Paulson vs. Bank Execs: Who is Telling the Truth?

These statements occur within a mere six paragraphs of each other in a Wall Street Journal story, “Devil Is in Bailout’s Details‘:

Upending the government’s relationship with the financial sector, the Bush administration outlined a plan Tuesday to prop up banks by injecting $250 billion into U.S. financial institutions….

The government is making clear it expects banks to lend out the funds it gets from Uncle Sam. Further exercising its clout, Treasury also extracted a promise that the financial firms would help struggling homeowners, continue lending and would sign up for loan guarantees offered by the Federal Deposit Insurance Corp.

“What we’re doing is making clear to the banks how important it is to deploy the capital,” Treasury Secretary Henry Paulson said in an interview….

Bankers and industry experts said that aside from a handful of token restrictions, the capital injections more closely resemble a blank check.

Now it is possible that this contradiction between what Paulson says he said versus how the industry is hearing it is a symptom of inept drafting by the Wall Street Journal writers. I suspect otherwise. While this article does not have much in the way of comments from the recipients of the government’s largesse, this one is revealing:

Bank of America Corp. Chairman and Chief Executive Officer Kenneth Lewis was supportive of the new plan, while acknowledging that some conditions for the government help were not ideal. “Our interest is in anything that helps the system operate more normally at this point,” said Bank of America spokesman Robert Stickler. As for the possibility of government interference, “Who knows?” he said. “We are in unchartered territory.”

This remark is a no lo contendere, it neither admits or denies the existence of any specific requests from Treasury. And believe me, helping struggling homeowners, one of Paulson’s action items, is an area where the industry’s response to government efforts has been slow and half-hearted.

In fact, the Journal authors nailed it when they used the word “token.” The banks will probably put a few measures in place so as not to embarrass their new sugar daddy. But with no formal conditions set at the time of the capital injection, the terms generous compared to recent private sector financings, and only (at most) promises made to a Treasury secretary with a bit more than three months left in office, the government assistance of early this week was as close as you get in adult life to free money.

Update 11:10 PM The New York Times provides a dramatic account of the meeting in which Paulson told the nine bank CEOs they were taking the government’s dough. It reads like Mafia strong-arming. And the telling bit is this:

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.

This is, in its own way, every bit as brazen as the three page scribble that the Treasury Department provided as its proposed TARP. And those pages included definitions, too.

Any corporate general counsels (or lawyers who advise them) are particularly encouraged to speak up. However, I doubt that CEOs can make commitments of this magnitude without board approval (unless perhaps they had a pre-existing shelf registration, but equity is seldom sold pursuant to a shelf offering, and I would assume the same is true for preferred). And a one-pager standing in as some sort of agreement is a travesty. Such patently ridiculous going-through-the-motion-of-having-some-sort-of-procedure is worse than operating on a handshake (and handshakes work well between honorable people, but that has become a scarce commodity in the US), because it says this sort of trampling of normal process is appropriate. This is the sort of move you’d expect to see in a banana republic…..oh wait, that’s no longer a fresh observation about the US.

The bank CEOs, when finally offered the terms, saw them as attractive and quickly fell into line. But then why resort to these strong-arm tactics in the first place? Many of the moves in the meeting, as recounted by the Times, were classic coercion techniques, the sort used by cults. If CEOs, people at the very top of the food chain, aren’t willing to say, “I’m sorry, I never agreed to be held hostage, incommunicado, or sign an agreement in order to leave” then who CAN say it? Remember, as the Times tells it, they were told by Paulson they had to agree before they were told what they were agreeing to (at least in sufficient detail to evaluate it).

I guarantee this will prove to have been a Faustian bargain, not for having taken the government’s juicy deal, but for having allowed themselves be forced to make a decision, under duress, with their peers present and no opportunity to withdraw, think, or confer with advisors.

To make the point more clearly: the public at large was taken not just once, but twice, It was hosed in the unduly generous terms given to nine banks (the lack of writedown of assets to realistic values, the failure to wipe out current equity holders and subject debt holders to a haircut, the merely symbolic limits on executive pay). But it also got a less obvious shellacking in the way legal and regulatory processes were trampled. Given the Treasury and Fed’s combined banking authority, and the dubious valuations of many types of assets on these firms’ books, the powers that be could easily have compelled any bank to accept a much less favorable deal, or frankly any deal they wanted them to take. And it would not have taken all that much additional effort (although it might have taken some planning, which is a persistent shortcoming of this Administration).

