It was one of the most shocking paragraphs I've ever read.
"The chief executives of the nine largest U.S. banks trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday," The New York Times reported on Oct. 14. "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 Paulson said they must sign it before they left."
When Paulson called the meeting, the executives had no inkling of his plans, the Times reported, and many of the CEOs thought Paulson would brief them about the government's latest bailout program, or perhaps consult them about a voluntary initiative. Instead Paulson's goal was to ram hundreds of billions of public dollars from the bailout down their throats in exchange for partial ownership by the government through stock.
"No one expected him to present his plan as an ultimatum," the Times continued. "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."
The chairman on Wells Fargo, Richard Kovacevich, protested that his bank hadn't invested in exotic mortgages, wasn't in trouble and didn't need the money. So did Bank of America's Ken Lewis. Morgan Stanley's John Mack said his bank didn't need the capital either because it had just sealed a $9 billion deal with a Japanese bank. But the sheer size of the payoff the government was offering stunned and swayed them. Tens of billions of dollars each. Three hours later, they had all signed.
The government gets ownership in the banks in the form of preferred stock shares in exchange. Paulson promised the government would not interfere in management decisions or exercise its right to vote on the common shares it will also get warrants to purchase in the deal. (Yeah, right.) The banks could buy out the government after a few years. (Again, yeah right.)
But the government did get the right to dictate CEO pay. I'd bet what little is left in my 401(k) that that will be just the start of the government control that will be exercised over the banks.
This was not what the federal economic bailout was supposed to be about. The government pledged to spend about $700 billion buying up bad assets to get them off the books of struggling companies, a distasteful idea in itself. Practically forcing Main Street's money on banks that don't need help in exchange for a government stake in those banks -- and an inevitable say in their control -- as part of a partial nationalization effort was not part of the bipartisan plan that Democrat and Republican leaders alike forced on the public, only weeks ago, under the guise of stabilizing the stock markets. (The price tag for these new activities will likely run over $2 trillion, by the way, more than three times the initial $700 billion promised.)
Last week, round two began as Paulson turned his attention to a second, smaller tier of banks. The goal was to ram another $125 billion plus down their throats to "provide industry stability" and "spur consolidation" with other institutions that had wrecked their balance sheets with bad investments.
Once again, bank leaders protested loudly. John Allison, chief executive of BB&T, said that BB&T has no compelling need to participate, the Charlotte Business Journal reported.
"We have plenty of lending capacity," Allison was reported as saying. The bank recently got a $1.2 billion infusion of cash from deposits moved by those fleeing failing institutions, he explained. But tremendous pressure from federal regulators and the lure of up to $3 billion from the government could force BB&T to change its mind, Allison said.
The new and revised bail-out plan will likely be offered to every U.S. bank with more than $500 million in assets, financial experts say.
How'd we get here? Essentially by making Treasury Secretary Henry Paulson God.
In one paragraph, the writers of the bailout legislation gave Paulson and any future treasure secretary in the next presidential administration the right to ignore what the bailout legislation says the government will do as part of the bailout and instead to do whatever he or she damn well pleases.
According to Section 8 of the bailout law, "decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
May not be reviewed by any court of law or administrative agency? No matter what form of personal or financial corruption ensues among those involved? Yup.
That is a staggering and unprecedented amount of power, a power so great it humbled the CEOs of the nation's nine biggest banks in a matter of hours. That kind of power doesn't just invite corruption, it begs for it. It is a recipe for utter lawlessness and a kind of government thuggery that has no precedent in our nation's history. It is a formula for iron fisted control of entire industries by a single all-powerful government bureaucrat. And Paulson is putting that power to use right now.