Alert: Paulson, Bernanke Testimony

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are scheduled to testify today before the House Financial Services Committee.

Grassely's Probe of Ex-Goldman Execs at Treasury Could Lead Directly to Paulson

Obviously, the political winds have shifted, Senator Chuck Grassely is calling for an investigation of ex-Goldman execs at Treasury. FT reports:

A senior Republican senator is seeking an investigation into potential conflicts of interest among former Goldman Sachs executives serving at the US Treasury and whether any officials exceeded their authority by implementing a controversial tax change without the approval of Congress.

Chuck Grassley, the most senior Republican on the Senate finance committee, asked Eric Thorson, inspector-general of the Treasury, to investigate the "independence" of several Treasury officials who formerly worked at Goldman Sachs and serve as advisers to Treasury secretary Hank Paulson, the former chief executive of the Wall Street bank.

Mr Grassley said in a letter to Mr Thorson that there was reason to be concerned that “relationships” between the officials and board members at two merging banks, Wells Fargo and Wachovia, gave the “appearance of preferential treatment”.

Mr Grassley singled out Robert Steel, a former Goldman official who worked under Mr Paulson at the Treasury before he became chief executive of Wachovia...

Mr Grassley, who has a reputation for aggressively uncovering and pursuing tax evasion, has a previous working relationship with Mr Thorson, who served as chief investigator for the Senate finance committee and whom Mr Grassley once praised for having “integrity and courage”.

Since ex-Goldman CEO and current Treasury Secretary Paulson signed and approved the tax change, this investigation is headed right at Paulson.

For background on this developing story, read my October 6 post, Pigs At The Trough: Behind The Citigroup, Wachovia, Wells Fargo Circus.

Inhofe: Forget Credit Squeeze, Freeze Paulson

U.S. Senator. Jim Inhofe (R-OK) lets go on Treasury Secretary Henry Paulson. He told the Tulsa World:

It is just outrageous that the American people don't know that Congress doesn't know how much money he (Treasury Secretary Henry Paulson) has given away to anyone.

It could be to his friends. It could be to anybody else. We don't know. There is no way of knowing.

He was able to get this authority from Congress predicated on what he was going to do, and then he didn't do it.

I have learned a long time ago. When they come up and say this has to be done and has to be done immediately, there is no other way of doing it, you have to sit back and take a deep breath and nine times out of 10 they are not telling the truth.

And this is one of those nine times.

Inhofe wants to freeze what is left of the initial $350 billion — reportedly $60 billion, but Inhofe concedes he does not know for sure, according to the Tulsa World.

Then he wants a provision requiring an affirmative vote by Congress before Paulson can get his hands on the second $350 billion of bailout money.

Inhofe may be the only member of the Senate who actually understands economics. He told the Tulsa World, with regard to extending unemployment benefits, that, "You don't stimulate the economy by giving away more money."

With regard to an automobile industry bailout, Inhofe said "If we keep on nursing a broken system, then we can't expect to have a different result come later on."

Issa Grills Kaskari

The link to this youtube video was posted in a comment below. I have never come across Karl Denninger before, but, as you will see, he gets it BIG TIME.

Hank Paulson Must Think Water Freezes at 60 Degrees

The latest news from our Treasury Secretary is that the consumer credit markets are frozen. The only problem is that Hank Paulson's idea of frozen is different than yours and mine. This guy is probably the only person lookng, in August, for the ice skating rink in New York's Central Park.

Robert Higgs explains:

Notwithstanding the many developments on the bailout front during the past six weeks, the New York Times, like other media outlets, continues to quote Wall Street insiders who report, as Alex Roever of JPMorgan Chase did recently: "You have a market that is frozen." What planet do these guys live on? It certainly is not the same one to which the Federal Reserve's data apply. I’ve been singing this song for many weeks, but I’m going to keep singing it until somebody in the news media wakes up and realizes that these "frozen credit market" tales are pure hooey. Look at the data, for crissake. By now we should all be ready to move beyond hysteria, get a grip on reality, and begin thinking about how to repeal everything the government has done during the past six weeks...

Memo to NYT: check the data on consumer loans published by the Federal Reserve System. The latest report, dated November 7, says: "Consumer credit increased at an annual rate of 1-1/4 percent in the third quarter. Revolving credit increased at an annual rate of 2-1/2 percent, and nonrevolving credit increased at an annual rate of 1/2 percent. In September, consumer credit increased at an annual rate of 3-1/4 percent." Would you describe this report as indicating a "frozen" credit market? Total consumer credit outstanding in September, $2,588 billion, exceeded the average amount outstanding in any year from 2003 to 2007, the period of the credit bubble.

My gut tells me that in Henry's mind unfreezing this non-frozen market means shipping more billions to the Robert Rubin wing of Goldman Sachs, i.e. Citigroup.

THE HEAT IS ON Issa to Paulson: I Want the Time and Date

Three cheers for two truth seekers in Congress.

Congressman Darrell Issa (R-CA), along with Congressman Dennis Kucinich (D-O), are raising important questions about the Paulson Bailout plan, and just how and why it was changed from a mortgage bailout plan.

“I want to know whether Congress was lied to or whether there was a team all along that had an alternate idea of how the money was spent,” Issa said, before demanding to know the “time and date” Hank Paulson, Treasury secretary, had decided to abandon his initial plan to buy up mortgages, reports FT.

