Sunday, September 21, 2008


The Bush regime's proposed cure for the fiscal crisis involves the granting of greater new and irrevocable power to one official than at any point in American history. On matters financial, Henry Paulson, presently treasury secretary but former major participant, as head of Goldman Sachs, in the dangerous greed-driven practices that led to the crisis, will have the status of a dictator.

This is not being reported by the media; it is not being discussed by the candidates; and it is not being seriously debated by the general public. This is one of the most dangerous moments in American history. From Section 8 of the proposed legislation : "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."

Edge of the American West - The Secretary of the Treasury may purchase mortgage-related assets, and hire people to help him do it, and designate agents to do it, pretty much insofar as he pleases, up to $700,000,000,000, beholden to nobody and subject to no review, for the next two years.

Compare for example the Reconstruction Finance Corporation, created in January 1932, and authorized to loan to pretty much any lending agency as it pleased, with not more than $200,000,000 for the relief of banks closed or in the process of liquidation. All loans had to be secured, couldn't be made on foreign securities or acceptances, no more than 5% of the money could go to any one company, couldn't exceed three years' term, couldn't pay fees or commission to applicants for loans, and so forth. Railroads accepting such loans had to do so under terms acceptable to the regulatory Interstate Commerce Commission.

The law in addition made provision for winding up the Corporation when appropriate and requiring it to report quarterly to the Congress on its activities and employees.

In short, although the situation in January of 1932 was visibly more dire than it is now, Congress was less willing to hand over utter independent authority to the Hoover administration.

With Roosevelt, Congress was a bit more trusting of the executive. Compare the National Recovery Act, of June 1933:

"The President is hereby authorized to establish such agencies, to accept and utilize such voluntary and uncompensated services, to appoint, without regard to the provisions of the civil service laws, such officers and employees, and to utilize such Federal officers and employees, and, with the consent of the State, such State and local officers and employees, as he may find necessary, to prescribe their authorities, duties, and responsibilities, and tenure, and, without regard to the Classification Act of 1923, as amended, to fix the compensation of any officers and employees so appointed.

"The President may delegate any of his functions and powers under this title to such officers, agents, and employees as he may designate or appoint, and may establish an industrial planning and research agency to aid in carrying out his functions under this title."

It's worth noting the Supreme Court found this blanket grant unconstitutional. . .

Do you think this Congress should be more trusting of the Bush administration than the 1932 Congress was of the Hoover administration? Conversely, do you think the Bush administration deserves the same level of trust from this Congress as the Roosevelt administration? Even the giant relief bill of 1935, which gave Roosevelt around $5bn, had more strings attached than this law.

Wikipedia - Asset Management and Securities Services is a rapidly growing business for Goldman as it gains market share. It is separated into two divisions, and includes Asset Management, which provides large institutions and very wealthy individuals with investment advisory, financial planning services, and the management of mutual funds, as well as the so-called alternative investments (hedge funds, funds of funds, infrastructure funds, real estate funds, and private equity funds). The Securities Services division provides prime brokerage, financing services, and securities lending to mutual funds, hedge funds, pension funds, foundations, and High net worth individuals. This segment accounts for around 19 percent of Goldman's earnings. . . As of 2007, the fund was valued at $32.5 billion, the second-largest fund hedge fund after competitor JP Morgan's $33.1 billion fund

In August 2007, it emerged that Goldman had to spend $2 billion to rescue its own Global Equity Opportunities hedge fund from "significant market dislocation."

On August 28, 2007, a former Goldman Sachs associate accused of being the mastermind behind an insider trading scheme, one that pocketed $6.7 million, pleaded guilty in Federal District Court in Manhattan. . .

In 2005, the firm advised both the New York Stock Exchange and Archipelago, which owns an electronic trading platform, in merger talks. Controversy surrounded the deal as John Thain, who at that time headed the New York Stock Exchange, was a former Goldman Sachs Executive.

Also in 2005, Goldman Sachs received criticism from civic groups and New York City politicians when they received approximately $1.6 billion in taxpayer subsidies (mostly through Liberty Bonds) from New York City and state taxpayers to finance the firm's new headquarters near the World Financial Center in Lower Manhattan in return for a commitment to keep at least 9000 employees and a major trading operation in Manhattan. . .

