Latest Bailout Plan Spin: Its a Money Maker!

Most people are unfamiliar with the evolution of financial management over the years. It began as a clubby old boys network, who you knew mattered more than what you knew. It evolved over time. Starting in the late 1970s, retail stock brokerage became a telemarketing sales business. Although that model is clearly changing, there is still trillions of assets under management today that got that way via the cold call.

The cold calling sales approach was developed and refined at Lehman Brothers (perhaps their collapse was Karma). It was encapsulated by a man named Martin D. Shafiroff, who wrote up, refined and perfected various phone techniques. These include the straight line, the first trade, the trust close. All of his various techniques were published in the book “Successful Telephone Selling in the ’80s” and subsequent editions (’90s, etc.) Having worked on the Sell side for the first decade of my Wall Street career, I am intimately familiar with the various pitches the retail world uses to obtain clients and assets. There is not a single retail broker of my acquaintance that does not have Shafiroff’s how-to on his bookshelf.

The reason I bring this up today is due to the latest sales pitch from various people, aggressively pushing the bailout plan. The newest spin on the massively expensive plan is “Hey, its a jumbo money maker!”

The spin reminds me of the classic retail stock jockey. The guy has buried his clients in a series of bad trades, bad judgment, poor risk management — all motivated by his self-interested, commission-generating trades. The only way out of the money losing mess, pitches the broker,  is a big, Hail Mary trade.

Sound familiar?

This technique is one of the last ones in the the Shafiroff book. Once an aggressive retail broker is upside down, the plea goes out for raising more money from the mark client. “Believe me, I hate being under water more than you. I pulled in some favors, this is the trade that makes it all back for us and then some. I could even get in trouble telling you this, so don’t mention this to your pals. This is the one — but I need you to send in more capital so we can recoup the prior trades that went bad on us.”

I guess Paulson read the book in the early days of his career. That line of bullshit is identical to what the public is now being fed. A series of OpEds in the Washington Post and the Wall Street Journal (and who knows where else) are all pushing the same nonsensical line: The bailout plan is a big money maker:

Andy Kessler in the WSJ:

“My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion — yes, with a “t” — for the United States Treasury…

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.

Firms will haggle, but eventually cave — they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion.”

Bill Gross (who just volunteered to manage the bailout for free) in the Washington Post:

“The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from “troubled financial institutions” to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.”

Now, I have a few question for Messrs. Kessler & Gross: What does this say about the private sector? Why can’t the all of the private equity funds, sovereign wealth funds, and enormous pools of capital do this themselves? There are trillions of dollars sitting around in cash, yet none of it that sees any value here?

I guess that Hank Paulson, George Bush and Ben Bernanke — all of whom have been been unequivocally, expensively, tyrannically wrong about the entire crisis from the beginning — are smarter than both the markets, and all of the private equity pools, about this paper?

Does that sound right to you? The guys who missed this from day one — despite many many admonitions from many people — only they see the value in this paper, whereas the smart guys who saw the shitstorm coming in advance, and bet against it, don’t?

I am in the same camp as Michal Lewis, who writes at Bloomberg “the Treasury plan also creates this wonderful hidden opportunity for Goldman Sachs to make a killing, and thus preserve its bonus pool for a long time to come.”

Put me down as sympatico with Anatole Kaletsky, who writes in the London Times:

“Mr Paulson may be a former chairman of Goldman Sachs, but as US Treasury Secretary he does not know what he is doing. His recent blunders, starting with the “rescue” of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a “comprehensive and fundamental” solution to the global financial crisis, without apparently having any idea of what he would actually do.”


I have a 10 year bet for those folks now pushing the “Trust me, we will make it all back on this one trade” spin. If you who think the Paulson plan is a money maker, a cash winner, and a net after-fees taxpayer surplus creator, put your money where your mouth is. I bet you one million dollars, to the charity of the winner’s choice, that the current plan is ginormous money loser.

Any takers?


Previously: Fixing Housing & Finance: 30/20/10 Proposal (September 2008)

CEO Clawback Provisions in the Bailout? (September 2008)

Sources: How Main Street Will Profit William H. Gross Washington Post, September 24, 2008; Page A23

The Paulson Plan Will Make Money For Taxpayers ANDY KESSLER WSJ, SEPTEMBER 25, 2008

America Must Rescue the Bonuses at Goldman Sachs Michael Lewis Bloomberg, Sept. 24 2008

Save the world? Hank just didn’t have a clue Anatole Kaletsky Times, September 25, 2008

Originally published at The Big Picture and reproduced here with the author’s permission.

8 Responses to "Latest Bailout Plan Spin: Its a Money Maker!"

  1. Guest   September 25, 2008 at 8:24 am

    Sure and let’s all invest in pink elephants with green spots that fly. What a cynical and pathetic attempt to fanagal 700 billion.Paulson is a puppet of The Fed. What a joke.The blind leading the blind.

  2. gepay   September 25, 2008 at 8:28 am

    It is sad that all of the economically informed people at RGE monitor can see what is happening but not be able to do a thing to stop it. Roubini has seen it for years. And tell me, what good had it done? (well some people have saved themselves some financial grief I am sure but stopping a train wreck…)Here we are and nobody can stop the biggest heist in history. Paulson has become rich by being an ethical and upstanding guy, looking out for the best of everybody. That’s the way one becomes the head of Goldman Sachs so we can trust him to do the right thing with our money. It makes me want to puke.

  3. Guest   September 25, 2008 at 8:43 am

    This situation is accurately described as an ATTEMPTED FINANCIAL COUP D’ETAT. These people are attempting to control the U.S. and holding the american people hostage by threatening to catapult the economy into depression.

  4. Anonymous   September 25, 2008 at 9:10 am

    I’ll add another million to you. That makes 2 million. There is no evidence that this does anything to alleviate the $60 trillion derivatives issues. And, a no vote for all incumbants this fall for even listening to Paulson.

  5. Anonymous   September 25, 2008 at 9:13 am

    When Lehman went down, the Fed made two payments to JP Morgan – total $138 billion. Lehman, same time, made a $138 billion payment to Citibank for CDS exposure. No Lehman bailout, but a de facto Citi bailout. Where is that story? 700 billion now, 7 trillion next?

    • Anonymous   September 25, 2008 at 9:14 am

      Missed a statement here – JP Morgan made the same payment amounts of $138 billion to Lehman.

  6. artichoke   September 25, 2008 at 12:32 pm

    I might be willing to go for a deal like we got with AIG. Majority equity in the bailed-out bank (79.9%), punitive interest rate on the cash bailout, moderately fair pricing.That has at least upside potential. Short of that they’re pulling our leg.

  7. artichoke   September 25, 2008 at 12:34 pm

    Remember the “bacon the Rabbi would hate to eat on Yom Kippur” is not an executive comp. restriction, it’s the mortgages that are currently choking that Rabbi. The Treasury must be richly rewarded for touching that unclean stuff.