"I think it's fairly obvious that Congress would have never passed the [rescue plan] had it known how Treasury would marshal the resources it was given," Kucinich said during his opening remarks before a hearing on the bailout.

Note to Kucinich and Issa, the Paulson bailout plan was a scam from the start. See my post The BIG LIE: The Supposed Paulson Bailout Plan, written BEFORE Congress even approved the plan. But, I really suspect the scam started with the takedown of the competitors of Goldman Sachs. An investigation (away from the clueless SEC) must be done to determine the exact causes that led to the collapse of these two firms. Goldman, Paulson's old firm, has publicly admitted that it has picked up 100 new major clients since the financial crisis began.

If Banks Are Supposedly Not Lending...

...why are they competing so aggressively for new deposits?

From today's WSJ:

Banks across the U.S. are engaged in a heated competition for deposits as the battered industry tries to shore up its funding sources.

From giant Citigroup Inc. to tiny S&T Bancorp Inc. -- which is based in Indiana, Pa. and has just 55 branches -- banks are responding to uncertain times by sharply increasing the interest rates paid on deposits.

Bottom line, if you are a good credit, you can get money. Banks aren't chasing deposits so that cash is piling up in their vaults. The frozen credit markets are just more Paulson propaganda.

Why the "Stimulus" Packages Are Suffocating the Economy

Terence Corcoran at Canada's Financial Post nails it:

Henry Paulson’s about-face yesterday on Washington’s US$700-billion financial market bailout should be the last straw. It is now past time for governments, from the G20 through to Washington and Ottawa, to call a moratorium on bailout plans and stimulus efforts, liquidity injections and capital supports, rescue packages and mortgage guarantees, deposit insurance expansions and credit subsidies.

To put the matter bluntly: These measures — from Mr. Paulson’s surprise policy turnaround to China’s fake stimulus program to the looming spectre of the G20 meeting this weekend — are all undermining global financial market recovery.

Complicating matters, the world today faces the prospect of an Obama administration hell-bent on more initiatives, including auto-industry bailouts and even bigger blasts of “stimulus” to rescue an economy that’s drowning in too much stimulus.There’s a simple reason this endless succession of interventions, the most radical and massive in global financial history, is not working and is instead making a bad situation worse. They are designed to subvert market realities and by doing so, they make it impossible for the rest of us to make rational market decisions — about our money, our jobs, our investments, our spending...

Totally Clueless Barney Frank

What part of the Henry Paulson scam doesn't Barney Frank get.

The fact that Paulosn has admitted that while the bill was going through Congress he wasn't going to buy up mortgages?

That the mortgage plan drawn up by Treasury made no sense from day one?

It appears Frank still doesn't have a clue. From today's WSJ:

House Financial Services Chairman Barney Frank (D., Mass.) said Wednesday he was disappointed Mr. Paulson was scrapping the asset-purchase plan. "I think he's wrong not to use it that way," Mr. Frank said.

Behind Bush's New Free Market Religion When It Comes To the Auto Industry

So why has the Bush Administration and Henry Paulson suddenly found Free Market religion when it comes to auto industry and is dragging its feet on an auto industry bailout?

The auto industry via the United Auto Workers union is a tool of the Democrats, not the Republicans. The blatant hypocrisy in this "bailout" never fails to amaze.

Bloomberg with the ugly details:

President-elect Barack Obama is pushing Congress this year to approve as much as $50 billion to save cash-starved U.S. automakers and appoint a czar or board to oversee the companies, a move that would require President George W. Bush's support, people familiar with the matter said...Still, the Bush administration so far has opposed bailing out the carmakers...``The intent of the TARP was to deal with the financial industry,'' Treasury Secretary Henry Paulson, who is administering the program, said yesterday in a press conference. ``My focus is on the financial sector, getting credit going, getting lending going.''

Paulson Deserves The Electric Chair

How obvious is Paulson's scam getting? Even mainstream media is figuring it out.

Here's ABC's Dan Arnall on whether there has been, as he puts it, a "Great TARP Bait & Switch:

No Troubled Asset Purchases? Then what are they doing with that $700 billion blank check? They are buying bank stock, not troubled assets. We probably shouldn't call it the TARP anymore. Instead, they are focused on a capital purchase plan (CPP) which is the widely reported $250 billion plan to use taxpayer money to purchase a stake in banks. "By October 26th we had $115 billion out the door to eight large institutions," said Paulson. "In Washington that is a land-speed record from announcing a program to getting funds out the door. We now have approved dozens of additional applications, and investments are being made in approved institutions." When we'll get a list of those dozens of additional applicants which will be getting a piece of the $125 billion in remaining taxpayer case remains to be seen. The original CPP participants were told about the program at a closed-door meeting at Treasury and no minutes have been released on what was said during the meeting.

So, is this the biggest bait and switch in American history? There will certainly be critics who say that Paulson and the Bush Administration were disingenuous when they were selling Congress and the American public on the program back in September. And they’d probably be right. Paulson said today, he knew when the bill was signed the purchase of trouble assets wasn’t the right solution to the problem.

