The Paulson Plan
Robert Wenzel | Information Clearing House, Sep 29, 2008
The word oligarchy dates back at least to the time of Aristotle and comes from the Greek words for “few” (ὀλίγον olígon) and “rule” (ἄρχω arkho). An oligarchy is generally considered any form of government where a small elite segment of society, be they from royalty, wealth, family or military, rule. The most current day popular meaning associates an oligarch with an extremely wealthy person who acquires his wealth, or increases it significantly, by incorporating the use of government influence. Oligarchs are not the only ones who become rich, but their success and secretive influence over governments put them into a separate class.
A recent example of a major grab of power and wealth in this type of oligarch fashion comes from the period of the collapse of the Soviet Union. In the confusion during the collapse, and the rise of Boris Yeltsin as president of Russia, the oligarchs made their move. With relatives or close associates as government officials, sometimes even government officials themselves, they achieved vast wealth by acquiring state assets very cheaply during the so-called “privatization” process controlled by the Yeltsin government.
The current $700 billion Paulson bailout plan has brought to the forefront a new class of what must be called American Oligarchs and oligarch wannabes. Some may have originally earned their wealth by supplying consumers with desired goods, but at some point they crossed over to the dark side to use government as a vehicle to take from the poor and the middle class to give to themselves. Others, never produced an honest product and have been career long parasites on the working classes.
It is instructive that outside of this small group of oligarchs and wannabe oligarchs, few appear to have been in favor of the Paulson “bailout”. (Note: The use of the word “bailout” to describe the Paulson Plan is a misnomer, see my column: THE BIG LIE: The Supposed Paulson ‘Bailout’ Plan).
A letter circulated and signed by many academic economists was sent to Congressional leaders objecting to the plan. The Austrian economists, who are the only ones who understand the business cycle, as would be expected also objected to the plan (See Rockwell: Stop the Bailout and Murphy: The Government Is Not Promoting Stability ).
Even some bankers have objected:
U.S. Treasury Secretary Henry Paulson’s proposed $700 billion bank rescue aims to help “poorly run” companies and the primary beneficiaries would be Goldman Sachs Group Inc. and Morgan Stanley, said BB&T Corp. Chief Executive Officer John Allison in a critique of the plan.
Treasury “is totally dominated by Wall Street investment bankers” and “cannot be relied on to objectively assess” the impact of government policy on the financial industry, Allison wrote in a Sept. 23 letter to Congress…
Allison, 60, said Congress should “hear from well-run financial institutions” as lawmakers consider the plan, which seeks to ease the credit crunch by buying troubled mortgage- related assets. Under Allison, Winston-Salem, North Carolina- based BB&T avoided the subprime mortgage market, whose collapse led to the credit crisis. BB&T has risen 26 percent this year, the best showing in the 24-company KBW Bank Index.
From the right, Newt Gingrich has called the plan “stupid.” From the left, Paul Krugman opposed the plan, calling it “Cash for trash.”
Most noteworthy is the fact that the notoriously pro-Bush FOX television network carried this AP report:
There is scant public support for President Bush’s $700 billion federal rescue plan for the U.S. financial industry and little expectation it would solve the crisis that has roiled the markets and hobbled some of the country’s largest investment firms, according to a poll released Friday.
Just 30 percent of Americans say they support Bush’s package, according to an Associated Press-Knowledge Networks poll released as White House and congressional leaders struggled to rescue the plan after House Republicans rebelled against it. Despite the president’s pleas that the package is urgently needed to prevent an economic meltdown, 45 percent say they oppose Bush’s proposal while 25 percent said they are undecided.
Yet, despite the extremely limited support for the plan, the Oligarchs prevailed and Paulson’s Plan will become law. Indeed, the Oligarchs were out in full force to support the legislation. As I have pointed out before, Paulson with his Goldman Sachs connections must be considered an oligarch, but there are others.
Billionaire David Rubenstein, co-founder of the politically connected Carlyle Group, has come out in favor of Paulson’s Plan. Rubenstein told CNBC that he hopes Congress will move quickly to approve the rescue of the U.S. financial system.
Carlyle Group almost has too many ways to benifit from Paulson’s Plan to count. They ran a mortgage securities firm that went under. Those securities will be coming up for sale under a reorganization, just in time for purchase by the Treasury.
The Federal Reserve has changed regulations which will allow them to buy larger stakes in bank stocks. And Rubenstein wants to buy some of the paper the Treasury acquires. “Private equity can help by buying these assets,” he told CNBC. “Private equity can be among the most significant buyers of assets.”
Billionaire Warren Buffett is in favor of the plan, and he just bought, through Berkshire Hathaway, a $5 billion stake in Goldman Sachs. Goldman Sachs just received approval from the Fed to become a bank holding company, so that they can buy up troubled banks (And then sell the troubled mortgages of the banks to the Treasury?). Buffett called Paulson’s plan “absolutely necessary” and said that “I am betting on the Congress doing the right thing for the American public and passing this bill,”
Billionaire Wilbur Ross , through a firm controlled by Ross, bid $435 million last September to buy the service unit of American Home Mortgage, which collects payments from homeowners. He is in favor of Paulson’s Plan and penned a column published at the New York Post to say so, “…we need this passed, and passed quickly…,”wrote Ross.
