fewer than 10 and could announce the results as early as this week. Goldman submitted a bid but offered to provide its services gratis.
While Mr. Kashkari is playing a prominent public role, other Goldman alumni dominate Mr. Paulson’s inner sanctum.
The A-team includes Dan Jester, a former strategic officer for Goldman who has been involved in most of Treasury’s recent initiatives, especially the government takeover of the mortgage giants Fannie Mae (http://topics.nytimes.com/top/news/business/companies/fannie_mae/index.html?inline=nyt-org) and Freddie Mac (http://topics.nytimes.com/top/news/business/companies/freddie_mac/index.html?inline=nyt-org). Mr. Jester has also been central to the effort to inject capital into banks, a list that includes Goldman.
Another central player is Steve Shafran, who grew close to Mr. Paulson in the 1990s while working in Goldman’s private equity business in Asia. Initially focused on student loan (http://topics.nytimes.com/top/reference/timestopics/subjects/s/student_loans/index.html?inline=nyt-classifier) problems, Mr. Shafran quickly became involved in Treasury’s initiative to guarantee money market funds, among other things.
Mr. Shafran, who retired from Goldman in 2000, had settled with his family in Ketchum, Idaho, where he joined the city council. Baird Gourlay, the council president, said he had spoken a couple of times with Mr. Shafran since he returned to Washington last year.
“He was initially working on the student loan part of the problem,” Mr. Gourlay said. “But as things started falling apart, he said Paulson was relying on him more and more.”
The Treasury Department said Mr. Shafran and the other former Goldman executives were unavailable for comment.
Other prominent former Goldman executives now at Treasury include Kendrick R. Wilson III, a seasoned adviser to chief executives of the nation’s biggest banks. Mr. Wilson, an unpaid adviser, mainly spends his time working his ample contact list of bank chiefs to apprise them of possible Treasury plans and gauge reaction.
Another Goldman veteran, Edward C. Forst, served briefly as an adviser to Mr. Paulson on setting up the bailout fund but has since left to return to his post as executive vice president of Harvard (http://topics.nytimes.com/top/reference/timestopics/organizations/h/harvard_university/index.html?inline=nyt-org). Robert K. Steel, a former vice chairman at Goldman, was tapped to look at ways to shore up Fannie Mae and Freddie Mac. Mr. Steel left Treasury to become chief executive of Wachovia (http://topics.nytimes.com/top/news/business/companies/wachovia_corporation/index.html?inline=nyt-org) this summer before the government took over the entities.
Treasury officials acknowledge that former Goldman executives have played an enormous role in responding to the current crisis. But they also note that many other top Treasury Department officials with no ties to Goldman are doing significant work, often without notice. This group includes David G. Nason, a senior adviser to Mr. Paulson and a former Securities and Exchange Commission official.
Robert F. Hoyt, general counsel at Treasury, has also worked around the clock in recent weeks to make sure the department’s unprecedented moves pass legal muster. Michele Davis is a Capitol Hill veteran and Treasury policy director. None of them are Goldmanites.
“Secretary Paulson has a deep bench of seasoned financial policy experts with varied experience,” said Jennifer Zuccarelli, a spokeswoman for the Treasury. “Bringing additional expertise to bear at times like these is clearly in the taxpayers’ and the U.S. economy’s best interests.”
While many Wall Streeters have made the trek to Washington, there is no question that the axis of power at the Treasury Department tilts toward Goldman. That has led some to assume that the interests of the bank, and Wall Street more broadly, are the first priority. There is also the question of whether the department’s actions benefit the personal finances of the former Goldman executives and their friends.
“To the extent that they have a portfolio or blind trust that holds Goldman Sachs stock, they have conflicts,” said James K. Galbraith (http://topics.nytimes.com/top/reference/timestopics/people/g/james_k_galbraith/index.html?inline=nyt-per), a professor of government and business relations at the University of Texas (http://topics.nytimes.com/top/reference/timestopics/organizations/u/university_of_texas/index.html?inline=nyt-org). “To the extent that they have ties and alumni loyalty or friendships with people that are still there, they have potential conflicts.”
Mr. Paulson, Mr. Kashkari and Mr. Shafran no longer own any Goldman shares. It is unclear whether Mr. Jester or Mr. Wilson does because, according to the Treasury Department, they were hired as contractors and are not required to disclose their financial holdings.
For every naysayer, meanwhile, there is also a Goldman defender who says the bank’s alumni are doing what they have done since the days when Sidney Weinberg ran the bank in the 1930s and urged his bankers to give generously to charities and volunteer for public service.