Of course, if you read EPJ, you would also have known about this back in September. On September 25, BEFORE THE BILL WAS APPROVED BY CONGRESS, I titled a post THE BIG LIE: The Supposed Paulson 'Bailout' Plan

At the time Paulson was talking about paying for mortgages at deep discount prices. That wasn't going to help out banks in trouble and in my post I discussed this, and I clearly smelt the rat as I wrote:

This $700 billion may end up in many places, but it doesn't appear it is going to bail out many troubled banks. This could be news to many Americans, since it also appeared to be news to Fed Chairman Ben Bernanke, who is something of Paulson's lapdog. Bernanke tends to follow Paulson's lead and doesn't generally get out of order, but he even barked as he was figuring out what Paulson was up to... As best that can be determined, since Paulson likes to keep everything vague, it appears the $700 billion will act as a feeding trough for all sorts of insiders and wannabes.

I really don't know what is going on with Congress and most other observers. Most really have no clue. Most don't know the Fed tightened money supply all summer, to worsen the crisis, most don't know the Fed has changed the rules so that the Fed Funds rate is not as relevant, and they missed a $700 BILLION inside bank job as it was going on, since most don't know what causes a business cycle or how to deal with it.

Part of the blame has to go to the authors of basic economic texts, for this lack of basic understanding. Some of the blame can be put at the feet of teachers for ineffectual teaching, but a bright student should be able to pick up a Paul Samuelson text or a Greg Mankiw text and get the economic basics, but that is not the case. Congress, the media, the world is filled with nothing but economic idiots. If I was Mankiw, I would not be proud of the fact my texts are the best selling texts, when college students graduate clueless about economics.

But, I digress. Even the Mankiw educated students are beginning to understand the scam Paulson has pulled off. Even if it took Paulson, himself, to admit today, that even he didn't believe in his plan as it was being passed by Congress.

Did he tell Congress this at the time? NO.

Did he go to Congress and say, "I made a mistake in my calculations, and we are going to have to do it differently"? NO

Instead he took the money and passed it out to his crony buddies. Goldman Sachs got $10 billion (after being a bank holding company for all of a week!). The Robert Rubin wing of Goldman (Citigroup) got $25 billion. And it should be noted that before Paulson went to Congress for money, he crushed both Bear Stearns and Lehman Brothers. There was no bailout money for them. The crushing of Bear and Lehman wasn't a bad thing for Goldman. Goldman's chief earlier this week bragged at a conference that Goldman has picked up 100 new clients because of the crushing of Bear and Lehman.

This $700 billion is the greatest heist of all time. If Dennis Kozlowski can get 25 years for bogus "crimes". And, Jeffrey Skilling can get 24 years for his edgy pranks, then Henry M. Paulson Jr. deserves the electric chair, for taking the "bailout" money and bringing the economy to its knees.

Dean Baker With the Big Question

Are Ben Bernanke and Henry Paulson crony capitalists?

Alert: Paulson Speaks Wednesday

Details:

Wednesday, November 12, 2008, 12:00 p.m. EST
Secretary Henry M. Paulson, Jr.
Financial Rescue Package Update
Treasury Department
Media Room (4121)
1500 Pennsylvania Avenue, NW
Washington, D.C.

Treasury Secretary Paulson Lied to Congress

I don't know how else to interpret this report from WSJ:

Mr. Paulson wanted flexibility to use the money any way he saw fit. Privately, he told his staff that equity injections might be needed. But in public testimony, he all but ruled out that option, describing it as something a government would do for failing institutions, not the solvent ones he wanted to assist.

Of course, as we now know, the money has gone mostly to solvent financial institutions and in the form of equity investments. With Goldman Sachs, Paulson's old firm, and the Robert Rubin wing of Goldman, Citigroup, among the first to get billions from the Treasury.

AIG Bailout Is Now at $250 Billion?

The Treasury is in full obfuscation mode. It is putting out some very confusing numbers as to its bailout of AIG. For example today's press release on the bailout said:

The U.S. Treasury on Monday announced that it will purchase $40 billion of newly issued AIG preferred shares under the Troubled Asset Relief Program. This purchase will allow the Federal Reserve to reduce from $85 billion to $60 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York (New York Fed) on September 16, 2008...

In one new facility, the New York Fed will lend up to $22.5 billion to a newly formed limited liability company (LLC) to fund the LLC’s purchase of residential mortgage-backed securities from AIG's U.S. securities lending collateral portfolio. AIG will make a $1 billion subordinated loan to the LLC and bear the risk for the first $1 billion of any losses on the portfolio. The loans will be secured by all of the assets of the LLC and will be repaid from the cash flows produced by these assets as well as proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

Proceeds from this facility, together with other AIG internal resources, will be used to return all cash collateral posted for securities loans outstanding under AIG's U.S. securities lending program. As a result, the $37.8 billion securities lending facility established by the New York Fed on October 8, 2008, will be repaid and terminated...

In the second new facility, the New York Fed will lend up to $30 billion to a newly formed LLC to fund the LLC's purchase of multi-sector collateralized debt obligations (CDOs) on which AIG Financial Products has written credit default swap (CDS) contracts. AIG will make a $5 billion subordinated loan to the LLC and bear the risk for the first $5 billion of any losses on the portfolio. In connection with the purchase of the CDOs, the CDS counterparties will concurrently unwind the related CDS transactions. The loans will be secured by all of the LLC's assets and will be repaid from cash flows produced by these assets as well as the proceeds from any sales of these assets. The New York Fed and AIG will share any residual cash flows after the loans are repaid.

