Last year, when Hank Paulson told us all that the planet would explode if we didn’t fork over a gazillion dollars to Wall Street immediately, the entire rationale not only for TARP but for the whole galaxy of lesser-known state crutches and safety nets quietly ushered in later on was that Wall Street, once rescued, would pump money back into the economy, create jobs, and initiate a widespread recovery. This, we were told, was the reason we needed to pilfer massive amounts of middle-class tax revenue and hand it over to the same guys who had just blown up the financial world. We’d save their asses, they’d save ours. That was the deal.

It turned out not to happen that way. We constructed this massive bailout infrastructure, and instead of pumping that free money back into the economy, the banks instead simply hoarded it and ate it on the spot, converting it into bonuses. So what does this Goldman profit number mean? This is the final evidence that the bailouts were a political decision to use the power of the state to redirect society’s resources upward, on a grand scale. It was a selective rescue of a small group of chortling jerks who must be laughing all the way to the Hamptons every weekend about how they fleeced all of us at the very moment the game should have been up for all of them.
[...]
Taken altogether, what all of this means is that Goldman’s profit announcement is a giant “fuck you” to the rest of the country. It is a statement of supreme privilege, an announcement that it feels no shame in taking subsidies and funneling them directly into their pockets, and moreover feels no fear of any public response. It knows that it’s untouchable and it’s not going to change its behavior for anyone. And it doesn’t matter who knows it.

Let it never be said that Geithner is not a true disciple of Hank Paulson.

Paulson screwed us on the way in, when we bought all those lovely securities in troubled banks for way more than they were worth then:

The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.
[...]
The Treasury, when it was headed by Secretary Henry Paulson, received bank assets worth about $176 billion in exchange for capital purchases of $254 billion under the Troubled Asset Relief Program, the Congressional Oversight Panel said in a report today.

Geithner’s screwing us on the way out, as we rush to sell the warrants back for way less than they are worth now:

The U.S. Treasury has sold warrants it obtained from rescued banks for about two-thirds of what they are worth, a group overseeing the federal bailout said.

The Congressional Oversight Panel, in a report released today, said taxpayers should have recovered $10 million more from warrant sales with 11 small banks. A Treasury official countered that the Obama administration is seeking to protect taxpayers.

(2) The Original Screwing

Bloomberg:

The five-member (Congressional Oversight Panel’s) report said that the Treasury’s portfolio of warrants could be worth as much as $12.3 billion, with a “best estimate” of $8.1 billion and a “low estimate” of $4.7 billion.

At one level, the news is that we stand to lose between $1.6 billion and $4.1 billion as the Obama administration continues to seek to protect taxpayers by selling warrants for two-thirds of what they are worth.

At another level, the news is that we really know very little about how to value such derivatives (which are just about the simplest kind of derivatives that exist). We do have lovely formulae; the Congressional Oversight Panel used the rightly famous (and Nobel-Prize-winning) Black-Scholes options pricing model for their estimates. But nobody really knows with any confidence what numbers should be plugged into the formulae. So the best we can do is say that the warrants are worth anywhere between $4.7 billion and $12.3 billion. That’s how well we know how to value the very simplest derivatives.

And what were these banks and bankers who beat our economy into a bloody pulp doing? They were taking derivatives that are infinitely more complicated, and they were putting billions and trillions of dollars at risk by buying or selling these derivatives.

Roll that around in your mind, and allow yourself to contemplate the awesome risks these banks and bankers blithely took.

Paulson’s Next Stop: Johns Hopkins Washington Post (1/16/09):

Treasury Secretary Henry M. Paulson Jr. said yesterday that he has decided to take a position at Johns Hopkins University’s School of Advanced International Studies after he leaves the Treasury Department.

His exact title has yet to be worked out, said a spokeswoman for the school in downtown Washington.

In an interview on his last official workday at the department, Paulson said he decided on SAIS to have an office and “a place to hang my hat.” He said he plans to stay for at least several months before deciding what to do next.

Paulson said he has yet to make up his mind on a long-term career option but wants to be involved in nature conservation. A former chairman of Goldman Sachs, Paulson added that he is not interested in taking a job as a chief executive of a company, nor is he seeking to make money.

Since the Post is basically laundering a press release here, I figured I’d translate:

I wrote and held the bit above for the time when Paulson came out in public again. And that time is now:

A book this fall will offer one of the ultimate inside takes on the economic crisis, from former Secretary of the Treasury Henry Paulson.

“I didn’t come to Washington thinking I was going to leave and write a book, but this period was so significant and there are so many insights and so many lessons learned that I think an understanding of this extraordinary period is important,” Paulson told the Associated Press Wednesday from his office at Johns Hopkins University’s School of Advanced International Studies in Washington.

