hank paulson

Berlau says: “Paulson Must Be Held Accountable for Alleged Bank of America Threats”

by Gary Howard on July 16, 2009 · 1 comment

in Economy, Legal, Politics as Usual

CEI Director of the Center for Investors and Entrepreneurs, John Berlau, released a statement on former Treasury Secretary Henry Paulson’s testimony before Congress (prepared version) on his alledged strong-arming of Bank of America during last year’s bank bailouts. You can read the original release here or see below.

Paulson Must Be Held Accountable for Alleged Bank of America Threats

Statement by CEI John Berlau

Washington, D.C., July 15, 2009—Former Treasury Secretary Henry Paulson is set to testify July 16 before the House Oversight and Government Reform Committee on whether he pressured Bank of America about the bank’s deal to buy Merrill Lynch.  Bank of America (“BofA”) CEO Ken Lewis has testified that he felt pressured to do the deal by Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson.

Statement of John Berlau on testimony tomorrow of former Treasury Secretary Henry Paulson before the House Oversight and Government Reform Committee.

As much as President Obama is criticized, legitimately, for federal meddling in business and dictating who should serve on the auto industry boards, conservatives and others must never forget that it was Bush administration Treasury Secretary Henry Paulson that made the federal government go where it had never gone before in its dealing with private corporations. It is heartening that the House Oversight and Government Reform Committee is having a bipartisan hearing tomorrow in which Paulson will testify on these actions

Paulson exceeded his authority as Treasury Secretary on numerous occasions. When the government took over AIG in September, longtime company leader Hank Greenberg was locked out of negotiations, and Paulson replaced AIG’s CEO with Edward Liddy, who Paulson served with on the board of Goldman Sachs when Paulson was CEO.

Reports also indicate that Paulson strongly pressured healthy banks to take government money and give the government ownership stakes in the institutions, implicitly threatening negative regulatory actions if they didn’t take the deal. A set of Paulson’s “talking points” from a meeting with bankers, obtained through a Freedom of Information request by the group Judicial Watch, has him emphasizing to bank CEOs that “if a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance.”

But the most disturbing allegation is the one that the committee will be exploring that Paulson and others including Federal Reserve Chairman Ben Bernanke pressured Bank of America CEO to deceive his shareholders and not report the extent of losses at Merrill Lynch at the time BofA was attempting to acquire it. According to testimony before New York state Attorney General Andrew Cuomo, Lewis was seriously considering backing out of the deal, under a “Material Adverse Change” clause in the merger agreement, because of bigger losses than predicted on Merrill’s balance sheet. According to Lewis, Paulson said, “we would remove the board and management” if BofA did so. So Lewis and the BofA board backed down.

Lewis obviously failed his shareholders by not standing up to Paulson, but Paulson’s alleged actions were the most outrageous. Paulson had no authority to remove a board and CEO of a private company – that’s for shareholders to decide.

According to Cuomo’s report, “Paulson largely corroborated Lewis’s account.” Paulson will have a chance to give his side tomorrow, but his actions, if true, cannot be excused by any counterfactual of what would have happened if the merger had not gone through. The financial crisis was largely caused by breakdown in trust, and fostering mistrust at the government level will only prolong the crisis in confidence.

Paulson and others need to be held accountable, and the rule of law must be honored. If the allegations are true, Paulson probably violated many of BofA shareholders’s constitutional rights, including the 14th Amendment’s guarantees of due process and equal protection under the law.  A Bivens lawsuit, which is filed against government employees who abuse their authority and violate constitutional rights, may be appropriate for BofA shareholders to file against Paulson and others who allegedly threatened Lewis with removal if he didn’t deceive investors.

Stop Thief! NYT steals Examiner’s AIG scoop with no attribution

by John Berlau on April 17, 2009 · 1 comment

in Bailout Watch, Culture, Politics as Usual, Sanctimony

One week after Washington Examiner ace investigative reporter Timothy P. Carney broke the blockbuster story reporting that American International Group’s post-bailout CEO Edward Liddy owned a large stake in Goldman Sachs. a top recipient of the AIG bailout, the New York Times has decided that this is news “fit to print.” But for some reason, the so-called paper of record didn’t think it was “fit” to give any credit to the original source of this story.