PEU Report takes a stab at figuring out what all this means:

AIG lined up more billions in taxpayer funds. The first $143 billion wasn't enough to save the company. In a confusing, financial magician move, AIG will get $40 billion for preferred stock, $52.5 billion in TARP money for junk assets, and their total debt to Uncle Sam shrinks by $25 billion. That sleight of hand brings the total for AIG to over $250 billion.

Hey, if you spent $250 billion on a bailout of one company, you would try to hide the fact also.

Paulson Wants To Expand "Bailout" Beneficiaries Even Further

Bond insurers and specialty finance firms such as General Electric Co.'s GE Capital unit, CIT Group Inc. are now, among others, on Paulson's mind bending Bailout Road.

David Warsh with Big Questions and Big Stories

David Warsh has just published the silver anniversary issue of Economic Principals. I have been reading him from the start, when his column was at the Boston Globe. Twenty-five years ago, his column was the first item I turned to, in the big, thick Sunday Globe. The memories come back, as if it were only yesterday. He is not an Austrian, but he is a damned honest, sincere, interesting and informative writer. We definitely need more people like him (or at least hope, he carries on for another 25 years!)

His silver anniversary issues comes out with rockets blaring and asks these important questions:

How deep has been the opposition between the Federal Reserve Board and the US Treasury Department these last fifteen months? Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson have presented a generally united front. But what goes on behind the scenes? What of their staffs? The sheer opacity of Paulson’s initial plan to buy and hold troubled securities, and the clumsiness with which it was presented, has yet to be explained. What was the process by which it was developed and internally reviewed?

Warsh is on to something here. In early Congressional testimony, Bernanke's view of how the mortgage bail out would proceed was decidedly different from Paulson's. Bernanke testified that the bailout would result in mortgages being bought at "value at maturity". Paulson said they would be bought at discounted market value. The next day in further testimony, Bernanke fell in line with Paulson. Paulson's plan proved a non-starter. Indeed, WSJ reported that it is a dirty little secret that Paulson's Plan to buy up mortgages would not work and indeed would cause more problems for banks, and that is why Treasury shifted to infusing capital directly into banks. And, then, of course, there is the fact that Goldman Sachs and Morgan Stanley become bank holding companies, and each receive a $10 billion infusion from Treasury. What Just Happened? is the title to Warsh's column, yes indeed.


Warsh also broke wide open Harvard University’s Russia scandal of the 1990s.


Warsh writes:

No column I ever wrote cost more than “The Thing’s a Mess,” the first installment, in 2002, of many columns over the last six years about the collapse in 1997 amid charges of corruption of Harvard University’s USAID-sponsored mission to advise the government of Boris Yeltsin. I knew I was damaging several longstanding relationships with economists whom I admired by calling attention to the details of the US Justice Department’s ultimately successful attempt to recover damages in Boston’s Federal District Court.

Since then I have gotten used to it, and in more than twenty pieces, I have given a pretty good account of how Harvard professor Andrei Shleifer was found to be investing in Russia, along with his wife, deputy, and deputy’s family, in violation of his contractual obligation to provide disinterested advice, and how his close friend and mentor Lawrence Summers sought unsuccessfully to distance himself from the lawsuit, but not from Shleifer, first as Treasury Secretary and then as president of Harvard, as the matter plowed on to its ignominious conclusion. The episode was widely covered in Russia, and became part of the rich lore of Russian resentment
of US policy in the aftermath of the Cold War.

Warsh also writes of the reception he received from the usual suspects about his breakthrough story:

But you would never have a clue that any of this [the Russia episode] had happened from three of the most widely-read economists’ blogs, the Freakonomics site, J. Bradford Delong’s Semi-Daily Journal, or N. Gregory Mankiw’s blog. Why? Because they are economists, and not committed to “without fear or favor” news, though they deliver plenty of interesting tidbits over the course of a week. Besides, Shleifer is on the board of directors of the Becker Center on Price, where Freakonomics’ Steven Levitt teaches. DeLong, who worked under Summers at the Treasury Department, has been Shleifer’s friend since the two were college roommates. Mankiw regularly touts his colleague for a Nobel Prize.

The online edition is free, but the $50 Bulldog edition puts bread, not likely steak, on Warsh's table, and is available by subscripton.

Alert: Paulson Speaks Tuesday in NYC

Details:

Tuesday, October 28, 2008, 10:45 a.m. EDT
Secretary Henry M. Paulson, Jr.
Remarks on Markets and the Economy
Securities Industry and Financial Markets Association Annual Meeting
Marriott Marquis
1535 Broadway
New York, N.Y.

The Dirty Little Secret You Read About First At EPJ

A Brian Carney interview with Anna Schwartz, published this weekend by WSJ, hints at how dangerously clueless Treasury Secretary Hank Paulson is. 

In September, I wrote, of Paulson's initial plan to buy up mortgages:

Treasury Secretary Paulson's "bailout" plan has little to do with bailing out banks in trouble. In fact, if his plan is approved by Congress, it is likely the number of banks that will be in trouble will hardly decrease...You see, Paulson wants to buy the mortgages on the cheap, at their "real" value. But the bad stuff, the sub-primes, and the like, are worth at best 50 cents on the dollar. For banks that are insolvent because they own this paper, a Treasury purchase of 50 cents or less on the dollar isn't going to help things, indeed, it may make it clear to even more that these banks' liabilities far exceed their assets. 

