Fool Blog: Paulson's Mother of All Boondoggles

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Is Treasury Secretary Hank Paulson letting the cat out of the bag about who he's most worried about right now? He doesn't like the idea of "punitive" elements in the $700 billion bailout package he's championing. Apparently, Paulson fears that such elements, like limits on executive pay, could mean the companies in question might decide not to participate.


Congressional Democrats are trying to insert some limits on executive compensation, among other things, into the massive bailout package, and I have to say I agree with them wholeheartedly. Heck, if a company's feeding at the government trough at taxpayers' expense and risk, then, gee, I guess maybe the company might owe those taxpayers something -- like, perhaps, jettisoning CEOs without giving them huge golden parachutes, or maybe even holding them accountable for the millions they made while they took on far too much risk and helped build this toxic and dangerous situation. Call me stark-raving crazy.

And what the heck is this implication that some institutions might choose not to participate in the plan because they'd be so miffed at the "punitive" elements? If things are as dire as they've been portrayed, I think maybe, just maybe, the government could call their bluff, right? Plus, Paulson's apparent aversion to "punitive" action doesn't do much for people who might feel a wee bit uncomfortable knowing that he used to run Goldman Sachs (NYSE: GS  ) and obviously has plenty of buddies in the industry.

As for "punitive," let's talk about punishing elements. Bring that topic up with the common American who didn't buy a McMansion with some "exotic" mortgage, or who didn't go into debt to purchase too many other toys they didn't need, and now faces the prospect of a triple whammy: rising taxes to pay for this disaster, nonexistent returns from savings, and runaway inflation as the Fed keeps printing money.

Maybe Paulson and his friends figure that Americans are reeling from the onslaught of relentless, historical, and often bizarre news that's been compacted into the past few weeks: Fannie Mae (NYSE: FNM  ) and Freddie Mac being seized, AIG (NYSE: AIG  ) nationalized, Lehman going bankrupt, Merrill Lynch (NYSE: MER  ) being acquired by Bank of America (NYSE: BAC  ) , Washington Mutual (NYSE: WM  ) spiraling downward as it looks for a buyer, and, most recently, Morgan Stanley (NYSE: MS  ) and Goldman Sachs suddenly becoming bank holding companies. Did I miss anything? Probably. It's all so mind-blowing.

Is this newest "shock and awe" campaign expected to confuse and scare Americans so badly that they won't be outraged? Trust me, I know -- it is tempting to blank out the way our entire financial system has been altered in a dizzyingly swift period of time, but if you haven't blanked out, you can take our Fool Poll on the biggest financial shock of the week.

If you're not outraged yet, I have a hunch you will be once the dust settles. Please feel free to let loose in the comment boxes below -- or, if you'd like to defend Paulson's sympathetic, kid-gloves approach to these poor, suffering financial company heads, then feel free to share that, too.

Bank of America is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns no shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (20) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2008, at 2:42 PM, SCdujour wrote:

    Paulson's move sounds like politics as usual; how unfortunate from a seemingly stand-up guy up to that point. The surprising part to me is that he couldn't come up with a better excuse -- I agree that the "not want to participate" excuse is laughable. Although, a hallmark of this administration has been to pick an excuse and be very assertive about it. Sadly, it has 'worked' repeatedly.

  • Report this Comment On September 22, 2008, at 2:57 PM, wcoastjosh wrote:

    I just finished discussing these same reservations about how Paulson is handling this situation. I am a staunch Republican, and I am shocked that we are not standing up for any oversight for this massive outlaying of OUR money. In hindsight it appears letting Bear Stearns fail would not have been "the end of the world." So why is it that every time, we are told "it is the end of the world if Paulson does not get more of our money," we do not question this at all? Additionally, if the super elite, after running their financial institutions into the ground, will not take a pay hit as a condition to have my money bail them out, why should I give them any of it, and perhaps more importantly DO THEY REALLY NEED IT THAT BAD?

  • Report this Comment On September 22, 2008, at 3:00 PM, megalon81 wrote:

    My biggest worry is that we are all being rushed into a bailout deal that will ultimately put taxpayers over the edge. I can't reconcile the "unwilling to paarticipate" line with the dire warnings about what will happen if the taxpayers do not agree to take this action. I find the "need for speed" argument feeding my suspicions regarding why all these developments happening on the weekends.

  • Report this Comment On September 22, 2008, at 3:33 PM, DukeTG wrote:

    I'm 28 years old, and I think I may seriously try to figure out how I can move to Canada. It's bad enough that I'm going to be asked to pay for this for the next 60 or so years (or until the sweet release of death relieves me of the obligation), but I don't think I can rationalize living in a country that finds it OK to socialize bank losses but not health care. If I have to pick one or the other (and I would truly rather not) I'd rather have my tax dollars going to people at the bottom.

