[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.