Carney, a member of WSJ's editorial board, confirms that the reasoning in my analysis was exactly why Paulson ditched the first plan:

The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week.

Of course, whatever Plan Paulson developed, it would include getting cash into the pockets of his crony buddies. Paulson's first plan would have just sunk the rest of the entire banking system while Goldman Sach's wallet, and the lke got fatter.

Why You Read EPJ

Andy Kessler in today's WSJ:

Wall Street and banks live by short-term loans.

EPJ in September:

Since the Fed operates on the short term end of the interest rate spectrum,that's where investment bankers borrowed their billions. Borrow at the low short-term rates and lend long on mortgages and the like at higher rates, and earn the spread. That was the Fed enabled game.

Kessler today:

But here's the current dilemma: If Treasury pays more than market price for these distressed securities, it would look like a taxpayer gift to Wall Street. That's politically unfeasible. So Treasury has to pay the current distressed prices. (Despite this week's stock-market bounce, prices are still dropping on toxic CDOs.) But if Treasury pays current, fire-sale prices, it would lead to major write-downs at banks. Since most of these securities are collateral for other loans, and regulators force banks to have minimum capital requirements and cash on hand, any write-down in value immediately means new capital needs to be raised. And then who would throw good money after bad?

EPJ in September:

Treasury Secretary Paulson's "bailout" plan has little to do with bailing out banks in trouble. In fact, if his plan is approved by Congress, it is likely the number of banks that will be in trouble will hardly decrease. Billions more in real bailout money will be needed to bail these banks out...You see, Paulson wants to buy the mortgages on the cheap, at their "real" value. But the bad stuff, the sub-primes, and the like, are worth at best 50 cents on the dollar. For banks that are insolvent because they own this paper, a Treasury purchase of 50 cents or less on the dollar isn't going to help things, indeed, it may make it clear to even more that these banks' liabilities far exceed their assets. The only way a Treasury purchase of these mortgages would help is if they were bought closer to face value, boosting the value of the banks assets.

More Details On 'Wall Street' Sequel

As if Henry Paulson and Ben Bernanke are not enough entertainment, FOX is fast tracking a 'Wall Street' sequel.

Michael Douglas will return as Gordon Gekko, according to Variety. Bud Fox is history.

Allan Loeb will write the screenplay. In addition to screenwriting, Loeb is a licensed stockbroker who once worked at the Chicago Board of Trade.

Big Banks Get $125* Billion Cash Going Away Gift From Paulson and the Bush Administration

Please sit down before you read this. If you have high blood pressure or heart trouble don't even try to read this, find a decent sports page instead, this is not for you.

Approximately half of the first $250 billion tranche of money approved by Congress for the mortgage crisis will end up in the hands of the "healthy" big banks.

"For the good of the American financial system," Treasury Secretary Paulson has told the big banks they must take his $125 billion (Give or take a billion or two) handout, reports NYT.

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch. So much for bailing out the mortgage market.


Here's the kicker: The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings. In other words, all current shareholders are protected, unlike Lehman, Bear Stearns, Fannie Mae and Freddie Mac shareholders.

No matter how they frame this,the truth is this is a roughly $125 Billion going away gift from the Bush Administration to Wall Streets elite.

UPDATE: The exact terms of the funding have been released by Treasury. For the first five years, the dividend on the preferred stock will be only 5%, not 10%. The full terms on the funding can be found here.

*Note I initially put the headline handout number, and number in the story, at $135 billion. The handout number is a bit unclear, so to be conservative I have lowered the total handout estimate to $125 billion

They Are Getting Ready To Divvy Up The Lucre: US Summons Only Super Elite Bankers To A Meeting

The Bush administration summoned executives from leading banks to a meeting in Washington Monday afternoon to work out details of the $700 billion plan.

And, as they say in Chicago, "If you are not at the table, you are on the menu."

For the record those expected at the table are:

Goldman Sachs CEO Lloyd Blankfein, Morgan Stanley CEO John Mack, Citigroup CEO Vikram Pandit, JPMorgan Chase & Co. CEO Jamie Dimon, and Bank of America Corp. CEO Kenneth Lewis were all asked to attend. There was some speculation that Paulson might have expanded the invitation to at least three other CEOs from various regional banks, people said.

The FDIC directly examines and supervises about 5,250 banks and savings banks, and Paulosn invites at most 8 bankers to discuss how to divvy up $700 billion?

"It was expected that whatever comes out of the meeting will be used to put the finishing touches on the plan," AP reported its sources as saying.

Report: U.S. To Guaranty Japanese Firm's Investment In Morgan Stanley

In continued moves that favor Wall Street's "chosen ones", it appears that the United States government will guaranty an investment by Japanese bank Mitsubishi UFJ Financial Group in Morgan Stanley.

Andrew Ross Sorkin at NYT is reporting (My emphasis):

In what could set an important precedent, federal officials assured a big Japanese bank late Sunday that its planned investment in the embattled Wall Street giant Morgan Stanley would be protected, according to people involved in the talks...

