By Michael West
HENRY Paulson has got to be kidding. He wants American taxpayers to hand a cool $US700 billion ($A833 billion) to his pals on Wall Street in return for a gigantic bundle of their delinquent assets … without his pals taking a pay cut.
Could there be a finer reward for failure? Could there be a worse deal for taxpayers?
No stake in the upside, no ceiling on extortionate Wall Street salaries, no guarantee the system will be stabilised. Just the mother of all rip-offs: a deal to privatise Wall Street's profits and socialise its losses.
How about this bit: "Decisions by the Secretary (Paulson) pursuant to the authority of this act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Like a Roman emperor, Paulson's pals get an explicit protection against any review by the courts and Congress while taxpayers fork out top dollar for rubbish the banks can't sell. It is the quintessential dudding.
If the Paulson "cash for trash" plan can avert systemic failure — and this is by no means assured — it could have legs but Congress is jacking up at the ample "trust me" aspects. And rightly so.
As House of Representatives Democratic Speaker Nancy Pelosi put it, Congress would not "simply hand over a $US700 billion blank cheque to Wall Street and hope for a better outcome".
Until now, Americans had been mostly apathetic when it came to the excesses of investment banks. But now that Main Street is being urged to bail out Wall Street, again, and in huge measure, the temperature is rising. Congress wants a brake on salaries, some guarantee that Paulson's pals won't simply load up the truck with billions in bonuses again, this time funded by Ma and Pa Kettle.
The four biggest investment banks, which included Bear Stearns and Lehman Brothers, shelled out $US30 billion in bonuses last year. Lehman just went under and Bear Stearns was bailed out earlier in the year.
While trying to push through his emergency deal, Paulson says he wants to defer the debate on salaries. Someone should take him aside and tell him, "Pal, it's over". The moral and philosophical underpinning for $50 million salaries is gone, let alone $10 million salaries care of government.
These structures were on the basis of a compact with the market that pay is "at risk" and should reflect performance. That compact is finished. What is the risk if losses are nationalised? And what is the performance? From the subprime to the ridiculous, the orgy of leverage on leverage, mimicked in financial centres as far afield as Australia, has whipped the world to the brink of recession and destroyed faith in the entire system.
And now here is another $US1 trillion (which is the tip on the face value of the $US700 billion in assets) to add to the $US9.6 trillion US national debt. Where will the money come from? The issue of Treasury bonds. Who will buy them? Anyone for some bonds in an entity whose obligations are spiralling out of control.
The US dollar has been sinking thanks to the daunting prospect of a bond market deluge. The more paper on issue, the lower the price. Either the US defaults on its obligations — an outcome many regard as "unthinkable" — or taxes will have to go up. Higher taxes … deeper recession.
It is critical Paulson and his pals demonstrate to the world that they understand the jig is up. People and pay are central to this understanding. Industrialists or entrepreneurs with their own businesses can pay themselves whatever they like but the failed managers of licensed institutions on corporate welfare can hardly expect a blank cheque from those they have blown up. The contract is finished. Wall Street has not fulfilled its obligations.
As Paulson tries to shove his plan through in the face of congressional opposition, the rewards for failure have already shamed the principle of pay for performance.
Fannie Mae boss Daniel Mudd and his opposite number at Freddie Mac, Richard Syron, walked last month with $US9.43 million in retirement and pension benefits on their way out the door — failed, sacked and showered with money as their two giant mortgage businesses were bailed out.
Chairman and CEO of Lehman Brothers Richard Fuld picked up $US22 million for 2007, the year his thousands of staff found themselves on the street. He took $US35 million the year before.
Merrill Lynch boss John Thain took a $US200 million payout with two offsiders for less than a year's work. Merrill was so close to obsolescence it sold itself to Bank of America for $US50 billion in scrip just as Lehman was biting the dust a few days ago.
Thain was given a $US15 million bonus for signing on. Two former Goldman Sachs executives hired by Thain may do even better. Head of global trading Thomas Montag, has already received a $US39 million bonus since signing on in August. With stock options accelerated by the buy-out, he could finish up with $US76 million. The bank's head of strategy, Peter Kraus, was bestowed with a $US95 million package just to beat what he was on at Goldman.
Goldman boss Lloyd Blanfein took home $US54 million last year and Morgan Stanley's John Mack $US42 million.
Regulatory oversight and the ramifications of Bush's tax-cuts-for-the-rich policy, alongside his catastrophic jaunt in Iraq, have come home to roost. America is this year heading for its first $US1 trillion deficit and Paulson's bail-out will add another $US1 trillion to the bill. Thank goodness for Warren Buffett and his $5 billion investment in Goldman Sachs.