Treasury Secretary Looks Out for His Buddies First
Hank Paulson has acted like the secretary of Wall Street rather than the secretary of the Treasury. This economic crisis manifested itself in August 2007 and nothing that Paulson has done has been a remedy for the problem. His solutions have only propped up his cronies on Wall Street. He is sidestepping the real problem in the market: counterparty risk. Only an independent clearing house can solve this crisis.
Secretary Paulson’s bailout package does nothing for the problem. It injects money into bankrupt institutions by buying preferred stock, which only solves the easy part of the crisis. What if the stuff on the banks’ books is worth less than they say? We will still have a problem. The crux of the problem is that there is so much counterparty risk that banks will not lend to each other. This has frozen what’s called the interbank credit market. Banks do not trust each others’ financial statements. This is why our credit system is clogged.
There are only two ways to get rid of counterparty risk. One is don’t trade with each other. This is not an option; it’s what is happening today. The other is to trade through an independent “clearing house” that erases counterparty risk by guaranteeing each trader is solvent. Once we recertify trust, the credit market will unlock and trading can resume.
Sleeping Americans only arise to scream at each other during presidential election seasons, Jeff. The nationalization of the very central banking system probably won’t faze them. The centralization of money — and the fact it’s 100% debt — certainly didn’t, and that happened almost a century ago.
Seriously, this issue and the greater, underlying framework that makes the US dollar a fraud ripe for just this kind of abuse at our massive expense makes the Socialist Obamessiah paltry four upcoming years in office look like a walk in the park.
They just added a figure amounting to 20% of the entire national debt to the taxpayer’s back and they did it in a span of a few weeks! But the voters sleep on. More amazingly, “conservative” Republicans love fake money more than the socialist “”progressives do!
This whole affair is shameful and people need to go to prison for what they have done. Republicans AND Democrats.
He is looking out for his own platinum nest eggs.
Paulson’s a Dem. What do you expect? Also, most big corporations give far more to the Dems than to Pubs. It used to be the other way around, because they wanted the positive business environment the Pubs offered. Then they found out there was much more money in plundering the public coffers than in doing actual business. Long-term, it’s suicide, but who cares when you yourself walk away with $100M?
Banks are already using bailout money to buy other banks or to PAY BONUSES! Everyone and his mother are all lining up at the public trough. They are indulging in governmental pillaging and plundering. No ethics. No shame.
While “Dining at the Taxpayer Buffet,” online.wsj.com/article…, the front page of today’s Wall Street Journal highlighted their analysis that shows that financial giants, who are getting huge injections of federal cash, owed their executives more than $40 billion for past years’ pay and pensions as of the end of 2007. online.wsj.com/article….
We can now confirm what those of us that have been close to the market have always known – that the investment banks that put our economy into this pickle to begin with, will now use taxpayer “bailout” money to reward those executives who caused the mess.
Not only that, but instead of lending the money out, they are using the money for mergers and acquisitions and capital expenditures to try and keep the market as it was. The government’s clear intention was to increase the amount of lending and to free our economy of the credit crunch.
At least, that was the sound-bite we received on the evening news, when they railed against executive compensation.
A fiction writer would have trouble concocting a story line like this.
“Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars (and counting). No one can spend such money wisely even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will begin to be more about politics than economics. The banks were first.” online.wsj.com/article….
Why might that be? Could it be because “Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs?” http://www.nytimes.com/2008/1….
So Government Sachs is going to be making a decision, perhaps today, on which clearinghouse will win the sweepstakes to clear the toxic credit default swaps market. Will it be ICE or CME?
“Jeff Sprecher, chief executive of ICE, said banks are committed to the credit-default-swap market despite the prospect of tighter regulation and higher capital needs. He said ‘capital efficiency’ in this market isn’t a priority of many banks, who are willing to pay more to retain their dominance in trading.” online.wsj.com/article….
So the investment banks will give up capital efficiency in order to “dominate trading.”
Just what does this mean?
It means that this whole thing does not pass the “smell test.”
That about says it all. In order to control order flow, control trading and to control the ‘game’, the investment banks, at the public trough to pay execs who caused the crash of the economy, will use their political clout and government connections to ensure that they continue to ‘dominate trading.’
Ask yourself, how is it that they derive such a huge percentage of their gross income from their proprietary trading groups? No one can be that good, can they?
Then ask yourself, why is it that they trying to create dark pools of liquidity?