“I give Hank credit for attracting so many talented people. None of these guys need to do this,” said Barry Volpert, a managing director at Crestview Partners and a former co-chief operating officer of Goldman’s private equity business. “They’re not getting paid. They’re killing themselves. They haven’t seen their families for months. The idea that there’s some sort of cabal or conflict here is nonsense.”
In fact, say some Goldman executives, the perception of a conflict of interest has actually cost them opportunities in the crisis. For instance, Goldman wasn’t allowed to examine the books of Bear Stearns when regulators were orchestrating an emergency sale of the faltering investment bank.
THIS summer, as he fought for the survival of Lehman Brothers (http://topics.nytimes.com/top/news/business/companies/lehman_brothers_holdings_inc/index.html?inline=nyt-org), Richard S. Fuld Jr. (http://topics.nytimes.com/top/reference/timestopics/people/f/richard_s_fuld_jr/index.html?inline=nyt-per), its chief executive, made a final plea to regulators to turn his investment bank into a bank holding company, which would allow it to receive constant access to federal funding.
Timothy F. Geithner (http://topics.nytimes.com/top/reference/timestopics/people/g/timothy_f_geithner/index.html?inline=nyt-per), the president of the Federal Reserve Bank of New York (http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_bank_of_new_york/index.html?inline=nyt-org), told him no, according to a former Lehman executive who requested anonymity because of continuing investigations of the firm’s demise. Its options exhausted, Lehman filed for bankruptcy in mid-September.
One week later, Goldman and Morgan Stanley (http://topics.nytimes.com/top/news/business/companies/morgan_stanley/index.html?inline=nyt-org) were designated bank holding companies.
“That was our idea three months ago, and they wouldn’t let us do it,” said a former senior Lehman executive who requested anonymity because he was not authorized to comment publicly. “But when Goldman got in trouble, they did it right away. No one could believe it.”
The New York Fed, which declined to comment, has become, after Treasury, the favorite target for Goldman conspiracy theorists. As the most powerful regional member of the Federal Reserve (http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html?inline=nyt-org) system, and based in the nation’s financial capital, it has been a driving force in efforts to shore up the flailing financial system.
Mr. Geithner, 47, played a pivotal role in the decision to let Lehman die and to bail out A.I.G. A 20-year public servant, he has never worked in the financial sector. Some analysts say that has left him reliant on Wall Street chiefs to guide his thinking and that Goldman alumni have figured prominently in his ascent.
After working at the New York consulting firm Kissinger Associates, Mr. Geithner landed at the Treasury Department in 1988, eventually catching the eye of Robert E. Rubin (http://topics.nytimes.com/top/reference/timestopics/people/r/robert_e_rubin/index.html?inline=nyt-per), Goldman’s former co-chairman. Mr. Rubin, who became Treasury secretary in 1995, kept Mr. Geithner at his side through several international meltdowns, including the Russian credit crisis in the late 1990s.
Mr. Rubin, now senior counselor at Citigroup (http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html?inline=nyt-org), declined to comment.
A few years later, in 2003, Mr. Geithner was named president of the New York Fed. Leading the search committee was Pete G. Peterson, the former head of Lehman Brothers and the senior chairman of the private equity firm Blackstone. Among those on an outside advisory committee were the former Fed chairman Paul A. Volcker (http://topics.nytimes.com/top/reference/timestopics/people/v/paul_a_volcker/index.html?inline=nyt-per); the former A.I.G. chief executive Maurice R. Greenberg (http://topics.nytimes.com/top/reference/timestopics/people/g/maurice_r_greenberg/index.html?inline=nyt-per); and John C. Whitehead, a former co-chairman of Goldman.
The board of the New York Fed is led by Stephen Friedman, a former chairman of Goldman. He is a “Class C” director, meaning that he was appointed by the board to represent the public.
Mr. Friedman, who wears many hats, including that of chairman of the President’s Foreign Intelligence Advisory Board, did not return calls for comment.
During his tenure, Mr. Geithner has turned to Goldman in filling important positions or to handle special projects. He hired a former Goldman economist, William C. Dudley, to oversee the New York Fed unit that buys and sells government securities. He also tapped E. Gerald Corrigan, a well-regarded Goldman managing director and former New York Fed president, to reconvene a group to analyze risk on Wall Street.
Some people say that all of these Goldman ties to the New York Fed are simply too close for comfort. “It’s grotesque,” said Christopher Whalen, a managing partner at Institutional Risk Analytics and a critic of the Fed. “And it’s done without apology.”
