Drama Behind a $250 Billion Banking Deal

MARK LANDLER and ERIC DASH / New York Times 15oct2008

WASHINGTON — The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

But by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.

What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with theirs.

Mr. Paulson announced the plan Tuesday, saying “we regret having to take these actions.” Pouring billions in public money into the banks, he said, was “objectionable,” but unavoidable to restore confidence in the markets and persuade the banks to start lending again.

In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses.

All told, the potential cost to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks. The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks.

Analysts say the United States was forced to shift policy in part because Britain and other European countries announced plans to recapitalize their banks and backstop bank lending. But unlike in Britain, the Treasury secretary presented his plan as an offer the banks could not refuse.

“It was a take it or take it offer,” said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. “Everyone knew there was only one answer.”

Getting to that point, however, necessitated sometimes tense exchanges between Mr. Paulson, a onetime chairman of Goldman Sachs, and his former colleagues and competitors, who sat across a dark wood table from him, sipping coffee and Cokes under a soaring rose and sage green ceiling.

This account is based on interviews with government officials and bank executives who attended the meeting or were briefed on it.

Mr. Paulson began calling the bankers personally Sunday afternoon. Some were already in Washington for a meeting of the International Monetary Fund.

The executives did not have an inkling of Mr. Paulson’s plans. Some speculated that he would brief them about the government’s latest bailout program, or perhaps sound them out about a voluntary initiative. No one expected him to present his plan as an ultimatum.

Mr. Paulson, according to his own account, presented his case in blunt terms. The nation’s largest banks needed to begin lending to each other for the good of the financial system, he said in a telephone interview, recalling his remarks. To do that, they needed to be better capitalized.

“I don’t think there was any banker in that room who was going to look us in the eye and say they had too much capital,” Mr. Paulson said. “In a relatively short period of time, people came on board.”

Indeed, several of the banks represented in the room are in need of capital. And analysts said the terms of the government’s investment are attractive for the banks, certainly compared with the terms that Warren E. Buffett extracted from Goldman Sachs for his $5 billion investment.

The Treasury will receive preferred shares that pay a 5 percent dividend, rising to 9 percent after five years. It will get warrants to purchase common shares, equivalent to 15 percent of its initial investment. But the Treasury said it would not exercise its right to vote those common shares.

The terms, officials said, were devised so as not to be punitive. The rising dividend and the warrants are meant to give banks an incentive to raise private capital and buy out the government after a few years. Still, it took some cajoling.

Mr. Kovacevich of Wells Fargo objected that his bank, based in San Francisco, had avoided the mortgage-related woes of its Wall Street rivals. He said the investment could come at the expense of his shareholders.

Mr. Kovacevich is also said to have expressed concern about restrictions on executive compensation at banks that receive capital injections. If he steps down from Wells Fargo after completing a planned takeover of Wachovia, he would be entitled to retirement benefits worth about $43 million, and $140 million in accumulated stock and options, according to James F. Reda & Associates, a executive pay consulting firm. Pay experts say the new Treasury limits would probably not affect his exit package.

Mr. Kovacevich declined to be interviewed about the meeting.

Kenneth D. Lewis, the chairman of Bank of America, also pushed back, saying his bank had just raised $10 billion on its own. Later, Mr. Lewis urged his colleagues not to quibble with the plan’s restrictions on executive compensation for the top executives. These include a ban on the payment of golden parachutes, repayment of any bonus based on earnings that prove to be inaccurate, and a limit of $500,000 on the tax deductibility of salaries.

If we let executive compensation block this, “we are out of our minds,” he said, according to a person briefed on the meeting.

In an interview on Monday, before the meeting, John J. Mack said his bank, Morgan Stanley, did not need capital from the Treasury. It had just sealed a $9 billion deal with a large Japanese bank. During the meeting, Mr. Mack, Morgan Stanley’s chief executive, said little, according to participants.

Mr. Paulson, however, was peppered with questions about the terms of the investment by other chief executives with experience in deal-making: Lloyd C. Blankfein of Goldman Sachs, Vikram S. Pandit of Citigroup, John A. Thain of Merrill Lynch and Mr. Dimon.

Among their concerns were: How would the government’s stake affect other preferred shareholders? Would the Treasury Department demand some control over management in return for the capital? How would the warrants work?

With the discussion becoming heated, the chairman of the Federal Reserve, Ben S. Bernanke, who was seated next to Mr. Paulson, interceded. He told the bankers that the session need not be combative, since both the banks and the broader economy stood to benefit from the program. Without such measures, he added, the situation of even healthy banks could deteriorate.

The president of the Federal Reserve Bank of New York, Timothy F. Geithner, then proceeded to outline the details of the investment program. When the bankers heard the amount of money the government planned to invest, they were stunned by its size, according to several people.

As they heard more of the details, some of the bankers began to realize how attractive the program was for them.

Even as they insisted that they did not need the money, bankers recognized that the extra capital could be helpful if the economy became shakier. Besides, many of these banks’ biggest businesses are tied to the stock and credit markets; the quicker they improve, the better their results.

