By Jeff M. Wilson
Treasury Secretary Hank Paulson along with Federal Reserve Board Chariman Ben Bernanke offered to solve all of the current Wall Street credit problems. Their solution, Congress remits to them a blank check payable for $700 Billion. That’s slightly less than $2,300 from every man, woman and child in the United States. To paraphrase a member of Congress, “it’s like a paying an arsonist to put out the fire.”
Maybe it’s time we fire the arsonists.
Secretary Paulson, a Phi Beta Kappa graduate of Dartmouth with a Harvard M.B.A., is brilliant. Having started at Goldman Sachs in 1974, he rose through the ranks to become Chairman and Chief Executive Officer of Goldman Sachs from the firm’s initial public offering in 1999 until his swearing in as Treasury Secretary in July 2006. It is more than ironic that he has amassed much of his personal of fortune of $500 million by creating and selling the very “toxic waste” investments that he is proposing that we, the U.S. taxpayers buy.
Chariman Bernanke has pronounced that the price to be paid for this is at what he describes as “hold-to-maturity” value. He says “the holders have a view of what they think it’s worth. It’s hard for outsiders to know.” So, the Chairman proposes we trust the firms who own the investments to tell us how much they’re worth, and then pay whatever they say. He argues this is much better for our markets and economy than paying current “fire sale” value. Really? It sounds like a terrible investment to me. So, let’s look at the Chairman’s background to understand his experience with investments and the marketplace.
Chairman Bernanke received a B.A. in economics in 1975 from Harvard University (summa cum laude) and a Ph.D. in economics in 1979 from the Massachusetts Institute of Technology. Since 1985 he was Professor of Economics at Princeton, where he rose to Chair of the Economics Department. He is another incredibly brilliant man. So for twenty years, from 1985 until his swearing in as Chairman of the Federal Reserve in June, 2005, he has worked strictly as an academic. He spent not a single day in business and has no experience in the private sector.
So the Secretary who helped to start and feed the fire, and the Chairman who wrote and taught about it, now want American taxpayers to give them total authority to buy $700 billion worth of investments that the very people who own them call “toxic waste.”
Today, Warren Buffet came out in favor of the Treasury Secretary’s proposed bailout. However, Mr. Buffet, perhaps the greatest value investor of all time, didn’t buy at “fire sale” prices the “toxic waste” investments that he is recommending the U.S. taxpayer buy at the much, much higher “hold-to-maturity” prices. Instead, with his own money, he made a sweetheart deal to invest $5 billion in Goldman Sachs preferred stock. This investment carries a 10% interest rate, along with warrants that today guarantee him at least a $1 billion profit on his investment in just 1 day!
Mr. Buffet buys entire companies when he wants to make a great investment. He buys stock in companies on the open market when he is exploring a longer-term investment approach. Historically, he makes specially negotiated investments in companies when he is taking advantage of market conditions to make a short-term trade, as he did with Level 3 a few years ago. Why should the U.S. taxpayer get ripped off while he makes billions on a short-term trade?
When the Congressional committee suggested that the $700 billion be made available in stages, not all at once, Secretary Paulson said it would be a grave mistake. In making any new investment, isn’t it prudent to invest slowly and methodically, evaluating and improving the process and the values paid? Shouldn’t the U.S. taxpayers’ money be invested wisely? Why rush to hand this money to a bunch of “consultants” to invest all at once? We are asked to believe Secretary Paulson and Chairman Bernanke will hire the right investment bankers, and act wisely. These are the same two gentlemen who have repeatedly assured us that everything was under control since two Bear Stearns hedge funds collapsed in June of 2007.
We’ve been rushed to action before by this duo. On Jan. 17 in testimony to Congress, Chairman Bernanke said, “To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so.”
When the Federal Reserve lent $29 billion to JP Morgan to buy Bear Stearns, with the assets of Bear Stearns as collateral in March of 2008, Secretary Paulson defended the move as necessary to prevent “severe” damage to financial markets. Then we saw Fannie, Freddie, AIG and Lehman fall. They were wrong then, what has changed that we should rush to believe them now?
Paul Volcker, Federal Reserve Chairman from 1979 to 1987 commented at the time that the Federal Reserve under Bernanke was testing the “time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return.” So, what exactly is the “point of no return?”
No one, certainly neither Secretary Paulson nor Chairman Bernanke know the full extent of the problem with these “toxic waste” investments. So, let’s do a little math.
It is estimated that the total net worth, or wealth of the entire United States is approximately $57 trillion. It is further estimated that the total value of all derivatives is approximately $600 trillion. Derivatives are financial agreements between two parties often backed only by their “promise”, and little or no assets. In his 2002 letter to shareholders, Warren Buffet said, “derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Let’s assume only 10% of these derivatives are “toxic waste”, that there is no ability by the issuer to honor their contract. That comes to $60 trillion, or a few more trillion than we have if we sold our entire country. Bottom line: we don’t have enough money to fix the financial toxic waste that these geniuses with their MBAs, PhDs, and fancy computer models created, and that Mr. Buffet warned us about more than 5 years ago.
Since we don’t have enough money to fix that problem, what can we do? Strengthen the safety net for the poorest Americans, create jobs for those who can work, and promote American industry and energy independence.
Here’s a 5 point plan for bolstering confidence and our economy:
1. Double the time period for unemployment benefits
2. Increase aid to states to enhance welfare, workfare and child care
3. Increase aid to states to increase pay to teachers
4. Create and fund important infrastructure projects a la the Depression Era WPA to revitalize our roads, bridges and utility grid.
5, Provide tax incentives to promote energy efficiency, solar power, and a $10,000 credit for any new vehicle that can run 40 miles continuously without the use of liquid fuels (this last one may save General Motors and the United States)
Oh yes. I almost forgot. Point 6. FIRE THE ARSONISTS!
Jeff M. Wilson, BSE, CLU, ChFC is President of Wilson Advisory Group, LLC. He received his B.S. Economics from The Wharton School of the University of Pennsylvania and was trained by one of the principal advisors to the DuPont family. Wilson Advisory Group was founded in 1987 to deliver independent wealth management services free of the conflicts of interests that prevail in most Wall Street firms.