Mr. Hanky’s reverse Midas touch

I have, in recent days, taken to calling Treasury Secretary Henry “Hank” Paulson Mr. Hanky, not because of any complex metaphor, but more because I just knew he was full of shit. Well, thanks to his most recent actions, Hank has given my allusion a new, improved accuracy.

As discussed in recent days, Paulson changed his position on stock injection, and decided to use $250 billion of bailout money to pump equity into troubled banks. He made his announcement after Still President Bush broke the ice for him on Tuesday morning. . . which was a day after Hank made the directors of America’s nine largest banks an offer they couldn’t refuse. . . .

Or so the story goes.

The thing is, it was an offer that the bankers couldn’t refuse, but not in that Godfather way. It was an offer they couldn’t refuse because the deal was so sweet!

As Dean Baker noticed:

[T]here is a big issue about the terms under which they were given capital. Secretary Paulson decided that a 5 percent rate of return on preferred share was good enough for the taxpayers. Warren Buffet got a 10 percent return for his investment.

No one would confuse Henry Paulson for Warren Buffet, but come on -- he could get a 4.0 percent return buying treasury bonds. I can't believe that he had such bad business sense when he was CEO of Goldman Sachs.

And a commenter on Baker’s post noticed even more:

[I]t's not just the 5% "coupon" (dividend, technically), that marks this as bad relative to the Buffet deal. Buffet received an equivalent amount ($5 billion) of favorably-priced common stock warrants that he can exercise anytime during the next five years. The rough plan for Paulson, as I understand it, is for the Treasury to get warrants equal to just 15% of the preferred stock injection.

Also striking is how different this is than the Treasury-AIG deal. I understand that the AIG bailout was for different purposes -- AIG was going immediately bankrupt whereas the solvency of the banking system over the next, say, 24 hours, is relatively assured (with diminishing levels of confidence the farther one goes out) -- but the Treasury charged AIG for its loan facility a rate of LIBOR + 8.5%. While I understand that there is a difference between a loan and a preferred stock purchase, they are not all that different: preferred stock is like a bond, but with fewer recovery protections, and like a stock for capitalization purposes, but it doesn't share in the broader common stock market gains. The important point with the present Paulson action is, to my eye, that the Treasury picked a very low fixed rate for a LONG time (five years!) without reference to LIBOR.

OK, kind of technical there, but the point is clear: Paulson took what was a fairly good idea as structured by Gordon Brown (or even by Warren Buffet), and turned it into shit. Don’t believe me, check out what investors thought (again from Baker):

The markets gave Paulson's investment strategy a big thumbs down from the taxpayer perspective. Goldman Sachs shares jump 10.7 percent after the details were made public. Shares of Bank of America rose 16.4 percent and Citigroup's stock rose 18.2 percent. Obviously the market thinks that Paulson gave the banks a really good deal.

Conversely, the United Kingdom’s big three all saw their stock prices fall after Brown exchanged equity for preferred and common shares and exercised their voting rights to make changes in bank leadership.

(This might sound a little counterintuitive, but if you are not a board member of a bank, you actually want to see this result, at least in the short term. It actually means that screwing up has repercussions—which means less of that “moral hazard” that so many of the serious set warn us about when plans to help those facing home foreclosure are mentioned.)

The former King of Goldman has turned what was his Midas touch when it came to private capital, and turned it into the reverse for his public service. Even when shown a golden blueprint by the UK, Paulson’s fingerprints changed the result into a shitpile.

So, congratulations, Mr. Hanky, the Treasury Poo, you’ve now wholly embraced your nickname. Alas, it is the rest of us that are left holding the bag. . . .


(cross-posted on The Seminal)

How cute. . .

Hank is going to let Bush pretend he’s still in charge. . . .

The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks, according to officials. The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers, officials said.

And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

. . . .

Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes.

President Bush plans to announce the measures on Tuesday morning. . . .