But Paulson instead went through a bizarre, public exercise in sham corecion (and real sidestepping of even minimal normal forms) so as to avoid a candid discussion of how lousy the banks’ balance sheets really were. And the ruse, like the TARP itself, was another demonstration that the Treasury considers itself to be outside the law.

Early in his career, Paulson was a staffer for John Erlichman. It appears that imprinting stuck.

I am surprised to be invoking this text a second time in only a few days (if you saw this in comments, forgive me), but it may make the point more clearly. From Robert Bolt’s screenplay about Thomas More, A Man for All Seasons:

More: Yes. What would you do? Cut a great road through the law to get at the Devil?

Roper: I`d cut down every law in England to do that.

More: Oh! (advances on Roper) And when the last law was down, and the Devil turned round on you –where would you hide, Roper, the laws all being flat? (He leaves him) This country’s planted thick with laws –man’s laws, not God’s –and if you cut them down –and you’re just the man to do it –d`you really think you could stand upright in the winds that would blow then? (Quietly) Yes, I`d give the Devil benefit of law, for my own safety`s sake.

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  1. doc holiday

    This kind of goes back to the vague mandate for Fannie and the need to make mortgages available to Americans. The discretionary weaving of the patch work quilt of shadow banking remains a mystery!

  2. tompain

    Anxiously awaiting an explanation from Treasury as to why it is that it puts over $100 billion in cash into these banks in exchange for 5% return for 3 yrs plus some warrants, while it put no cash into GSEs but wiped out the shareholders; put no cash into WM, but orchestrated a sale that wiped out those shareholders; put no cash into WB, but orchestrated a sale of that firm at a steep discount.

  3. Peter

    Quelle surprise, the banks took easy money without complaint (esp. since the terms didn’t include the covenants that Yves and others have discussed).

    This is what Buffett got for his preferred shares:
    * 10% dividend yield
    * 10% premium to par upon call
    * 100% of mkt cap of pfd stk in warrants to buy common stk.

    This is what Paulson got for the taxpayers’ preferred shares:
    * 5% dividend yield (9% after 5 years but they’ll most likely be called away after 3 years, so 5% is the effective rate)
    * par call (0% premium)
    * 15% of mkt cap of pfd stk in warrants to buy common stk

    So the taxpayers get less current yield, less upon call scenario, and far less upside. And the terms are far more generous than what I’ve seen in the convertibles / pfd.shares+warrants mkt. Sure, the US govt has lower cost of capital than Buffett so Paulson could have had less onerous terms for the banks and still make the same expected profit, but this is bending over backwards.

  4. Anonymous


    this is pure theft.

    You could invest, if you so chose, in preferreds from the same institutions at 15% yields.

    Instead, you, as a taxpayer, are being coerced to invest at 5%.

    The 10% difference is pure economic loss.

    This is generational theft on an unprecedented scale

    I hope all you in Yves generation continue to have confidence that those of us younger will choose to honor the debts you’re running up.

    Maybe we young’uns will shrug.

    Pleasant dreams.

  5. doc holiday

    I know this is somewhat off topic and off color, but as I read the story, " Wall Street Journal story, "Devil Is in Bailout's Details", I noticed the nice photo of Ben and Hank and couldn't help notice the vast difference in suits, which they were wearing. I can't comment on the ties, but, maybe there are hidden clues there as well?

    I'm just a poor country hobo living off field mice — but I'm wondering if there is some new clothing twist hitting the fashion runway? How would I know?

    I'm unaware as to the trends of how a suit should be cut and what the proper law is for a lapel, i.e, should your lapel be really short and almost guru looking*, or should your lapel be long and narrow and provide full disclosure for your tie?

    I tried doing some fashion research on this topic, but I really suck at fashion, but I imagine the guy with more cash has an Armani, but when were talking trillions, you probably should dress to the t's, or is that nines?

    See: * In the early Beatle-mania years, the Beatles would occasionally wear black, and then later grey, Edwardian collarless suits.[8][11] This style of suit was adopted from the Mod youth cult, then at its peak in the UK. These suits (instead of leather trousers, plaid shirts, and slacks) became extremely common for new bands to wear after 1964.
    Later, during the psychedelic era of 1966–1968, the Beatles popularised bright colours, and wore paisley suits and shirts and trousers with floral patterns. The Beatles also popularised Indian-influenced fashions such as collarless shirts and sandals.

