classical economics
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Paulson Games Banks
President, Congress and American People, Too

By Wayne Jett
© October 28, 2008

    Secretary of the Treasury Henry Paulson Jr.’s surreptitious game plan for “consolidation” in the financial sector remains on track. He claims unprecedented power to pick winners and losers. On Friday, Paulson refused to inject capital into NCC, Ohio’s largest bank, but provided capital to PNC, Pennsylvania’s largest bank, so PNC can buy NCC at a fire-sale price of $2.23 per share. The buy-out price was engineered by FDIC (meaning by “economic czar” Paulson) at a 20 per cent discount to its trading price a day earlier.
    To aid PNC, Paulson’s selected “winner,” Treasury will invest $7.7 billion in new preferred shares of PNC. In addition, Treasury put in place a new tax break that enables PNC to write off NCC’s accounting losses immediately. The tax break alone will pay for PNC’s cost to acquire NCC. PNC just became Ohio’s biggest bank as well as Pennsylvania’s biggest bank at no cost, and has $7.7 billion in new capital.
    NCC’s shareholders eat dirt. The only alternative was to suspend nonsensical FASB Rule 157, which did not exist until November, 2007. But suspending an accounting rule that requires financial assets to be marked below their true value does not fit Paulson’s game plan.
    If you recognize no pattern in Paulson’s conduct, you are behind the curve. Paulson destroyed Bear Stearns’ common shareholder equity by delivering BSC to J. P. Morgan Chase for $2 per share after the share price closed at $30 on the most recent trading day – giving fraudulent short sellers a bonanza payday. Paulson’s FDIC seized IndyMac after hedge-fund-friendly Senator Charles Schumer started a run on the bank by depositors – again paying off big for naked short sellers. Then the biggest scores yet followed in succession: Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Bros., AIG, Washington Mutual and Wachovia Bank. In each case, institutional failure followed governmental refusal of assistance, or of suspension of Rule 157, or of protection from fraudulent naked short selling. And, naked short sellers reaped billions in illicit profits in each case.
Setting the Stage
    Henry Paulson Jr. has been pivotal in the genesis and performance of this entire saga. First, as CEO of Goldman Sachs from 1999 until his move to Treasury in July, 2006, Paulson executed Goldman’s exploitation of the new dark market in crude oil futures by creating Intercontinental Exchange (ICE) with Morgan Stanley. Second, with Goldman, Paulson packaged many billions of mortgage backed securities and marketed them globally. Third, Paulson and Goldman aided formation of Markit Partners to price credit derivatives. In March, 2007, Markit published ABX index of sub-prime mortgage bonds. ABX was easily manipulated, and Goldman shorted the underlying MBS bonds just as vigorously as it had marketed similar securities, driving down the ABX. Finally, during Paulson’s Treasury tenure, FASB Rule 157 became effective in November, 2007, requiring financial firms to mark the value of MBS assets to market, and to run the adjustments through their current profit and loss statements.
    Add to this a Securities & Exchange Commission with commissioners and staff completely captured by influences of Paulson, Wall Street firms, hedge funds and politicians. The mix produces nirvana for robber barons eager to tilt the table of U. S. financial markets, sliding investment capital from accounts of retirement plans, mutual funds, foundations and individuals into hedge fund barons’ purses.
Awaking to Reality
    Even Joe Nocera, New York Times’ normally reliable apologist for naked short selling hedge funds and prime brokers, says Paulson’s “bailout plan” was a “bill of goods” which only pretended to be stimulus for bank loans to borrowers. Paulson’s actions greatly benefit three factions: (1) banks will have more monopoly power and less competition; (2) hedge funds gain illicit profits by short selling target companies; and (3) vulture funds and “winner” banks acquire assets at liquidation prices.
    Don’t expect this “consolidation” to be limited to the financial sector. Hedge funds, vulture funds and monopolists have much to gain by proceeding with similar tactics to dismantle companies in technology, transportation and other sectors already pulverized and ripe for taking. They will not stop of their own accord.
    Remember, when AIG neared collapse on September 16, President Bush and then Congress demanded Paulson produce a plan to save the financial sector before the general economy suffered more damage. Paulson proposed that he be given $700 billion and complete discretion to buy “mortgage related assets” so homeowners in default could remain in their homes and the housing industry could recover. Before the bailout bill passed, the aim shifted to authorize Paulson to buy “distressed assets” to alleviate the credit crisis. Upon enactment, policy again shifted; Treasury would inject capital into banks so they would unfreeze the credit markets with lending and investing.
    These extended “bait and switch” tactics produced unprecedented leveraging of government power for business advantage of private parties seeking to destroy competition. Treasury announced October 27 nine more banks which will get federal capital in exchange for preferred shares. Even these nine “winners” would undoubtedly prefer fair access to private capital, rather than succumbing to government ownership. But the favored nine would not change places with “loser” banks, whose shares will be targeted by naked short sellers to prepare them for “acquisition.”
    Why so cynical about prospects? Experiences of NCC, WaMu, Wachovia, Merrill and others set the pattern, frightening financial firms and all publicly traded companies. That is why the markets remain in decline. A “winner” today can be turned into a “loser” tomorrow by privately influenced government whim without regard to market fundamentals. ~