Sunday, September 28, 2008

The Paulson Plan And The Rise Of The American Oligarch Class

By Robert Wenzel

The word oligarchy dates back at least to the time of Aristotle and comes from the Greek words for "few" (ὀλίγον olígon) and "rule" (ἄρχω arkho). An oligarchy is generally considered any form of government where a small elite segment of society, be they from royalty, wealth, family or military, rule. The most current day popular meaning associates the word oligarch with an extremely wealthy person who acquires his wealth, or increases it significantly, by incorporating the use of government influence. Oligarchs are not the only ones who become rich, but their success and secretive influence over governments put them into a separate class.

A recent example of a major grab of power and wealth in this type of oligarch fashion comes from the period of the collapse of the Soviet Union. In the confusion during the collapse, and the rise of Boris Yeltsin as president of Russia, the oligarchs made their move. With relatives or close associates as government officials, sometimes even government officials themselves, they achieved vast wealth by acquiring state assets very cheaply during the so-called "privatization" process controlled by the Yeltsin government.

The current $700 billion Paulson bailout plan has brought to the forefront a new class of what must be called American Oligarchs and oligarch wannabes. Some may have originally earned their wealth by supplying consumers with desired goods, but at some point they crossed over to the dark side to use government as a vehicle to take from the poor and the middle class to give to themselves. Others, never produced an honest product and have been career long parasites on the working classes.

It is instructive that outside of this small group of oligarchs and wannabe oligarchs, few appear to have been in favor of the Paulson "bailout". (Note: The use of the word "bailout" to describe the Paulson Plan is a misnomer, see my column: THE BIG LIE: The Supposed Paulson 'Bailout' Plan).

A letter circulated and signed by many academic economists was sent to Congressional leaders objecting to the plan. The Austrian economists, who are the only ones who understand the business cycle, as would be expected also objected to the plan (See Rockwell: Stop the Bailout and Murphy: The Government Is Not Promoting Stability ).

Even some bankers have objected:

U.S. Treasury Secretary Henry Paulson's proposed $700 billion bank rescue aims to help ``poorly run'' companies and the primary beneficiaries would be Goldman Sachs Group Inc. and Morgan Stanley, said BB&T Corp. Chief Executive Officer John Allison in a critique of the plan.

Treasury ``is totally dominated by Wall Street investment bankers'' and ``cannot be relied on to objectively assess'' the impact of government policy on the financial industry, Allison wrote in a Sept. 23 letter to Congress...

Allison, 60, said Congress should ``hear from well-run financial institutions'' as lawmakers consider the plan, which seeks to ease the credit crunch by buying troubled mortgage- related assets. Under Allison, Winston-Salem, North Carolina- based BB&T avoided the subprime mortgage market, whose collapse led to the credit crisis. BB&T has risen 26 percent this year, the best showing in the 24-company KBW Bank Index.

From the right, Newt Gingrich has called the plan "stupid." From the left, Paul Krugman opposed the plan, calling it "Cash for trash."

Most noteworthy is the fact that the notoriously pro-Bush FOX television network carried this AP report:

There is scant public support for President Bush's $700 billion federal rescue plan for the U.S. financial industry and little expectation it would solve the crisis that has roiled the markets and hobbled some of the country's largest investment firms, according to a poll released Friday.

Just 30 percent of Americans say they support Bush's package, according to an Associated Press-Knowledge Networks poll released as White House and congressional leaders struggled to rescue the plan after House Republicans rebelled against it. Despite the president's pleas that the package is urgently needed to prevent an economic meltdown, 45 percent say they oppose Bush's proposal while 25 percent said they are undecided.

Yet, despite the extremely limited support for the plan, the Oligarchs prevailed and Paulson's Plan will become law. Indeed, the Oligarchs were out in full force to support the legislation. As I have pointed out before, Paulson with his Goldman Sachs connections must be considered an oligarch, but there are others.

Billionaire David Rubenstein, co-founder of the politically connected Carlyle Group, has come out in favor of Paulson's Plan. Rubenstein told CNBC that he hopes Congress will move quickly to approve the rescue of the U.S. financial system.

Carlyle Group almost has too many ways to benifit from Paulson's Plan to count. They ran a mortgage securities firm that went under. Those securities will be coming up for sale under a reorganization, just in time for purchase by the Treasury.

The Federal Reserve has changed regulations which will allow them to buy larger stakes in bank stocks. And Rubenstein wants to buy some of the paper the Treasury acquires. "Private equity can help by buying these assets," he told CNBC. "Private equity can be among the most significant buyers of assets."

