Today’s must read MSM piece is a brutal Bloomberg column, delineating why the Bailouts have been such a sweet deal for the banks. Despite the gross incompetence and sheer recklessness of Wall Street and the Financial sector, they were handed massive amounts of money with little in the way of returns to the taxpayer, no specific guidance or requirements.

It was Moral Hazard writ large, essentially an encouragement of future speculative excess. and even less penalties.


“Henry Paulson may be the most powerful manager of money in the world and he still couldn’t do for taxpayers with the $700 billion bailout of American banks what Warren Buffett did for his shareholders in investing in Goldman Sachs Group Inc.

The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.

Paulson’s warrant deals may give U.S. taxpayers, who are funding the bailouts, less profit from any recovery in financial stocks than shareholders such as Goldman Sachs Chief Executive Officer Lloyd Blankfein and Saudi Arabian Prince Alwaleed bin Talal, owner of 4 percent of Citigroup Inc., said Simon Johnson, former chief economist for the International Monetary Fund.

The transactions are “just egregious,” said Johnson, a fellow at the Peterson Institute for International Economics in Washington. “You want to do it the way Warren does it.”

Paulson’s decisions mark the first time in the nation’s 236- year history that the U.S. government has had to prop up the financial system by purchasing shares in institutions from Goldman Sachs, the most profitable Wall Street firm last year, to Saigon National Bank, a Westminster, California, lender with a market value of $3.8 million.

And that article gets even more critical from there. Go read it . . .


Paulson Bailout Didn’t Give Taxpayers What Goldman Gave Buffett
Mark Pittman
Bloomberg, Jan. 9 2008

Category: Bailouts, Corporate Management, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “$700 Billion Dollar Attaboy

  1. You know, I’m thinkin’ that, until we gravitate from calling this “Moral Hazard”, to something more fitting, like F*cking Ripoff, peoples aren’t going to capture the truer essence of what’s transpiring..

    this: “… first time in the nation’s 236- year history that the U.S. government has had to prop up the financial system by purchasing shares…” –should be most telling..

  2. Lugnut says:

    Moral Hazard????

    Calling it ‘Moral Hazard’ might lead some to believe there was the potential lure of financial malfeance hanging out there wiating to be stumbled upon by otherwise well meaning parties, rather than the outright intent of deceipt and defraudment that was the plan from the word go.

    Where’s all this friggin Congressional oversight Congress alledgedly demanded as a precondition of passing the pork laden TARP bill, hmmm? Hows that Bloomberg suit against the Treasury going by the way? And how come none of the banks are willing to disclose what they’re doing with our tax dollars? And how come no one in Congress is jumping up in down in a press conference screaming for disclosure of collateral received and bank received money audit trails? ITs not there and you don’t see it because they are all complicit in this. Feed the sheeple just enough so they don’t ‘Baaah’ too often.

    Calling it Moral Hazard is like saying Timothy McVeigh was moody.

  3. karen says:

    Excerpt below from Chuck Butler’s Daily Pfenning:

    Ty Keough sent me a note yesterday from James Quinn on… “As the politicians scurry to “save” capitalism through the use of communist measures, more Americans are becoming disheartened. The definition of communism according to Webster’s is:

    A system in which goods are owned in common and are available to all as needed.

    George Bush, Henry Paulson and Ben Bernanke have decided to seize money from the vast majority of Americans who lived within their means, utilized debt sparingly, and worked hard to get ahead, and give it to the most appalling failures in our society. They have shoveled billions to banks that operated their businesses like gambling parlors. They have shoveled hundreds of millions to people who bought houses with no money down, interest only mortgages and fraudulent loan applications. They are now rewarding automakers who made the wrong vehicles, pay 30,000 workers per year to not work, and have only been able to “sell” cars by giving them away with 0% financing to any schmuck who could sign on the dotted line. These acts fit the definition of communism. We are now more communist than China.”

  4. b_thunder says:

    Moral hazard? Yes, but also an ouright THEFT, 14 times greater than (alleged) Madoff’s.
    ” Hank” Paulson was placed in the People’s Treasury for a reason, so be a savior of the industry that put him there. The BANKS. If you’re not a bank executive, a major shareholder or one of the “partners” – wake up, Hank paulson plays for the other team!
    Message to Obama: appoint a prosecutor to investigate the backroom deals between the Treasury and the Banks.
    The only thing that scares me is…. not knowing what Hank has prepared for the parting shot, the final hurrah. Will it be another gi-normous monetary giveaway to The Street? Or something even greater? Something with a lasting effect????