  • Report this Comment On September 22, 2008, at 4:15 PM, Corporality wrote:

    IMHO, these are exactly the questions that our media and public should be demanding answers to. We Americans are now the proud socialist owners of Fannie Mae, Fredic Mac and AIG. The mantra of privatized gains and socialized losses can’t be repeated enough. I don’t imagine there’s much talk about socializing a company that actually turns a profit, Exxon? How stupid would that be? No, we need to socialize these corporations that were grossly unregulated because their sizes make their screw-ups too big to let the market sort out. Who cares if some old lady loses at Vegas, but if it’s some intertwined behemoth; then by all means, the taxpayer needs to cover their losses so they can go back to what they do so well: LOSE.

    I’ve heard a Republican blame the twerps that bought houses they couldn’t afford, it’s their fault, not the lenders who make their living on calculating risk. There’s no love lost for the selfish greedy and dumb McMansion buyers, but lets own up, we are a country of stupid people, it’s akin to blaming the retarded Captain for crashing the tanker and giving the guy who hired him a new tanker and a bonus.

    Well done Ms. Lomax! Please keep it up!

  • Report this Comment On September 23, 2008, at 5:39 AM, chrysalisvoyage wrote:

    On distressed Companies not wanting to participate in the bailout if punitive conditions are attached...

    As a former manager of a private equity fund, I have been amazed at the steps management will take to avoid 'the haircut.' And I'm sure that the management in question will attempt to freeze the markets before they will consent to taking this cut.(experience tells me they would accept the equity dilution long before the pay cut just in case any of you shareholders thought that they had your best interests at heart)

    But surely the Treasury and the Fed have a couple of big sticks to ensure participation. What about closing the discount window or revoking FDIC coverage of deposits at those institutions. In venture capital, the last person standing with money in their pockets gets to make the rules. The taxpayer is the last person standing, at least for the moment. So Congress, stand up and make a deal. Ratchet the management and shareholder as much as possible because as strange as it may seem, that's what makes capitalism work.

  • Report this Comment On September 23, 2008, at 12:15 PM, daniairzona wrote:

    Does Wall Street make up a diffrent country? They must , because if they were US Citizens they would have the same repercussions as every other taxpayer who did not make wise financial decisions. And to benefit from a bail out! I may not be the wisest fool, but is something wrong with this picture?

  • Report this Comment On September 25, 2008, at 11:17 AM, scchengmus wrote:

    Re: Treasury and Presidential address tonight

    ... so ... what the F the use of using the famous "D.C. scare tactic" now Paulson & Bernake?? just to save face at election time with 2-mths left for GW out of the total 8-yrs?? why even stress a fact that we've obviously known and read about for the entire year of 2007 now on National TV, again with the "911 face or urgency??" Geeee, you mean we're REALLY in a recession now (how do you spell that again: Resesccion?!?) You mean you finally admit it after 24 months of downturn??

    I had no idea real estate values are falling. I didn't know the market was in deep S. I didn't know we had a credit crisis like the 1980's. I didn't know oil was high. I didn't know the Dollar was falling. NO S SHERLOCKS!! say something we don't already know from Grade School.

    so yes, I used to worship Paulson's post at Goldman Sachs just like all the rest of Wall Street. with all the short selling strats, arbitrage, ingenius swaps on derivatives, and CDS' and options hedging etc etc. make $$$$$ in salary + $$$$$$$$$ in bonuses. now, after all the financial engineering applied to the capital markets world for the past 2 friggin' decades, he's gonna pull the plug and slam on the Maserati-brakes in 1-week to say "NO" to all of the above techniques that were commonplace?!? and after all the profiting the House suddenly proposes limits on executive compensation? what a novel idea for Washington to have a voice in Capitalism, since after all only 4 other Govt regulatory agencies proposed similar measures 2-yrs ago with ZERO acceptance from Washington --like they were a sleeping elephant. What, so the SEC just gave up. where have they've been lately? why didn't they slowly control the crisis instead waiting until now when so many fortunes have been lost??

    my problem here isn't partisan Republican vs. Democrat, since this election can no longer relies on pure "sides." that has always been a crock of S anyway. doesn't matter what Party, but what intelligence. my problem is what happened to Laissez Faire free enterprise economics that made America? all these Socialist Communist moves were ridiculed by the US when China applied them 10-yrs ago, but now the US acts like it's "unprecendented and mandatory that we spend the $700MM as taxpayers" to band-aid mistakes by people at the top. it's also a big Fg hyprocrisy that the 2 biggest officers who proposed the bail-out were at one point in their lives huge Oil and Bank traders who already cashed out their fortunes with the same methods, but now have the power to manipulate the put stop-limits onto the general public.