Later, Mr. Pandit told colleagues that the investment would give Citigroup more flexibility to borrow and lend. Mr. Dimon told colleagues he believed the relatively cheap capital was a fair deal for his bank. Mr. Lewis said he recognized the prospects of his bank were closely aligned with the American economy.

Mr. Thain was intrigued by the terms of the guarantee by the Federal Deposit Insurance Corporation on new senior debt issued by banks, participants said. He mentally calculated the maturities on debt issued by Merrill Lynch, to determine how the program could benefit his bank.

For Mr. Paulson, selling the bankers on capital injections may not have been as difficult as overhauling a rescue program that had originally focused on asset purchases from banks. In the interview, Mr. Paulson said the worsening conditions made a change in focus imperative.

“I’ve always said to everyone that ever worked for me, if you get too dug in on a position, the facts change, and you don’t change to adapt to the facts, you will never be successful,” he said in the interview.

Mr. Paulson insisted that purchases of distressed assets would remain a big part of the program. But having allocated $250 billion to direct investments, the Treasury has only $100 billion left from its initial allotment of $350 billion from Congress to spend on those purchases.

As the meeting wound down, participants said, the bankers focused more on contacting their boards before signing the agreement with the Treasury Department. With time running short and private space limited, some of the bankers left the Treasury building, heading for their limousines while speaking urgently into cellphones.

“I don’t think we need to be talking about this a whole lot more,” Mr. Lewis said, according to a person briefed on the meeting. “We all know that we are going to sign.”

Mark Landler reported from Washington, and Eric Dash from New York. Louise Story and Ben White contributed reporting from New York.

source: 16oct2008

US Government Expands Bank Bailout
on Wall Street’s Terms

BARRY GREY / WSWS 15oct2008

The Bush administration on Tuesday announced new measures, including a direct injection of $250 billion in taxpayer money, to prop up the major US banks. The government also said it would guarantee all debt issued by the banks and provide unlimited backing for the non-interest-bearing bank deposits of businesses.

The cash injection is to take the form of voluntary sales of preferred stock by financial institutions to the Treasury. It is being carried out under the powers granted Treasury Secretary Henry Paulson, the former CEO of Goldman Sachs, in the $700 billion bailout bill enacted by Congress on October 3.

When the bill was passed, Paulson and Federal Reserve Board Chairman Ben Bernanke said its main purpose was to permit the government to buy up to $700 billion in mortgage-backed securities and other bad debts from the banks. That plan, while not discarded, has been superseded by moves in the US and Europe to avert a collapse of the world financial system by rapidly bolstering the cash reserves of the major banks through direct purchases of stock.

Also on Tuesday, Fed Chairman Bernanke announced that the US central bank would quickly act on its previous pledge to serve as the buyer of last resort of commercial paper issued by US businesses. According to the financial columnist of the Washington Post, Steven Pearlstein, the panoply of actions commits “several trillion dollars in government funds” to propping up the banks.

The new plan was announced Tuesday morning in separate appearances by President Bush and top financial regulators, headed by Paulson and Bernanke. Their statements followed a closed-door meeting Monday at the Treasury Department with the CEOs of the largest banks in the US, where the terms of the bailout were discussed among current and former Wall Street executives whose combined wealth runs to billions of dollars.

The four biggest banks—Citigroup, JPMorgan Chase, Bank of America and Wells Fargo—are to receive $25 billion each. Goldman Sachs and Morgan Stanley are each to get $10 billion, Bank of New York Mellon will receive $3 billion and State Street will get $2 billion. The remaining $125 billion in the stock purchase program will be made available to thousands of smaller banks.

The new bailout plan is widely referred to in the media as a “partial nationalization” of the banks. It is nothing of the kind. It is, rather, a massive intervention by the state to use public funds to protect the social interests of the financial elite that is responsible for the greatest economic crisis since the Great Depression.

Management of the entire bailout program is being entrusted to the very financial firms that stand to benefit from the government handout. On Tuesday, it was announced that Bank of New York Mellon, one of the recipients of the government cash injection, will oversee the operation.

The plan, as crafted by Paulson in consultation with his banking cohorts, is designed to secure the personal and institutional interests of the most powerful sections of the American capitalist class. It mandates no structural or even regulatory changes in exchange for placing the resources of the country at the disposal of Wall Street.

None of the CEOs whose speculative activities resulted in the near-collapse of their own institutions are required to resign, let alone face financial or criminal prosecution. The plan does not even require that the banks use the money handed them by the government to lend to other institutions, businesses or individuals.

Paulson has made clear that the stock obtained by the government will be “non-voting,” that is, it will not entail the banks’ ceding any control to the state. As Bush stressed in his Rose Garden remarks on Tuesday, “... these measures are not intended to take over the free market, but to preserve it.”

The Wall Street Journal, in its account, noted the care taken to secure the interests of big shareholders. It wrote, “To make sure private investors aren’t scared away, the Treasury is expected to structure its investment on terms favorable to the banks and will inject capital in exchange for preferred shares or warrants... a move that is designed to not hurt existing shareholders.”

It further noted that the “government’s hope is that the new plan... will persuade private investors that government involvement won’t come at their expense.”