  5. Moss says:

    BR: Your next book should be Ripoff Nation, the subject matter keeps growing…. The article in The NYT today about Municipal Finance warrants some further vetting.

  6. And everybody thought Senator Shelby from Alabama was an imbecile for having refused to support this outrageous rip-off (the TARP) and the automaker rip-off. That’s it–take money from well-managed enterprises and give it to buffoons that couldn’t recognize risk if it came knocking on the door wearing a sign.

    “We are now more communist than China”

    Indeed. My twelve-year old daughter asked me if China was communist the other day. I told her sorta. But not anymore so than we are.

    “Are they evil?” She asked.

    Again, no more so than are we.

    It’s just abhorrent what has happened in this short span of time (the last four months) to the notion of a republic of free men freely governing themselves. There can be no freedom when the government requires confiscatory taxation to manage its affairs, which, either through direct taxation or monetization of the debt (indirect taxation), is where we are headed. On the thinnest of reeds–i.e., the prospect, and it is still only now a prospect–of economic trouble rivaling the Great Contraction, we have sold our souls to Washington, to be enslaved by the great beast as it appropriates our resources to save the plutocracy.

    Pfft. This country disgusts me.

  7. Mannwich says:

    Thanks for the pick-me-up this morning, karen. Good grief. I repeat, how can anyone in their right minds think this “recession” (me-thinks soon-to-be-quasi-Depression, but I digress) is going to even remotely follow past recessionary playbooks? It ain’t happening, folks. This is a once in a lifetime event and I guess people will remain in denial until the bitter end.

    I think I’m going back down to South Beach and hiding out for a while…….

  8. karen says:

    No worries, Jeff, it’s a fiat world. Watch and wait. The economy doesn’t need to “grow” as much as it needs to not “stagnate.”

  9. ottovbvs says:

    BR: Please this is one of those superficial analogies that are entertaining but fundamentally silly. Paulson’s goal were not quite the same as Buffett’s for godsake. I’m not saying Paulson has handled this perfectly but comparisons with Buffett are deeply flawed. Apart from producing loads of harumphing of the “I’m going to cancel my subscription variety” this all seems a bit of a waste of time. This whole thing was done in a panic and therefore has flaws, but it has basically stabilized the financial system which was the principal aim. According to news reports Geithner and Summers are already working on cleaning up the blood and you can expect a much more rigorous management of the recipients of the money when the new administration comes in.

    I’m bound to say a lot of the totally OTT comments here today remind me of a local situation I experienced a few years ago. The town wanted to turn the neighborhood which is mainly very old homes into an historic district which wasn’t a bad idea from a quality of life point of view and might even have helped real estate values but involved a few minor restrictions eg. you couldn’t open a gas station in the front yard or paint the house purple. Well you’d have thought they were proposing setting up a commune. The number of silly speeches and letters to the local newspaper along themes like “what we fought for in Vietnam” could have filled a book. There comes a time when you have to be able to see the wood rather than the trees.

  10. Mannwich says:

    Fiat, Schmiat, karen. The government will only end up making the situation much, much worse.

  11. The_Syndicate says:

    “I thought we were going to get a decent return on this deal, have transparency with regards to how the money is being used and get credit flowing again so I could expand my business- wow I was naive” – Joe the plumber

  12. DL says:

    Well, at least Hank Paulson won’t have any trouble finding a good job at a bank.

  13. EDF says:

    As I understand it, the Treasury cannot fully account for the money that’s been lent. Can someone elaborate, please?

  14. VoiceFromTheWilderness says:

    This has been obvious since the day the TARP passed. A five page bill to spend 0.7 Trillion dollars is not a ‘rescue plan’, it’s a con-job, plain and simple. The comedic buffoonery from Treasury that has insued has only reinforced that view.

    It would be nice if instead of either informing me after the fact of the obvious, or drowning me in the spin of PR men with carreers to build/destroy, the MSM would inform me of things I need to know when they are relevent. A timely article on the relationship between Cerberus Capital Mgmt and the Bush WH detailing the bailout of cerberus that has recently been decreed from on high by the same clowns at Treasury — now that would be info.