A person familiar with Mr. Geithner’s thinking who was not authorized to speak publicly said that there was “no secret handshake” between the New York Fed and Goldman, describing such speculation as a conspiracy theory.
Furthermore, others say, it makes sense that Goldman would have a presence in organizations like the New York Fed.
“This is a very small, close-knit world. The fact that all of the major
financial services firms, investment banking firms are in New York City means that when work is to be done, you’re going to be dealing with one of these guys,” said Mr. Langevoort at Georgetown. “The work of selecting the head of the New York Fed or a blue-ribbon commission — any of that sort of work — is going to involve a standard cast of characters.”
Being inside may not curry special favor anyway, some people note. Even though Mr. Fuld served on the board of the New York Fed, his proximity to federal power didn’t spare Lehman from bankruptcy.
But when bankruptcy loomed for A.I.G. — a collapse regulators feared would take down the entire financial system — federal officials found themselves once again turning to someone who had a Goldman connection. Once the government decided to grant A.I.G., the largest insurance company, an $85 billion lifeline (which has since grown to about $122 billion) to prevent a collapse, regulators, including Mr. Paulson and Mr. Geithner, wanted new executive blood at the top.
They picked Edward M. Liddy, the former C.E.O. of the insurer Allstate (http://topics.nytimes.com/top/news/business/companies/allstate_corporation/index.html?inline=nyt-org). Mr. Liddy had been a Goldman director since 2003 — he resigned after taking the A.I.G. job — and was chairman of the audit committee. (Another former Goldman executive, Suzanne Nora Johnson, was named to the A.I.G. board this summer.)
Like many Wall Street firms, Goldman also had financial ties to A.I.G. It was the insurer’s largest trading partner, with exposure to $20 billion in credit derivatives (http://topics.nytimes.com/top/reference/timestopics/subjects/d/derivatives/index.html?inline=nyt-classifier), and could have faced losses had A.I.G. collapsed. Goldman has said repeatedly that its exposure to A.I.G. was “immaterial” and that the $20 billion was hedged so completely that it would have insulated the firm from significant losses.
As the financial crisis has taken on a more global cast in recent weeks, Mr. Paulson has sat across the table from former Goldman colleagues, including Robert B. Zoellick (http://topics.nytimes.com/top/reference/timestopics/people/z/robert_b_zoellick/index.html?inline=nyt-per), now president of the World Bank (http://topics.nytimes.com/top/reference/timestopics/organizations/w/world_bank/index.html?inline=nyt-org); Mario Draghi, president of the international group of regulators called the Financial Stability Forum; and Mark J. Carney, the governor of the Bank of Canada.
BUT Mr. Paulson’s home team is still what draws the most scrutiny.
“Paulson put Goldman people into these positions at Treasury because these are the people he knows and there are no constraints on him not to do so,” Mr. Whalen says. “The appearance of conflict of interest is everywhere, and that used to be enough. However, we’ve decided to dispense with the basic principles of checks and balances and our ethical standards in times of crisis.”
Ultimately, analysts say, the actions of Mr. Paulson and his alumni club may come under more study.
“I suspect the conduct of Goldman Sachs and other bankers in the rescue will be a background theme, if not a highlighted theme, as Congress decides how much regulation, how much control and frankly, how punitive to be with respect to the financial services industry,” said Mr. Langevoort at Georgetown. “The settling up is going to come in Congress next spring.”
http://up.nytimes.com/?d=0/4/&t=&s=2&ui=2423756&r=http%3a%2f%2fwww%2enytimes%2ecom%2f2008%2f10%2f1 9%2fbusiness%2f19gold%2ehtml%3fdbk&u=www%2enytimes%2ecom%2f2008%2f10%2f19%2fbusiness% 2f19gold%2ehtml%3fdbk%3d%26pagewanted%3dprint http://wt.o.nytimes.com/dcsym57yw10000s1s8g0boozt_9t1x/njs.gif?dcsuri=/nojavascript&WT.js=No&WT.tv=1.0.7
http://www.nytimes.com/adx/bin/clientside/290fbf28Q2FTXFoRT.-IR9e-6JX.RnQ3AJLQ25Q20w_Q5DQ25Q25Q25vwrmFoLQ26Q5D
boutons_
10-21-2008, 09:43 PM
In Paulson We Trust
Focused on the election? Might be a good idea to watch your pockets at the same time. Here's a glance at what's happening to the Wall Street bailout.