Insights and lessons learned. If this was actually the case, Paulson should be advising his bumbling successor. But what could Paulson have possibly learned? Everything he touched fell apart, and he couldn’t open his mouth without saying something that was proven false in almost no time at all. From his greatest hits:

I challenge anyone to come up with five statements from any one person that top Paulson on the scale of wrongness. (Cheney, maybe, but he’s the devil incarnate.) But when Paulson was given a chance to come clean on these and other massively costly errors in a Fox Business interview, he blamed other people:

“We’re not proud of all the mistakes that were made by many different people, different parties, failures of our regulatory system, failures of market discipline that got us here.”

I wonder if this is the “insight” and the “lessons learned” that we can expect in the book. If so, Johns Hopkins must be so proud. They may want to rethink giving him a job, and maybe send him packing with a nail on which to hang his hat.

By way of background, recall this Bloomberg article from four weeks ago:

Henry Paulson may be the most powerful manager of money in the world and he still couldn’t do for taxpayers with the $700 billion bailout of American banks what Warren Buffett did for his shareholders in investing in Goldman Sachs Group Inc.

The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.
[...]
The transactions are “just egregious,” said (Simon Johnson, former chief economist for the International Monetary Fund and a fellow at the Peterson Institute for International Economics in Washington). “You want to do it the way Warren does it.”
[...]
“If Paulson was still an employee of Goldman Sachs and he’d done this deal, he would have been fired,” (said Joseph Stiglitz, a Columbia University professor who won the Nobel Prize for Economics in 2001).
[...]
Buffett received 43.5 million Goldman Sachs warrants valued at $82.18 apiece on the date of the transaction, or $3.6 billion, Bloomberg analytics show. Paulson, who served as the New York-based bank’s chief executive officer until 2006, injected twice as much taxpayer money into Goldman Sachs a month later and got 12.2 million warrants worth $72.33 each, or $882 million.

Now here’s the Oversight Panel’s estimate of how much we lost right off the bat:

The Treasury, when it was headed by Secretary Henry Paulson, received bank assets worth about $176 billion in exchange for capital purchases of $254 billion under the Troubled Asset Relief Program, the Congressional Oversight Panel said in a report today.

“The loss estimate is conservative,” said Representative Alan Grayson, a Florida Democrat on the House Financial Services Committee.

That’s a $78 billion boondoggle, effortlessly making it clear what a rank amateur Bernie Madoff really is. And Paulson stole from a lot more people than Madoff, too. A hell of a lot more money, stolen from a hell of a lot more people. Plus, he gets away scotfree.

Perhaps one day the name Paulson will be even more infamous than the name Ponzi?

*** Update, 7:10 a.m. ***

Propublica has a breakdown of the handouts by recipient.

Citigroup received (the first time around) $25 billion for securities that are estimated to have been worth only $15.5 billion at the time of the transaction. That’s a handout of 38%.

The second time around Citigroup presumably had a better feel for how much highway robbery was permitted, if not encouraged. This time they persuaded us to cough up $20 billion for $10 billion worth of securities.

AIG is the one that really cleaned up though, receiving $40 billion for securities that are estimated to have been worth only $14.8 billion at the time. That’s a handout of 63%.

Honorable mentions where they are due:
— JP Morgan Chase got away with $4.4 billion of our money.
— Morgan Stanley came close with $4.2 billion.
— Goldman Sachs walked away with a 25% handout, PNC with 27%.

Henry Paulson may be the most powerful manager of money in the world and he still couldn’t do for taxpayers with the $700 billion bailout of American banks what Warren Buffett did for his shareholders in investing in Goldman Sachs Group Inc.

The Treasury secretary has made 174 purchases of banks’ preferred shares that include certificates to buy stock at a later date. He invested $10 billion in Goldman Sachs in October, twice as much as Buffett did the month before, yet gained warrants worth one-fourth as much as the billionaire, according to data compiled by Bloomberg. The Goldman Sachs terms were repeated in most of the other bank bailouts.
[...]
The transactions are “just egregious,” said (Simon Johnson, former chief economist for the International Monetary Fund and a fellow at the Peterson Institute for International Economics in Washington). “You want to do it the way Warren does it.”
[...]
“If Paulson was still an employee of Goldman Sachs and he’d done this deal, he would have been fired,” (said Joseph Stiglitz, a Columbia University professor who won the Nobel Prize for Economics in 2001).
[...]
Buffett received 43.5 million Goldman Sachs warrants valued at $82.18 apiece on the date of the transaction, or $3.6 billion, Bloomberg analytics show. Paulson, who served as the New York-based bank’s chief executive officer until 2006, injected twice as much taxpayer money into Goldman Sachs a month later and got 12.2 million warrants worth $72.33 each, or $882 million.