The Treasury’s assurances amount to another extraordinary move by the government and could serve as a model for future deals. The tense, weekend talks were so critical to the financial markets that they drew in both the Treasury and the Japanese government...Mitsubishi and the Japanese government pressed the Treasury Department over the weekend to guarantee that if the United States were to inject money into Morgan Stanley at a later time — a step the Treasury has ruled out for now — the move would not wipe out Mitsubishi’s investment.

Paulson has found another formula that protects his cronies, their jobs and their stock positions, while funneling them money. Remember the days, oh so long ago, of Freddie Mac and Fannie Mae officers losing their jobs because they needed cash injections? Remember the days when these poorly managed companies' stock turned to dust when the government put in rescue money? Those days are gone. For Paulson's elite, they will show up this morning with their jobs intact, their stock positions intact (in fact, thanks to the government guaranty, a likely soaring Morgan Stanley stock). Somewhere, Dick Fuld, former Lehman CEO, is fuming.

Tape Blows Cover On True Treasury Intentions

The new kid at the Treasury hasn't quite learned you really can't talk in public about what you are really up to at Treasury. New Interim Assitant Secretary of the Office of Stability, Neel Kashkari, has been caught on tape providing the true details of what Treasury is up to. This will get him muzzled pretty fast, but it provides us the opportunity to see the scheming going on at Treasury.

Kashkari's statements were posted on YouTube, and now appear to have been removed.

WSJ reviewed the tapes and reports first on the fact that Kashkari considers the executive pay caps demanded by Congress a joke:

As the biggest market intervention in U.S. history made its way through Congress, Neel Kashkari, the Treasury official named this week to run the program, offered assurances to 800 financial-industry players.

Attempts by Congress to make beneficiaries pay for their mistakes, such as placing caps on executive pay, were "quite reasonable" and "a pretty modest hindrance to you," he told them, according to a recording of the Sept. 28 conference call made public on video-sharing Web site YouTube.

Kashkari told participants in the call that lawmakers' interest in limiting executive compensation was "emotional" and "probably the most difficult part of the negotiation" with Congress.

When one industry participant said the caps might discourage participation, Kashkari noted their limited scope, which he called "a pretty modest hindrance to you coming into the program," WSJ reports.

WSJ also reports that the conference call took place the night before the House rejected the rescue plan, on September 28. The plan passed days later on October 3.

The dates are important because Kashkari, according to WSJ, also reported to the financial insiders that, "Our preference would be to try to help healthy banks become even healthier." (My emphasis.)

Remember, the entire focus, at the time, was on buying up bad mortgages and there was no news out publicly about Treasury helping "healthy banks"?

Indeed, I just did a search of the New York Times database and the first time the words "healthy bank" come up in a search is on October 9, where NYT reports that as Part of a NEW "Plan B" that Treasury may take positions in banks, even healthy ones.

This is how NYT reported the story (My emphasis):

Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials...

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it...including healthy ones.

This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.

As Bob Murphy has pointed out, they haven't even bought one mortgage yet, so how could they have failed at attempting to unlock the supposed frozen market?

"New interest"? "New options" "After yet another tumultuous day"? Then why was Kashkari talking about these details to the securities industry, even BEFORE the first House vote?

A database search of WSJ pretty much shows the same thing, the first time "healthy bank" is used with regard to the takeover of banks is October 10. The only other relevant search that comes up is an Op-Ed piece on 9-26 by John Paulson , a respected Wall Street investment manager--not the Treasury Secretary--, who discusses the Treasury's plan to buy mortgages from all banks. And he would certainly be shocked to hear that two days after his Op-Ed that Kashkari said the Treasury's preference was to help healthy banks, given that John Paulson wrote in his Op-Ed:

By allowing all banks to sell their worst assets to Treasury at inflated prices, taxpayers would be subsidizing healthy banks which have access to private capital (Goldman Sachs, J.P. Morgan, Wells Fargo, and Bank of America, for example) as well as banks that don't have a private alternative. But under a Preferred plan, only banks that don't have a private alternative will be given federal assistance. This would reduce the outlay otherwise required to solve the crisis.

Folks, we have a smoking gun here, you would have to be blind not to see that the Bernanke-induced crisis is being used by Paulson to funnel money to Goldman Sachs and his other crony favorites. The plan all along was to help out "healthy banks". It's on tape from the interim Assistant Secretary of Stability. Yeah, crisis and fear alright. Every time they utter those words, they move more of the $700 billion closer towards Goldman Sachs' vault.

UPDATE: There is a poor quality audio tape of the conference call on YouTube. Here is Part 3 where at the 9:00 minute mark the mention is made that healthy banks will be preferred. Thanks, Anthony.

Ian Welsh On Hank

Welsh on Hank's plan:

Apparently Fannie and Freddie are to start buying 40 billion a month (20 billion apiece) of non-performing crap mortgage securites. This is Paulson's way to get things moving before his TARP fiasco is up and running, a way to spend more money than Congress gave him, and a way to make up for having to divert money from TARP to an equity infusion by buying preferred stocks.

200 billion was made available to Freddie and Fannie at the time they were placed
into receivership. This plan will blow through that in 5 months and that doesn't even cover the fact that, well, Freddie and Fannie had massive losses and the money was meant to cover those losses, not as a slush fund to buy up trash.