Almost all of the significant details in the Times story  by Mary Williams Walsh, posted last night on its web site, were reported in Carney’s column in the Examiner a week ago (and elaborated on in my post in Open Market): The fact that Liddy — who was installed in his position by former Treasury Secretary Hank Paulson (and with the approval of  then-Federal Reserve Bank of New York President Tim Geithner, a detail not in the Times story!) — still owns more than 27,000 shares of Goldman Sachs that its valued at more than $3 million; and that this represented a potential conflict of interest because Goldman was a counterparty of AIG that got $13 billion from the taxpyer-funded bailout.

The Times even talks to the same AIG spokeswoman, Christina Pretto, who originally confirmed these details for Carney. But the story doesn’t once reveal to Times readers that all this information had already been broken by the Examiner.

It is highly doubtful the Times hadn’t known of the Examiner piece. Earlier, at the prominent financial blog site Ritholtz.com, prominet risk analyst Chris Whalen wrote a commentary on the issue citing both Carney’s piece and my analysis in Open Market.

The Times’ appropriation in its covering of what I had described to Carney as a “looting” of taxpayers and AIG shareholders can, in a sense, be called thievery on top of thievery.

LibertyWeek 38: Pirate Warriors on Deck

by Richard Morrison on April 13, 2009

in CEI Projects, Podcast

Your hosts Richard Morrison and Cord Blomquist are joined by special guest co-host Jeremy Lott for a very swashbuckling Episode 38 of LibertyWeek. We start with the rescue of Capt. Richard Phillips from Somali pirates by the U.S. Navy and Special Forces, look into the murky finances of AIG CEO Edward Liddy in Scandal Watch, and figure out what ISPs are up to in Technology News. We also get an update on how West Virginia is about to become even more Wild and Wonderful, and finally we answer the call for wealthy, multilingual volunteers in Olympic News.

AIG CEO Liddy owns millions in stock in bailout beneficiary Goldman — Tim Carney blockbuster in DC Examiner

by John Berlau on April 10, 2009

in Bailout Watch, Features, Odds & Ends, Politics as Usual

Everyone should read the blockbuster exclusive in today’s Washington Examiner in which Timothy P. Carney confirms that American International Group CEO Edward Liddy — appointed to his position at the behest of Hank Paulson and Tim Geithner after the government takeover of AIG in September — still owns more than $3 million in stock in Goldman Sachs, one of the biggest beneficiaries of the AIG bailout.

I am privileged to be quoted in this article that both breaks news and puts it into an informative policy context. The dogged investigative reporting conducted for this piece by Carney, a former Warren T. Brookes Journalism Fellow at CEI, should be enough to garner him several awards, and in my opinion this piece and likely follow-ups may be Pulitzer Prize-worthy material.

A couple weeks ago, after the brouhaha about the “retention” bonuses paid to the AIG Financial Products employees, Liddy’s calm demeanor before Congress and the media helped diffuse the situation. He emphasized that he was making a nominal $1-a-year salary and argued he was doing the CEO stint merely as a public service. Liddy wrote in a recent Washington Post op-ed that “my annual salary is $1. My only stake is my reputation.”

But Carney found that Liddy was not telling the whole story about his real stake in the AIG bailout. Namely that Liddy, as Carney notes, has “an acute financial stake in one of AIG’s counterparties—namely, his $3.2 million personal investment in Goldman Sachs.” And under Liddy’s direction, AIG disbursed nearly $13 billion from the taxpayer bailout money to Goldman, in a move many say is more disturbing than the employee bonuses that were the source of the recent controversey.

Everyone from former AIG CEO Maurice “Hank” Greenberg to liberal Rep. Brad Sherman, D-Calif., have expressed outrage that Goldman and other banks were compensated at full value for their derivative contracts. Goldman had bought billions in credit deafalt swaps from AIG. Had AIG gone into bankruptcy, Goldman and other counterparties would have almost certainly had to take a “haircut” on the contracts due to declining market conditions.

In the article, Carney generously writes that “there is no reason to believe Liddy is influencing AIG actions to unfairly benefit Goldman.” Yet Liddy had to be aware that many were saying Goldman may not have survived the hit if AIG substantially reduced payment. He resigned his position from Goldman’s board of directors when he became CEO of AIG, ostensibly to avoid conflict of interest, but has not seen fit yet to sell his more than 27,000 shares in Goldman stock, which he is listed as holding in the firm’s 2008 proxy statement. Carney reports that “an AIG spokeswoman confirmed for the Examiner that Liddy still owns all these shares.”