It was a simple two-step. GM first successfully converted GMAC into a bank holding company (a process which just involves knocking at the Fed’s door and going “Pretty please?”):

The Federal Reserve gave General Motors a crucial boost yesterday by approving a request from GMAC, which provides funding for most of the automaker’s dealers and many of its customers, to become a bank holding company.

The move gives GMAC access to new sources of funding, including a potential infusion of taxpayer dollars from the Treasury Department and loans from the Fed itself.

That approval was the Fed’s Christmas present to GM. And it didn’t take long at all for that potential infusion to turn into a done deal:

The U.S. Treasury committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp., widening the government’s effort to keep the largest U.S. automaker out of bankruptcy.

The Treasury will purchase a $5 billion stake in GMAC and lend $1 billion to GM so the automaker can contribute to the lender’s reorganization as a bank holding company, according to a statement issued yesterday. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.

The fresh capital will enable GMAC to expand lending to car buyers and help save GM. The automaker’s U.S. sales plunged 22 percent this year through November after GMAC ran short on cash and limited loans to people with only the best credit.

Wasn’t GM the auto company that was being vilified the most for having made crappy corporate strategic decisions? They seem to have moved pretty adroitly to profit from the prevailing economic climate in Washington.

Treasury Secretary Henry M. Paulson Jr. said yesterday that Congress must release the second half of the $700 billion financial rescue package, warning that emergency loans to the nation’s automakers have all but depleted the funds available to stabilize the still-fragile financial markets.

The need is urgent:

Without fast action to replenish the fund that serves as the primary safety net for the financial system, Treasury officials and others said, the government would be hampered in its ability to respond to a fresh round of market turmoil.

The Bush administration, however, has not yet asked for the remaining $350 billion. In fact, it has not even decided whether to actually ask for the money:

Despite the urgent need for the funds, the Bush administration has not yet made a decision on whether to request the money, a Treasury official said. Paulson is concerned that Congress would say no, an event that could trigger havoc on the markets, according to sources who have been in contact with the Treasury.

The possibility of congressional rejection is real. Key lawmakers in both parties have expressed anger at how Paulson used the first half of the money, saying it was haphazardly managed, and have said they would be reluctant to hand over the rest to the Bush administration.

There are, of course, many reasons why Congress may say no.

One, some in Congress are unhappy at the make-it-up-as-you-go-along manner in which the money has been used, at the lack of any real plan, and at the switcheroo Paulson suddenly pulled in November:

Treasury Secretary Henry Paulson told us he now has a different plan for how to spend that $700 billion of your money.

When Congress OK’d the bailout package, they all told us it would be spent buying troubled mortgage assets.

That’s what Congress voted on. That’s what Congress approved.

Now, Paulson says it would be better for the economy if he uses the money to buy bank stocks as a way to help their balance sheets so they are more likely to lend you money for a car or student loan or credit card.

That’s the beauty of no-strings-attached. You can lurch off in a new direction whenever you want, with or without a real plan.

Two, there’s the slowly simmering anger all over the country at how, in stark contrast to the auto industry, nobody at any time — neither Congress nor the Bush administration — has required banks who get taxpayer bailouts to tighten their belts even the teeniest notch, or make any changes in the way they operate. Nobody has required executives in these banks to give up their corporate jets or their fancy perks. Nobody has required banks who get taxpayer bailouts to cease and desist from paying their executives multi-million dollar bonuses.

And then, just as Paulson gears up to ask for the remaining $350 billion, subversive news organizations start putting out stories like these:

Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.

The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue.

Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.

Here’s a typical snapshot:

At Bank of New York Mellon Corp., chief executive Robert P. Kelly‘s stipend for financial planning services came to $66,748, on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said.

Adding fuel to fire is the arrogance with which bailed-out banks are responding to requests for accountability of some sort:

It’s something any bank would demand to know before handing out a loan: Where’s the money going? But after receiving billions in aid from U.S. taxpayers, the nation’s largest banks say they can’t track exactly how they’re spending the money or they simply refuse to discuss it.

“We’ve lent some of it. We’ve not lent some of it. We’ve not given any accounting of, ‘Here’s how we’re doing it,’” said Thomas Kelly, a spokesman for JPMorgan Chase, which received $25 billion in emergency bailout money. “We have not disclosed that to the public. We’re declining to.”

The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings, and what’s the plan for the rest?

None of the banks provided specific answers.