Hank Paulson is, no doubt, the most impressive of the Bush administration cabinet members, (admittedly not a high bar.) He made hundreds of millions on Wall Street, ascending to be the head of Goldman Sachs. Now, as Treasury Secretary, he has brought in colleagues from Goldman to help manage the $700 billion bailout of Wall Street banks that are in trouble, including Goldman, and... Wait one minute. Doesn't something ring false here? Hank Paulson no doubt is honorable, but even he has conflicted interests.
When the bailout bill was before Congress, a number of outside groups -- including the Campaign for America's Future which I head -- for more information on the debate go here -- (http://www.huffingtonpost.com/robert-l-borosage/www.ourfuture.org)pushed hard for the bailout to be managed by an independent agency, with an empowered board that included independent representatives of workers and consumers. Whatever the form of the bailout -- Paulson's initial demand for $700 billion left that undefined -- it was vital that the transactions be accountable to more than once and future bankers.
And know we know why. After initially proposing to buy toxic securities from the banks at inevitably elevated prices, Paulson sensibly decided to follow the British model and inject capital directly into the major banks in exchange for equity. $125 billion is going into the first nine -- Goldman Sachs, Morgan Stanley, Merrill Lynch, Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Bank of New York Mellon and State Street Corporation. This plus a guarantee of new debt over the next three years is designed to reassure other banks of their solvency, and hopefully get them to resume lending to one another and to businesses.
But Mr. Paulson didn't exactly cut a great deal for taxpayers. He didn't get the terms that Warren Buffett demanded, putting up a lot less cash, to invest in Goldman Sachs. And as the New York Times editorial complained (http://www.nytimes.com/2008/10/14/opinion/14tue1.html), (http://www.nytimes.com/2008/10/14/opinion/14tue1.html)he made government a passive investor, leaving in place the boards and the directors that led their banks into crippling losses.
He made no demands that the banks begin lending again, instead of just hunkering down, girding for future losses. And remarkably -- unlike the British -- he didn't demand that the banks stop paying out dividends to shareholders. Nor is it clear that bank regulators will perform the triage needed, merging and purging the banks of excess capacity.
That failure is likely to be very costly to taxpayers and very generous to the very folks who led us into this mess. In a New York Times op ed, (http://www.nytimes.com/2008/10/21/opinion/21stein.html?ref=opinion) David S. Scharfstein and. Jeremy C. Stein show that, if paid at the current levels, the dividends will redirect more than $25 billion of the $125 billion to shareholders in the next year alone. One in five dollars will go out the door, and thus be unavailable to plug the large capital hole on the banks' balance sheets.
Will those dividends be paid? Most likely, since the directors and officers of the nine banks are leading shareholders. Scharfstein and Stein estimate their personal take will amount to $250 million in the first year, nothing to sneeze at.
Worse, Paulson does nothing to curb the bloated compensation levels that characterized Wall Street in the days of debauch. Jonathan Weil of Bloomberg News shows (http://www.bloomberg.com/apps/news?pid=20601039&sid=azo7aySdpFHw&refer=columnist_weil) the effect. Morgan Stanley, for example, gets $10 billion in taxpayers, dollars. Yet this year it has racked up $10.7 billion in employee compensation -- the vast majority not yet paid out -- even as its stock market value plummeted lost 34.7 billion since the beginning of the company's fiscal year. With taxpayers help, Morgan Stanley may well pay those bonuses.
Weil reports that the " five families of Wall Street" -- Goldman, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Sterns -- lost about $83 billion in stock market value from the start of the 2004 fiscal year. At the same time, they reported about $239 billion of employee compensation. For every dollar of shareholder value destroyed, the employees pocketed almost three. And that was before they got taxpayer money.
No one doubts that the bailout is needed to prop up the global economy. But under Paulson's plan, we may end up, in Weil's words, "throwing money at an industry that pays too many people more than they're worth, to perform services the world has too much of
already."
What's needed is an independent agency with summary powers and an independent board, to work with the FDIC and other agencies to sort out the solvent banks from the broke, those that need to be saved from those that should fail. And, as in the Chrysler bailout, a suspension of dividends to shareholders until the government has been repaid.
Now maybe Paulson is making the best choices possible given the extent of the crisis. He's got more information and is far better banker than the rest of us. But with $700 billion in taxpayers' money at stake, surely it would be wise to have an independent board that can hold him accountable.
==========
I LOVE FREE MARKETS and KLEPTOCRATIC PLUTOCRATS!
Powered by vBulletin® Version 4.2.5 Copyright © 2024 vBulletin Solutions Inc. All rights reserved.