What could possibly be wrong about exposing some sunshine in there? Just what exactly are they trying to hide?
The SEC should change the rules to make sure that the playing field is level and not rigged in favor of these banks. All orders should see the market so that everyone can compete, and the markets should be transparent.
This should not be done by federal mandate, which may be compromised by circumstance, or in some shady, smoke-filled back room.
The American taxpayer is demanding that there be a fair, open, and free-market competition for this CDS clearing business.
And let the best exchange win.
Here’s a link to some more thoughtful prose on this topic:
http://seekingalpha.com/article/102576-america-needs-an-independent-clearinghouse-for-otc-cds?source=wl_sidebar_search
The problem is, as you stated, the New York investment banks are going to do everything in their power to block an independent party like the Merc from clearing these trades. There’s too much money at stake. They have already positioned themselves to wrest control through their ownership of the ICE exchange and it’s recent aquisition of the Clearing Corp. The power struggle is under way in Washington, and New York has more political muscles to flex…
Come on now, is anyone really surprised that a government official in charge of a huge spending account would favor his friends and cronies? If you think about it for a second, it is what always happens when we hand over large sums of money to some government official with a blank check book to spend it. Its exactly why this “bail out” plan should never have been passed. Too big to fail, my ass! If we get an Obama presidency, this will be just one more reason why… Republicans need a serious reality check. They need to wake up from their habits of rushing to the government every time someone stubs a toe.
http://www.marketwatch.com/news/story/USW-Raises-Questions-about-%20Treasurys/story.aspx?guid=%7B8DACA075-541D-4562-9501-52C5AF31AB2F%7D
further evidence that this bail out is not for taxpayers
The article that Jeff posted above in #9 is exactly the problem with this Wall Street Bailout.
Apparently Government Sachs knows no bounds in what it will do to save the NY investment banks at the expense of the American taxpayer.
“Taxpayers Dramatically Overpay for Government Stake in Goldman Sachs and Other Financial Firms”
“In a letter sent today to U.S. Treasury Secretary Henry M. Paulson, United Steelworkers (USW) President Leo W. Gerard raised questions about the prudence of Treasury investments of $125 billion of taxpayers’ money into nine financial institutions, including the firm which Paulson recently headed, Goldman Sachs.
“An analysis prepared by the Union, which was attached to the letter, uses traditional Wall Street valuation techniques to demonstrate that the Treasury’s investment in Goldman and the other firms was worth approximately half of the price paid and that the other half was a gift to the firms’ shareholders. The analysis was done by comparing Treasury’s investment to one made just twenty days earlier by Warren Buffett.”
“This behavior is simply outrageous,” said Gerard. “Half the money is invested and the other half of the public’s money is gifted to institutions after they paid out hundreds of billions in undeserved bonuses and shareholder dividends and engaged in reckless speculation.”
“This is no different than if you paid me $10,000 for a car for which no one else would pay more than $5,000,” writes Gerard. “You bought it for $5,000 and gifted me the other $5,000.”
So if they demonstrate the hubris for this, what makes any of us think that they will be fair when choosing a clearinghouse that will unlock the credit markets????
Just another reason that they hate ‘transparency’….
I think this recent study eloquently lays out why certain congressman were for the bail out, and certain ones were not. Goldman Sachs has spent 4.5M on lobbying this year.
http://www.chicagogsb.edu/email/chicago_on/PoliticalEconomy.pdf
Goldman told clients to short bonds it helped sell: report
By Tom Bemis
Last update: 7:08 a.m. EST Nov. 11, 2008
LONDON (MarketWatch) — Goldman Sachs proposed that some of its clients bet against California bonds it had collected millions of dollar in fees to help bring to market, according to a published report Tuesday. Goldman made the pitch in a document obtained by ProPublica, a non-profit investigative journalism organization, and the Los Angeles Times which published a joint-bylined story on the practice Tuesday. Goldman’s actions were not illegal, according to the report, but the company has stopped suggesting the trading strategy to its clients, a spokesman told the news organizations.