“We’re not providing dollar-in, dollar-out tracking,” said Barry Koling, a spokesman for Atlanta, Ga.-based SunTrust Banks Inc., which got $3.5 billion in taxpayer dollars.
[...]
“We’re choosing not to disclose that,” said Kevin Heine, spokesman for Bank of New York Mellon, which received about $3 billion.
[...]
Most banks wouldn’t say why they were keeping the details secret.

“We’re not sharing any other details. We’re just not at this time,” said Wendy Walker, a spokeswoman for Dallas-based Comerica Inc., which received $2.25 billion from the government.

Maybe all that secrecy isn’t funny, but what about this request to AP from the New York Mellon Corp. spokesman :

I just would prefer if you wouldn’t say that we’re not going to discuss those details.

It’s not all arrogance, though. There’s also incompetence:

Some banks said they simply didn’t know where the money was going.

That’s reassuring! Yes, let’s please go ahead and give them some more.

Treasury Secretary Hank Paulson was asked this very question in a Q&A that ran in yesterday’s Wall Street Journal, and he replied, “We didn’t have an option.” He said that Lehman had neither a buyer, as Bear Stearns did in JPMorgan Chase (JPM), nor adequate assets to justify a life-saving federal loan.

That’s his version, and no doubt he will stick to it as fervently as he preached the proposition for months that the worst was behind us, and that as far as the future was concerned, all was for the best in the best of all possible economies.

My personal opinion, though, is that it just hadn’t occurred to Paulson and his advisers and string-pullers yet that they could actually get away with stuff like the AIG and Citicorp rescues and the so-called $700 billion bailout plan.

The U.S. financial system is stabilizing and the government does not plan to tap the remaining $410 billion of a financial rescue fund unless a further need arises, Treasury Secretary Henry Paulson told the Wall Street Journal in an interview published on Tuesday.

Paulson said he was unlikely to use the remains of the $700 billion bailout to launch substantial new programs, preferring to keep money in reserve for unforeseen emergencies and to preserve flexibility for the Obama administration.

Paulson May Ask for Remaining $350 Billion of TARP – Bloomberg (11/24/08):

Paulson may ask Congress for the remaining $350 billion from the Troubled Asset Relief Program as he puts together plans to boost consumer credit. Treasury and Federal Reserve officials are working on an effort to buttress the market for securities backed by auto, student and credit-card loans, Paulson said last week. He’s also assembling an office to address mortgage foreclosures.

The Hank Paulson theory of accelerating idiocy is gaining steam. Kudos to Robert Schmidt and John Brinsley for fighting the urge to pretend that Paulson isn’t a total flip-flopping moron, devoid of any credibility or competence.

Robert Siegel (NPR): You said yesterday, overall, we’re in a better position than we were. That’s a modest statement of progress, but it’s a statement of progress. How can you tell Americans who are listening something that’s happened, something that should have affected their lives by now, that is a tribute to the nearly $300 billion that has already been committed by the U.S. government [to a banking bailout]?

Paulson: Yeah, I would say the first thing I would say to Americans, what we were dealing with was, we were dealing with a financial system, a banking system that was on the tipping point. Credit was frozen. Banks weren’t lending to each other. People were asking themselves about the viability of banks.

I believe the banking system has been stabilized. No one is asking themselves anymore, is there some major institution that might fail and that we would not be able to do anything about it. So I think that is a positive.

I think in terms of the challenges, in terms of working through this economic downturn. Let me tell you, it took a long time to build up these excesses. It’s going to take a good while to work through this period. And the first focus, as I said yesterday, should be on recovery and repair. And it’s going to take a while longer to work through it.

Siegel: But just to clarify, you’re saying no one is saying now there could be a failure of a major institution that we wouldn’t be able to deal with. There could be a failure of another major institution, though.

Paulson: I got to tell you, I think our major institutions have been stabilized. I believe that very strongly.

As if on cue, “As stock plummets, Citi on the brink”.

This time last year, Citigroup Inc. was valued at about $180 billion. As of Friday morning, its market capitalization stood at $20 billion — and its once-proud share price had shriveled to $3.75, a 16-year low.

Citigroup’s share price has dropped more than 60% this week, and analysts are starting to wonder just what the future holds for the financial-services company a Dow Jones Industrial Average component.

There are several options facing Citigroup as it tries to stem the decline.

It could sell some of its business units or even sell itself whole — both are under consideration, according a Wall Street Journal report — or it could try to buy itself time and gain market confidence by firing Vikram Pandit as chief executive.

In a worst-case scenario, a government bailout along the lines of that handed to American International Group could be used to rescue Citigroup.

Wrong about everything, all the time, now with more speed.

I honestly think Congress should remove Paulson from office. We can’t take two more months of his abject incompetence.