Carney points out the paradox of “strange public-private chimeras like AIG spawned in this age of bailouts.” When it bailed out the firm, the government took an 79.9 percent stake in AIG, making AIG in one sense a government entity. Yet, as Carney points out, this “situation represents a potential conflict of interest that would never be allowed in a government agency.”

It also likely wouldn’t fly in a purely private company, where directors and shareholders are on guard against executives’ “related party transactions” that aren’t in the company’s best interest. Yet, because he is running a public-private hybrid, Liddy lacks accountability to both to private shareholders and government ethics rules

Former Treasury Secretary Paulson, himself a former Goldman Sachs CEO, has a lot to answer for in forcing out AIG CEO Robert Willumstad and bringing on Liddy to replace him. So does Geithner, who was heavily involved in the AIG bailout as president of the Federal Reserve Bank of New York. Why did they not insist that Liddy divest his holdings or find someone who didn’t have this conflict?

Above all, this shatters the illusion that the government can magaically take over a company, fire the CEO, and run it more efficiently for the taxpayers. I have written before on Open Market that Obama’s firing of Rick Wagoner was not the first time the government forced out a CEO. Even before Paulson ousted Willumstad after the bailout, then- New York Attorney General Eliot Spitzer effectively forced out longtime AIG CEO Greenberg on baseless charges that have almost all been dropped. Greenberg built up AIG successful 35-year tenure, and has testified that the issuance housing-related credit defaut swaps at the center of the firm’s problem exploded in the months after he left.

As I tell Carney in concluding paragraph of the story, “The whole AIG experience demonstrates the fallacy that the government can efficiently sack CEOs and replace them.”

Paulson’s Bailout Was a Scam

by Hans Bader on December 16, 2008 · 3 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Precaution & Risk, Regulation

National Review editor Rich Lowry, who mistakenly supported the financial system bailout because he trusted the Bush Administration, now realizes that he was deceived by Treasury Secretary Hank Paulsen, and that the bailout was sold to the public under false pretenses.

Having promised to use bailout money to buy up troubled assets, the Bush Administration instead used the money for completely different purposes, and now wants to use some of it to bail out an entirely different industry — the automakers.  The Bush Administration reads the bailout bill as giving it almost limitless discretion as to who to bail out and how.  That interpretation of the bailout statute should be rejected, because such a vast grant of discretion would be unconstitutional.

The proposed bailout of the automakers would itself be a grave mistake, costing taxpayers billions while avoiding the painful reforms to the auto industry needs to enable its long term survival and failing to make inexpensive deregulatory reforms that would allow the auto industry to recover.  The bailout would repeat the mistake England made in the 1970s, when it completed the ruin of its failing auto industry by attempting to bail it out, at a cost of billions of pounds, making it uncompetitive and dependent on welfare instead.

Geithner choice is ‘more of the same’ — was Paulson’s bailout cohort

by John Berlau on November 21, 2008 · 2 comments

in Bailout Watch, Politics as Usual

If news accounts are true, and Presidet-Elect Barack Obama has indeed decided on Timothy F. Geithner to be his Treasury Secretary nominee, it represents a giant step away from Obama’s promise of “change you can believe in.”

The Geithner nomination would be “more of the same” in almost every respect — more bailouts, more lack of transparency in the bailouts, and more corporate welfare. Geithner was the architect of the Bear Stearns bailout and cohort of Treasury Secretary Paulson in American International Group and the TARP bailouts. In choosing Geithner, Obama might as well have nominated Hank Paulson to another term!

Geithner’s financial qualifications are in many respects quite thin. He has never been a banker nor an academic economist. As liberal columnist Robert Kuttner noted recently in the American Prospect, Geither “has neither a doctorate in economics nor an M.B.A.”

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License to Print Money. Literally.

by Iain Murray on November 13, 2008

in Bailout Watch, Economy

The threat of deflation is so big in the UK, where they have found their version of the financial crisis worsened by the weakness of sterling and the size of government, that a former Treasury adviser is suggesting they need to think about printing money.