At this point I simply have no benefit of doubt left to give to Paulson or his cronies in the Bush administration. TARP never made any sense, and the rationale of supporting mortgage markets through this is transparently stupid. If the mortgage markets are having problem and Freddie and Fannie need to be used to support them, then buying up old crap mortgage securities is far less helpful than having them buy up new mortgages or mortgage backed securities.

Instead this seems designed to help Hank's friends offload trash, more than to clear a market blockage.

But, as they say in the tech business, I guess from the Bush administration's point of view, that's a feature, not a bug.

Nothing ever makes any sense with Hank until you realize it always somehow ends up with Goldman.

Alert: Interim Assistant Secretary for Financial Stability To Speak

Treasury Interim Assistant Secretary for Financial Stability Neel Kashkari will deliver remarks Monday before the Institute of International Bankers in Washington. He will discuss financial markets and Treasury's progress implementing the Emergency Economic Stability Act.

When
Monday, October 13, 8:00 a.m. EDT

Where
The Four Seasons Hotel
Salon A
2800 Pennsylvania Avenue, NW
Washington, D.C.

Keep in mind that this is another Goldman Sachs man brought over to Treasury by Paulson.

Alert: Paulson Post G-7 Press Conference Scheduled for Friday

Details:

Friday, October 10, 2008, 6:45 p.m. EDT
Secretary Henry M. Paulson, Jr.
Post-G7 Press Conference
Office of Thrift Supervision
Auditorium, 2nd Floor
1700 G Street, NW
Washington, D.C.

First Details of The Paulson Heist Emerge

OK, it's been clear from day one that the Paulson $700 Billion "Bailout" is the biggest scam in recorded history, since Paulson has set it up in a way that it won't bailout anyone.

Now, the first details of Round 1 of the scam emerge from WaPo (My emphasis):

The Treasury Department this week plans to start outsourcing the management of up to $700 billion in troubled securities using special contracting authorities that enable it to retain private portfolio managers, custodians and other financial services consultants without following standard acquisition procedures....

...it means that the government has little time to assess the companies that will be partners in what could become one of the largest public-sector funds in American history. Some of the same firms that have played roles in the rise and collapse of the mortgage-backed securities market may end up guiding the government as the bailout unfolds, department officials said...

Contracting specialists said the department has the authority to retain "financial agents" to manage money on its behalf. By using that authority at a rapid clip, instead of through traditional acquisition procedures, the government creates a risk that it won't hire the best firms at the best price, they said.

D. Kent Goodger, a contracting official for four decades who now teaches procurement classes for the federal government, said decisions to bypass federal acquisition regulations for urgent and compelling reasons in the past has led to trouble and cost overruns. "By rushing ahead, doing this quickly, it creates inherent risks," Goodger said...

An analysis by Taxpayers for Common Sense, a watchdog group, found that the government's use of private firms during the resolution of the savings-and-loan crisis two decades ago lead to "untrammeled payouts to the private sector and reprimands from Congress and the Government Accountability Office."

Bottom line, the public was right in opposing this measure, and one has to begin to think that Naomi Wolf is right and that a coup has taken place in America.

The Bill just passes, so you would think that the Treasury would be walking on egg shells trying to do everything step-by-step with prudent procedures. Instead, they not only throw out standard procedures, they go out and employ that great method known as reckless abandon, which in the past has lead to "untrammeled payouts to the private sector and reprimands."

And, this is Round 1. Just wait for the details on how Treasury plans to buy and sell mortgages and mortgage securities, when no one has a clue as to what many of them are actually worth.

On Paulson And His Phony Frozen Market

The National Association of Realtors says pending home sales rose 7.4 percent from July to August.

The group said its seasonally adjusted index of pending sales for existing homes rose to 93.4 from an upwardly revised July reading of 87. The reading was the highest since June 2007.

Pigs At The Trough: Behind The Citigroup, Wachovia, Wells Fargo Circus

First a very quick summary of what has been going on.

Early last week, the FDIC forced the hand of Wachovia and pushed them to be taken over by Citigroup. It was a typical FDIC sweetheart deal. This time for Citi. Citi paid $1 a share, or about $2.2 billion.

The government agreed to provide Citigroup with a financial guarantee on Wachovia’s most risky assets. It is similar to the deal that the Federal Reserve established with JPMorgan Chase’s emergency takeover of Bear Stearns.

Then later in the week, Wells Fargo recognizing that Wachovia was worth a lot more than $2.2 billion, especially because of some tax law changes made by Paulson's Treasury, bid, get this, $15.4 billion WITHOUT any government protection against risky assets.

Now,the courts will decide who gets Whacovia

So what is going on with all this aggressiveness to buy a bank in trouble?

Paulson's Treasury is writing regulations that will benefit firms like his old firm Goldman Sachs. It just so happened that this rule change was made last week Tuesday and Wells Fargo decided to try and steal Wachovia from the grips of Citigroup and its sweetheart deal. A signed agreement between Citi and Wachovia be damned.

What's the Treasury rule change that caused all this commotion? Specifically, companies are allowed to shelter profits from taxation based on their past losses. When a profitable company buys a company with losses, however, the government historically has limited the profitable company's ability to shelter its income based on the acquired company's losses. In the case of Wells Fargo, the company could only have sheltered about $1 billion in income each year --for a total of $20 million over the 20 year life span of tax loss carry forwards..