Billionaire Warren Buffett is in favor of the plan, and he just bought, through Berkshire Hathaway, a $5 billion stake in Goldman Sachs. Goldman Sachs just received approval from the Fed to become a bank holding company, so that they can buy up troubled banks (And then sell the troubled mortgages of the banks to the Treasury?). Buffett called Paulson's plan "absolutely necessary'' and said that "I am betting on the Congress doing the right thing for the American public and passing this bill,''

Billionaire Wilbur Ross , through a firm controlled by Ross, bid $435 million last September to buy the service unit of American Home Mortgage, which collects payments from homeowners. He is in favor of Paulson's Plan and penned a column published at the New York Post to say so, "...we need this passed, and passed quickly...,"wrote Ross.

There are likely other oligarchs who maintain a low profile and keep their names out of the headlines, and there are oligarch wannabes like former New York City Mayor Rudy Giuliani . Giuliani has put out a press release advising that his firm has formed a "task force" to "guide financial institutions, private investment funds, institutional investors and other market participants through the legislative, regulatory and enforcement challenges posed by the" Paulson Plan.

Clearly, the new oligarchs have arrived in America. It will mean a lower standard of living for the rest of us as it is clear by the Paulson Plan that they are not afraid to think big when grabbing money from the populous at large. Further, they have the political skill and influence to get the legislation passed that will benefit themselves even when there is virtually non-existent popular support. Be scared, very scared. The new American Oligarchs now rule financial America and there is no such thing as enough with them. They will be back for another big bite from our wallets and income streams, all too soon.

Update: Word has reached me (HTrpm) that snuck into Paulson's plan are changes that will make it easier for the Fed to inflate the money supply. So is the play for the Oligarchs to grab the banks, the assets and the mortgages and then inflate the money supply boosting the value of all these assets by trillions, while the rest of us simply get to deal with the price inflation as higher prices at the grocery store, the gas pump and everywhere else?

Robert Wenzel is an economic consultant and Editor & Publisher of He can be reached at


  1. Even if the Oligarchs won, what was the alternative? The credit markets have dried up from all accounts and doing nothing was not an option.

  2. @ ChrisHoward

    The point is that the oligarchs won and no one else. This does not even protect the banks that are going to fail. It ONLY puts money into yhe pocket of the oligarchs, it is a shell game to fool the public.

    A real bailout would have sent money to the banks in trouble, that the billionaires are the only ones in favor tells you where this money is really going.

  3. Tommy

    If I understand you correctly, you are saying that only a favored few "won". That presupposes that the credit markets are not going to loosen up and that this may create a degree of confidence that has been lacking.

    I may not have seen all your posts on this topic, but what alternative do you see as better and fairer?

  4. Tommy

    You mention that "a real bailout would have sent money to the banks..." Isn't that exactly whjat didn't work in Japan?

  5. This plan would never work.

    People will be fooled that the reason that the market tanked today was because the plan was voted down. In fact, the market was tanking before the plan was voted down - and everyone assumed it would pass. Also, by banning short selling they prevented short sellers from *covering* their shorts and helping to put a floor on the market.

    The problem is that banks don't trust each other because they can't trust whats on each other's books. They are liars and snake oil salesmen (like Paulson) and they don't believe each other.

    The original meaning of "credit" is to believe or trust that someone will pay you back. (Latin credere). Only when you return transparency and consistency to the way you account for the toxic securities can you begin to restore true credit to the system.

    Throwing $700 bln at the problem destroys real credit, which is faith in the dollar and trust in American economic principles.

  6. Crisis like this are a normal part of the capitalist system. Whether or not the economy survives this most current crisis is irrelevant in the big picture. Think of the billions of people across the globe that have suffered and died as a result. We need a controlled economic system that will guarantee equality and prosperity for all rather than one that rewards ruling class gambling mobsters at the expense of the vast majority of humanity. We need a revolution.


  7. @ ChrisHoward

    You mention that "a real bailout would have sent money to the banks..." Isn't that exactly whjat didn't work in Japan?

    First,my comment about saving the banks was specifically about that. If you make them solvent you save, thats an equation Assets > Liabilites. Saving the banks would be a good start to saving the economy,

    As Harvard economist Jeffrey Miron has pointed out ,bankruptcy makes a lot more sense than a bailout and savers and borrowers will eventually find each other. $700 billion not required, to put into the pocket of the Oligarchs.

  8. The problem I have with Miron's point is that he doesn't care how long it takes for the market to work just as long as it ultimately happens. I'm not sure that this is the situation in which we currently find ourselves.

  9. The point is Miron's plan will work. Bringing liquidity to poorly structured products is nuts and simply rewards the incompetent and the shifty.

  10. To me a better alternative would be a temporary suspension of mark-to-market and a devaluation of the dollar along with economic stimulus in the form of cutting taxes on capital. Politically, none of that would likely be effective or possible. I still think that some inflation (devaluation) will be neccessary, since this problem far exceeds the .7 trillion allocated so far.