    >> psychedelic banking anyone?

  6. Anonymous

    Folks, instead of the bailout, just imagine that Bush is wasting twice as much money this year in Iraq as he did last year. Nobody ever had a problem with that.

  7. Don

    A Credit Stimulus Package
    As I understand this part of TARP, it is essentially a credit stimulus package. The first part was forcing 9 large banks to jointly participate because:

    “Bringing together all nine executives and directing them to participate was a way to avoid stigmatizing any one bank that chose to accept the government investment.”

    I’m not so sure that this wasn’t done to move the plan forward quickly and avoid negotiating with each bank, but I get the point, sort of.

    Then, because each bank could use the money for something other than loans, the plan forces them to loan the money.

    “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it,” Mr. Paulson said, who offered some details of the plan along with the Federal Reserve chairman, Ben S. Bernanke, and the chairman of the Federal Deposit Insurance Corporation, Sheila C. Bair.

    The problem here would seem to the quickness, intelligence, and risk of these loans.

    “In a letter to Mr. Paulson on Monday, Mr. Schumer, chairman of the Joint Economic Committee, urged the Treasury to demand that banks receiving capital eliminate their dividends, restrict executive pay and stick to “safe and sustainable, rather than exotic, financial activities.”

    I’m still not reassured.

    If the banks aren’t required to loan the money at all, that would seem to defeat the point of the credit stimulus, and be merely helping the banks by improving their overall financial position. From my perspective, not good.

    Don the libertarian Democrat

  8. Anonymous

    This has been par for the course since at least 1900. We have a banking class that has always extracted far too great a reward for what they contribute. It’s only at extreme moments like this one that everyone suddenly realizes it.

    The incoming government really could abolish the Fed and reset the system. They will have limitless power, an extraordinary mandate of both the people and the circumstances and a lot of good advice from those who did not cause the problem and who have been sounding a warning call for decades.

    Fat chance. They’ll just make Jamie Dimon the new King Henry.

  9. Anonymous


    The answer to the question in your title is, almost certainly, none of them. They have all been lying since this crisis began and now they cannot even be bothered to co-ordinate the lies.

  10. Anonymous

    The real tradegy is that there was not a man, a leader, among the nine who would stand up and say, “Mr. Secretary you have exceeded your authority and I will be taking my leave.” Nor is there a man in the Congress or running for President who will echo those sentiments. These are beginning to look like dark days.

  11. Anonymous

    What do you expect from this administration? They are unbelievably ignorant, incredibly smug and absolutely ruthless thugs! They have been since the day they came into office; just talk with any career diplomat who was around when the Chimp Boys came to town. It was like a light switch has been thrown; suddenly nobody’s opinion mattered, or even existed. They brought their conclusions with them. It will take decades to repair the damage they’ve done, assuming it can be repaired at all. They’ve done a fine job of it.

  12. bg


    You are conflating three large issues. 1) The (lack of) trust in the current administration, 2) The (ab)use of the rule of law, 3) The need to recapitalize the banks immediately.

    If 250B has not freed the money markets, then banks believe that their peers are still not solvent.
    If NR thinks bank losses are $3T they are probably right.

    It is not clear to me that #1 and #2 are at issue here at all. Government is not putting a gun to banks head – it is pulling them out of a firefight.

    Paulson may be handling the crisis ad-hoc, but he is moving in the right direction quickly, and with better results than many feared. Making sausage in public is an ugly business.

  13. Steve Diamond

    At best, the CEO’s could have committed to return to their boards and seek approval. To sell new equity requires at least board approval and, depending on the availability of shares, might require shareholders approval.

  14. Anonymous

    The NYT article ends with a mention that all of the CEO’s did have to reach out to their boards for approval, as you’d fully expect. If management whole-heartedly backed the deal, why wouldn’t the board?

  15. Yves Smith


    I may have hyperventilated on the rule of law issue, but that is partly because plenty of attention is being paid to other aspects of this plan.

    However, I do not think the issue here is lack of trust, or to put more accurately, the lack of trust is deserved, and due to the real issue, lack of competence.

    The quesstion I harped on above (the deal being a bad one for taxpayers) is in part because the terms (coupon) was unduly favorable to the banks. But the bigger reason, and this was mentioned partenthetically here, and longer-form elsewhere, is that this latest iteration of the TARP is still not a good plan.