  15. jwatwo says:

    In Nov, a rapidly going bankrupt Citigroup shows up, leveraged 2000 to 1 with a margin call. Instead of telling them to get lost, we are printing and giving them $400 B (20 x what they are worth) which will deal with 1 % of their problem. Note that this is a company that tries to make its money suckering people into paying up to 28% interest on loans. A real sustainable business model. It totally blows up every ten years. But Paulson and the Fed are behind these guys 2000 % a month ago. And probably a million % when they go bust.

    So what’s going on here? Are we going to spend 2 to 3 years of GDP to save Citibank? Morgan Stanley is 2.5 times the CDO debt bomb that Citi is. I think as much money is being printed as possible to pay off the bets to politically connected individuals who made contracts with these sinking entities before they go out of business. Hopefully this ends Jan 20. But if it doesn’t …

    In late November, NPR ran a three part tableau of the crisis. One part dealt with an amalgam of six school districts of high school teacher retirement funds in northeast Wisconsin. A rep from a Canadian bank talked the high school teachers on the committee to engage in this deal: insure $200 M of CDOs with $200 M of borrowed money for a net return of a few hundred thousand dollars a year. Two years have passed since the deal was inked. The CDOs are all underwater.

    Instead of pushing for a national law making these arrangements illegal, null and void as Chris Whalen advocates, Paulson (who as CEO of Goldman Sachs was an architect and beneficiary of these things) got himself appointed Treasury Sec as things began to fall apart and is running up the national debt (was $5.6 T when Bush arrived) to shore up shadowy entities.

  16. sinomania says:

    “more communist than china” LOL

    “Communist Party” in Chinese translates roughly as “collective property party”. The idea of “communism” that we associate with China is a construction by that great China born propagandist Henry Luce. If you haven’t been to China, I recommend that every American go, travel around (on your own, mind you), go to a big city, into the countryside and observe. You will never think of China the same way again and your eyes will really be open about our country and form of government and economy.

  17. jwatwo says:

    I forgot to add that if total US credit card debt is less than $1 T and total mortgages are $5 T, why has $8.3 T of Fed/Treasury giveaways and guarantees (BR #) not total blown the financial crisis away? It has to be these CDOs.

  18. Big E says:

    Correction: Fannie/Freddie are $5T, the entire mortgage market is $10-11T.

  19. Real Banker says:

    If you mean Moral Hazard by trying to EARN outrageous returns to pay for the preferred dividend then I agree…

    The required dividend on the preferred is 5% after tax, or about 7.5% pre-tax. The best banks are earning about 2-3% net interest margin. So the hurdle rate will at least need to be 9.5%. Most people are not going to apply for a 9.5% loan. This high hurdle rate partially explains the reason why banks will merge instead of try to lend. It is much easier to earn a 9.5% return from a merger investment than try to lend out at 9.5%.

    In other words this capital investment is incentive for banks to MERGE and to NOT lend.

  20. DC says:

    I must have missed it, but I have yet to read/hear/view a summary of what catastrophic scenario Hank presented in order to make his Congressional audience wet their collective knickers.

    Mostly I’ve heard that “the system would have collapsed” or something of that nature. What does that mean specifically? Supposedly the TARP was going to solve the problem except the TARP money has never been used as originally intended — so shouldn’t the system have collapsed by now?

    To the point made earlier by b_thunder: something just plain stinks. It appears to have been a literal robbing of the US treasury in order to save Paulson’s buddies from market forces. (Is Hank ‘Butch’ and Ben ‘Sundance’ or the other way around?)

    So the question remains whether a real global and societal catastrophe was imminent, or was TARP just a cover (that is, a tarp) for the negligence and malfeasance of Paulson’s pals?

  21. roc says:

    Lots of hostility here in the comments, but not much understanding of how the TARP is really administered and what it is doing. I can say that as a “real banker” one who had the offer to take TARP money.

    First – and this is important – The TARP money is a LOAN to banks. The interest is 5% payable to the Treasury and it is a preferred liability so, unless your bank is going out of business, they will get paid. The treasury is borrowing this money for almost nothing and loaning it out at 5%, not a bad spread when you get a first position plus warrants on the stock. This program will probably make a lot of money for the taxpayers. The biggest risk IMHO is a few of the very largest banks that still have questionable balance sheets with plenty of level 3 assets.

