The Paulson Putsch
Questions for the new CEO of US Government Inc.
by Lila Rajiva
by Lila Rajiva
DIGG THIS
[Last Wednesday,
Hank Paulson was installed as CEO of US Government Incorporated,
replacing the now defunct United States of America].
Charles Krauthammer
wrapped up an astounding week in American history with a hosanna
to Ben Bernanke and Hank Paulson. The best possible team to have
on your side in a financial crisis bigger than any since the 1930s,
says he. Bernanke, because he is an economic historian specializing
in the Great Depression. And Paulson, because he knows everyone
in the banking industry and is the perfect person for arm-twisting
and deal-making. Financiers aren't all bad, sniffs Krauthammer.
There were all those greedy realtors and home-owners too.
Yes, Charles,
we do see that greed is a many-splendored thing, visiting the poor
and rich alike. But on a mundane level, the yearning of the cleaning
lady who gets herself in over her head with a home loan she can't
pay is not the same sort of public hazard as the cosmic larceny
of financiers who've skipped out with hundreds of millions from
companies they've skinned like pole cats
Fortunately,
one honest man, Kevin
Phillips, showed up on Charlie Rose to wrap up the week
correctly.
No hope was
his verdict.
I don't think
he meant this crisis alone. He was talking about public culture.
No hope from
this Democratic party or this Republican party. Or from Paulson.
Or from Washington.
No hope of
remedy or change. Nothing to do but wait for nature to take its
course. It may be diverted and distracted, he said, but it will
not be deterred.
He's right.
The remedy for the disease of empire is usually the death of empire.
These are the
first death throes. The question is what sort of country will remain.
What took almost
a decade in the thirties, was resisted by businessmen and statesmen,
what was debated and questioned for years before it took place,
step by step, happened last week overnight. With no more
than a whisper in advance, the state took over the American economy.
A vast portion of housing, banking, and insurance was nationalized.
The free market died in the USA.
There are some
who say it never lived.
Or lived only
a shadow of its self. Maybe so. But whatever shadow it was, there
was enough of it to defend, to fight for, to hold up. There was
enough to define it as the American way.
That will be
seen now as a linguistic oddity by historians in time to come as
they piece together the steps by which the most enlightened experiment
in government in modern times came to an end, not 250 years after
it began. It will be no consolation that it did so in the most impeccably
post-modern style with both a bang and plentiful whimpering,
a digitalized death by program-trading and risk-models, with balance-sheets
and portfolios hemorrhaging electronic red in Guangzhou and Gurgaon,
in Peoria and Panama City.
The whimpering
came mainly from those with the utmost responsibility for the whole
business and the ones least likely to suffer from its fall out –
the bankers and financiers of Wall Street and their front
men in Washington, whose dereliction of professional duty was so
monumental that in another age and place it would have entailed
not merely a court-martial but ritual supukku.
Yet, you heard
not one expression of real remorse or shame from any of them.
Not from Alan
Greenspan (who presided over the Fed over two decades), or from
Robert Rubin (Clinton's former Treasury Secretary, a one-time Goldman
Sachs CEO and current Citigroup director) or from John Thain (ex-NYSE chief, previously senior manager at Goldman, and the last chief
of Merrill Lynch before its take over) or from Maurice Greenberg
(former chairman of the NY Federal Reserve and until recently CEO
of A.I.G, the insurance giant that was nationalized overnight).
They had nothing
to offer except the time-worn counsel of confidence men: trust
me.
And you almost
want to. In the land of Tom & Jerry, Snoopy, and Mad
magazine, there is such an air of cartoonish unreality to the whole
disaster that any minute now you expect a new episode to start up,
a boom in, say, molybdenum, with another round of shysters and hucksters
clutching each other's forked tails, chasing round and round, with
the Hungarian Rhapsody firing off wildly in the background.
But it's not
a cartoon. It's an economic kamikaze attack. A hit to the financial
nerve center of the economy delivered by no other than the capo
of the capital markets himself, Hank Paulson, the former chairman
of Goldman Sachs, than which there is no more powerful investment
bank in the world.