    Marc Faber put it well, and said something along the lines of “Paulson is moving towards the Swedish plan, but he isn’t moving quickly enough, and he doesn’t have enough money to deviate from it very long.”

    Some of the big elements that are missing are:

    1. Failure to ascertain what the banks are really worth, now. Why hasn’t the Fed and Treasury sent in swat teams? If everyone big were scrutinized, there would be no stigma. Once you know who is underwater (probably everyone, but there will still be differences in degree) then you can figure out a salvage operation.

    2. Reluctance to shrink balance sheets and do triage. The banking industry HAS to shrink, Its current size is based on a lot of dud assets, its sustainable size is considerably smaller. The regulators should be orchestrating a consolidation/rationalization process. They instead appear to be trying to stabilize it in place by moving bank assets onto the government balance sheet. That will not work. Even the taxing power of the advanced economies cannot prop up all those bad assets.

    3. Failure to wipe out shareholders and (when the hole in the balance sheet is sufficiently large) administer haircuts to bondholders

    4. Keeping incumbent management in place, particularly at current pay.

    Despite the willingness of the Treasury to spend like a drunken sailor, the US does not have bottomless firepower, and what we have is being wasted. The mammoth interventions of the weekend/early this week have barely budged interbank lending rates. That indicates these massive expenditures are misfires.

    The proof is in the pudding, and lending rates and risk spreads are still only a tad below the record levels of last week. I do not see Paulson as moving in the right direction (although he does appear to have for now abandoned the moronic MLEC 2.0 “buy up dud assets at rich prices” plan), I see him only doing selective pieces of the correct course of action, the ones that are convenient and ideologically comfortable for him. Partial remedies in a setting like this are no remedy at all.

  16. SilverDollar


    You are to be commended for all your fearless reporting. Truly herculean efforts, and they are appreciated.

    We truly are a banana boat basket case at this point, and I really don’t see how we get out of this intact. Any thoughts on how this plays out over the next 6-12 months?

  17. bg


    I am flattered by your long reply. I did not mean to imply that Paulson was doing it right. It would be ideal to wipe out the common and the management. It would be perfect to only capitalize the worthy.

    My point was focusing on the rule of law and general arrogance of the administration seems off target even if correct.

    I was angry for weeks about TARP, and wrote many emails to congressmen. I closed my short positions over the weekend in ‘hope’ of a global recapitalization plan. We are moving in the right direction, and the meltdown has paused. I once again dare hope that all the brilliant people on this beat (including yourself) are getting sleep and perspective. These are important times, and we might just get it right.

  18. Yves Smith

    Anon of 1:37 AM,

    I am sensitive to issues of coercion and manipulation, in part because I worked for organizations that were cults. Goldman, where I worked at the start of my career, most assuredly, in its organizational design, is a cult. Cults are tremendously effective. To a lesser degree, elite Japanese organizations are also cults, but some of that is product of the Japanese culture, which demands far more complaince to social pressure than would occur in the West.

    Saying you are gong to lock people into a room until they agree (submit) is a classic deal trick, but it actually was used earlier, in brainwashing in the Korean War. Getting people together when you can get (or wheedle) a plurality into accepting something is also very powerful and another brainwashing technique (it is called “social proof”). The laggards fall into line (note it happens less readily in juries because you need a skilled discussion leader to use the “social proof” to coerce the nay-sayers in line. In jury setting, conversely, a judge often gives instructions that empower jurors as individuals).

    Thus the demand that they sign the agreement, even if it was not strictly enforced, was another powerful trick. He put everyone in the position of thinking they had no other option than to sign it. That was the suggestion made. And no one objected, The group gave its tacit assent. That too is very powerful. Social psychologists have found that people place a great premium on consistent behavior (read Robert Cialdini’s “influence: The Power of Persuasion”. He discusses at length how salesmen and negotiators use prior commitments to lead people by the nose).

    People are FAR more suggestible than they realize. And most CEOs do not negotiate on their own behalf, so they are less attuned than you might expect (tellingly, Dimon, who has done a lot of deals, was reported to have left the meeting angry. He at least recognized he was being roughed up).

    Even slight changes in turn of phrase in polls will change the results (saying “What do you think of the job George Bush is doing” will elicit lower scores than “What do you think of the job George Bush is doing as President?” The “as President” confers respect and also is a reminder of the difficulty of the job).

  19. cent21

    About the only benefit of this is speed. It would have taken years and excruciating plodding case by case valuations to identify and buy troubled assets. This plan will inject leveragable capital quickly.

