The New Fixers

The New Fixers
Daniel Gross
Oct 04, 2008

http://www.newsweek.com/id/162269

In 1907, one man saved us from financial collapse. Today it takes a troika.

"This is the place to stop this trouble!" J. P. Morgan said on the afternoon of Oct. 23, 1907. After the failure of several trust companies (unregulated banks, kind of like today's subprime lenders), the banker had decided that the collapse of the Trust Co. of America would cause too much damage to America's fragile financial system. He pulled together leading bankers and pooled funds to bail out the firm. Over the course of two weeks, as a fevered crisis gripped Wall Street and Washington, Morgan acted time and again: saving brokerage firms, rounding up $25 million in cash in 20 minutes to help the New York Stock Exchange stay open, underwriting municipal bonds for New York City, bringing in gold from Europe to bolster the dollar and replenish Washington's coffers. "He essentially singlehandedly saved New York City from failure," says Sean Carr, coauthor of "The Panic of 1907."

One of the troubling features of our current, rolling crises on Wall Street has been the absence of a single, Morganesque financial statesman-someone who can put a stop to the trouble. President Bush is essentially AWOL, and Federal Reserve chairman Ben Bernanke doesn't command the respect of the global markets the way his predecessor, Alan Greenspan (who, it is now clear, helped create this mess), did. "I don't think any one man in today's immense and immensely complex markets could play the role J. P. Morgan played in 1907," says Jean Strouse, author of the Morgan biography "American Financier." Indeed, the best we have is a troika of unrelated executives who are performing different components of Morgan's historic role.

John Pierpont Morgan, all paunch and haughty jowls, owner of a rhinophyma-ridden nose that launched a thousand caricatures, was the dominant banker of America's gawky financial adolescence. Today the most powerful banker in Gotham is Jamie Dimon, the CEO of a firm that descends (historical irony alert!) from the House of Morgan itself. Like J.P., he is aloof and willing to play hardball. In March, Dimon's JPMorgan Chase picked up the failed investment bank Bear Stearns, and in September he snagged the banking operations of ailing Washington Mutual, both for a nominal price. As a result, Dimon now commands a mammoth bank with more than $2 trillion in assets, 5,400 branches and $900 billion in deposits.

At his core, Morgan was an investment banker-a seeker of order, a dealmaker and adviser. Today the investment banker in chief is Treasury's Henry Paulson, the former CEO of Goldman Sachs. Morgan was known to bring feuding railroad executives aboard his yacht, the Corsair, and sail it around New York harbor until they made a deal. Paulson has repeatedly summoned Wall Street executives and political leaders to the offices of the New York Federal Reserve and the Treasury Department for marathon deal meetings.

Paulson has the balance sheet of the Federal Reserve and the taxpayer behind him. Morgan had only his name. But in his day, that was more powerful than any guarantee Uncle Sam could provide. Now it is Warren Buffett, the proprietor of Berkshire Hathaway, whose name commands such respect. With his folksy ways and desire to share his wealth and wisdom with the public, Buffett may appear to be an anti-Morgan. Yet a line from Alice Schroeder's new doorstop "The Snowball: Warren Buffett and the Business of Life"-"He was a man who loved money, a man for whom the game of collecting it ran in his veins as his lifeblood"-could just as accurately have described Morgan. In recent weeks, Buffett has stepped in with his own cash and reputation to stop runs on the bank at Goldman Sachs and General Electric (Buffett is a director of NEWSWEEK's parent, The Washington Post Company). Of course, like Morgan, who profited on some of his system-saving maneuvers in 1907, Buffett was also out to make a buck.

There are important differences between Morgan and his modern-day successors. Morgan was willing to save the financial sector without the government's help. Dimon and Buffett made their investments only because of the prospect of federal assistance. And all three lack his imperium: Morgan would never have strummed a ukulele to entertain shareholders, as Buffett does, nor gotten down on his knees to beg a congressional leader for support, as Paulson did to House Speaker Nancy Pelosi.

But mostly, the difference is that the financial world has changed. "When you look at the complexity of the system and all the interconnectivity and size of these institutions, that is the challenge," Henry Paulson told NEWSWEEK in September. J. P. Morgan, sitting in his fortress-like office at the corner of Wall Street and Broad Street, could easily survey the entirety of the U.S. financial system and get his arms around the problems. Today, as his modern-day imitators look at a chaotic, interconnected global economy, all they can do is play whack-a-mole.

Bailout bill loops in green tech, IRS snooping

Bailout bill loops in green tech, IRS snooping
Declan McCullagh
Oct 03, 2008

http://news.cnet.com/8301-13578_3-10057618-38.html

Bailout type
Cost to taxpayers (Source: Reuters)

Financial bailout package approved this week
up to or more than $700 billion

Bear Stearns financing
$29 billion

Fannie Mae and Freddie Mac nationalization
$200 billion

AIG loan and nationalization
$85 billion

Federal Housing Administration housing rescue bill
$300 billion

Mortgage community grants
$4 billion

JPMorgan Chase repayments
$87 billion

Loans to banks via Fed's Term Auction Facility
$200 billion+

Loans from Depression-era Exchange Stabilization Fund
$50 billion

Purchases of mortgage securities by Fannie Mae and Freddie Mac
$144 billion

POSSIBLE TOTAL
$1.8 trillion+

NUMBER OF HOUSEHOLDS PER U.S. CENSUS
105,480,101

POSSIBLE COST PER HOUSEHOLD
$17,064+

Here's a look a some of the green-tech measures:

(1) One-year extension for wind and refined coal energy tax credits. A production credit for electricity produced from renewable marine energy sources (meaning through wave power and river power, or by exploiting the differences in ocean temperature). Energy credits for "small wind properties," geothermal heat pump systems, and energy-efficient residential properties.