You don't have
to be a conspiracy theorist to see that what Al Qaeda did to the
US partially and symbolically, was accomplished literally and completely,
in broad daylight, from within. The Paulson Put(sch), we'll
call it, playing off the old joke about Greenspan's boom. And we
got it, almost to the day, a Biblical seven years after the twin
towers were hit.
Is it really
conspiracy-mongering to wonder about the timing? Public panic drives
market crises, and public panics can be manipulated. Subliminal
memories and fears can turn quickly into worship or hysteria, anxiety
or terror. Or a mixture of all of them that ends with thinking paralyzed
and will power exhausted.
Since 9/11,
the first two weeks of September have become a time of foreboding.
In an election year, voters are waiting for an "October surprise."
Add to that, continual threats of war with Iran, ongoing wrangling
with Russia, vague fears of another terrorist attack or of a provocation
that might let the government seize more power. For traders, September
is the tired coda of the seasonal slump in the markets, doubly volatile
and brittle in the waning days of a year of unquiet, of economic
stress, of war-mongering, of mounting foreclosures and debt and
unemployment, with tension from the elections running high.
So, the questions
must not wait. We have to ask them.
Here they are,
in no particular order, as they occur to me:
Q. 1. Mr. Paulson,
were traders at your old firm, Goldman
Sachs, involved in the short-selling that brought down Lehman and
Bear Stearns, as many people allege?
The
SEC's temporary ban on short-selling of 799 financial stocks comes
after two of your old firm's rivals have first been disposed
of by short-sellers. Wouldn't you call that a selective enforcement
of laws?
Q. 2. Wouldn't
you say that you are powerful enough to influence the chairman of
the SEC who sets the rules and that SEC rules deeply affect your
old bank?
By extending this ban to other countries, isn't the government
acting in concert with a handful of bankers to sustain a global
financial regime that suppresses the natural functioning of the
market? You may doubt it, but short-sellers are God's creatures
too. Is this really what we are peddling at gun-point to Iraqis
as freedom?
Q. 3. SEC Chairman
Christoper Cox has been very critical recently of "naked"
short-selling, which is the practice of selling stocks short without
having "borrowed" the shares from the broker. Mr. Paulson,
isn't it the case that naked shorting is already illegal
under the Securities and Exchange Act of 1934 and that lax enforcement
of the rule is a
long-standing problem that the SEC, for a variety of reasons, tends
to ignore? Isn't the recent ban by the SEC intended only to
protect the financial sector from market forces? Doesn't this encourage
malinvestment and doesn't it unnaturally bolster the value of the
financial industry at the expense of other industries, something
that artificially low interest rates over twenty years have also
encouraged?
Q. 4.
Isn't the change of Goldman Sachs and Morgan from investment banks
to holding companies, extraordinarily swift and unexamined?
By allowing these investment banks to hold customer deposits, haven't
you simply used your public position to shore up the funding of
your old company and an associated bank? If not, why didn't you
convert all five investment banks to depository institutions too?
And as an aside, since when is it the job of the government to bolster
the balance sheets of investment banks?
Q. 5. Why do
you expect depositors to trust Goldman Sachs as a retail bank, given
the unscrupulousness
and recklessness it displayed as an investment bank? What guarantee
is there that these deposits won't be used to fund more reckless
trading, pay off Goldman's bad loans, or profit some crony somewhere
else?
Q. 6. Given
Goldman Sachs's unprecedented ties with the US government as
well as with the British government, European banks, and leading
hedge funds and financial firms, how could a former CEO of Goldman
Sachs not be aware of the solvency and liquidity issues at
major investment banks and insurance companies?
On March 6,
2007, little more than three months before the first shoe dropped
in this escalating crisis, you
told the public that all was well, in the Washington Post. You
said:
"We have
a very strong global economy...with low inflation, high levels of
liquidity and I feel very comfortable with the global economy."
