Print

 Email

The Year In Review

Fed Chairman Bernanke, Treasury Secretary Paulson, SEC Chairman Chris Cox, Senator Christopher Dodd (D) Connecticut.

I think all of us know that what we went through in the last half of the Nineties is not sustainable. We’re going to need to adjust ourselves to a period of more normal growth. How we think about managing our businesses in that environment is the tricky question we’re all grappling with.

Henry Paulson
U.S. Secretary Of The Treasury

New York

Published: August 10, 2009
By Robert Butche

TARP Time Line ( 2008 )

• Sept. 7, 2008: The government seizes Fannie Mae and Freddie Mac.
• Sept. 15, 2008: Lehman Brothers files the largest bankruptcy in history.
• Sept. 15, 2008: Bank of America agrees to acquire Merrill Lynch for about $ 50 billion.
• Sept. 16, 2008: American International Group Inc. awarded $ 85 billion loan from the Federal Reserve.
• Sept. 21, 2008: Goldman Sachs Group Inc. and Morgan Stanley change from Investment Banks to commercial banks to firm up their access to Federal Reserve funding.
• Sept. 26, 2008: The securities and Exchange Commission confirms it failed to oversee Bear Stearns
• Sept. 26, 2008: Washington Mutual seized by government regulators.
• Sept. 29, 2008: House of Representatives rejects a $ 700 billion plan to rescue the U.S. financial system.
• Sept. 29, 2008: Citigroup agrees to acquire the banking operations of Wachovia Corp.
• Oct. 1, 2008: The Senate approves a rescue plan ( TARP ).
• Oct. 3, 2008: The House passes rescue plan.
• Oct. 3, 2008: George W. Bush signs the rescue plan into law.
• Oct. 6, 2008: The Fed says it will double its auctions of cash to banks to as much as $ 900 billion.
• Oct. 11, 2008: Treasury Secretary Paulson affirms treasury plans to pump government funds into banks.
• Oct. 13, 2008: The Fed begins to flood the financial system with liquidity.

Treasury Calling

Whatever else may be said about them, the world’s financial elite are more than kindred spirits. Those at the top of capitalism’s food chain are among the most powerful people on the planet. So, too, are their tentacles intertwined in and around business, politics and government so thoroughly that whatever impacts one of these businesses is certain to impact all the others. In this sense, at least, the world’s elite businesses — especially those in banking and finance — comprise something of a band of brothers.

Late last summer the managers of Wall Street’s financial giants received a series of possibly unwanted telephone calls from one of their most successful and influential brethren. The caller was Henry Paulson, former CEO at Goldman Sachs, then Bush Administration Secretary of the Treasury. Being part of Wall Street and the secretary of the treasury insured that Paulson’s calls would be accepted, if not always welcomed, by nearly everyone on his list.

Paulson’s calls delivered unhappy news, inside information, and commands largely expressed as suggestions or recommendations. His message was not at all upbeat, for the relentless collapse of mortgage-backed securities was fast turning the international financial services business into a worldwide catastrophe. At the outset Paulson called to influence decision makers, but he understood their responses would likely determine who would survive and who would not.

Those receiving the calls understood that — as well as the reality that, friend or foe, Hank Paulson would be making decisions that could well determine which of them would survive and which not. Some had reason to believe they would either be protected, or bailed out, or given advantage, while others, including some of Paulson’s most troublesome former adversaries, would neither welcome his advice or show their cards.

Henry Paulson’s call list contained the names of some of his favorite people on the street. At the top, some accounts suggest, were old friends among Paulson’s former competitors such as Jamie Dimon at JPMorgan-Chase and Lloyd Blankfein who succeeded Paulson as CEO at Goldman Sachs.

The other CEOs the secretary of the treasury would communicate with included some men with whom Paulson had engaged in battle including the man others have described as his nemesis, Richard Fuld. Lehman’s CEO, Dick Fuld was not well liked on Wall Street — as much for his immense success as his cantankerous and competitive nature. But whatever Hank Paulson thought of Fuld, his stature, power and being the longest serving CEO at Lehman-Brothers, demanded that he be involved in treasury’s efforts to save the financial services industry from complete collapse.

While it seems unlikely any of those Paulson called thought themselves responsible for having done anything wrong, risky, foolish or criminal, to some degree Paulson understood that those on his call list were clearly a part of the problem. His job, if they and he were to survive, was to convince them to become part of the solution. One such competitor, JPMorgan’s Dimon, could be counted on for wise counsel, leadership and timely action. The other, Goldman’s new CEO, Lloyd Blankfein, would be one of Paulson’s most influential contacts and an unspoken beneficiary of information and treasury policy.

Frothy Race To Riches

Paulson And Bernanke At U.S. Capitol

The problems facing the financial markets were daunting. All of those on Paulson’s call list, including Dimon, had been caught up in the bubble — and the frothy rush to immense and seemingly endless riches. As a result, all of them had also, to some degree, mismanaged their companies by betting most, or all of their firm’s tangible net worth on mortgaged-backed securities.

Whether the firms on secretary Paulson’s call list were trading or originating mortgage backed securities or speculating on derivatives, they sought to lay off some or all of the risk by purchasing collateralized debt obligations ( CDOs ) on investments rated AAA by rating agencies including Standard and Poor’s. The seller, of what are essentially insurance contracts, was AIG. CDOs were purchased on the mistaken belief that these obtuse contracts were insuring events for which there was no known risk.

They were wrong.