For even more proof that America needs an INDEPENDENT Clearinghouse for swaps and CDSs, please go to:
http://online.wsj.com/article/SB122654508030023565.html
Research from the University of Chicago shows Paulson Plan is taking care of his cronies. http://www.chicagogsb.edu/email/chicago_on/PaulsonsGift.pdf
It will be interesting to see if anything ever comes of this:
Senator Calls for Investigation of Former Goldman Executives
Chuck Grassley, the most senior Republican on the Senate finance committee, has asked Eric Thorson, inspector-general of the U.S. Treasury, to investigate potential conflicts of interest among former Goldman Sachs executives serving at the Treasury, The Financial Times reported. Mr. Grassley is also seeking to discover whether any officials exceeded their authority by implementing a change in the tax code that saved some institutions tens of billions of dollars.
http://dealbook.blogs.nytimes.com/2008/11/17/senator-calls-for-investigation-of-former-goldman-executives/
I am adding articles as they come out to the comment section of this for the record. On this site, and on a financial blog, Paul Richards and I were way out in front of the MSM when it came to the cronyism, and the solution to the financial problem.
http://www.denverpost.com/opinion/ci_11000613
It may be true that a few of the top guys at the big investment banks are willing to forgo their bonuses for 2008, however it appears that “Top Traders Still Expect The Cash.”
In other words, the cover-up is still on.
The investment banks take government (taxpayer) money, a few at the top say “We won’t take bonuses”, but then the truth comes out and the rest of the firm still wants theirs – all at taxpayers expense, of course.
The more things change, the more they stay the same, I’m afraid……
http://online.wsj.com/article/SB122705339535539245.html?mod=testMod
Wow! Cannot imagine how this will be viewed a positive use of taxpayer funds:
Ten percent of $700 rescue package may go to bonuses
10-19-2008
Wall Street walked into the path of its own oncoming stupidity. Of the $700 billion in Treasury rescue money, as much as $70 billion could go to bank and brokerage bonuses.
According to The Guardian, “Financial workers at Wall Street’s top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year.” The paper goes on to say that the Morgan Stanley (NYSE: MS) pool is large enough to buy the entire company when its stock was at a recent low.
Although this information get filed under “things you can’t make up,” it will probably have such a severe backlash that Congress will run hearings until the bankers have exhausted the extra money they are making on legal fees.
The contrary argument to punishing the firms is that some of the people getting big pay-outs work in departments that actually contributed huge sums of money to their parents.
If the management at these firms has any sense at all, they will pay nothing to the staff wh o worked in operations that lost money and file with the SEC to show the amount of operating income made from the operations where people are getting an extra check.
There will be hell to pay either way.
Douglas A. McIntyre is an editor at 247wallst.com.
Apparently, these ‘Masters of the Universe’ don’t like it very much when their own ‘trick-bag’ is used against them:
Citigroup: If You Can’t Save the Stock, Blame the Shorts
>Citigroup once earned a lot of money by helping hedge funds sell shares short. Now the banking giant wants the government to impose some limits on the practice.
>Citigroup has started lobbying Washington politicians to reinstate the “uptick rule”–preferably before this week’s 46% slide in its shares gets any worse.
http://blogs.wsj.com/deals/2008/11/20/citigroup-if-you-cant-save-the-stock-blame-the-shorts/
Re-instituting the uptick rule is sensible. they also should trade stock in . 05 increments. it will make for a fairer market. Shorts are becoming predators rather than carrying out an economic function.
What’s the old joke that the sharks won’t eat the lawyers because of ‘professional courtesy’?
Well….
” Somali Pirates in Discussions to Acquire Citigroup ”
November 20 — The Somali pirates, renegade Somalis known for hijacking
ships for ransom in the Gulf of Aden, are negotiating a purchase of
Citigroup.
The pirates would buy Citigroup with new debt and their existing cash
stockpiles, earned most recently from hijacking numerous ships,
including most recently a $200 million Saudi Arabian oil tanker. The
Somali pirates are offering up to $0.10 per share for Citigroup, pirate
spokesman Sugule Ali said earlier today. The negotiations have entered
the final stage, Ali said. “You may not like our price, but we are not
in the business of paying for things. Be happy we are in the mood to
offer the shareholders anything,” said Ali.
The pirates will finance part of the purchase by selling new Pirate
Ransom Backed Securities. The PRBS’s are backed by the cash flows from
future ransom payments from hijackings in the Gulf of Aden. Moody’s and
S&P have already issued their top investment grade ratings for the
PRBS’s.
Head pirate, Ubu Kalid Shandu, said “we need a bank so that we have a
place to keep all of our ransom money. Thankfully, the dislocations in
the capital markets has allowed us to purchase Citigroup at an
attractive valuation and to take advantage of TARP capital to grow the
business even faster.”
Shandu added, “We don’t call ourselves pirates. We are coastguards and
this will just allow us to guard our coasts better.”
