TARP: The Goldman Sachs Bailout Bill
Paulson's role in shaping and directing the government bail outs is more than just a gross conflict of interest. It's a monument to Washington's indifference to the appearance of impropriety. Washington insiders are tone-deaf to the anger with which the public greeted their plan to bail out financial titans. Their failure to challenge Paulson shows why none of them should be trusted with the $700 billion blank check they're drafting for the Treasury Secretary to spend.
Here's Morgenson's description of that meeting:
Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.
Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.
All the parties involved will swear that cronyism played no part in the decisions. But Americans are fools if they trust Paulson to oversee the $700,000,000,000 bailout of Wall St. firms - or indeed any bailout plan. By all accounts, Goldman is set to become one of the prime beneficiaries of the bailout. If the Wall Street bailout must go forward – and it doesn't have to, and shouldn't – but if it must, then it should be overseen not by Paulson, whose record is full of huge red flags, nor by another Wall St. insider, nor by a Bush administration official. None of them have the credibility needed to manage such sums in such circumstances. No, if a manager is needed it should be somebody who has been right all along about the impending chaos, a longtime critic of lax regulation and lousy legislation, and above all someone chosen by and directly accountable to the Congress.
First of all, Paulson personally has little credibility. His indifference to the appearance of wrongdoing in giving Goldman Sachs alone a seat at the meeting just described wasn't an isolated incident. He demonstrated what a shady character he is by sending to Congress draft legislation demanding that there be no oversight whatever of his actions under his own proposal. When confronted during hearings about this preposterous demand, Paulson pretended that he meant the opposite of what his draft actually said...that he assumed Congress would insist on oversight of him. This level of duplicity and dishonesty would make Alberto Gonzales blush. Paulson should be forced to step down from his post, rather than entrusted with a blank check.
Indeed, it's clear that Paulson deliberately employed fear mongering as he tried to stampede Congress into granting him vast sums to subsidize Wall Street (h/t Andrew Malcolm):
In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.
"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."
It's also worth pointing out the obvious: The Wall Street disaster has unfolded under Paulson's watch. Every step he's taken to cope with the crisis has been belated and reactive. It's also clear that his interventions have caused as many problems as he may have solved. The fact that he's an appointee of George W. Bush ought to be a clue that his competence cannot be assumed.
Furthermore, he led Goldman Sachs at the very time it was accumulating most of the toxic debt that now weighs it down. In my books, that marks him as a dope. Indeed, as Treasury Secretary he has repeatedly made rosy forecasts that quickly turned to dust. As recently as July and August, Paulson was saying that the banking system is sound, that the subprime loan crisis is largely contained, and that Fannie Mae and Freddie Mac didn't need any cash injections. Paulson's record is abysmal.
Why is he still in charge of the Treasury Department? Damned if I want him to be given a $700 billion slush fund.
Second, the bill produced by Congress gives the Treasury Secretary such sweeping powers that it's hard to reconcile with constitutional government.
Let's set aside the decision to try to prop up weak financial firms, which as gjohnsit convincingly argued has proven disastrous in the past century. Let's also not dwell on the many defects of the proposed plan, such as the crazy idea of creating a federal insurance program to retroactively guarantee investments that already have burnt to the ground.
I want to focus simply on the fact, underlined by Floyd Norris of the NYT, that under the proposed legislation the Treasury Secretary "would emerge with vast new power".
During its weeklong deliberations, Congress made many changes to the Bush administration’s original proposal to bail out the financial industry, but one overarching aspect of the initial plan that remains is the vast discretion it gives to the Treasury secretary...
Mr. Paulson can choose to buy from any financial institution that does business in the United States, or from pension funds, with wide discretion over what he will buy and how much he will pay. Under most circumstances, banks owned by foreign governments are not eligible for the money, but under some conditions, the secretary can choose to bail out foreign central banks.
Under the bill, the Treasury is to buy the securities at prices he deems appropriate. Mr. Paulson may set prices through auctions but is not required to do so.
Rarely if ever has one man had such broad authority to spend government money as he sees fit, with no rules requiring him to seek out the lowest possible price for assets being purchased.
That's actually just the beginning of the sweeping powers granted to the Treasury Secretary under this bill. He can set executive pay at any level he deems appropriate in the firms he's buying junk securities from. He can purchase any kind of investment "on such terms and conditions as are determined by the Secretary", in other words at any price he deems appropriate. He's supposed to use market mechanisms to keep the price down, but there's no teeth in that suggestion. Here's the extent of the bill's provisions on that score:
The Secretary shall use the authority under this Act in a manner that will minimize any potential long-term negative impact on the taxpayer...
Yes, the legislation really is that vague. And if that's not bad enough, the Treasury Secretary can sell the junk investments off "at any time, upon terms and conditions and at a price determined by the Secretary". In short, he can – and Paulson seems to promise that he will – buy the toxic investments for more than their current value, and then turn right around and sell them back to Wall Street for what they're actually worth.
The bill's advocates argue that it is less terrible than the ridiculous proposal sent to Congress last week by Paulson. That's true. Congress has insisted on oversight by an Inspector General with regular reports to Congress. But so what? This is the kind of oversight mechanism that has done little during the last 8 years to rein in the Bush administration's worst excesses.
The bill under consideration is vague in the extreme and therefore lax. There's almost nothing that a Treasury Secretary cannot expect to get away with under this legislation. Nobody should be entrusted with such sweeping powers, so few requirements, and so little accountability...least of all a Wall-Street insider such as Henry Paulson.
Third, let's not forget that there's a distinct possibility that John McCain could win the election and appoint the next Treasury Secretary to pick up where Paulson leaves off. McCain's judgment is at least as bad as Bush's, particularly on matters economic and financial. He's surrounded himself with people like Phil Gramm...
...the arch-deregulator, who took special care in his Senate days to prevent oversight of financial derivatives — the very instruments that sank Lehman and A.I.G., and brought the credit markets to the edge of collapse. Mr. Gramm hasn’t had an official role in the McCain campaign since he pronounced America a “nation of whiners,” but he’s still considered a likely choice as Treasury secretary.
McCain has larded his campaign staff with lobbyists in complete indifference to the appearance of impropriety. And in the single major nomination he has made, by which the public can judge his commitment to good government, McCain selected an obscenely unqualified running-mate in Sarah Palin.
If nothing else, the prospect of a McCain presidency ought to scare the hell out of any member of Congress considering whether to vote for the bailout bill and give a Treasury Secretary, to be named later, near monarchical powers over the future national budget.
For the one thing that we can be sure of about the proposed legislation, if the history of such bailouts is any guide, is that it is going to be just the first of many attempts to prop up the teetering financial houses. This week's bill starts us down a path from which it will be hard to turn back. Having dumped money into firms that by all rights should go bankrupt, the government will almost certainly want to keep pumping more money into that bottomless pit to rescue the rescue. The next president will become a hostage to the Goldman Sachs Bailout Bill.
crossposted at unbossed.com