In fact, the
vice-chairman of the Federal Reserve's Board of Governors claimed
risk containment was improving:
"We are
increasingly turning to the market for credit default swaps, or
CDS. CDS are more standardized than corporate bonds, and, over time,
they have also become more liquid. They therefore provide us with
new, and in many cases more precise, measures of credit risk."
But in the
same month, Fed chairman Bernanke was more cautious. In
an address to the Joint Economic Committee of Congress he said,
"Overall,
the economy appears likely to continue to expand at a moderate pace
over coming quarters...To the downside, the correction in the housing
market could turn out to be more severe than we currently
expect, perhaps exacerbated by problems in the subprime sector."
Despite this
risk, you and your associates have acted as if you put together
your rescue plans at the last minute. At least, this is the more
innocuous explanation....
If, despite
your privileged access to board rooms and back offices, you did
not know until after the fact how bad the situation was, isn't this
a prima facie case of incompetence? And if you did
know but concealed it from the public and from Congress, isn't that
a case of dereliction of duty? And if, as you admitted last Friday
on FOX, you let matters reach such a critical state that
Congress would be forced to give in to you because it was a national
economic emergency, wouldn't that be malfeasance?
Q. 7. Why were
Fannie Mae and Freddie Mac shareholders, including holders of preferred
stock, punished? Why were their claims wiped out, while the claims
of bond-holders were coddled? Senior debt holders were given back
100% on the dollar. Junior holders also did not suffer proportionately.
Instead, losses were borne almost entirely by equity holders. Senior
debt holders include investors like Bill
Gross, manager of PIMCO funds. What does it say that the government
is treating them preferentially and short-changing other shareholders?
Isn't that why no private investors have been willing to step in
to infuse cash into other strapped firms? In
other words, didn't your so-called rescue of Lehman and Freddie
actually botch the process of recovery, as Anatole Kaletsky argues?
Q. 8. You've
claimed that the regulatory system needs to be overhauled. Which
parts, specifically, do you wish to modernize, how, and why? And
why is it that in November 2006, only 6 months before the market
began falling apart, you
were saying exactly the opposite on NPR?
I quote:
"Excessive
regulation slows innovation, imposes needless costs on investors,
and stifles competition and job creation."
In your defense,
you were referring to Sarbanes-Oxley,
over which reasonable people seem to disagree.
What isn't
in dispute, though, is that your old firm was repeatedly in trouble
with regulators throughout its history. Given that, do you think
it's credible for you to argue that regulations are the answer?
Haven't we
placed the fox in charge of the chickens here?
Q. 9. What
does it say about the state of the country that the Treasury Secretary
of a Republican president effectively nationalized a major part
of economy without any kind of Congressional hearing or review?
Isn't this directly and completely antithetical both to the constitution
and to free markets?
Q. 10. Isn't
a blanket demand for more regulation a gross simplification of the
issue? Isn't it true that in some respects this financial crisis
was exacerbated by ill-considered regulations, some of which
were put in to solve previous financial crises? For instance, some
analysts
consider mark-to-market accounting (FAS 157) problematic. They
claim that forcing banks to value illiquid assets at the last market
price is like forcing homeowners to judge their house value by firesale
prices at an auction. It leads to rapid and exponential loss of
value, ratings downgrades, and an avalanche in write-offs.
At the same
time, it is also true that some other rules, like the uptick
rule (which limits short-sale orders to a price higher than
the current bid), may need reinstating to prevent cascading sales.
So, isn't a
debate centered around more regulation versus no regulation
just the usual "black-or-white" phony debate that siphons off analysis
into party-line squabbling? Can't this whole crisis be summed up
instead as a case of too big and too muddled? And isn't the
solution smaller banks and more transparency? If so, do we
need massive regulatory overhaul? Couldn't we get what we want through
decentralization, market competition, and independent external audits?
A few pragmatic, well-considered, clearly spelled-out and consistently
applied rules. Not more centralization and more bureaucracy,
which is what your proposal demands.