In 1986, David Brown was convicted of passing inside information to Ivan Boesky on a takeover deal. Robert Freeman, who was a senior Partner, the Head of Risk Arbitrage, and a protege of Robert Rubin [later Treasury Secretary under Clinton], was also convicted of insider trading, with his own account and with the firm's.

n 2006, Goldman Sachs' mortgage-bond division - Alternative Mortgage Products (GSAMP) - issued 83 home-loan-backed bonds, valued at $44.5 billion. In the subprime sector, it grew its business by 59% from 2005, offloading some $12.9 billion on to fund managers.

According to Inside Mortgage Finance, that made GSAMP the 15th biggest issuer of subprime-backed bonds in 2006. According to the website, Goldman Sachs was one of the top 10 sellers of Collateralized Mortgage Obligations and may have sold about $100 billion in CMO's over the last two and a half years.

But, by the start of the third quarter this year, those securities were being downgraded by the credit ratings agencies faster than any other subprime lender. According to a Reuters report, Citigroup's research, stated "portions of Goldman's GSAMP-issued bonds, which include subprime loans from a variety of lenders, have been downgraded a combined 69 times by Standard & Poor's and Moody's Investors Service in the year through June 15. Sixty of the GSAMP downgrades refer to classes from 2006 bonds," Citigroup added, and Allan Sloane in The Washington Post stated that one of Goldman's 2006 crop - the GSAMP Trust 2006- S3 - may actually be "the worst deal. . . floated by a top-tier firm." One in every six of the 8,274 mortgages bundled together in GSAMP Trust 2006-S3 was already in default 18 months later. Whoever bought the S3 bonds will have either taken a 100% loss, or are waiting to sell it on at a heavy discount.

The media has almost entirely ignored the enormous conflict of interest involved in having a Treasury Secretary who was a former chief of Goldman Sachs assuming huge powers that could affect his former firm. In addition, one of Obama's key advisors is a former head of Goldman Sachs and was Treasury Secretary under Clinton. In the story below, the NY Times does mention GS, but note how the writer refers to those who rise questions about the firm as "irreverent."

Ben Smith, NY Times - The federal government's proposed rescue plan coursed through the financial system like a shot of adrenaline Friday. Battered firms, including Morgan Stanley and Goldman Sachs, showed new signs of life. Even those thought to be near dead, like A.I.G. and Washington Mutual, were being resurrected by the market.

The news quickly revived investors in those and other firms. Lloyd C. Blankfein of Goldman Sachs, for example, did not seem to need a rapid infusion of capital for his firm. Irreverent commentators pointed out that Goldman's former chief executive, Henry M. Paulson Jr., now the Treasury secretary, had administered medicine that would, as it turned out, help his old friends. . .

The only remaining independent banks, Morgan Stanley and Goldman Sachs, were once again the golden boys of Wall Street. But all manner of financial institutions could benefit from the plan, from Citigroup and its big investors, like the Abu Dhabi Investment Authority; to Washington Mutual and its large private investor, David Bonderman; to perhaps even the American International Group and its former chairman and chief executive, Maurice R. Greenberg. . .

Goldman Sachs will be able to sell some troubled assets. That fact reignited discussion about the many administration officials who are Goldman alumni. Along with the Treasury secretary, who created the plan, another former executive of the firm is Joshua Bolten, the White House chief of staff. The plans lifted Goldman's shares 20 percent on Friday, to $129.80. Mr. Paulson, once Goldman's biggest individual shareholder, had to sell his stake when he moved to the Treasury Department.

The government's decision about which assets to accept will determine which banks are helped most. For example, the acceptance of commercial mortgage-backed securities will help big banks like Morgan Stanley, Goldman Sachs and Citigroup. . .

Michael Mandel, Business Week, March 2008 - In the middle of perhaps the greatest financial upheaval since the Great Depression, Treasury Secretary Hank Paulson is proposing a change in financial regulations which basically amounts to a big wink to Wall Street. His plan will go nowhere, both for political and practical reasons. In fact, it does not even meet the minimum standard of improving transparency, which would reduce the possibility of a similar crisis in the future. . .

The one clear improvement is more regulatory oversight for mortgage lenders. Otherwise everything else in the plan consists of rearrangements and clarifications of current regulatory responsibilities, at least in the short and medium run. For example, responsibility for regulating insurance companies would gradually be shifted from the state to the federal level. And the SEC and the Commodity Futures Trading Commission should be merged. The Paulson plan makes sure to note that the new combined agency should engage in faster approvals of new financial products.

The Paulson plan belongs in a fictional world where financial institutions do a good job in regulating and monitoring themselves. Unfortunately, that's not the world we live in.

The most striking thing about the current problems is just how much money the banks and the investment banks have lost. They apparently had no idea of how risky their own exposure was. The supposedly smart guys were simply stupid.