    I’d say it’s time for Ben and Paulson to go on a couple weeks vacation, and let the world settle down a bit. Underlings can follow through on getting the capital transfusions to the group of nine.

    I wonder what’s going on internationally with leverage and derivatives, there must be some wicked backlash, and there must be some things that the G7 central bankers are really scared by, to be acting as they are.

  20. Steve


    According to Bloomberg, Buffett got even more: the 4 top executives at Goldman, their family members, and trusts, are prohibited from selling more than 10% of their shares for three years, unless Buffett’s preferred is sooner retired.
    An excellent method to align the executives’ interests with Buffett’s, and an object lesson from ol’ Warren about how far to trust these guys.

    A similar restriction on the executives of banks receiving a gift of money from Treasury would be prudent and fair, and hence unthinkable to Paulson. Then again, under earlier circumstances, it would have been Paulson himself bending over for Warren’s cash.

  21. Anonymous

    Yves — I was going to post a longer comment, but your comment of 2:05 was far better than mine would have been, and I think you should expand upon it and make it a blog post of its own. This was certainly a deal trick, putting them in a room and forcing them to make an individual (or less likely, group) stand against him. “Leverage” (the bilateral kind seen in negotiating) is an amazing thing. It can be very much real, yet it can be very much illusory. And it can toggle between discrete states as if a packet in quantum mechanics. Poof, it is gone. It’s in someone else’s hands. Power, perhaps real, perhaps illusory, still can achieve almost unthinkable things. That is why many, many people more intelligent than I have spent lifetimes studying ways to control power, to subject power to checks and balances, to alert people of the danger of power and how quickly it can overcome you. There’s a fire in the Reichstag, and you wake up a few weeks later and Hitler is sworn in as Chancellor and the Weimar days are done.

  22. Hubert


    as you write about Cialdini it brings up in my mind a related theme: reciprocitation.

    I found your blog when Cioffi blew up, have read it religiously since then.
    I was lucky enough to profit handsomely from situations I understood better and/or earlier thanks to your tireless efforts.

    So I guess it would be time for me to give back to you. Can´t you charge for voluntary subscriptions or consulting or along that route?

  23. ciccocicco

    You are all so hilarious.
    It was only friday that the world was collapsing, and now you are focusing yur attention on 5% vs 10% return for 5 years. That is 30 BN LESS INCOME in 5 years for the government. In exchange for having a quick smooth process without too many lawsuite.


  24. Yves Smith


    Thanks for asking. Earl Crockett also made a request, and even came up with a good name:

    I wish to propose the founding of an “Yves Smith Well Being and Restoration Fund” so you can jet off to the Caribbean Island of your choice on every Tuesday and Wednesday when nothing of substance ever happens anymore.

    I am going to implement something along those lines but need to sort out the best way to do it. So do keep your eye out. Knowing how things go, it will probably take a couple of weeks, Things either happen quickly or take much longer than one would ever think reasonable.

    I am also game for consulting (in fact, that’s what I do in my day job) as well as speaking/presentations. I can give more detail on my consulting background and expertise if that is of interest.

    Thanks for asking.

  25. Darcy

    Have to echo Huberts comments.
    Your valiant work made me reconsider a savings option. If only the councils in the UK had read this blog.

    A 300,000 person “fish” economy being the bankers for the UK local government…. nuts or sprats.

    What about a voluntary donation pot?

  26. fresno dan

    At some point, reality has to be acknowledged. I always assumed the people who ran Goldman Sachs (and now Treasury) must be brillent.

    I repeat: Did Paulson know how Goldman made money when he ran it???

    It is becomng clear to me that Paulson really, sincerely, truly, has no conception of where his ideas will lead. And by the way, just another example against too much government regulation.

  27. fresno dan

    Yves: Not only do I have to read your blog postings now, now I have to read all the comments for your replies. Your knowledge and insights are just wonderful.

  28. Matt Dubuque

    Matt Dubuque

    The taxpayers deserve VOTING seats on the board of every bank receiving funds.

    This of course is heresy among those who pray at the altar of the free markets.

    How can we possibly go against the divine wisdom of the invisible hand?

    It was the free market jihadis that crashed the system.

    They are now HOARDING cash.

    The central banks have done their part. The sovereigns have done their part.

    The banks continue to HOARD their cash and this can EASILY provoke an immediate depression.

