Under The Table

From Industry Shorts by Nichole Wagner:

While all eyes were fixated on the bailout bill at the end of September, the Treasury slipped a tax policy change under the Congress’ radar. It took several days for lawmakers to become aware of the change, but when they did, many were angry and questioned the legality and motivation behind it.

The change in tax code repealed a 22-year-old law that prevented tax-motivated mergers. The current policy has no limit on the amount of taxable income a bank can deduct after an acquisition. This change could cost taxpayers $105 billion to $110 billion says Robert L. Willens, a prominent corporate tax expert.

As of press time, legislators have not publicly declared that the alteration is illegal because they are afraid that recent bank mergers may unwind as a result. However, Charles Grassley, most-senior Republican on the Senate Finance Committee, is seeking an investigation into possible conflicts of interest.

In a letter, Grassley stated that he wants to investigate the independence of several Treasury officials who were also ex-Goldman Sachs executives, as well as the relationships between the Treasury officials and bank board members. Specifically, the relationship with Robert Steel, former Treasury advisor and ex-Goldman employee, who is now the chief executive of Wachovia.

The senator is disturbed that the tax change was made one day after Wachovia agreed to be acquired by Citigroup. This alteration gives the “appearance of preferential treatment” Grassley says by sweetening the deal for Wells Fargo that later stepped in and acquired Wachovia. Under the new tax code, the merger saved Wells Fargo nearly $20 billion in taxes.

Maybe The New Guy Will Get A Better Grade

From All the Wrong Policies: Paulson Gets 'F-Minus' from Former Regulator by Aaron Task:

As bad a year as the stock market is having, Treasury Secretary Paulson is having an even worse one, according to William Black, Associate Professor of Economics and Law at the University of Missouri.

The professor, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis and blew the whistle on the "Keating Five" in 1989, says Paulson deserves an "F-minus" for his role in the financial crisis.

He also notes Paulson steered Goldman Sachs into subprime and alt-A mortgage securities before becoming Treasury Secretary in 2006. Goldman began shorting those instruments shortly after Paulson's departure, he notes.

The current crisis is "not a hundred-year flood, that suggests it's an act of God caused by random forces," Black says. "This was one cause by bad policies, the same policies that have caused prior crises."

From Stocks surge on Treasury chief talk by Alexandra Twin:

Stocks rallied Friday, with the Dow industrials bouncing as much as 550 points, after reports surfaced that President-elect Barack Obama will nominate New York Federal Bank president Timothy Geithner as his new Treasury Secretary.

In particular, Wall Street seemed to welcome Obama's reported pick of Geithner, the vice chairman of the Federal Reserve's policy-setting committee. Geithner was the Fed's point person on the rescue of Bear Stearns and AIG.

Henry Paulson - Bush Appointee

Political Animal on April 1, 2008:

No surprise there. After all, Paulson created his plan a year ago, well before the current crisis exploded last summer. Far from being a way to rein in banking industry excesses, it was originally a conservative wish list designed to "streamline" the federal bureaucracy and lighten the regulatory burden on Wall Street, which was, um, slowing down the growth of sophisticated new financial instruments that — that, er, were needed to keep the American financial industry in its place as the leader of the world.

But just for once, would it kill the Bush administration to address an actual problem, instead of merely using it as an excuse to jam some long-wished-for piece of money-con flim-flam through Congress?

From 'Paulson's new 'Global Banking Corp.' IPO 2009 by Paul B. Farrell:

1. Opening scene: Paulson and Goldman Sachs, 1974-2006

Harvard M.B.A., 1970. Then a staffer at the Pentagon and with Nixon. Joins Goldman in 1974. CEO in 1999. Paid $38 million in 2005. Federal ethics laws let him sell $484 million in Goldman stock tax-free when he left. Net worth, about $700 million.

And I have to pay taxes every time I sell any stocks, even if it is only a fraction of a share.

From A Loophole For Poor Mr. Paulson by Jessica Holzer:

But don't shed too many tears for Paulson. He has amassed quite a fortune--a roughly $700 million equity stake in Wall Street's premier investment banking house. And soon, he will have the chance to diversify a good chunk of those holdings without paying a dime to the Internal Revenue Service.

By accepting the Treasury post, Paulson is poised to take advantage of a tax loophole that allows government officials to defer capital gains taxes on assets they have to sell to avoid a conflict of interest, as long as the proceeds are reinvested in government securities or a broad array of mutual funds approved by the government within 60 days.

Technically, the tax kicks in once these replacement assets are sold, using the purchase price of the original assets as the cost basis, says Tom Ochsenschlager of the American Institute of Certified Public Accountants. But why sell when you can avoid the tax altogether?