Wall Street Journal - Douglas Elmendorf, a senior fellow at Brookings Institution and former Treasury official, said while inaction is a risk, the Treasury's plan could cost taxpayers a huge amount of money. "This approach saddles taxpayers with significant downside risk but limited potential upside gain," Mr. Elmendorf said.

From a July 23 letter from Ralph Nader to Senator Chris Dodd and Rep. Barny Frank

Ralph Nader, July 23 - I write today to suggest that you jointly hold hearings on the Federal Deposit Insurance Corporation's ability to deal with potential bank failures in the next several years.

In a March 10, 2008 memorandum on insurance assessment rates, Arthur J. Murton, Director of the Division of Insurance and Research for the Federal Deposit Insurance Corporation stated:

"While 99 percent of insured institutions meet the 'well capitalized' criteria, the possibility remains that the fund could suffer insurance losses that are significantly higher than anticipated. The U.S. economy and the banking sector currently face a significant amount of uncertainty from ongoing housing sector problems, financial market turbulence and potentially weak prospects for consumer spending. These problems could lead to significantly higher loan losses and weaker earnings for insured institutions."

Indeed, the recent failure of IndyMac highlights the need for tough Congressional oversight. Banking experts have indicated that the cost of the collapse of IndyMac alone will be between $4 billion and $8 billion. The FDIC has approximately $53 billion on hand to deal with bank failures. This amount may not be adequate given the cost of IndyMac and given the approximately $4 trillion in deposits the FDIC insures.

Several questions should be presented to FDIC officials such as. . .

As of March 31, 2008 the FDIC reported 90 "Problem Institutions"? with assets of $26 billion. What is the current number of "Problem Institutions"? and what are the assets of these "Problem Institutions"??

How many banks are likely to fail in 2008 and 2009 respectively?

What is the estimated range of costs of dealing with the projected failures?. . .

The FDIC is not likely to address its own inability to clearly assess the current risks posed to depositors and taxpayers by the high-rolling banking industry. I hope you hold hearings sooner rather than later on this important matter.

Senator Bernie Sanders, Huffington Post - In my view, we need to go forward in addressing this financial crisis by insisting on four basic principles:

1. The people who can best afford to pay and the people who have benefited most from Bush's economic policies are the people who should provide the funds for the bailout. It would be immoral to ask the middle class, the people whose standard of living has declined under Bush, to pay for this bailout while the rich, once again, avoid their responsibilities. . .

Specifically, to pay for the bailout, which is estimated to cost up to $1 trillion, the government should:

a) Impose a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would raise more than $300 billion in revenue;

b) Ensure that assets purchased from banks are realistically discounted so companies are not rewarded for their risky behavior and taxpayers can recover the amount they paid for them; and

c) Require that taxpayers receive equity stakes in the bailed-out companies so that the assumption of risk is rewarded when companies' stock goes up.

2. There must be a major economic recovery package which puts Americans to work at decent wages. Among many other areas, we can create millions of jobs rebuilding our crumbling infrastructure and moving our country from fossil fuels to energy efficiency and sustainable energy. Further, we must protect working families from the difficult times they are experiencing. We must ensure that every child has health insurance and that every American has access to quality health and dental care, that families can send their children to college, that seniors are not allowed to go without heat in the winter, and that no American goes to bed hungry.

3. Legislation must be passed which undoes the damage caused by excessive de-regulation. That means reinstalling the regulatory firewalls that were ripped down in 1999. That means re-regulating the energy markets so that we never again see the rampant speculation in oil that helped drive up prices. That means regulating or abolishing various financial instruments that have created the enormous shadow banking system that is at the heart of the collapse of AIG and the financial services meltdown.

4. We must end the danger posed by companies that are "too big too fail," that is, companies whose failure would cause systemic harm to the U.S. economy. If a company is too big to fail, it is too big to exist. We need to determine which companies fall in this category and then break them up. Right now, for example, the Bank of America, the nation's largest depository institution, has absorbed Countrywide, the nation's largest mortgage lender, and Merrill Lynch, the nation's largest brokerage house. We should not be trying to solve the current financial crisis by creating even larger, more powerful institutions. Their failure could cause even more harm to the entire economy.


At September 21, 2008 11:27 PM, Anonymous Anonymous said...

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

AT ANY ONE TIME means no limit total. they can refill the credit card over and over

At September 22, 2008 12:45 PM, Blogger John said...

If this passes, Americans are truly screwed.


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