Choosing Up Sides

America's Federal Reserve -- Bankers To The World

By the time Paulson sought to reign in Wall Street’s collapse, something close to a trillion dollars in worthless investments put in jeopardy essentially every financial institution world-wide. When the Chairman of the Federal Reserve accompanied Secretary Paulson to brief the Congress on the possibility of an imminent collapse in world-wide banking, little was known about the nature of the problems nor the extent of damage already inflicted on the financial system.

On Capitol Hill, fear was palpable. Precedents didn’t exist. No one fully grasped either the extent or the damage potential. In the fog of battle, and rife with fear, the only issue upon which nearly everyone agreed was that if nothing was done the collapse of international finance would prove cataclysmic.

The strategy decided upon by Paulson and Bernanke was not complicated. At its heart was a belief that if some institutions were let to fail while others were shored up, bailed out, or protected from certain types of risk, it just might be possible to stave-off collapse. Deciding on who would be nationalized and who would be immunized from harm was not going to be easy. Institutions which were either quasi-governmental, or whose losses were covered by the full faith and credit pledge of the U.S. Treasury would be, for the most part, nationalized. Those institutions that were inherently private, and who went along with Paulson and Bernanke’s intricate and complex steps to recovery, would be entitled to temporary liquidity — or other assistance in the form of cash infusions, guarantees, or temporary loans.

Too Big To Fail

American International Group -- Too Big To Fail?

The impact of these decisions was often described as the Too Big To Fail test. By the time the unfolding calamity had begun to be fully understood, Bear Stearns had already bit the dust, CitiGroup was in dire straits, Merrill-Lynch had been forced into a cram-down merger into Bank of America. Lehman Brothers, and it’s hard-nosed CEO Richard Fuld had been advised by Paulson to sell out or face collapse. Fannie Mae and Freddie Mac were all but gone — and the world’s largest insurance company, American International Group, which had assumed billions of dollar in guarantees for worthless mortgage paper was left insolvent.

Early on, no one understood the extent of the dealings and interconnections between the principal players, or AIG’s foolish decision to make far bigger money speculating in the same financial products they were insuring for the biggest banks, traders and underwriters. In the disarray that followed Hank Paulson’s calls to his former friends and competitors, there were few certainties.

There were some, but not many, certainties insiders believed they could rely upon. Those who who had caused the collapse, for the most part, remained certain they would remain in control of their companies. No bar owner or truck driver could survive financial collapse, but then they don’t have the connections and power wielded by the world’s major financial services companies. Small crimes land one in jail while large crimes often do not.

Scrambling In The Darkness Of Ignorance

"If we need more money, we'll print it."

Hank Paulson had seen the sub-prime mortgage problems looming for at least two years — without taking action. Not that it mattered, for neither he, nor Federal Reserve Chairman Benjamin Bernanke, fully understood either the scope or complexity of the problems ahead. Bernanke, who had schooled himself for just such a catastrophic possibility, envisioned The Fed as the principal actor, while Paulson, who understood both the economic forces and the players, thought the problems far too large to solve without Treasury and Congressional involvement.

Although they often made joint decisions as a matter of demonstrating commonality of purpose and coordination of power, such decisions too often failed to meet their intended goals. Sometimes a decision that was chosen to achieve consensus failed to solve anything — due to how it was politically altered or watered down. Whatever else can be said about how Mssrs Bernanke and Paulson went about stabilizing banks and restoring financial markets, it’s now clear that not fully understanding the size, scope and causes of the mortgage backed investments business gave both men reason to re-think their positions, change plans, or enlarge their scope of action. Sometimes they even reversed themselves — most notably on the most effective use of TARP funds.

Robbing America To Enrich The Few

Big Money

What came out of their decisions, and those made by both the Bush and Obama administrations, was a two-pronged transfer of wealth from present and future citizens to the very people who had caused, and were still in charge of the institutions that had failed.

In the rush to secure stability, decisions were made that had profound impact on certain players or institutions. One firm that had foolishly bet billions was Goldman Sachs — the one player most likely, for a number of reasons, to survive the catastrophe underway — no matter what happened to others.

Under the TARP funding program there were a series of transactions in which half the $780 bln Congress authorized to purchase troubled assets, was directly, or indirectly transferred to Goldman Sachs, AIG, JPMorgan-Chase, CitiGroup, Bank Of America, Fannie Mae, Freddie Mac and nearly all of their surviving trading partners.

Now that it’s all over — reality has set in. After having brought down nearly everyone around them, some of the most influential and prosperous among the band of brothers, survive intact. That their shareholders didn’t lose everything — as did those at other firms — it was because your money was put in place to protect theirs. Not because they were better managers or stewards of other people’s money — only that your money isolated them from reality.

Today their failed management teams remain in place, their ineffectual boards of directors remain unchallenged and their immense compensation packages and self-serving bonus plans still in place — doling out $ billions.

Together these firms took risks, made decisions and bet their equity recklessly and foolishly. For their own self-interest they ran the financial services businesses into the ground. Each firm was out to win as much as possible for its outrageously compensated managers and partners. As the game escalated, and the stakes approached historically astronomical levels, the gangs running these companies bet the house.

To the CEOs running the world’s largest financial institutions the risks were zero. By any measure, they knew they were each too large to fail. Nothing could happen, they believed, and even if it did, they’d be made whole.

For years, the biggest financial firms in the world rolled the dice with your money.

When they lost — their firms turned insolvent — they demanded to be made whole, to remain in control of their companies, to be immune from criminal prosecution.

You were not so lucky — for you and your children will be paying for their good fortune for as long as there is a United States government.