Henry Paulson, who himself had to be dragged kicking and screaming to this equity injection plan, worked out the details in private with the biggest players on Monday. . . and then kept it on the QT so that Still President Bush could come out on Tuesday morning and make it seem like he had some role to play in all this.

He didn’t.

Truth is, Mr. Hanky didn’t much either. Democrats in Congress inserted the language (over Paulson’s objections) in the TARP bill that gave Treasury the authority to do this; Paulson then did nothing for ten days, until markets tanked, credit got tighter, and UK PM Gordon Brown got most of the Europe on board with a similar plan. Hank Paulson is just desperately trying to keep up.

Meanwhile, Hank’s old pals at Goldman Sachs have cut a deal with New York state to headquarter their newly configured full-service bank in New York City. So, they get more from the federal government, and a state tax break, too.

How cute.


(cross-posted on The Seminal)

What’s the opposite of leadership?

When last we spoke, the Dow was starting Friday in freefall while all eyes turned to a meeting of the G7 called by the chief executive of the United States, George W. Bush Henry Paulson. During the course of Friday, the Dow did a bit of a rollercoaster rebound, but I am not going to tell you it was because investors were expecting x or y from the G7 or the US Treasury Department, or because there was some bargain hunting, or because Mercury was in retrograde. (I utterly despise this kind of Stock Market analysis—it’s post-hoc hooey—so when you catch me doing it, and I assure you I will, take it with appropriate measures of sodium.)

What happened next? Well, the G7 released an abysmal document pledging future efforts, sunshine and lollipops, etc., but when it came to the details of actually doing something, one can sum it all up with, “splunge!” The next day, the IMF mostly followed the G7’s “lead.”

That was all very bad news.

As I wrote last week, economists out here in the real world had coalesced around a “stock injection” or “equity injection” plan, coupled with government guarantees on interbank loans—essentially a partial nationalization of banks willing to enter into the bargain—as the best way to quickly loosen up the credit market (and, ideally, provide time for more and better long-term changes to our global economic systems). It was an option that Hank Paulson rejected outright in late September. However, language permitting an equity injection was inserted into the $700 billion bailout signed into law ten days ago.

Still, Paulson did nothing last week to use that new authority. Never mind asking about the actual president of the United States. . . what was he up to? (You can’t see me, but I’m tipping my head back and pointing my right thumb toward my mouth while mimicking gulping sounds.) Well, there were those morning pep talks. . . zheesh!

Prime Minister Gordon Brown of the UK, however, did float the idea of equity injection and guarantees last Wednesday—and, late Sunday night, Brown made the float flesh, moving to pump 50 billion quid into British banks, and guarantee interbank lending, to boot. The European Union appears to be following suit.

Lo and behold, Hong Kong, European, and London markets are up sharply this morning. (You see, I told you I’d do it.) (Afternoon update: the Dow is also up sharply. The US and Japanese exchanges have Monday off.)

Which all raises an interesting question: If Brown came to Washington’s G7 confab with the equity plan in tow, and we now see that the EU was ready to go along with that framework, then why was the G7’s statement so unproductively obtuse? In other words, who prevented the G7 from simply issuing a statement saying, “What Gordon said”?

Hmmm. . . .

There is, clearly, only one possibility—Why, hi-de-ho, it’s Mr. Hanky!

And perhaps even more amazing, today, Monday, after the UK and EU have taken decisive action, the US Department of Treasury has let it be known that they will maybe, probably start injecting some of our bailout billions directly into banks in exchange for equity. . . but they have not issued any instructions or details of how, or who, or when, and they are offering this without the other part of the Brown plan, the guarantees!

What is Paulson’s rationale? What is the opposite of leadership? (Again, forget about “the leader of the free world”—and again, head tipped back, glug, glug, glug.)

