Sunday, October 19, 2008

Crony Capitalism

"Treasury Secretary Henry Paulson is expected to tap Neel Kashkari, a key adviser on whom he has come to rely heavily during the financial crisis, to oversee Treasury's $700 billion program to buy distressed assets from financial institutions, according to people familar with the matter. Mr. Kashkari, 35 years old, a Treasury assistant secretary for international affairs and a former Goldman Sachs Group Inc. [GSG] banker, is expected to be named interim head of the Treasury's new Office of Financial Stability as early as Monday. ... Kashkari has become one of Mr. Paulson's key advisers over the past year as the housing meltdown deepeed and spread to other parts of the economy. .. In his new role, Mr. Kashkari will oversee some key decisions on how the program operates. ... Treasury is excted to hire about two dozen lawyers, accountants and other staff for the office. Treasury is trying to determine how to handle conflicts of interest as a result of the program, especially with respect to the asset managers it hires. Anyone with direct experience of these mortgage assets will likely work for a firm with a financial stake in the same asset', my emphasis, Deborah Solomon (DS) at the WSJ, 6 October 2008.

"Here's another development sure to outrage some observers of the mortgage crisis: Some members of the financial brain trust being tapped by Washington to clean up the mess worked at firms wrapped up in the subprime debacle. ... But everyone in finance is angling for a piece of the government's proposed $700 billion kitty, which could bring in hefty fees. ... 'There really should be a no-crony clause', says James K. Galbraith, a professor at the University of Texas. In congressional hearings, Paulson said, 'We've been very conscious of [conflicts]. When we've dealt with advisers before, we've been very careful about how we do it.' ... Paulson's choices are understandable. After all, the universe of people who understand the complexities of this crisis is small. Conflicts arose and were addressed after the Resolution Trust Corp. was created to deal with the insolvent assets from the [S&L] crisis of the late 1980s. Law firms, for example, weren't allowed to advise the RTC on deals involving insolvent firms with which they had a previous relationship. ... Says Michael S. Gambro, a securities lawyer at Cadwalader, Wickersham & Taft [CW&T]: 'What's the cost of hiring people who are less competent to do the job?'," my emphasis, Businessweek, 6 October 2008.

"Treasury's request for proposals make clear that it wants large, established firms with significant assets to work for the government's program to buy mortgage-backed securities and other distressed assets. To qualify, institutions must already manage at least $100 billion. ... Market observers say there are just a handful of firms that could handle such a large portfolio of assets. ... 'There are so many people who need something to do,' said John Douglas, former general counsel of the Resolution Trust Corp., ... and a partner at the Atlanta office of Paul Hastings Janofsky & Walker. ... The government also is looking for institutions to provide the program's infrastructure, such as providing custody and cash accounts, and confirming trades. Those firms must have at least $500 billion under management. One of Treasury's biggest hurdles will be handling conflicts of interest that are likely to arise. Companies that qualify for Treasury's program are likely to have a financial stake in the very assets they will be charged with buying and selling, Treasury doesn't expect to eliminate all conflicts of interest, but is is hoping to minimize them, according to a person familiar with the matter", my emphasis, Deborah Solomon and Aaron Lucchetti at the WSJ, 7 October 2008.

"The enablers on Capitol Hill and in the Bush adminstration have given $700 billion to Wall Street to continue business as usual. Former [GSG] CEO Henry Paulson hired former [GSG] executive Neel Kashkari to oversee the bailout. Kashkari's job will be to deliberately overpay the banks for their junk assets so that they will have enough money to stay in business and, ideally, to beign operating on a normal basis. ... But the point of the rescue is to return the banks to normal operations, not to keep the banks' executives and stockholders happy at taxpayer expense. The Paulson plan, by contrast, is designed precisely to make the bank executives and shareholders happy. ... The presidential candidates should commit themselves to excluding Wall Street people from top positions in their administrations. We do not need yet another Treasury Secretary from [GSG]. ... The argument for putting Kashkari in charge of the bailout was that he understood the way that Wall Street does business. But it is not clear that this is a skill we really need. The whole point is that we want Wall Street to change the way that Wall Steet does business", Dean Baker (DB) at the Houston Chronicle, 9 October 2008. Here's a link:

"The Wall Street US$810 billion--and counting--bailout is being interpreted by millions of angry Americans as no less than a class struggle weapon of mass destruction. ... So Americans will soon be listening to the sound, not of music, but of over a trillion of their future taxpayer earnings being sucked-up by [GSG], Citibank, Bank of America and JP Morgan Chase. The Bank of China will also collect. ... The US Treasury--that is, Treasury Secretary and former [GSG] CEO Hank Paulson--will print money like crazy, just like during the Latin American crisis of the 1980s. And who is the Treasury hiring to decide which banks and which debts to buy up? Wall Street experts. So this is a new Iraq war in more ways than one. ... Now it's time for Wall Street to pull its own Blackwater. ... The Economist magazine--the voice of the City of London--says that economists are mostly Barack Obama cheerleaders. ... Were there other options apart from the biggest redistribution of wealth--this one towards the top, not the bottom--since the 1917 October Revolution in Russia? ... Obama could have called dozens of economists to educate him about the financial crises in Mexico in 1997, Brazil in 1999 and Argentina in 2001. ... So there was no US national debate. ... McCain has alredy admitted, on the record, that he knows virtually nothing about the economy. ... Remember that low-level functionary who came up with that sub-Hegelian concept of the 'end of history' after the fall of the Soviet Union--one Francis Fukuyama? Even he is alarmed", Pepe Escobar at, 9 October 2008.