Meanwhile, Rich Lowry quotes AEI’s Peter Wallison about Hank Paulson’s latest u-turn:

The problem is that these shifts in direction have caused investors and others to lose confidence that Paulson knows what he’s doing, and that in itself could be causing some of the distress in the markets. The whole idea of TARP was to increase confidence, and that’s now been frittered away. If you go to Congress with a plan, it better be the plan you are actually going to carry out, or you better have a good explanation for why it isn’t going to be implemented. If Paulson has lost faith in his original plan, he has to explain why, and his failure to do so is probably worse than his constantly shifting objectives. When you’re Treasury Secretary, you don’t have the luxury of saying “Oh, never mind.”

We here have never thought that Paulson knew what he was doing, except helping out his cronies in Wall Street. If we don’t get some people in government willing to bite the bullet (and that is unlikely), we may well end up having to print money too.

In mortgage modifications, property rights of investors must be respected

by John Berlau on November 12, 2008 · 3 comments

in Bailout Watch, Economy, Legal, Personal Liberty, Politics as Usual

Today, in addition to Treasury Secretary Henry Paulson’s expected announcement of a major mortgage modification plan through the $700 billion TARP, Barney Frank’s House Financial Services Committee is holding a hearing entitled “Private Sector Cooperation with Mortgage Modification.” However, despite the word “cooperation” in its title, it’s clear from letters Frank and others sent out that the hearing will be confrontational rather than cooperative. Specifically, Frank and some fellow committee members seek to villify investors in mortgage-backed secuties who assert their property rights under contracts with banks servicing the mortgages.

The harsh tone was set in a letter that Frank and fellow committee Democrats, including Carolyn Maloney, D-N.Y., and Maxine Waters, D-Ca., sent to investor William Frey. The representative wrote that they were “outraged” the Frey was opposing their “voluntary efforts” to “achieve a dimuntion in foreclosures” through the Federal Housing Administration refinancing plan mortgage bailout passed this summer. They then urged him to “reverse his position of trying to obstruct the operation of the bill.” So much for “voluntary,” huh.

But all Frey was doing was asserting the basic American property right of having a contract upheld. Because of securitization, many mortgages are not the banks to modify. Instead they are owned by investors, including pension funds holding the savings of the very middle-class families Frank and others are trying to help. In my OpenMarket post a few months ago, “Abrogating Peter’s Contract to Pay Paul,” I noted that according to investment bank Credit Suisse, 14 percent of MBS are owned by pensions and mutual funds that serve middle-class savers. So a big bailout, I wrote, “not only ‘robs Peter to Pay Paul,’ through taxpayers’ bailout of bad loans by banks and borrowers. It can also be said to ‘abrogate Paul’s contract to Peter.’”

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That $800 Billion

by Julie Walsh on October 22, 2008 · 10 comments

in Bailout Watch, Economy

So what has Paulson done so far with your $800 billion? He’s rewarded his friends, of course. $70 BILLION has gone to executives and staff. The Guardian reports:

Financial workers at Wall Street’s top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year – despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government’s cash has been poured in on the condition that excessive executive pay would be curbed.

Yes, Paulson’s Goldman Sachs – which didn’t even get bailed out – will get a $11.4 billion gift from the government. Congress is investigating.

Further, as colleague Iain Murray unveiled, “Jamie Dimon, the CEO of JP Morgan Chase, has agreed in principle to be Obama’s Treasury Secretary. Dimon worked hand-in-glove with Hank Paulson over the Bear Stearns bailout.”

So it appears Mr Spread-the-Wealth will continue Paulson’s legacy.

They’re In The Money

by Iain Murray on October 21, 2008 · 2 comments

in Bailout Watch, Economy

We’re hearing from a variety of sources that Jamie Dimon, the CEO of JP Morgan Chase, has agreed in principle to be Obama’s Treasury Secretary. Dimon worked hand-in-glove with Hank Paulson over the Bear Stearns bailout. The new boss, it appears, will be the same as the old boss.

Looks like the revolving door between Wall Street and the Treasury Department ain’t going to stop any time soon.

In a related note, the excellent Capital Research Center, which has done so much good explaining how leftist NGOs dictate public policy, has now turned its lights on Goldman Sachs.

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