Paulson fought against getting this authority, and now, once granted it, despite movement from economies much smaller than “his,” he still drags his feet. Contrast this with Hammerin’ Hank, say, September 17, hyperventilating and threatening the end of civilization as we know it if he didn’t get his 70 billion Benjamins to spend however he pleased. How can we explain the difference?

Well, as we seem to have to say too much these days, we can’t know what is in a man’s heart. . . but might the behavior gap have something to do with the ideological purity of this administration, and the company Paulson supposedly left behind to gallantly take over at Treasury?

Yeah, that was a rhetorical question.

First, the Bush Administration’s—hell, the whole Republican/Conservative movement’s—“private good, public bad,” “markets know best” philosophy not only helped usher in this nightmare, it lead to a stunning inability to entertain any viable solutions.

Second, from the beginning (or before the beginning) of this credit calcification and market tumble, it seems that Treasury has worked to protect, and even enrich, Goldman Sachs.

Just look at some of this: Lehman Brothers, a direct competitor of Goldman, was allowed to fail. Treasury said it had to draw a line. But a week later, the government steps in to save AIG by injecting capital (at first $80 billion; now well over $100 billion) in exchange for equity. It turns out that AIG owed Goldman something like $30 billion—in fact, a representative from Goldman Sachs was in the room when the AIG bailout was being negotiated.

With the big five investment banks reduced to the big two, many expected Goldman would be the next to go. Investors start shorting Goldman stock. The government’s response? Ban all short selling (not just naked short selling, as some had recommended).

That was quickly revealed to be a disastrous move for a variety of reasons, and the ban was lifted. Paulson went back to demanding his near trillion dollar blank check so that he could buy toxic assets off the hands of banks. . . investment banks included. Never mind that Paulson never was able to explain how that plan would actually solve the problems at hand.

All of this dicking around took weeks, of course; weeks where markets tanked, credit froze, jobs were lost, and the whole mess, by most accounts, grew worse and more expensive to fix.

By the way, there is a downside to the equity injection plan—that is if you own bank stock. If you own shares in a bank that opts in to an injection plan, a bank like, maybe, say, Goldman Sachs, the value of your shares will be diluted because the bank will have to issue additional preferred shares to exchange for government capital.

You don’t think that might adversely affect Hank’s “blind” trust, or the coffers of many of Paulson’s pals, now, do you?

I guess that’s a kind of leadership.


. . . .

Congratulations to Paul Krugman, Nobel Laureate.



(cross-posted on Daily Kos and The Seminal)

Damn Yankees

Even though I am anything but a Yankees fan (I am the fan of two teams, to paraphrase a quote the provenance of which I can’t remember, I am a fan of the Dodgers, and I am a fan of whichever team is playing the Yankees), I could not help but watch the ESPN broadcast of the final baseball game to be played at Yankee Stadium with a heavy heart. Simply known as “The Stadium” in metropolitan New York, it is—or was, I should now say—a living piece of history, a working facility that could provide present enjoyment alongside a palpable link to the past. Even with the terrible mid-Seventies remodel, seeing a game at Yankee Stadium still felt like spending a few hours in another era. You could look around and recognize tableaus from old newsreels and videotapes; you could feel like you were part of the history, not just of baseball, but of American popular culture.

Listening, however, to the broadcasters detail that history, not just of the stadium and the Yankees, but of the team’s majority owner, George Steinbrenner, I grew not only heavy of heart, but also sick of stomach. Talking about the Yankees’ marketing might without talking about what it has done to the economics of baseball is absurd; talking about “The Boss” (as Steinbrenner is unaffectionately known) without talking about the crimes he has committed—against individuals, baseball, and the United States of America—is offensive.

There is much to be said about Steinbrenner’s authoritarian, bullying management style that could still be dismissed as a subjective evaluation, but here is a point that is inarguable fact: George Steinbrenner is a crook.

