Three-Card Capitalists: The Financial Disappearing Act of 2008


Treasury Secretary Paulson’s Financial Disappearing Act of 2008 is a charade. Lawmakers who dug in and blocked this act of economic treason deserve applause.

The Orwellian name of the legislation itself should have frozen every American citizen in his tracks. The economy is not about to implode and if it were, it’s doubtful if government would do it anything but harm.

The financial markets are in a crisis of confidence because the US government is debasing its currency and stiffing its creditors. Uncle Sam is a deadbeat and the world knows it. The world is worrying what to do about the useless paper it’s holding. That’s what the panic is about.

It’s a strange day when Barry Goldwater and the Chinese Communists are in agreement ….

And they are both right.

Want to really stabilize the market?

Put the government’s financial house in order. Pay down the debt. Let the losers take their losses. Tighten belts. The economy is not in good shape, but it can still be whipped back into it. It will only take financial discipline and some willingness to accept hardship.

Instead, since last summer, Federal Reserve chairman Bernanke has embarked on a series of epic blunders in the opposite direction. Worried about cheap money? Give ’em cheaper money!

What does it mean that the banks have a liquidity crisis overlaying a solvency crisis? It means they are broke. The loans are defaulting and no one will lend any more. Why should they? They haven’t got back what they lent out before. What did you expect? That is the result of the bankers’ own stupidity, recklessness, and arrogance. The remedy for it is not to hold up the rest of the population like gangsters and demand at gunpoint that they hand over their wallets.

Money is in plentiful supply all over the world — especially in the accounts of the very people who are demanding our money.

And, by the way, what’s in it for Donald Trump that he’s come out to defend all this?

And what’s in it for Warren Buffett who also defends Paulson?

Paulson, Buffett and Hank Greenberg (the former chief of corrupt insurance giant AIG, now a charity child of the Federal Reserve) have all been in business together, one way or other. And some of that business doesn’t smell right. We now know the bailout of AIG was also a bailout of Goldman Sachs, its counterparty on a number of deals.

This spring the government handed down convictions to employees in one of Buffett’s reinsurance outfits, General Re, which did business with AIG. For decades, Greenberg has been at the center of multiple frauds including falsification of documents offshore and bid-rigging back home. His close associate, Mike Murphy, who lobbied successfully for tax treaties with Bermuda and set up many of the alter ego companies that were part of the fraud, has shredded documents to hide evidence. [There is also a behind-the-scenes power struggle at AIG between Greenberg and the post-Greenberg management, which has been cooperating with the FBI. That’s relevant to what’s happening too.]

What AIG did was hide losses in affiliated businesses that it owned. It did it by phony risk transfer deals. Risk transfers get better accounting treatment than loans. The fake deals also helped to reduce reserve requirements on the books so that AIG could look better to stockholders. That means the fraud worked both to boost prices and to shortchange shareholders of their dividends for years — at least through the ’90s and then again from 2000—2004.

And who do you suppose sold some of those credit default swaps to AIG and its reinsurers? You guessed it — Hank Paulson’s old bank, Goldman Sachs.

This is not just a problem of mortgage securities gone bad, as Buffett said in his public defense of Paulson and AIG. No. This is a matter of decades of white collar criminality, cronyism, and reckless business practices by leading banks and financial businesses, a massive bubble of stupidity, arrogance and greed that the market refuses to swallow any more. Right at the center are the very financiers who set it off.

AIG was phonying its books long before the housing bubble, at least since Alan Greenspan began cranking out liquidity on the cheap at the end of the 1980s. That is, as soon as the junk-bond mania died and the stock market crashed, money was injected into the system by Maestro Greenspan through low interest rates. The tech bubble was inflated. Goldman Sachs was in the thick of it, sending a tidal wave of credit across the globe through new and complex derivatives and through electronic trading. MIPs, SPVs, SIVs. These off-book vehicles and other hedges (for Ghana’s Ashanti Gold, for AIG, for Enron, even for Fannie and Freddie) were developed before the real estate bubble, some to skirt tax rules, others to make the books look better.

What they also did was blind the companies who used them to the risks and losses they had on their books. Accounting rules and business practices that rewarded managers in the short-term exacerbated the problem. They encouraged shortsighted deal-making, quickie trading into hedge-funds, opaque off-book entities, and accounting swindles of all sorts. Now the bar tab has come due and our boon companions are making their excuses and exiting in a hurry. Guess who’s paying?

After turning his own investment bank into a hedge-fund, the Treasury Secretary now wants to turn the government into a super hedge-fund. That is all this business amounts to. The government is insuring the bad assets. Well, as the AIG case shows, accounting tricks can turn insurance into loans or anything else. Bad debt becomes a troubled asset. Then the trouble passes (into our pockets) and out from the other end of the sleeve comes a white rabbit.

Welcome to the age of trompe l’oeil capitalism.

The Bush administration has already vanished a trillion (and counting) into the black hole of the Iraq war. Then there is the infamous trillion (and counting) that seems to have disappeared from the Defense Department under former Comptroller of Defense, Dov Zakheim, between 2001—2004 (Zakheim is now back in the Bush administration as a wartime contracts commissioner).

Why should this trillion be any different? Especially when we know Goldman Sachs is not only a big government contractor, it also defrauded the municipalities it sold bonds to?

Look at the bill closely.

Section 2 (Purposes) states that it "provides authority to the Treasury Secretary to restore liquidity and stability to the U.S. financial system and to ensure the economic well-being of Americans."

That this legislation gives unprecedented authority to the Treasure Secretary is blindingly clear to everyone.

As to the next point, liquidity cannot be restored by decree. It is not money alone but confidence that is being withheld.

