The $700B Bailout: “No fat-cats left behind”

Mr. Buencamino is  a fellow of Action for Economic Reforms. This article was published on October 1, 2008 in the Business Mirror, page A6

There must be some way out of here, said the joker to the thief,
There’s too much confusion, I can’t get no relief.
Businessmen they drink my wine, plowmen dig my earth,
None of them along the line know what any of it is worth.

– “All Along the Watchtower,” Bob Dylan.

Last week, US Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke asked the US Congress for US$700 billion to bail out troubled financial institutions.

Here’s what I gathered from their testimony before the US Congress:

Neither one of them knows exactly how much money is needed, whether US$700 billion is enough, too much, or too little.

Neither knows when and in what tranches, the money is going to be spent, if and when they get it.

Neither knows the value of toxic mortgage-backed papers because, as they admitted, financial instruments had become so complex no one understands them completely.

However, they are sure of one thing, they will not buy toxic papers at “fire sale” prices because…well…Wall Street’s fat cats have to eat, too.

Thus Treasury will hold a reverse auction “whereby banks (and other firms) offer to sell assets to Treasury at a price of their naming, and Treasury accepts those offers meeting its acceptable price.” (See www.thomaspalley.com.)

Both men claimed the rescue package is needed to reassure markets that the US government will not allow the system to fail.

The US$700 billion package, they said, will calm jitters, stabilize the stock market, and start credit flowing again.

In other words, Hank Paulson and Ben Bernanke’s proposed bailout plan is a psychological solution to a serious financial problem. It’s putting lipstick on a pig, as the cliché du jour goes.

Both men warned that America would lose the means to continue living beyond its means if they don’t get the money immediately.

Both men held out the hope that the money will enable them to work a miracle akin to transforming water into wine; they will turn shit creek into a river of gold.

Meanwhile, a capitalist saw opportunity in the crisis. Warren Buffet of Berkshire Hathaway invested US$5 billion into troubled Goldman Sachs, the financial institution that Hank chaired for many years.

Here’s the deal Buffet’s stockholders got for their $5B investment (quoting www.bigpicture.typepad.com):

  • “Goldman Sachs pays a fat dividend to Berkshire Hathaway of 10% on US$5 billion dollars — that’s US$500 million per year. And, since this is a preferred, it gets paid out of net income in after-tax dollars.”
  • “Goldman gets the right to call the preferred at any time at a 10 percent premium.”
  • “Buffett gets $5 billion worth of warrants with a strike price of $115, or about 43.47 million shares. The warrants are good for only 5 years.”

Going back to Hank and Ben, the neo-socialists.

Every man, woman, and child in America will shell out $2300 to finance their rescue package.

And this is what America will get in return: Clean sidewalks and socialism.

There will be no fat cats leaping out of skyscrapers and splattering their brains on sidewalks because Hank and Ben’s socialist safety net will break their fall.

There’s no guarantee Buffet will make a profit out of his investment, just like there’s no certainty the bailout will succeed, but if Buffet’s gamble pays off, his stockholders will get some juicy paydays without having to get out of bed unlike Hank and Ben’s stockholders, the American taxpayers, who might not even have a bed to sleep on if the bailout plan fails.

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