"An international investment banker who headed a federal agency and a financial officer with experience in several agencies are among the five people named to high-level positions in the Treasury Department's effort to carry out the financial rescue plan. ... Rueben Jeffrey III, an undersecretary for economic affairs at the State Department, is the Treasury office's new interim chief investment officer. ... Jeffrey, who was chairman of the Commodity Futures Trading Commission before going to the State Department in June 2007, is, like Paulson and Kaskkari, a former [GSG] executive", Marcy Gordon at the Houston Chronicle, 14 October 2008.

"The U.S. Treasury tapped Wall Street law firm Simpson Thacher & Bartlett LLP [STB] to advise it on a plan to make investments in the banking industry. ... The firm recently has advised a number of corporate clients caught up in the financial crisis, including Lehman Brothers Holdings Inc. and Washington Mutual Inc. One big challenge for [STB] will be to navigate potential conflicts between its work for the government and its corporate clinets. Firms typically create a 'Chinese Wall' in such cases to stem the flow of sensitive information between departments", Matthew Karnitschnig at the WSJ, 14 October 2008.

"Government officials say they are confident that they can distinguish well-managed banks from poorly managed ones, but the critics aren't as sure. Unless the government rapidly shuts down weak financial institutions, said Ross Levine, a Brown University economist, the owners of poorly performing banks have an incentive to make irresponsible bets, realizing the government would close them down anyway", Bob Davis and Justin Lahart at the WSJ, 15 October 2008.

"The $700 billion bailout package approved Oct. 3 by Congress could prove to be a bailout for some law firms too. Designed to help struggling financial institutions, the legislation came at an opportune time for law firms, which have been mired in their own downturn. ... Granted, the meltdown has already been good for a handful of elite law firms with New York roots and longstanding banking ties, such as Sullivan & Cromwell LLP, which in the last week, has represented Lehman Brothers Holdings Inc. and Fannie Mae and Wachovia Corp. ... Others feel confident that a rush of investigative and white-collar criminal work is also coming. 'Politicians are going to demand accountability,' says Bruce McLean, Akin Gump's chairman. 'If the government's going to buy up assets from a bank, it's prbably also going to look into whether or not there was criminal activity.' If there are indictments, civil shareholder litigation would be likely to follow", Ashby Jones at the WSJ, 15 October 2008.

More poor WSJ reporting. There are no more "former" GSG bankers, than there are former La Cosa Nostra made members, see my 29 September 2008 post. Consider, only those who (mis)managed these assets in question are qualified to manage them now. Amazing.

Ah, the "great man" theory at work. Only the select few, John Calvin's elect, can understand what's going on. Sure. These are the same people who built CDOs, CDOs squared, etc., and we are to assume they know what they're doing. Either they did and are criminals, or they didn't and are fools. Either way I would ban hiring anyone who worked for any firm in any capacity which sells assets to Paulson's "Super MLEC' at any time in the last ten years. Any lawyer, CPA, "expert, etc.". I'm sure Paulson is careful to ignore conflicts of interest within his chosen circle. I say to Gambro: What's the cost of hiring compromised people? Suppose Gambro, yes you, find say, a fraud occurred at say GSG. The fraud was papered over by say a senior Sullivan & Cromwell partner. Does anyone believe you, Gambro, will scream "crime-fraud exception" and start pressing Mike Garcia to indict someone, who for all we know, shares your train in the morning from Stamford? Get real. This is from CW&T's website, ""Our wide range of financial institution clients is a virtual 'who's who' of the world's top commerical and investment banks, U.S. and foreign bank holding companies, securities and commodities firms, thrift institutions, funds, brokerage houses, institutional investors, insurance, reinsurance and finance companies, savings and loan associations, and mortgage banks". Doesn't that give you warm feeling about Paulson's Super MLEC hiring CW&T to do anything? As I read CW&T's statement I thought, "Who's who, or rogues gallery"? Laugh! Now! Or else!

The Treasury is running its own "Lemon Socialism" program. This is an investment banker, CPA and lawyer welfare program, most of whom should be in prison. Here we are through the looking glass. How will the Paulson-Kashkari team minimize conflicts of interest? Simple. Citigroup will manage assets securitized by Merrill Lynch (ML), now part of Bank of America, Countrywide, now part of Bank of America, will manage assets securtized by GSG. GSG will manage assets securitized Citigroup. ML will manage assets securitized by Countrywide. Now you feel much better, don't you?

Right on DB!

Escobar sees things pretty much the way I do.

Where's today's "Tailgunner Joe"? Who will begin the Congressional hearings with "Are you now or have you ever been ... ". Now we find State is also infiltrated by "former" GSG executives. As Tailgunner Joe" would say, "In my hand I have a list of 288 'former' GSG executives who work in various policy making positions in: State, Treasury, Defense, Homeland Security, ... ".

As they say in Latin, "Res ipsa loquitur", the thing speaks for itself.

The same people who didn't see our banking problems say two years ago will now be able to distinguish well from poorly managed banks? Suppose they could now, then what? The Paulson bailout is designed to keep politically protected banks afloat, no matter how poorly managed they are. Suppose Uncle Sam wanted to identify poorly performing banks, would he say hire David Einhorn to do the work?

"Res ipsa loquitur", again.

1 comment:

John's Arts & Crafts said...

Great Article! a new blog giving deeper meaning into the $700 billion bailout or rescure plan