As to the last part, it is drivel, and offensive drivel from a government that has bankrupted the country and crippled the future of its sons and daughters.

Contra Nancy Pelosi, who detects an inaudible voice of the people whispering in its leaves, this bill is nothing more than a loud crude Ave Caesar to the bankers. There does not seem to be any more obvious point about the whole business than that the former CEO of Goldman Sachs gets more power.

In Section 101 the Treasury Secretary is given authority to establish a Troubled Asset Relief Program (“TARP”) and an Office of Financial Stability (OFS) within the Treasury Department to implement it that will coordinate with the Board of Governors of the Federal Reserve System (the Fed), the FDIC, the Comptroller of the Currency, the Director of the Office of Thrift Supervision (OTS) and the Secretary of Housing and Urban Development (HUD).

Is your head spinning?

TARP is simply doublespeak. It could have come straight from the old Soviet politburo. There are no assets involved here. These are liabilities. These liabilities are not troubled; they are junk.

And why do we need the Orwellian Office of Financial Stability? Is this the Minifinanz of the new United Sachs of America?

Minifinanz seems to bypass or parallel departments we already have. It actually looks strangely like a Treasury equivalent of Douglas Feith’s Office of Strategic Influence, which "stove-piped" false information to the President.

Section 102 creates a program to guarantee the bad loans (sorry, troubled assets) by creating risk-based premiums to cover anticipated claims.

Well — the claims are going to come, and they will be even higher, now that the claimants know that Uncle Sam, the Supreme Court, and the military are backing them. Because that is what the full faith and credit of the US ultimately means. The US government has got itself into the insurance business. Officially, this time.

Odd coincidence that earlier this year, Mr. Paulson was pushing a centralized insurance program that would bypass state insurance regulators.

Odder yet, Mr. Paulson’s old firm Goldman Sachs, wrote many of the derivatives on the credit swaps filling the books of AIG, which the Federal Reserve recently rescued to the tune of $85 billion.

Oddest of all, AIG has been fighting NY State’s insurance regulators on civil and criminal charges, as I noted.

Should someone point out that the remedy for state regulators who try to overreach and push federal regulators is not for the federal government to do an end run around state regulation?

This may help Mr. Paulson’s cronies. It will not help federalism.

In the area of oversight also the bill is deficient.

In Sec 103 of the bill we find that it is Mr. Paulson who alone decides which institutions get to be vanished up his sleeve.

And in Sec 104 we find that oversight of Mr. Paulson will be conducted by…well, Mr. Paulson.

Yes, the charmingly named Financial Stability Oversight Board (Drop the "Federal" and you are left with SOBs) will also have Chairman Bernanke, the SEC chair and the Secy. of HUD, and the Director of the FHFA — but we are not inclined to think that these worthies are any more than rubber stamps for the world’s most powerful banker.

Sec 105 requires Paulson to report to Congress within 2 months and for every 50 million spent.

But two months is a long time in the markets and 50 million can go up and out a lot of sleeves. Does Congress know enough about pricing mechanisms to see through any foul play? Shouldn’t Paulson instead report to independent experts with authority and experience in the real market, who are not appointed by Congress but are self-selected by their peers?

As for regulatory modernization, we recall derivatives regulation came up in the late 1990s. It was the former chief of Mr. Paulson’s old bank, then Treasury Secretary Robert Rubin, and Federal Reserve Chairman, Alan Greenspan, who blocked it.

But apart from the bizarre spectacle of bank managers handing stickup guys the keys to the vault, there are other problems.

How do the rights granted to Paulson (106) relate to other government departments? Why can’t the management of assets be done within existing bureaucracies and laws? How extensive are Paulson’s new rights? Can they be revoked? How easily?

How can the Secretary of the Treasury determine the interests of the public on his own (Sec 107)? And how can he waive Federal regulations on his own (107)?

How can the Secretary manage conflicts of interest (108), when the power given him here is in itself a conflict of interest?

Why is the FDIC in the asset-managing business? (107)

Why should foreign banks be told to act in concert with ours? (112)

(They do anyway, but putting it into law makes global government official.)

And if the government’s interests are to be protected, why does the government only get nonvoting warrants, and not shareholder votes, in the institutions participating in the program? (113)

Buy this book.

The media talks as if the bill gives Paulson $350 billion and he has to work for everything else. Actually, it authorizes the full amount. The only brakes are on the speed with which he gets the rest. The President can request anything over $250 billion and the burden of disapproval is placed on a joint resolution of Congress. How easy will that be to obtain?

For all the talk about helping home owners and punishing CEO’s, there is also little about either in the bill. And what there is is set up poorly.

Buy this book.

Mitigating foreclosures (109) and modifying loans terms are both unjust to homeowners who’ve abided by their loan terms or have already suffered foreclosure. It creates a serious moral hazard problem and encourages more and more claims on the government. Skip the lofty rhetoric. Marketing bad loans does not help the feckless and improvident (a number of whom are not poor), any more than selling credit cards helps them. You might as well hand out bottles to alcoholics. And more bad loans certainly don’t help people who are really hurting.

Likewise, the penalties for participating firms hardly amount to a slap of the wrist (111). If we’re serious about punishing the guilty, there should be disgorgement of all bonuses, incentives and golden parachutes, and severe penalties for unprofessional and illegal conduct. Retroactive pay-cuts for senior managers is in order.

This bill was never about helping anyone but the same crowd who got us into this mess. It’s legislative chicanery that does little more than clear the board and shuffle the cards for the next round of government-backed gambling with financiers who hold the trumps (and Buffetts) and make jokers out of all of us.

No more three-card monte and disappearing acts, please.

The stakes are too high now.