(2) New renewable-energy bonds. Up to $800 billion in energy bonds may be offered to the public, with a third from "public power providers," a third from governments, and the remainder from "cooperative electric companies."

(3) Tax credits for "cellulosic biofuels" and for "carbon dioxide sequestration." An extension of an alternative fuel credit. Tax credits for "new qualified plug-in electric-drive motor vehicles." Bicycle commuters get a nod, as do regulations aimed at "residential top-loading clothes washers."

IRS undercover operations: Privacy invasion?
The bailout bill also gives the Internal Revenue Service new authority to conduct undercover operations. It would immunize the IRS from a passel of federal laws, including permitting IRS agents to run businesses for an extended sting operation, to open their own personal bank accounts with U.S. tax dollars, and so on. (Think IRS agents posing as accountants or tax preparers and saying, "I'm not sure if that deduction is entirely legal, but it'll save you $1,000. Want to take it?") That section had expired as of January 1, 2008, and would now be renewed.

There's another section of the bailout bill worth noting. It lets the IRS give information from individual tax returns to any federal law enforcement agency investigating suspected "terrorist" activity, which can, in turn, share it with local and state police. Intelligence agencies such as the CIA and the National Security Agency can also receive that information.

What's a little odd is that there's been little to no discussion of the IRS sections of the bailout bill, even though they raise privacy concerns. Treasury Secretary Henry Paulson said this week: "I will continue to work with congressional leaders to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people by limiting the prospects of further deterioration in our economy." He never mentioned the necessity of additional IRS undercover operations.

Paulson's Reasons for Delaying Day of Reckoning

Paulson's Reasons for Delaying Day of Reckoning
Jonathan Weil
Oct 02, 2008

http://www.bloomberg.com/apps/news?pid=20601039&
refer=columnist_weil&sid=aMaWyNFImi4o

If you think this bailout is expensive, just wait until you see the next one.

The $700 billion rescue plan approved by the U.S. Senate won't fix the core problem with the nation's ailing financial institutions. And it almost guarantees that you and I will have to pony up for an even costlier bailout someday, maybe soon, if the House of Representatives passes it tomorrow.

Treasury Secretary Hank Paulson has correctly identified the quandary: Lots of shaky banks and insurance companies are showing strangely high values for assets that aren't worth squat in the market. Many need more capital and can't raise it. And he's right in saying the outlook is grim if we don't get this fixed.

What's stunning is how little the taxpayers would get in return for their money under Paulson's package, and how illusory much of the banks' newly minted capital would be.

Under the plan, Treasury would buy some companies' troubled assets at above-market values. To boost their capital, Paulson would have to pay the companies more than what their balance sheets say the assets are worth. Then other companies would use the rigged prices to write up, or avoid writing down, the values of similar holdings on their own books.

So, the taxpayers get hosed on the asset purchases. Other banks use the trumped-up prices to cook their books. And investor confidence supposedly is restored.

That brings us to this question: Why would a smart guy like Hank Paulson -- the former boss of Goldman Sachs -- advance such a dumb, shady plan? Let us count the reasons:

No. 1: It delays our national reckoning until after the presidential election.

No. 2: The reckoning will be worse than you can imagine.

No. 3: He's helping his friends.

No. 4: There's an excellent chance the Congress will pass it. Leave someone else to figure out the costs another day.

Growing right-wing opposition to the Paulson plan

Growing right-wing opposition to the Paulson plan
Glenn Greenwald
Sep 22, 2008

http://www.salon.com/opinion/greenwald/
2008/09/22/paulson/index.html

As the AP put it yesterday: "Many of the same economists and opinion-makers who'd provided a bipartisan sheen of consensus to Treasury Secretary Henry Paulson's previous moves have quickly begun casting doubts on the wisdom of a policy that would allow Treasury to purchase without oversight hundreds of billions of dollars of difficult-to-price assets from financial institutions.

And now, some of the most rabid ideologues on the Right are voicing increasingly strident opposition as well.

At National Review last night, Newt Gingrich wrote that "watching Washington rush to throw taxpayer money at Wall Street has been sobering and a little frightening" and said he "hopes Congress will slow down and have an open debate."

Thereafter, NR's Yuval Levin proclaimed that nobody could read through the Paulson proposal "without concluding that everyone in Washington has lost their minds."

In The New York Times today, Bill Kristol said he's "doubtful that the only thing standing between us and a financial panic is for Congress to sign this week, on behalf of the American taxpayer, a $700 billion check over to the Treasury."

While Michelle Malkin posted a lengthy alarmist screed warning that "Hank Paulson must be contained."

Right-wing opposition to the Paulson plan is vital for having any meaningful chance to stop it. Does anyone have any confidence at all in the Democrats' willingness and/or ability to impede this bailout train if the Bush administration and the Right were vigorously behind it, warning the nation of impending doom unless we submit to vast, unchecked government power of the type Henry Paulson is demanding?

The instances of complete Democratic acquiescence under those circumstances -- including when they "controlled" the Congress -- are far too numerous to allow any rational person to think Democrats, standing alone, would stop the Paulson plan. As sad as it is, meaningful right-wing opposition is critical for that to happen.