Isn't it true
that that the reason why you and your fellow bankers are obfuscating
the real problem is because leaving things too big and too muddled
makes it that much easier for you to... excuse the bluntness...
skim the cream off?
On March 23,
2007, NY Fed Reserve
Chairman Timothy Geithner, who cobbled together both the Bear and
the AIG rescues, said the best way to protect banks was to make
them better at absorbing shocks. He suggested giving them the
safety-net of more liquidity. In other words, more than a year ago,
before things began to unravel in July–August 2007,
while you were still insisting the system was strong, one of your
key bankers pointed out that more liquidity was needed. He would
certainly have told you this. Would it be unnatural to wonder if
this crisis was allowed to unfold so that a predetermined and desired
course of action (the creation of a megabank with access to customer
deposits and loans from the Federal Reserve) could be put through
without too much public debate?
Q.
11. Wasn't it one of Goldman Sachs' CEOs, President Clinton's Treasury
Secretary, Robert Rubin, who pushed for an end to Glass-Steagall,
one of the most important pieces of legislation we had on our books?
Among other things, it separated commercial and investment banking.
Combining banking functions encourages analysts at a bank to push
investments which the same bank might be trading for clients and
for itself. Isn't it true that for decades, Goldman Sachs has been
involved in conflicts like this, acting against the interests of
clients in dozens of cases? In Goldman's 2006 10K (a filing to the
SEC) there
is a 10-page section of pending legal claims, including mutual-fund
trading abuses, research improprieties, trading floor special abuses,
initial public offering irregularities, and an insider-dealing
scandal in 2001 involving a tip on Treasury bonds.
It was a Goldman
alum, Robert Rubin, who, along with then Federal Reserve chairman,
Alan Greenspan, actively blocked the regulation of the over-the-counter
derivative trade (OTC), which is at the center of the epic crisis
we are in today. That trade is the source of Goldman's (and other
investment banks) extraordinary profits.
I quote:
"We
disagree with any plan by the CFTC to regulate the OTC derivatives
market through exemption." Rubin
also lied about the response of Brooksley Born, chairman of
the Commodities Futures Trading Commission on this matter.
Q. 12. Goldman
Sachs has been at the forefront in creating many of the exotic securities
we see today, just as it was in the forefront of the development
of electronic trading. Both developments have increased the complexity
of the capital markets extraordinarily. When we haven't fully absorbed
the impact of these financial innovations, do we really need any
more? How can we trust that they won't be misused in the same way?
Given that derivatives have been around for over twenty-five years
and have not yet been regulated and that the stock-exchange has
been around over a hundred and suffers from regulatory excess where
it shouldn't be regulated and inadequate regulation where
it should be, what makes you think that we are going to do any better
now? Besides, to a layman's eye, far too many of these derivative
deals look like Ponzi schemes, where rising asset prices depend
on new buyers entering the system. We smell a sucker's game, with
the tax-payer as sucker-of-last resort. If this isn't so, enlighten
us, sir.
Q. 13. Didn't
the SEC itself change the limits on leverage set for broker-dealers,
the direct cause of the excess in leverage that has caused the credit
markets to collapse? In
2004, the SEC let all five investment banks volunteer for a regime
that set the debt-to-net capital ratio at 40:1, where it had
previously been 12:1. The SEC justified this change in exactly
the same language that you, Secretary Paulson, use now, only four
years later, in justifying another regulatory change:
Quote:
"The Commission's
2004 rules strengthened oversight of the securities markets, because
prior to their adoption there was no formal regulatory oversight,
no liquidity requirements, and no capital requirements for investment
bank holding companies."
With this history,
why should we think the SEC will be disinterested in creating rules
and impartial in enforcing them?
Q. 14. Can
you explain how the
structures you created for Enron and for Fannie Mae created
value for them and for their shareholders? Can you explain why there
were fraud
charges, convictions
and jail time for executives in one or both places?
