Henry 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.

LibertyWeek 47: Persian Powder Keg

by Richard Morrison on June 15, 2009

in CEI Projects, Podcast

Your host Richard Morrison welcomes back guest co-host Jeremy Lott and special guest Greg Conko for Episode 47. We start with the new Obama-Geithner plan for expanding regulation of financial markets, the protests over the disputed presidential election in Iran and the Federal Trade Commission’s investigation of telemarketing robocalls. We then move on to the “beer bikes” of Amsterdam and some potentially scandalous investment choices made by Sen. Dick Durban. Finally, we talk health care with CEI Senior Fellow Greg Conko, covering President Obama’s address to the American Medical Association and the recent Forbes article in which Greg and Dr. Henry I. Miller describe what an ObamaCare plan might actually look like (hint: it won’t be pretty).

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.

With or Without You

by John Berlau on March 30, 2009 · 1 comment

in Bailout Watch, Culture, Deregulate to Stimulate, Features, Mobility, Nanny State, Odds & Ends, Politics as Usual, Zeitgeist

The ouster of General Motors CEO Rick Wagnoner by the Obama administration isn’t the first time in the recent history of bailouts that the government has forced out a CEO. That first happened in September when Bush admnistration Treasury Secretary Henry Paulson forced out American International Group CEO Robert Willumstad in favor of Paulson’s friend Edward Liddy.

The lesson from AIG is that replacing a CEO is no panacea. There is no love lost for the poor managment of Rick Wagoner. He is the one who went to the government hat in hand, and when the government is paying the piper, it can call the tune. But replacing him won’t solve GM’s long-term problems of too many brands of autos and too large of a workforce. And it is increasingly clear that the bailout itself is an impediment to effective restructuring.

The prospect of an ever-increasing supply of tax dollars is leading parties with auto industry contracts — unions, bondholders, dealers and others — to play a game of chicken. No one wants to renegotiate a contract when they think the government will come in with more money to cover the losses. And the Obama administration, as with AIG, does not have the power of a bankruptcy court to discharge debt.

Allowing the companies to go into bankruptcy is what should have been done from the start. As with multiple businesses such as airlines that have succesfully emerged from Chapter 11 bankruptcy, debts could be discharged and the companies could be restructured in bankruptcy court.

To say that consumers would be discouraged at buying a car in bankruptcy misses the point. Consumers might be more likely to buy a car from a company restructured by a bankruptcy court, as they buy tickets from once-bankrupt airlines, than to buy a vehicle from zombie companies dependent on the next government bailout. This delay likely hurts “satellite” companies like auto parts makers more than a bankruptcy would.

In the meantime, the government should lift antitrust barriers and leave all options on the table for mergers. The merger with Chrysler and Fiat that the government is encouraging may not be the most effective. GM and Chrysler had long considered merging, but may have been blocked because the combined company would be deemed by antitrust regulators to have too large a share of the “light truck” market, never mind that this market itself is shrinking. Given the precarious state of the companies, they should be given a blanket antitrust waiver to make the combinations they deem best for their viability.

The government should also delay the imposition of the recently announced increase in Corporate Average Fuel Economy standards. This flawed mandate that adds costs and reduces choices even in a good economy, could be a lethal blow in times such as these.

Let’s drop both the auto bailouts and the mandates. The American auto industy, which has produced such wonderful innovations for so many decades, is too important to be “saved” by Washington’s central planners.”

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.

German Finance Humor

by Iain Murray on December 10, 2008

in Bailout Watch, CEI Projects, Economy, Regulation

When the Germans are laughing at you, things are in a pretty serious mess. That’s the case with the British version of the bailout, which the German finance minister has just ridiculed:

Criticising the UK government’s decision to cut VAT from 17.5% to 15%, Mr Steinbruck questioned how effective this will be.

“Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90?” he said.

“All this will do is raise Britain’s debt to a level that will take a whole generation to work off.”

Saying the UK government was now “tossing around billions”, Mr Steinbruck questioned why Britain was now closely following the high public spending model put forward by 20th Century economist John Maynard Keynes.

“The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking,” he said.

“When I ask about the origins of the [financial] crisis, economists I respect tell me it is the credit-financed growth of recent years and decades.

“Isn’t this the same mistake everyone is suddenly making again, under all the public pressure?”

Given that so far Henry Paulson and his Treasury team have seemed to take their cues from the Brown government approach, one hopes that Herr Steinbruck will turn his attention to the Bush-Obama policy approach soon. We could do with a Teutonic laugh.