Paulson, in his remarks, assured Wall Street that the plan would “make capital available on attractive terms” to the banks.

No similar concern is being shown for the tens of millions of working people who are being devastated by the collapse of the housing market and the rapid descent into recession. In his remarks on Tuesday, Paulson said, “We expect all participating banks to continue and to strengthen their efforts to help struggling homeowners who can afford their homes to avoid foreclosure.”

This is a fraud. Under conditions where some two million families have already been foreclosed, and analysts predict millions more will be thrown into the street over the next several years, the banks are engaged in no real efforts to “help struggling homeowners.” On the contrary, they are seeking to limit the losses from their predatory lending policies by charging fees and otherwise exploiting the very families they have victimized.

As Paulson’s remarks make clear, there are no requirements that the banks do anything to aid distressed homeowners, and he abandons to their fate the millions of homeowners who cannot “afford their homes.”

No less fraudulent are the supposed restrictions on CEO pay which Paulson said would be imposed on companies that participate in the stock purchase scheme. These token measures were included in the bailout bill at the insistence of its Democratic supporters, who hoped thereby to give themselves a measure of political cover in the face of massive popular opposition to the bill. They impose no specific limits on executive compensation and allow already existing multi-million-dollar retirement packages to remain intact.

It is up to Paulson, who took in hundreds of millions of dollars while he was the CEO at Goldman Sachs, to define what amounts to “appropriate standards for executive compensation,” and, as Washingtonpost.com reported Tuesday, Treasury officials have “argued that the legislation required only ‘minimal’ restrictions on executive pay and told congressional staffers that there was ‘wiggle room’ under the new law.”

Unfolding social disaster

No measures are being proposed to address the social disaster that is enveloping the American people. It is widely acknowledged that, whatever the immediate turn of events on the stock market, the US and the entire world are heading into a deep and protracted recession. The crisis, which to this point has largely centered in the financial markets, is taking hold of the broader economy and entering a new stage that will see double-digit unemployment and the growth of poverty and social misery.

The auto industry is already in the grips of a deep crisis, with all of the Big Three US companies teetering on the edge of bankruptcy. The attempts of General Motors (GM), Ford and Chrysler to survive by means of mergers will entail a new round of plant closures and tens of thousands of additional layoffs.

On Monday, GM announced it would shut its metal parts plant near Grand Rapids, Michigan by the end of next year, eliminating 1,500 jobs, and speed up the closure of its Janesville, Wisconsin assembly plant to December 23 of this year, costing 1,200 jobs.

On Tuesday, the German auto giant Daimler announced it was closing its Sterling Trucks division, shutting down plants in Ontario and Oregon and eliminating 3,500 jobs.

PepsiCo reported sharply depressed third quarter earnings and announced it would slash 3,300 jobs in the US.

Far from helping “Main Street,” as claimed by the politicians and the media, the bailout measures are designed to achieve a further concentration of power in the hands of a few giant banks. This will have a harmful effect on working people, students and small businesses, whose ability to obtain loans and credit, and the fees and interest they are forced to pay, will be set by firms exercising monopoly control over the financial system.

Both the substance of the bailout measures and the manner in which they are being imposed provide a stark demonstration of the iron grip of Wall Street over the state and the dictatorship of finance capital that exists behind the trappings of democracy in America.

The Democrats, from congressional leaders to presidential candidate Barack Obama, were the main backers of the bailout bill, and have given their enthusiastic support to the expanded bailout measures. House Speaker Nancy Pelosi sent a letter to Paulson congratulating him on the new plan.

New York Senator Charles Schumer, the chairman of the Joint Economic Committee, published a column in Tuesday’s Wall Street Journal calling Paulson’s decision to make capital injections into the banks “welcome news,” and Barney Frank, the chairman of the House Financial Services Committee, said he agreed with the plan’s provision that government-owned stock be non-voting, i.e., that the bankers suffer no loss of control in return for taking taxpayer money.

In his remarks on Tuesday, Bush said the new measures were aimed at the “root cause” of the problem. This is another lie.

The root cause of the crisis is the failure of the capitalist system. The only answer that addresses the needs of the working class is socialism.

The Socialist Equality Party emphatically opposes the entire framework of the government bailout. We call for a genuine program to nationalize the banks—that is, to take them out of private hands and transform them into public utilities under the democratic control of the working people.

Only on the basis of such a socialist policy can the resources created by the working class be allocated to provide emergency relief to the victims of the economic crisis—a halt to home foreclosures and utility shutoffs, a vast extension of unemployment benefits, a crash public works program to provide jobs at decent wages for the unemployed.

The anarchy of the market and despotism of the banks must be replaced by a planned socialist economy, to ensure the basic needs and raise the living standards and cultural life of the entire population.

This requires that the working class break from the Democratic Party and the two-party system and build its own party to fight for the establishment of a workers’ government.

This is the program being advanced in the 2008 elections by the Socialist Equality Party and our candidates, Jerry White for president and Bill Van Auken for vice president. We urge all those who see the need for a socialist alternative to depression and war to support our campaign, vote for our candidates and join the SEP.

source: 16oct2008