>If dealers are compelled to move their trades onto an exchange, that will lead to more transparency in pricing and more confidence in the marketplace which has been threatened by fears over counterparty risk. Why is that so bad?
And why IS it so BAD?
Because the investment banks HATE TRANSPARENCY.
How can that be?
Because they make a lot of their obscene proprietary profits from opaqueness, that’s why.
But after all the chaos to our economy and for causing the credit crisis, me’thinks they have lost their vote on this issue.
Mandatory Clearing for CDS, No Surprise
By Ivy Schmerken
Nov 24, 2008 at 10:24 AM ET
It was reported last week that dealers are backing a mandatory central clearing counterparty or CCP model for credit derivatives to avoid an alternative plan to move trades onto an exchange.
Dealers are agreeing to support the CCP initiative pushed by federal regulators to fend off an alternative plan, which is to bring the credit instruments onto an exchange, the report in the Financial Times said. In addition to accept mandatory participation in a central clearinghouse, major CDS dealers are accepting the inevitability of margining and oversight by the Securities and Exchange Commission, the Reuters article said.
I’m puzzled by this revelation since I assumed that dealer participation in a CDS clearinghouse was a done deal, but I guess not. With the current method of bilateral clearing exposing the entire financial system to systemic risk, and exposing institutions and hedge funds to the perilous fortunes of Bear Stearns, Lehman Brothers and American International Group, I assumed there was agreement on the need to insert a clearinghouse to remove the counterparty risk in the event of a default.
Also, all of the clearing initiatives that have emerged are in some way connected to an exchange. For starters, Intercontinental Exchange acquired The Clearing Corporation (CCorp), whose investors are nine major CDS dealers, and formed a New York-registered trust company to accelerate the CDS clearing initiative. CME Group, operator of the world’s largest futures exchange, is adapting its existing CME Clearinghouse to accommodate credit default swaps and has teamed up with Citadel Derivatives Group to develop an electronic execution platform. Global futures exchange operators NYSE Euronext (Liffe) and Eurex, have emerged as the main contenders to offer central clearinghouses for CDS in Europe. Kevin McPartland, senior analyst at TABB Group in New York, said that regulators could allow multiple clearing models to operate. “It would be pretty unprecedented to mandate the use of a particular provider,” says McPartland, who then adds, “Anything can happen.”
So exchanges appear to be involved in each of these central clearing house initiatives. Evidently dealers want to continue trading these instruments over-the-counter (OTC) ” via voice brokerage with dealers involved as intermediaries “rather than submit these trades to an exchange. Is it possible to submit OTC derivatives for clearing to an exchange-backed clearinghouse house, without trading the instruments on that exchange? I guess so.
“There are well established mechanisms to trade these products,” said Kim Taylor, managing director & president of the CME Clearinghouse in an interview last week. “People can continue to trade with voice or chat or email,” said Taylor with respect to CME’s CDS clearinghouse initiative. “There’s a small number of trades that are already executed electronically any of those trades are eligible to be submitted to the clearinghouse,” said Taylor. “Any trades that are open positions on the members books will be able to submitted to the clearinghouse and be converted into the cleared products,” said CME’s Clearinghouse President. While CME’s partner Citadel is working on execution platform that will electronically trade credit default swaps and indices, that’s “optional,” according to Taylor.
If dealers are compelled to move their trades onto an exchange, that will lead to more transparency in pricing and more confidence in the marketplace which has been threatened by fears over counterparty risk. Why is that so bad? I understand that dealers have resisted moving their OTC credit derivatives contracts onto an exchange. This will cause their profit margins to go down because the contracts will be homogenized into more vanilla structures and the method of pricing credit default swaps will be transparent to everyone. Credit derivatives have been a moneymaker for large banks at time when they have written off hundreds of billions of dollars in losses from CDOs and mortgage-related securities.
But moving credit derivatives onto an exchange will lead to higher volumes and more electronic trading and pave the way for straight through processing. The theory is that dealers will make-up in transaction volume what they are losing from transparency. This is a pattern that has been repeated in other OTC instruments.
But dealers probably have no choice but to back this regulatory centralized clearinghouse mandate. Relying on dealers to handle bilateral clearing for complex derivatives is no longer viable in the current environment.