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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Market down on bailout — Don’t compound damage with overregulation of ‘Main Street’

by John Berlau on October 3, 2008 · 2 comments

in Bailout Watch, Economy, Nanny State, Personal Liberty, Politics as Usual, Precaution & Risk

Today — five days after a courageous independent vote against Treasury Secretary Hank Paulson’s $700 billion bailout for Wall Street — the U.S. House of Representatives disappointingly approved the same basic measure. Many of the bill’s other “sweeteners”, such as earmarks and a regressive increase in deposit insurance for upper income bank customers –will also cost taxpayer hundreds of billions of dollars.

All this week I and my colleagues have pointed out ways this bailout could, in addition to being costly, be counterproductive for the economy. Wall Street may have been feeling this “buyers’ remorse” today as the Dow Jones Industrial Average pared back ealier gains to end the day down by 150 points. As Yahoo Finance noted, “financial stocks, which had traded sharply higher on the promise the bill would be passed, fell after the House vote on profit-taking and as the market focused on the tough road that still lies ahead for the U.S. economy.”

As I had noted previously, despite the scare tactics from Paulson to Pelosi of economic Armageddon if no bailout was passed, the volatility of the past few weeks was in siginifcant part due to fear about what goverment was going to do as well as fear of market conditions.

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Cost of Bailout Gets Bigger; SEC Regulation Backfires

by Hans Bader on September 23, 2008 · 8 comments

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

The financial bailout bill is not just “dangerous, inflationary, unnecessary, and unconstitutional.”  It’s also a lot more costly than the government admits, judging from the hypocritical arguments made by government officials.  The Treasury Secretary in the past has resisted calls to loosen federal accounting rules, so-called “mark-to-market” rules that require mortgages to be assessed at their current fire-sale prices, rather than their estimated value if held to maturity.  These rules can result in banks being declared insolvent even if few of their loans have defaulted.

Now, however, the government hypocritically plans to ignore its own mark-to-market regulations when buying up mortgage loans as part of the bailout, saying that instead of buying assets at their current “fire-sale prices,” the bailout will ”have taxpayers buy the assets and hold them at close to their maturity value.”  If “mark-to-market” accounting is really as accurate as the government claims, then the government is going to grossly overpay for the worthless mortgages it buys, and taxpayers are going to lose tons of money in the bailout — far more than the government is admitting.  On the other hand, if this accounting method is not accurate enough to be used by the government for its own purchases, then the government should stop forcing private banks to use it, since doing so jeopardizes their solvency, and the financial system as a whole.

Many commentators are now calling for relaxation of federal regulations mandating “mark-to-market” accounting (which requires assets to be valued at current fire-sale prices), in order to stem the financial crisis, including former FDIC Chairman William Isaac, the Wall Street Journal, John Berlau, Jeff Miller, Holman Jenkins, Newt Gingrich, and the Republican Study Committee

The SEC’s foolish ban on short-selling, a classic example of shooting the messenger, has now backfired, with people worried about the market falling investing in commodities like gold rather than the stock market, as investment manager Peter Schiff has observed.  Investor confidence took a dive after the details of the bailout became public — not surprising when you consider the role that government incompetence played in spawning the mortgage crisis, especially by the very lawmakers and officials who are pushing the bailout (such as mandating risky loans to promote “affordable housing“).

Bailout Threatens Economy, Shreds Constitution, Rips Off Taxpayers

by Hans Bader on September 22, 2008 · 11 comments

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

The stock market sank as the Bush Administration capitulated to liberal demands that its proposed $700 billion bailout of the financial system be expanded to add more costly give-aways, like “systematic” limits on foreclosure, that would allow irresponsible borrowers to remain in their homes at taxpayer expense.   The bailout is so extreme that it is unconstitutional.

Because of rigid federal accounting regulations that require Enron-style “mark-to-market accounting,” the bailout could actually deepen the financial crisis.  The bailout will reduce economic growth over the long run, and is logically inconsistent.

The bailout rips off people who lived within their means to pay their debts.  I can pay my mortgage, because I was frugal, and bought a little two-bedroom house on a fixed rate mortgage.  But reckless people in my region can’t pay their mortgage, because they bought big houses on adjustable interest-rate loans with low teaser rates.  Now that their introductory low rates have expired,  they can’t afford their payments.  The government is going to bail them out, at our expense.  While many defaulting borrowers have been living it up, buying fancy Lexus cars and eating expensive restaurant meals, I’ve been going through recycling bins on weekends searching for coupons.  (I found over $100 in baby food coupons that way).

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