    We need VOTING members on the Boards of Directors, representing the people, to get the money flowing to the communities.

    This will be derided as an “outlier” post today.

    Six months from now it will seem FAR more reasonable.

    Matt Dubuque

  29. luther


    another thing you might want to consider after this is all over is publishing a book (on recycled paper of course) that details the history of the crisis through your posts and selected comments.

    you are writing history as it's unfolding…

    plus it's a brilliant title for a book.

    although i don't think any of my comments were very insightful in the grand scheme, i would gladly 'donate' those comments for copyright purposes.

    i'm sure many others, including those much more knowledgable & insightful than i, would feel the same.

    just a thought to chew on for awhile….

  30. Alfred

    All top level executives for Wall Street banks (without exception)must stand trial in the court of law for accounting fraud, lying to the public and racketeering. They have defrauded the public and destroyed future prospects for the purpose of enriching themselves and their cronies. (according to Bloomberg Blankfein’s $70 Million Payday Would Survive Paulson’s Limits)

    To provoke the righteousness of Moore is not feasible in this context. While Paulson greatly resembles Roper Wall Street bankers are the quintessential Anti-Moore. Everybody who fails to see that misses the point.

  31. Independent Accountant

    You worked for Goldman and admit it. Wow. You’re forgiven. You’ve been out of Goldman at least ten years. I read a WSJ article today, “At Moment Of Truth, U.S. Forced Big Bankers To Blink” and thought of the 1910 Jekyll Island meeting that led to the Fed. The WSJ article read like a “planted” piece by your former employer. What do I think happened? To make MLEC 3.0 palatable to the angry populist mob, Paulson “formerly” of Goldman realized he had to make it appear he was giving the big banks castor oil to consume. The terms of Uncle Sam’s “investments” do not look as favorable as what Warren “Whitney” got from Goldman and GE. I believe the meeting was staged for publicity purposes. The big banks are initially paying a 5% dividend. Big deal. Would you buy Citigroup preferreds with a 5% coupon?
    By the way, keep up the good work.

  32. thomas j


    Why do you continue to naively assume that any measures taken by either Paulson or Bernanke are actually intended to mitigate the damage from the credit crisis to either the financial system or the rest of the economy?

    Can you not see that the dog and pony show starring these two apparatchiks and the chosen nine is nothing more than a calculated ploy to preserve the key members of the banking cartel that will eventually gorge themselves on the remaining entrails of the US economy at pennies on the dollar?

    And that similar strategies are now being pursued vis a vis central banking authorities throughout the rest of the world.

    Are you so supremely arrogant that you believe that you and a few other commentators were aware of the dangers of CDS and the securitization machine but that Paulson, Bernanke, et. al., are really surprised by the current circumstances?

  33. Independent Accountant

    I read the NYT article on the meeting and am convinced the meeting was a form of financial “guerilla theater”.

  34. tompain

    Yves, please explain your continuing obsession with the idea of wiping out shareholders. Does it not seem at all odd to you to wipe out shareholders based essentially on a forecast as to how the loans their institutions made will perform? We know that the market right now says the loans will perform poorly, but are shareholders not entitled to await the actual outcome? What if fewer people than you expect to walk away from their mortgages actually do so? What if the banks are actually able to earn enough pre-credit income to cover the losses as they arise? Should future investors take into account that not only will they be wiped out if their long-term investments perform badly, but they will also be wiped out if at any time during the holding period of those investments Nouriel Roubini says they will perform badly? This is madness. The capital markets cannot function this way. Let shareholders suffer the losses that they deserve and no less, but also no more.

  35. Alex

    “However, I doubt that CEOs can make commitments of this magnitude without board approval (unless perhaps they had a pre-existing shelf registration, but equity is seldom sold pursuant to a shelf offering, and I would assume the same is true for preferred).”

    Yves, the Times story you linked said they all got Board approval.

    More careful reading, please!

    “And a one-pager standing in as some sort of agreement is a travesty.”

    The one pager was a term sheet. I mean, jeebus, don’t you know the difference between a term sheet and a definitive agreement?

  36. HLS

    This reminds me of the FDIC’s rationale for not disclosing its list of troubled banks. I suspect that Paulson was afraid of triggering a bank run if he only purchased equity in those institutions. As soon as the list of institutions that received infusions was published, we would all know who is hurting the most.