"The idea is never to sell," says Robert Willens, the top tax and accounting analyst at Lehman Brothers. "If you're able to hold onto the replacement assets until your demise, you never have to pay it."

The tax break was designed to ensure that the wealthy are not deterred from taking posts in government because they fear a big tax hit. But it amounts to a significant perk of public office.

From Can you trust a Wall Street veteran with a Wall Street bailout? by Kevin G. Hall:

Back then, Bush saw Paulson's Wall Street experience as a plus. "Hank will follow in the footsteps of Alexander Hamilton and other distinguished Treasury secretaries who used their talents and wisdom to strengthen our financial markets and expand the reach of the American Dream," Bush said at the time.

Nothing like the wisdom and foresight of George W. Bush.

Has George W. Bush ever done anything positive for this country?

Financial Genius

Peter Brimelow takes a look at the 1998 Fed-orchestrated bailout of Long-Term Capital Management hedge fund, and sees some similarities to today.

From Another case of collusion? by Peter Brimelow:

LTCM was the current bailout in microcosm.

I was fascinated by the LTCM bailout. I couldn't figure out why the Fed needed to rescue a relatively small firm. But two excellent books "When Genius Failed" and "Inventing Money," respectively by Roger Lowenstein and Nicholas Dunbar (who really do deserve to be rich and famous) provided a lot of damning detail, albeit without drawing conclusions.

Bottom line: LTCM seems to have been bailed out because it was well-connected. Its connections were significantly to Goldman Sachs, which in turn was extremely well-connected to federal government. Its former CEO, Robert Rubin, was Treasury Secretary at the time.

By an amazing coincidence, another former Goldman CEO, Henry Paulsen, is orchestrating the current bailout.

You can find more information on When Genius Failed here.

Let’s take a look at John Meriwether. After graduating from college he worked as a bond trader at Salomon Brothers. He left Salomon in 1991 after being involved in a Treasury securities trading scandal. He was forced to pay a $50,000 civil penalty. Long-Term Capital Management (a hedge fund) was founded in 1994 by John Meriwether. For some reason his work at Salomon inspired Nobel Prize winners Myron Scholes and Robert C. Merton to join the board of directors of LTCM. They also found investors willing to part with $1,011,060,243. They did very well for awhile. They used highly leveraged positions and derivatives. Sound familiar? Then they tanked. They tanked so badly that the Federal Reserve Bank of New York organized a bailout of $3.625 billion to avoid a wider collapse in the financial markets. Sound familiar?

Are you wondering what became of John Meriwether? Did he go to jail? Was he banned from the financial markets?

John Meriwether runs another hedge fund called JWM Partners, LLC.

What is it they say about a fool and his money?

Are we now bailing out the financial system to keep it afloat so that the same people who got us into this mess can get us into another mess in the future?

For a system filled with accountants, where is the accountability?

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Arjun Murti

From Wall Street's crude ways by David Weidner:

The hubris and insensitivity of energy trading is best personified by Goldman Sachs. A Goldman commodities analyst famously predicted in March 2005 that oil would reach $100 a barrel. At the time, a barrel was trading about $55. The prediction led to a lot of ridicule, but it also drove up prices in the short term, and ultimately came true.

It also led to speculation that Goldman was trying to goose the market because it had a huge position in oil derivatives.

Now, Arjun Murti, the same analyst who made the earlier prediction, is back, promising $200 oil this year. Murti is again talking about demand, but again, world consumption doesn't suggest the price should double.

Henry Paulson Proposes Big Changes

Henry M. Paulson is the United States Treasury Secretary and a member of the International Monetary Fund Board of Governors. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs, one of the world's largest and most successful investment banks. Paulson was nominated by U.S. President George W. Bush to succeed John Snow as the Treasury Secretary.

Why do we continue to pick from the same old basket of rotten fruit? Can you say “conflict of interest?” The old adages “consider the source” and "the fox guarding the henhouse" come to mind when I hear of news like this: Sweeping Changes in Paulson Plan.

U.S. Treasury Secretary Henry Paulson plans Monday to call for sweeping structural changes in the way the government monitors financial markets, capping a broad review aimed at revamping a system of regulatory oversight built piecemeal since the Civil War.

If even only some of the changes get made, they would represent a major reworking of the U.S. regulatory system for finance. Such an outcome would likely take years and would also require major compromises from an increasingly partisan Congress.

Opposition is already emerging from critics who feel the document nods too far toward deregulation. The revamp process began early last year before the credit crunch and was initially aimed at improving American competitiveness. As such, it's a hybrid that both adds new rules to deal with recent financial woes but also simplifies old structures in a way that favors some in the finance industry.