Q. 15. Can
you explain to the American public how Robert Rubin as Treasury
Secretary, bailed
out Goldman Sachs bondholders in Mexico in the 1990s? Isn't
this much the same as the bail-out of Fannie's bond holders? Can
you explain how this type of globalization promotes global trade
when it defrauds US taxpayers, funds third-world crooks and strong
men, and incites chauvinism toward ordinary third-world citizens,
who get nowhere near the money but suffer the fall out?
Q. 16. Can
you tell us if Robert Rubin and Goldman Sachs have also been involved
in the suppression of gold prices, as the Gold Antitrust Action
Committee Inc. has long claimed? There is evidence that they
did this to hide the vast amount of liquidity (that is, paper money)
being pumped into the system by central banks all over the world.
Gold prices are a reliable indicator of inflationary trends and
signal the erosion of real savings to the public. As you should
know, erosion of savings is an attack on capital accumulation. It
causes malinvestment, siphoning large amounts of investment from
productive use in the economy into speculation and serial asset
bubbles.
Q. 17. Can
you tell us if Goldman Sachs misused federal environmental laws
and agencies to purchase land at fire-sale prices that ultimately
profited you and your family and associates? While CEO of Goldman
Sachs, you were chairman of the Nature Conservancy (TNC), an environmental
activist group that has positions on global climate change and has
a lengthy record of scandal and tax fraud,
as detailed by a series of investigative articles in the Washington
Post and in Senate hearings. The National Legal and Policy Center
alleged that TNC’s land donations were structured
to improperly give wealthy donors tax breaks. Shareholders,
as late as 2006, complained that you had a conflict of interest
in your dual role, according
to the National Legal and Policy Center, an activist group.
TNC’s activities call into question your own personal and business
ethics and contrast with your public rhetoric about market discipline.
Can we anticipate that the global banking junta that you
head will soon be joined at the hip
with the climate czars and the nuclear industry? Can we take
an unhedged bet on that?
Q. 18. Can
you explain why the financial press treats your old firm reverentially,
when its "white shoes" are splattered with fraud, corruption
and insider deals with government?
Goldman Sachs
was involved in fraud in the spectacular bankruptcy
of Penn Central, a transportation conglomerate, in the 1970s.
It was banker
to media
moghul, Robert Maxwell, who swindled pensioners.
Along with
the Clinton administration's Rubin and a bevy of academic experts,
it was involved in the market collapse in Russia that some call
the rape
of Russia.
It was even
involved
in the stock market crash in 1929, which it partly set off with
a type of Ponzi scheme.
Q. 19. When
the Treasury, key positions in the Federal Reserve system, the import-export
bank, the stock exchange, the British cabinet, the BBC, important
European banks, and leading hedge-funds are (or have been) filled
by alums of Goldman Sachs and other investment banks, can you suggest
why the public should still have confidence that the system is not
rigged in favor of financial and political elites here and abroad?
Why should you be given more power over the public purse? And if
our representatives do give it to you, shouldn't we conclude that
they are acting venally and against the public interest?
Q. 20. Can
you explain why despite all this, the public is still encouraged
to place more and more of its money in the stock market through
pension funds? Can we infer that advocates of this and other programs
like it intend to give the banks access to funds and not small investors
access to wealth?
Q. 21. You
went on TV last Friday to say that the system was clogged up with
illiquid assets, which, given enough time, would recover and enable
the government to recoup its expenses. But every reliable source
on real estate, from Robert Shiller to Nouriel Rubini and Nori Prins,
has indicated that the deflation in real estate prices is extensive
and probably only half over. Any debt related to real estate (the
major part of the bad debt) will get even worse and the assets being
sold to the tax payer will probably go to zero or near-zero in market
value. With the government severely strapped and under pressure
from the right (to expand war funding) and from the left (to expand
social spending), how likely is it that any of these assets will
be held long enough to make them profitable? Isn't it more likely
that they will be dumped somewhere down the line and any profits
siphoned off to the newly created Goldman Sachs bank or some other
private channel?
Q. 22. With
commercial
real estate also going south, can you assure us that Goldman
(which has investments in it) will not use its special relationship
with the government to lock in bids on infrastructure creation (perhaps
on the scale of the New Deal, considering the rhetoric that is being
tossed around) that will solidify its stranglehold on the market
and public sphere?