  37. Anonymous


    How do you reconcile your respect for rule of law with your desire to summarily wipe out shareholders without due process or compensation? Is not the arbitrary confiscation of shareholders’ property and example of the coercion and trampling you are here decrying? Why do you fear a Treasury that considers itself to be outside the law? Isn’t that exactly what you will want and need in order to wipe out all the shareholders you want wiped out? Surely you can trust Paulson to agree with you about which shareholders should be wiped out and which should not, no? Or should we appoint you Treasury secretary instead?

  38. pow wow

    Getting people together when you can get (or wheedle) a plurality into accepting something is also very powerful and another brainwashing technique (it is called “social proof”). – Yves Smith

    I think this insight, and the insights in Yves’s Update to this post are extremely important in understanding not only corporate governance, but also how our representative democracy functions, or fails to, particularly under any sort of threat (real or imagined) imposed on Congress and the nation by a sense of urgency or crisis.

    A “cult” sounds like an excellent description for what both political parties in Congress have become – and this manipulative “social proof” technique must be in constant use by party leadership (to force their desired outcome on key pieces of legislation) inside the party-segregated, non-public “caucus” meetings of both parties in Congress. [Those off-the-record caucus meetings seem to be the only place in Congress where actual “debate” ever takes place anymore, and even there most debates likely revolve largely around party power political calculations, rather than around the actual substance of the issue at hand.] The “key pieces” of legislation these days usually amount to whatever the president (the worst in our history) insists upon – see the FISA amendments and immunity, see the Bailout (which were both imposed top-down on Congress, without any bottom-up alternatives allowed to see the light of day) – and then presents to Congress for passage essentially as-is, no objections brooked. Presented, as Yves indicates – aside from ass-covering political rhetoric such as the Bailout’s alleged “oversight” and executive compensation restrictions – as part of a fraudulent superficially-going-through-the-motions exercise that insists that there be no meaningful amendment made to the White House legislation via the democratic committee process of Congress or by input – or even meaningful opportunity for input (hurry, hurry, hurry!) – from any non-“leadership” Members of Congress.

    It’s a sick and extremely dangerous dynamic, and it feeds off the weak, flawed characters of people like Harry Reid and Nancy Pelosi, who in turn are enabled by the acquiescence of their party’s followers in Congress – those who are supposed to be, and hold the powers and responsibilities of, individual legislators “representing” their districts while upholding the Constitution – who fall in line far too easily in the name of party unity and power (regardless of national interest), not rocking the boat, taking the easy road, avoiding public criticism, maintaining corporate campaign donations, etc., etc.

    I think this bastardization of process – the policy executors dictating to the policymakers aka the lawmakers (or corporate managers dictating to the corporate owners) – has probably migrated from modern corporate governance to public governance, rather than vice versa, but it’s extremely damaging to society as a whole in both cases, though doubtless more so in the case of our federal legislature – where democracy itself is slowly but surely being snuffed out by those who always “helpfully” accommodate the will of the likes of Reid, or the mischaracterized ‘well-meaning-but-overwhelmed’ Pelosi, and thus those in positions of power – often in the Executive Branch – whose interests Reid and Pelosi serve, instead of during their sworn duty to serve the American public’s long-term interests by following their own consciences with diligence and integrity.

  39. Glory's List

    Lurid & Alarming: the New AMERO current and the collapse of the U.S. dollar.

    OK — I'm 99% sure this guy, Hal Turner, is nuts, somehow, but he's making some pretty lurid and alarming and convincing claims that the government expects to default on it's debt and that the U.S. dollar will collapse.

    Here's his youtube announcement:

    New AMERO currency.

    and one of his blog posts:

    AMERO shipped to China.

    I really don’t believe any of this, but I know a few people who are buying it all. Can anyone comment? Thanks?

  40. Glory's List

    Lurid & Alarming: the New AMERO current and the collapse of the U.S. dollar.

    OK — I'm 99% sure this guy, Hal Turner, is nuts, somehow, but he's making some pretty lurid and alarming and convincing claims that the government expects to default on it's debt and that the U.S. dollar will collapse.

    Here's his youtube announcement:

    New AMERO currency.

    and one of his blog posts:

    AMERO shipped to China.

    I really don’t believe any of this, but I know a few people who are buying it all. Can anyone comment? Thanks?

  41. dearieme

    People used to enjoy the joke that someone asked Chou En-lai “What do you think of the French Revolution?” and he replied “It’s too soon to tell”.

    Delete “French” insert “American”?

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