In 1974, Steinbrenner was indicted on fourteen counts relating to his large, illegal under-the-table contributions to Richard Nixon’s re-election campaign. General George copped a plea—guilty of an illegal campaign contribution and guilty of obstruction of justice—and got off with a five-figure fine. Then Commissioner of Baseball Bowie Kuhn banned Steinbrenner from the game for two years—later cutting that penalty to 15 months. Ronald Reagan did Kuhn one better, granting Steinbrenner a full presidential pardon in the waning hours of the Reagan Administration.

Around about the same time as the pardon, George Steinbrenner grew weary of his all-star outfielder Dave Winfield, a player he had signed after the 1980 season to a ten-year, $23 million contract (the largest in the sport to that point). Or, more accurately, Steinbrenner got cheap. Having reneged on a contractual obligation to donate $300,000 to Winfield’s charity for poor, inner-city youth, The Boss was sued by Winfield. Steinbrenner’s response was to pay $40,000 to known gambler and all-around slime-ball Howard Spira in exchange for dirt on Winfield that could be used to derail the lawsuit.

This move got Georgie banned from baseball “for life.” In 1993, Fay Vincent, that era’s baseball commissioner, decided “life” meant “three years.”

I’m telling you this now; the good folks at ESPN mentioned none of it. Instead, they talked about Steinbrenner’s inevitable induction into baseball’s Hall of Fame. They’re probably right, but considering there are poor players who were banned from baseball for being caught hosting small-change crap games in their hotel rooms, and others that have been kept from the Hall for taking tiny bribes to supplement slavish salaries, Steinbrenner’s induction would make a mockery of the institution.

But all of this would just be inside baseball, as they say (well, except that he violated federal election laws, but, gosh, he was pardoned for that), were it not for the cause of Sunday’s lamentations and celebrations. Across the street from the old House that Ruth Built now rises the New Yankee Stadium. The old one will be torn down before next season to make room for a parking lot.

The Yankees didn’t really need a new stadium. The historic old one was more than serviceable, and has in recent years drawn over 4 million visitors a season. But in the last decade or so, as the Yankees were winning title after title, leveraging their brand, and increasing their revenue even faster than their payroll (much, much faster, really), George Steinbrenner neglected The Stadium, allowing for some very visible cracks and crumbles, making minimal repairs, and complaining about his plight all the way to the bank.

Steinbrenner demanded a fresh stadium. He threatened the city. He wanted a new ballpark, and better access roads for suburban commuters, and more space for parking, or else he’d take the New York Yankees out of New York.

New York City, faced with this manufactured crisis, eventually gave in. . . and gave in big, issuing hundreds of millions in tax exempt bonds to finance construction of the new stadium, along with pledging city funds to improve transportation and infrastructure around the area, seizing park land by imminent domain to make way for more parking, and over-valuing the land under the new stadium in order to facilitate a payment-in-lieu-of-taxes arrangement.

Negligence, a manufactured crisis, a gunless holdup, greed and corruption at every turn—sound familiar? You and I are not the only ones who think so. I was surprised and impressed to hear Bill Moyers close the Friday broadcast of his weekly show with an essay making some of the same observations—and doing so in harsh terms:

This last couple of weeks, ordinary mortals below could almost hear the ripcords of golden parachutes being pulled as the divinities on high prepared for soft, safe landings. All this while tossing their workers into the purgatory of unemployment, like sacrificial lambs.

. . . .

But let's change our metaphor for a moment. Let's go to our sports desk. Because if religion is no longer the soul of capitalism, we have to look somewhere else to understand this new gilded age. And there it is, just a few miles north of Wall Street, the "House that Ruth Built". . . . Yankee Stadium, as fabled a place to Americans as Ilium was to the Greeks.

But believe it or not, this Sunday — weather permitting — the Yankees will play their last game here. The stadium's being demolished, to be replaced next year with a brand new one. What a history to disappear down the memory hole.

. . . .

