Paulson’s Poison and Antidote
God saved America once in the Congress, convincingly defeating the motion of $700 Billion Bail out engineered by Paulson, aided by Bernanke and promoted by President Bush. However, the defeat means death of Goldman. So the Paulson is at it again, forcing the naïve President to follow his infamous Bush, Bush, Push Push policy to get the bill passed at any cost, this time through Senate. It is easy to manage 100 Senators in the House of Senate than 435 Congressmen in the House of Representatives.
He and Bernanke are showing the Senators the Rocky Mountain of impending economic collapse, with hundreds of carcasses around, each bearing one or the other bank’s name or brokers. These are the banks and brokers who floated the overseas subsidiaries in Bermuda, Cayman Islands, BVI, and host of such “off shore centers” to sell the exotic derivatives leveraged 6 to 7 times, even more- in some cases up to 50 times, into the balance sheets of off shore entities but off the balance sheets of their parents on shore, that is, on American soil. These derivatives were guaranteed later by their parents on shore for a fee – normally 1% to 2% of such transactions.
How we got here?
While the incomes were shown by their parents on their balance sheets, resulting into 4 to 5 times the normal profits associated with their normal range of business, boosting stock prices into upper stratosphere. When the troubles arose, and those derivatives started becoming “cancerous”, they transferred the respective assets and liabilities en masse from 2006 onwards, accelerating in 2007 and speeding up to extreme in 2008. These exotic derivatives turned into Toxic Waste with the result that the crisis started unfolding with the speed of hurricane Category 4, upgraded in September to Category 6 when massive force simply uprooted the banks, investment banks and brokers.
Nothing wrong with the regulatory mechanism…
Lot of blames has been heaped on the regulators for not monitoring or ignoring the worrying signs or warning signals. These derivatives did not exist in the books of the parents at all. They were existing in the books of their off shore subsidiaries which would not have been known to the regulators – they are not God after all. The parents did not disclose their onerous liability nor did they mention the extent of their guarantees to overseas subsidiaries to avoid taxes on the American soil.
When those derivatives turned sour or bad or toxic as they now call it, they transferred wholesale all assets and liabilities to the on shore parents as though they were their original creators. They therefore thrust upon the American citizens on shore, the off shore liabilities to which they were least concerned. How could local and domestic Americans be responsible for the business conducted by some one overseas in off shore centers? A bank like HSBC transferred the Assets and Liabilities of their overseas subsidiaries to the parents’ books by $45 Billions in a flash.
The question arises, if parents were neither involved nor part of original creation of off shore derivatives, and those off shore entities, popularly known as SIV (Structured Investment Vehicles), later busted with billions of dollars of losses, why should their American Parents be asked to shoulder their liabilities, when those subsidiaries were limited liability corporate entities and could have been allowed to die natural death? These American parents, in order to salvage their own reputations, allowed the transfer of Assets and Liabilities of their off shore subsidiaries.
Why Tax Payers should “Bail Out” Off Shore obligations of Parent companies?
The whole concept is outrageous. The local Americans are no way responsible for the actions of some company’s off shore operations. They do not pay taxes, are not governed by American law, do not contribute anything constructive to America, then what for the American Tax payers be asked to bail them out in the name of economy or imminent collapse of financial system? If this is acceptable, then American Tax payers are responsible for any corporation anywhere in the world just because their parents were American at one point of time.
Why Goldman always makes Money, when Competitors lose Billions?
In capitalism, it is a game of survival of the fittest. There are two ways of beating the competition – Healthy way and dirty way. In healthy competition, the better of one company rattles with the best of the other. The musical vibration fills the air and everyone dances on the floor.
Necessity knows No Law
In dirty competition, one survives by eliminating the other, following the principles of animal kingdom. The big fish eats the smaller one. A few decades ago, the British Courts delivered a unique judgment, that later became a legal idiom “Necessity knows No Law”. The seamen on a distressed boat survived on the flesh of the other human being. It was neither considered Manslaughter nor Homicide, but the acute necessity that forced the survival of the one at the cost of other.
In present financial turmoil of extreme duress, almost all brokers or Investment Banks lost billions every quarter. The likes of Citi Group, UBS, HSBC, RBS (Royal Bank of Scotland) amongst banks having large Investment Banking operation, and Lehman Brothers, Bear Stearns, Merrill Lynch, Morgan Stanley amongst brokers, are found losing billions of dollars every quarter EXCEPT Goldman Sach. They have been making money consistently. Even Warren Buffet was convinced that Goldman has the best franchise, management team and business model to make the money consistently. He opened his check book and gave them $ 5 billions when no one lends even $ 5 millions to other blue chip company or to even a commercial bank.
So the question arises, what uniquely places the Goldman and what differentiates it from the other competitors? How come they are always on the right side of the trade, so as to make money all the time in proprietary trading operations? What sets them apart from the other giants like Lehman, Merrill, Morgan Stanley and Bear Stearns in same line of business?
The possible answer is, other brokers were not so close to the US Administration. The Treasury Secretaries like Rupert Rubin (during President Clinton’s Administration) and Hank Paulson, in Bush Administration makes all the difference. Both were ex-Goldman Senior Executives. Goldman is therefore in privileged position to get the information from close quarters in US administration for over 12 years that other brokers could not or would not.
Why Paulson’s plan came only after the death of Bear Stearns and Lehman Brothers and elimination of giant Merrill Lynch from the market place? Why did not he push the plan well in advance to save those brokers under his proposed $700 billion blow out? Was it his game plan to eliminate entire competition by decimating Bears Stearns and Lehman Brothers, and removing Merrill Lynch from the scene via its take over by Bank of America so as to give him a killing field in the market place?
Congress Says “Nay”, President says I did not hear you! Work again
The present mood of the Congressmen is somber. They still do not know what had hit them. They are stunned. The Paulson and Bernanke, so called professionals, joined by the departing President Bush, scare the hell out of them. They employ old technique of con men; do this or you will cause that, showing Ground Zero a few blocks away from Wall Street.
What we need today is not the professionals but a few practical persons having common sense. The intelligentsias have to take back seat for a while. There is a famous saying on the stock market – When in doubt, do nothing. However, the Senators and Congressmen are so scared that they do not want to take responsibility if the situation worsens when no actions were taken. They know nothing, and they feel that they have to do some thing. may be they have to do every thing. These professionals, who made this mess at first instance, could not be wrong all the time, they guess.
President Bush does not want to invalidate his 8 years of record of incompetence. He agrees what is put before him by his Fed Chief Bernanke and Treasury Secretary – Paulson.
So let us see, whether man on the street with lots of common sense wins or the intelligent con men who have paramount influence on the poor law makers.
Wait for only one day, and let us pray God to revisit this wrecked country and bless again for the betterment. Oh God, do not leave us to the devious devils – we do come to the church every Sunday and light the candles. Please protect us from the utter destruction. Amen!
Kalidas, Hong Kong
October 1, 2008