There are likely other oligarchs who maintain a low profile and keep their names out of the headlines, and there are oligarch wannabes like former New York City Mayor Rudy Giuliani . Giuliani has put out a press release advising that his firm has formed a “task force” to “guide financial institutions, private investment funds, institutional investors and other market participants through the legislative, regulatory and enforcement challenges posed by the” Paulson Plan.
Clearly, the new oligarchs have arrived in America. It will mean a lower standard of living for the rest of us as it is clear by the Paulson Plan that they are not afraid to think big when grabbing money from the populous at large. Further, they have the political skill and influence to get the legislation passed that will benefit themselves even when there is virtually non-existent popular support. Be scared, very scared. The new American Oligarchs now rule financial America and there is no such thing as enough with them. They will be back for another big bite from our wallets and income streams, all too soon.
Update: Word has reached me (HTrpm) that snuck into Paulson’s plan are changes that will make it easier for the Fed to inflate the money supply. So is the play for the Oligarchs to grab the banks, the assets and the mortgages and then inflate the money supply boosting the value of all these assets by trillions, while the rest of us simply get to deal with the price inflation as higher prices at the grocery store, the gas pump and everywhere else?
Robert Wenzel is an economic consultant and Editor & Publisher of EconomicPolicyJournal.com. He can be reached at rw@economicpolicyjournal.com.
Peace and Justice Post 
Government of Thieves
October 18, 2008When Greed is Rewarded
By PAUL CRAIG ROBERTS | Counterpunch, Oct 17 / 20, 2008
Just as the Bush regime’s wars have been used to pour billions of dollars into the pockets of its military-security donor base, the Paulson bailout looks like a Bush regime scheme to incur $700 billion in new public debt in order to transfer the money into the coffers of its financial donor base. The US taxpayers will be left with the interest payments in perpetuity (or inflation if the Fed monetizes the debt), and the number of Wall Street billionaires will grow. As for the US and European governments’ purchases of bank shares, that is just a cover for funneling public money into private hands.
The explanations that have been given for the crisis and its bailout are opaque. The US Treasury estimates that as few as 7% of the mortgages are bad. Why then do the US, UK, Germany, and France need to pour more than $2.1 trillion of public money into private financial institutions?
If, as the government tells us, the crisis stems from subprime mortgage defaults reducing the interest payments to the holders of mortgage backed securities, thus driving down their values and threatening the solvency of the institutions that hold them, why isn’t the bailout money used to address the problem at its source? If the bailout money was used to refinance troubled mortgages and to pay off foreclosed mortgages, the mortgage backed securities would be made whole, and it would be unnecessary to pour huge sums of public money into banks. Instead, the bailout money is being used to inject capital into financial institutions and to purchase from them troubled financial instruments.
It is a strange solution that does not address the problem. As the US economy sinks deeper into recession, the mortgage defaults will rise. Thus, the problem will intensify, necessitating the purchase of yet more troubled instruments.
If credit card debt has also been securitized and sold as investments, as the economy worsens defaults on credit card debt will be a replay of the mortgage defaults. How much debt can the Treasury bail out before its own credit rating sinks?
The contribution of credit default swaps to the financial crisis has not been made clear. These swaps are bets that a designated financial instrument will fail. In exchange for “premium” payments, the seller of a swap protects the buyer of the swap from default by, for example, a company’s bond that the swap buyer might not even own. If these swaps are also securitized and sold as investments, more nebulous assets appear on balance sheets.
Normally, if you and I make a bet, and I welsh on the bet, it doesn’t threaten your solvency. If we place bets with a bookie and the odds go against the bookie, the bookie will fail, as apparently happened to AIG, necessitating an $85 billion bailout of the insurance company, and to Bear Stearns resulting in the demise of the investment bank.
Credit default swaps are a form of unregulated insurance. One danger of the swaps is that they allow speculators to purchase protection against a company defaulting on its bonds, without the speculators having to own the company’s bonds. Speculators can then short the company’s stock, driving down its price and raising questions about the viability of the company’s bonds. This raises the value of the speculators’ swaps which can be sold to holders of the company’s bonds. By ruining a company’s prospects, the speculators make money.
Another danger is that swaps encourage investors to purchase riskier, higher-yielding instruments in the belief that the instruments are insured, but the sellers of swaps have not reserved against them.
Double-counting of assets is also possible if a bank purchases a company’s bonds, for example, then purchases credit default swaps on the bonds, and lists both as assets on its balance sheet.
The $85 billion Treasury bailout of AIG is small compared to the $700 billion for the banks, and the emphasis has been on banks, not insurance companies. According to news reports, the sums associated with credit default swaps are far larger than the subprime mortgage derivatives. Have the swaps yet to become major players in the crisis?
The behavior of the stock market does not necessarily tell us anything about the bailout. The financial crisis disrupted lending and thus comprised a threat to non-financial firms. This threat would reflect in the stock market. However, the stock market is also predicting a recession and declining earnings. Thus, people sell stocks hoping to get out before share prices adjust to the new lower earnings.
The bailout package is a result of panic and threats, not of analysis and understanding. Neither Congress nor the public knows the full story. If the problem is the mortgages, why does the bailout leave the mortgages unaddressed and focus instead on pouring vast amount of public money into private financial institutions?
The purpose of regulation is to restrain greed and to prevent leveraged speculation from threatening the wider society. Congress needs to restore financial regulation, not reward those who caused the crisis.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com
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