    Second – TARP money is CAPITAL. Capital for a bank is much different than deposits. Real Banker above says the bank needs to loan at 9.5% to make the TARP work. He is right that the real cost of the money to the bank is about 7% but any smart bank will use this money to grow deposits (typically a multiple of 10-12 times capital) and turn $1 million of TARP capital into $10 million of deposits and $9 million of loans. Deposits are relatively cheap and you can get more if you raise your deposit interest rates. There is lots of money on the sidelines looking to be invested that could go into banks if they would pay more for deposits. Normally, a bank can get more capital by selling stock or borrowing in the capital markets. Neither is a good option right now so TARP is a reasonable option to grow deposits so you can make loans.

    This program has been very poorly explained, and people misunderstand how it really works, but it will work and the government will get repaid. Goldman and Buffett are a whole different deal than your local community bank. As a bank, I would rather stay small and not lend than do Warren’s deal, but Goldman and GE were desperate at the time. (Notice now they are both banks and will be out getting deposits rather than depending on the money markets that are frozen.)

    It’s a new world, but TARP to banks is probably the least of our problems.

    Go look at one of the lists of which banks are getting TARP funds. So far, I think there are less than 200 out of about 6000 banks. Not every bank who applies is getting the funding, but of course no one is disclosing those banks who applied and were denied. Except for the largest dozen or so banks, who reportedly were forced to take the money so it wouldn’t be obvious who was in trouble, the other banks are mostly in pretty good shape and could have survived without the TARP.

  22. $0 to $10.3 million(2) 0% RRR as of 1-01-09

    2. The amount of net transaction accounts subject to a reserve requirement ratio of zero percent (the “exemption amount”) is adjusted each year by statute. The exemption amount is adjusted upward by 80 percent of the previous year’s (June 30 to June 30) rate of increase in total reservable liabilities at all depository institutions. No adjustment is made in the event of a decrease in such liabilities. Return to table

    even ‘real bankers’ should 2x check something as important as the RRR every once in a while..

    ..Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.

    The dollar amount of a depository institution’s reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board’s Regulation D to an institution’s reservable liabilities (see table of reserve requirements). Reservable liabilities consist of net transaction accounts, nonpersonal time deposits, and eurocurrency liabilities. Since December 27, 1990, nonpersonal time deposits and eurocurrency liabilities have had a reserve ratio of zero.

    The reserve ratio on net transactions accounts depends on the amount of net transactions accounts at the depository institution. The Garn-St Germain Act of 1982 exempted the first $2 million of reservable liabilities from reserve requirements. This “exemption amount” is adjusted each year according to a formula specified by the act. The amount of net transaction accounts subject to a reserve requirement ratio of 3 percent was set under the Monetary Control Act of 1980 at $25 million. This “low-reserve tranche” is also adjusted each year (see table of low-reserve tranche amounts and exemption amounts since 1982). Net transaction accounts in excess of the low-reserve tranche are currently reservable at 10 percent.

    ‘low-reserve’ tranche limits, currently, U$D 44.4 MM

  23. gloppie says:

    “Neither is a good option right now so TARP is a reasonable option to grow deposits so you can make loans.”
    Why should I not feel resentment when my tax contributions are used to grow deposits so you can make loans I do not need, AND can not afford?
    Please do care to explain to me, Mr Banker, I am all ears.
    Thank you.

  24. mknowles says:

    Goldman Sacks-USA

  25. vaughn says:

    First – and this is important ROC,

    Any bank that takes TARP (American’s money) funds is either a beggar man or thief (most likely both).
    Hostility? As a taxpayer, I find your condescending arrogance completely bracing -if typical.
    Fact is, Wall Street and its enablers in .gov are leeches that have brought this country to its knees.
    The old parasitic regimes on WS should have been allowed to FAIL. We could charter 10 new clean banks with the fear of god and taxpayer/investor confidence in place on day one.
    These days I pray for a bond market dislocation.
    Between the Big Banks leeching and Obama’s impending Scamulus Plan my children WILL be debt slaves in their own country regardless of frugality.

    and Roc………….. FUCK OFF ……… entitled leech.