Q. 23. Aren't
you effectively creating state banks at this point? And aren't these
banks now part of a global
banking order?
Isn't
this restructuring part of the effort to create a new, "more
effective" international order that parallels and will eventually
"kill" the old one, the UN? I am quoting the words
of Charles Krauthammer, leading spokesman of said order and a big
fan of yours.
Q. 24. You
and your associates talk about trillions of dollars in value having
been lost from the world economy. But isn't it more accurate to
say that some of that value never existed? The prices were inflated
and a swindle...and the rest of the value was not lost but creamed
off. Isn't it fair to say that this was not done in an honest market
but in a crooked one, albeit a large number of people besides you
turned crooked too. In fact, if we tally the numbers for the value
lost and the fortunes found, they match up nicely.
This, Mr. Paulson,
won't stop the Democrats from making blanket statements about excessive
CEO compensation that will be used to diffuse public anger so that
honest CEOs from productive sectors and honest money managers and
banks will also become equal targets with the corrupt ones. (Not
that we object to CEO pay cuts either, but we think shareholders
should decide that.)
The criminality
of certain parts of the financial industry will provoke general
denunciations of free market capitalism. By redistributing a trivial
part of the spoils, voters will be bribed to go along with the heist
and demand that government make good every deficiency they suffer,
from receding wages to receding hairlines. The middle class and
the poor will supply a generous share of the improvident. People
who were happy to flip houses, lie on their loan applications, default
on their student loans, their credit cards and their car loans,
scam insurance companies and scoff at the thrifty and hardworking
will rush to the front of the outrage line. Democrats will call
for reform and forget Robert Rubin. Republicans will denounce Fannie
Mae and forget Paulson. Structures will be blamed, although structures
are only shadows cast by human beings. Laws will multiply, though
laws are only a small part of the problem. Public morality will
be ignored, though it is most of it.
Meanwhile,
you and your banker friends will stir up this propaganda as you
engineer a new regulatory
and tax charade calculated to suck even more money from the honest
into the pockets of thieves and derelicts.
Q. 25. You
claim that allowing the market to collapse would not be in the public
interest. But the market is not an elected official and it has no
responsibility to act in anyone's interest. Rather than setting
yourselves up as saviors of a market that doesn't need it, shouldn't
you and your friends, who fattened off a long series of reckless,
illegal and criminal actions, settle with your creditors honestly?
Lynch mobs
are not for us. There are far too many other people who enabled
this gigantic swindle for us to practice selective outrage. We are
happy to concede that an investigation into all this would be a
perfect waste of time and tax-payer money, would addle and inflame
an already addled population, and would be stretched to kingdom
come. We suggest instead that you and your friends do the minimally
decent thing. We suggest that you step down, pay back the clients,
shareholders, and investors you robbed and put the rest of your
dishonorable fortune to better use.
 You,
Mr. Paulson, are said to love bird-watching. Perhaps you could return
to those vast lands in Chile that Goldman
donated to your conservation charity. Go there and do something
productive for a change. Leave human society and the round of bankers
and bureaucrats. Take off that tie. Work with your hands. Create
a sanctuary for endangered birds. At least then, those of us who
skimped and saved and followed the rules of the free market can
swallow our bitterness. Our pitiful savings might have eroded and
vanished because you and your camp followers were flipping and dealing
on a scale that would blanch the face of a pathological gambler,
but at least we will be able to console ourselves that the bald
eagle that was struck down last week in Washington and New York
will fly free somewhere in this world because of the wealth
we foolishly entrusted to you.
September
25, 2008
Lila Rajiva
[send her mail] is the
author of the ground-breaking study, The
Language of Empire: Abu Ghraib and the American Media (MR
Press, 2005), and the co-author with Bill Bonner of Mobs,
Messiahs and Markets (Wiley, 2007). Visit her
blog.
Copyright
© 2008 Lila Rajiva
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