[Yankees] owner, George Steinbrenner, is one of the country's richest tycoons, among the Forbes 400. But when it came to paying for the new pleasure dome costing $1.3 billion, the millionaires on the field and King Midas in the skybox came up with some razzle-dazzle plays to finance their wealth machine. Tax-free bonds, requiring ordinary citizens to subsidize the construction, and hundreds of millions more for new parking garages, a train station and parks. Those parks, by the way, will supposedly replace the ones seized by the city to make room for the new stadium. The little league games that used to flourish on sandlots just outside the old ball park have been moved miles away, sent down to the minors on a long road trip.

That's okay, you may think, there will be plenty of room for the tax-paying public to come root, root, root for the home team — even the coliseum in ancient Rome had bleachers, for the commoners. But in fact there will be 5,000 fewer seats in the new stands.

And while the Yankees reportedly have promised that half of what's left will cost $45 apiece or less, those seats that used to cost $250, right behind the dugout, will cost you $850. And if you want to be near home plate, you'll have to cough up $2,500...per game.

Meanwhile, there will be more luxury suites and party rooms where the fat cats gather, safely removed from the sweaty masses. Corporations and wealthy individuals will be able to rent the luxury suites for anywhere from $600,000 to $850,000 tax deductible dollars a year, assuming they haven't filed for bankruptcy this week.

. . . .

Why aren't the fans and tax payers giving the Yankees a Bronx Cheer? They are. But city officials rolled over them while making sure local politicians stay in the line up. The pols are getting their own luxury suite at the new stadium for free and first shot at buying the best available seats.

And so this Sunday evening we will bid farewell to dear old Yankee Stadium, and await the new colossus to rise from its ruins. It will cast its majestic shadow across one of the country's poorest neighborhoods, whose residents will watch from the outside as suburban drivers avail themselves of 9,000 new or refurbished parking spaces. Never mind all the exhaust, even though in this part of town respiratory disease is already so high they call it "asthma alley."

Not that the well-to-do in the infield seats will have to hear that wheezing. They'll have access to a private club, a private entrance and a private elevator. Totems of this Gilded Age. Let the games begin.

Moyers is wonderfully on point, but as hard-hitting as this commentary is, it actually misses the chance to land an additional punch. . . or two. Perhaps Moyers didn’t realize, or perhaps he just had to edit for time, but missing from Friday’s story was an even more direct link between the meltdown on Wall Street, and the teardown in the Bronx.

Almost all Yankees games are broadcast in New York on the YES Network, a cable station formed after the Yankees and the NBA’s New Jersey Nets got into a pissing match with their previous television home and some of that station’s owners. The Nets have since landed in the pocket of wealthy real estate mogul Bruce Ratner, but the Yankees restructured the company with a new partner and kept YES a growing concern. Today, the television network is believed to be worth $1.5 billion (about $200 million more than the Yankees themselves).

Oh, that new partner in the YES Network? That would be Goldman Sachs.

Goldman Sachs is one of the last two of the once “big five” independent investment banks. . . wait, what’s that? Goldman Sachs is now not an investment bank? This just in: Sunday night, during that Yankees game, or there abouts, Goldman and its only remaining rival, Morgan Stanley, sought and got permission to change themselves into full-service banks. They will argue that this makes them more competitive in these new tough times, but, in point of fact, they did this today because it will mean that they can partake of a much larger slice of the pending federal bailout. But, I digress. . .

Goldman Sachs, majority owner of the YES Network, is also the institution that gave us current Treasury Secretary Hank Paulson (as well as Clinton Treas-Sec Robert Rubin). Paulson is the architect of the proposed financial sector bailout—a bailout that is an even better example of the shock doctrine than the New Yankee Stadium.

Paulson’s substantial portfolio is now in a blind trust, but it is more than possible that it still contains plenty of shares of both Goldman and YES. Inside baseball, indeed.


(cross-posted on Daily Kos and The Seminal)