One source tells me that dealers bought into CCorp. last year thinking it was a 2011 or 2012 issue. In other words, they could put the need for the central clearinghouse on the backburner. But now it’s on the fast track again. Both ICE and CME said they would go live by end of November, said McPartland of Tabb Group.. “I understand that the regulators were fast tracking the application process to get things up and running quickly,” he says.
http://tinyurl.com/6na4sk
It defies logic, blows one’s imagination, but Goldman and the other investment bankers will never stop until they build their bucket-shop at ICE!!
Read this amazing quote from a beneficiary of Paulson’s bailout money:
>>E. Gerald Corrigan, a managing director of Goldman Sachs who is a former Federal Reserve official, made an impassioned call for robust regulation — even if it meant giving a single exchange a sort of monopoly over the business.
>>Corrigan said his concern over possible further risk to the financial system is so great that he wouldn’t mind seeing a single clearinghouse for the swaps, which could make it easier for regulators to “see it and control it.”
Corrigan, from Government Goldman, wants a ‘single-clearinghouse’ – no doubt, the Goldman hand-picked one – ICE – certainly because they know that they will be able to control it and turn it into their own personal bucket-shop.
And this is even after causing the credit crisis and putting the taxpayer on the hook for their shenanigans!!!
http://biz.yahoo.com/ap/081208/meltdown_credit_default_swaps.html?.v=4
Imagine the hootspa!!
And amazingly, the banks are spending TARP money on Capex to develop ELX, to bring the software and infrastructure of BOTCC up to date; and to do M+A. Meanwhile, it’s tough for buisnesses to get a loan at a decent price. I heard that GM’s commercial paper borrowing costs were 25% or more. This is obviously an extreme example, because of the flimsiness of GM, but I think you get the point.
Banks will do everything that they can to keep sunshine out of the marketplace. With it, they have to assume risk and take chances just like the other market participants-and they just cannot afford to do that!
Tim Geithner’s reply to the Investment Banks when they argued to him at a “clearing solution” meeting that in their new incarnation, they were capable of self-regulation.
Kudos to the Fed for refusing to allow the IB’s to ‘dictate what swaps’ were to be cleared, thus denying their ‘request … to veto the submission of certain contracts…”
Geithner: “Self-regulation is to regulation what self-importance is to importance.”
see also:
Fed Refuses Banks Request to Limit Credit-Default Swap Clearing
2008-12-12 15:22:34.150 GMT
By Matthew Leising
Dec. 12 (Bloomberg) — U.S. regulators are refusing to allow JPMorgan Chase & Co., Goldman Sachs Group Inc. and seven other banks to dictate what credit-default swap trades will be processed by Intercontinental Exchange Inc.’s proposed clearinghouse, said two people with knowledge of the discussions.
The Federal Reserve Bank of New York denied the request for permission to form a committee that would be able to veto the submission of some contracts, according to the people, who asked not to be named because the discussions are private. The Fed wants ICE U.S. Trust, as the clearinghouse is known, to be governed independently of the banks, the people said.
Jeff, Great article…as we have sued Henry Paulson; Ben Bernanke; Shelia Bair; James Dimon; JP Morgan CHASE&Co.; & Goldman Sachs, in their individual/corporate capacities in US District Court in Camden,New Jersey with Judge Noel Hillman, the former US Justice Prosecutor who convicted Abbromoff,et al.,(CASE# 08-cv-5245)
The Co-Plaintiffs…Larry Bumgarner & Stephen P. Wallace as PRIVATE ATTORNEY GENERALS(google); ex rel.,United States of America and All US Taxpayers as a CLASS similarly situated as a WHISTLEBLOWER Action…
Plz review all Pleadings & Amended COMPLAINT on 11/21/08 on PACER legal subscription service & contact me @ your earliest convenience @ (918)694-1870 Thank you, Steve
http://finance.yahoo.com/tech-ticker/article/208786/AIG-Bombshells%3A-%241.2B-in-Bonuses%2C-Over-%24100B-Paid-to-Goldman%2C-Other-Counterparties
More evidence that this was a bail out of Goldman. Paulson took care of his buddies first.
http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine
click the link and see that the liberal media are finally waking up. Goldman is deep in the Obama administration as well. Some of his leading fundraisers were Goldman investment bankers.
It is clear that Paulsen made decisions to advantage Goldman. His decisions on Bear, Lehman, the AIG bailout, and now, the evidence that Goldman traded against its own customers in the credit crisis.
http://www.mcclatchydc.com/227/story/77791.html
We need to ban proprietary trading, internalization of order flow, and payment for order flow.