But the Treasury last week Tuesday changed the rules and removed the limits on the income banks can shelter based on the losses of acquired companies. In announcing its deal for Wachovia, Wells Fargo estimates it could write down $74 billion in losses on Wachovia's loan portfolio. Absorb that: Instead of $1 billion in tax sheltered income per year under the old rules, the new rules will allow $74 billion in sheltered income in any time period.

So basically, you have the government throwing so many goodies at the elite players that are left standing, like Citi and Wells Fargo, that they are fighting over who gets the goodies. Will it be Citi with its FDIC sanctioned low ball bid of $2.2 billion and the financial guarantee by the government against losses on Wachovia’s most risky assets, or will it be Wells Fargo and the super sized increase in value of Wachovia's tax loss carry forwards of $74 billion.

Either way, it is a heist.

Citi and Wells Fargo are pigs at the trough of multi-billion dollar gifts from the government under the cover of the overall financial crisis.

You can be certain there are all sorts of these hidden deals tucked inside the 400 plus page Paulson Plan and other rules being changed by government agencies because of the crisis. Most of them are hidden and unknown to the general public. The story was broken by WaPo on the tax benefit change only because of Wells Fargo's aggressive bid for Wachovia, and thus focus on the deal.

But, keep in mind that Goldman Sachs (Paulson's old firm) just became a bank holding company that is expected to be making very aggressive acquistions in the banking industry. Thus, Paulson's change in banking tax law will likely benefit Goldman to the tune of billions upon billions in tax benefits--especially since Paulson's phony bailout will require mortgage securities to be sold at depressed market values, which will producee greater tax loss carry forwards for Goldman from the banks they acquire.

So it doesn't matter how the court rules, whether in favor of Citi or Wells Fargo. The fix is in, with major benefits handed out by the government to whichever pig wins.

Given the billions involved, let's hope they at least pay for their own lipstick.

UPDATE: Forgot to mention, the new CEO at Wachova is Robert Steel, a former Treasury AND Goldman man. Cozy.

Jim Chanos On Frozen Markets

Top flight short-seller Jim Chanos emails Joe Nocera with some observations on the frozen markets that Treasury Secretary Paulson is so concerned about:

[T]he only reason these markets are illiquid is because THE CURRENT MARKS DON’T REFLECT REALITY! There are plenty of buyers (including me)for "distressed assets,” at the right price. We may reasonably argue if a certain C.D.O.[collateralized debt obligation] is worth 25 or 30 cents on the dollar, but I have no interest when the bank showing me the same paper at 60, could “do the deal” at 55…! The illiquidity is due to the continued overpricing of this paper, not the paper itself.

The Oligarchs Win...

...not exactly surprising. The Paulson Plan has passed the House and has been signed by GW.

Other than to emphasize that billionaire Warren Buffett, one of the wealthiest men in the world, will likely be a major beneficiary of this bill, I have nothing new to add to what I have already posted on the topic:

Mr. X Has Read the Senate Version of the Paulson Plan...

The Very Clueless New York Times

Warren Buffett As Fear Monger...

Buffett Boosts His Oligarch Credentials, Again

FDIC Insurance Increase: Ground Cover for Paulson Bill

The Paulson Plan Is Dissed, What Next?

The Paulson Plan And The Rise Of The American Oligarch Class

THE BIG LIE: The Supposed Paulson 'Bailout' Plan

The Bad News Bailout

Henry Paulson, American Oligarch

The Very Clueless New York Times

Today's NYT carries a story reported by Andrew Ross Sorkin, Diana B. Henriques, Edmund L. Andrews and Joe Nocera. It was written by Nocera. There was additional reporting by Jenny Anderson, Nelson D. Schwartz, Eric Dash, Louise Story, Michael M. Grynbaum, Carter Dougherty and Vikas Bajaj.

Written in the style of a cheap paperback thriller, it recounts the recent activity by Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke and other government officials in dealing with the current financial crisis. Yet none of these reporters reported on the key elements behind the crisis. For starters, not a word about the poorly structured balance sheets of the firms in trouble. Simply put, the financial incompetents borrowed short-term and lent out long term--a mismatch of assets and liabilities that was an accident waiting to happen. Properly matched assets and liabilities would have gone a long way toward eliminating the runs on most of the investment banks.

Botching this, the NYT reporting gets worse. They report a ridiculous statement made by Bernanke:

That Thursday evening, however, time was of the essence. In a hastily convened meeting in the conference room of the House speaker, Nancy Pelosi, the two men presented, in the starkest terms imaginable, the outline of the $700 billion plan to Congressional leaders. “If we don’t do this,” Mr. Bernanke said, according to severl participants, “we may not have an economy on Monday.

But fail to point out that while Bernanke is begging Congress for $700 billion, he has authority at the Federal Reserve to buy as much of whatever he wants, whenever he wants. Indeed, when the House failed to pass the bill on Monday, the Fed went in and pumped $630 billion into the system.

Ultimately, this crisis is about the Fed creating an economy dependent on more and more new money pumped into the system, and that the Fed stopped creating new money approximately four months ago. As we warned during the entire period here, here,