  • Report this Comment On September 26, 2008, at 3:31 PM, spongeworthyusa wrote:

    I say if the Wall Street fat cats don't want to be punished for getting things in this bad situation, they can just fail away.

    It's that simple.

  • Report this Comment On September 26, 2008, at 9:09 PM, Nappyhill wrote:

    As a realtor who has been in the business for over 18 years (and, no, I did not steer any buyer clients into dangerous mortgages), I started predicting the housing slump & domino effect since late 2004. It didn't take much in the way of brains to see that the same pattern of irresponsible lending that led to the savings and loan crisis in the late 80's (and tighter regulation of banking practices in the early 90's), was being repeated through deregulation and would lead to disaster. (Although the level of the disaster is beyond anything I could imagine!)

    In the spring of 2005, Business Week magazine began talking about the coming housing slump, and the danger of derivatives and the casual game playing for profit by the hedge funds. Perhaps part of the bailout should include subscriptions to Business Week, so that Cox, Paulson and Bernancke (I'm sorry . . . can't remember spelling), can do a better job of forecasting the future and guard against greedy and unbridled speculation.

  • Report this Comment On September 27, 2008, at 4:56 PM, lugnutzmike wrote:

    I agree with scchengmus 1000% Iz just a po truckdriver Scarlett, I doon no notin' about makin' no money! Half the comments I've heard over this finacial chernobel(sp?) say that some how it was "Bill's fault" for screwing up Fannie and Freddie with affordable housing regulations. There's PLENTY of blame to go around. I didn't notice the Republicans refine or amend the affordable housing provisions, they let them ride and contributed with The Bankruptcy Protection Abuse Prevention and Consumer Protection Act of 2005. Hmm, tighten up on the little guy for using the same tactics business uses to jettison their mistakes. And for the kicker, lets offer subprime, balloon payments, interest only loans, lier loans, etc. to the uninformed and greedy. Wall Street/Big business got caught in their own web of greed and deceit. They've misrepresented the facts sooo much that even they finally weren't sure what they were. I hope the Administration(Bush,Paulson,Bernacke, et. al.) tactic doesn't work this time. They've cried "Wolf" too many times and been the proverbial "Day late, and a dollar short" every where else. 700 billion dollar (That's billion with a B) and no oversight and Paulson chooses who lives or dies, with NO oversight? And Offer these lending institutions, the ones who created this mess a premium for their "toxic Debt" to "encourage" them to sell it to the government. PLEASE. The last gasp attempt at another corporate give-away at the expense of the taxpayer, and trust me, if this goes through thats all any of us will be is "tax PAYERS." If there isn't anymore regulatory oversight and these finacial institutions don't sell their assets for their current value, let them be absorbed or fold. The balloon has popped. Lights out, the party's over.

  • Report this Comment On September 28, 2008, at 9:14 AM, stckshopper wrote:

    The overwhelmingly "anti-bailout" comments I've read over the last week have me wondering why I continue seeing televised statements from members of our representative government about the certainty of the bailout legislation's passage into law.

  • Report this Comment On September 28, 2008, at 5:59 PM, FreeNachos wrote:

    This is psychotic. Completely detached from reality: If you don't HAVE the money don't BUY things. It couldn't be more simple.

    Yeah, do nothing and it probably WILL cause a recession maybe it WILL destroy the "credit" industry. How is that BAD? Should homes keep costing more and more? Should people be using so much credit? Isn't that how the 1929 crash got going?

    We're living a psychotic lifestyle and this just puts a bandage on the problem so we can continue to live "comfortably". It's going to come crashing down. How can it not? It's just math.

  • Report this Comment On September 28, 2008, at 6:02 PM, FreeNachos wrote:

    PS - How do we start a second American Revolution?

    They're gonna tax us and send it to companies that don't represent us or have our interests in mind. Let's have a tea party.

  • Report this Comment On September 29, 2008, at 7:06 AM, carefulinvestor wrote:

    Let's add two more provisions to the gov'ts buyout/bailout plan.

    If the gov. is getting stock options and warrants for the cash infusion, and taxes (or future taxes) are being used to purchase the distressd assets, make the options/warrants marketable and send me my share. Give every taxPAYER (not taxFILER) their share and let them decide whether the investment is worthwhile.

    Second, as part of the buyout/bailout plan make a minor change in the way compensation, bonuses, and stock options are issued to board members and executive employees of ALL publically traded companies. Let the stock holders vote on the proposed amounts, but (and here is the kicker) company board members and executive employees CANNOT vote on such measures.

  • Report this Comment On September 29, 2008, at 4:07 PM, birkett1nealy wrote:

    I still find it alarming that nearly everyone calls the $700B "taxpayer money." You have obviously not been paying attention the last 8 years. The taxpayers have paid for very little. So much of what the government spends is borrowed from other countries. So if too much borrowing got us into this mess, how are we supposed to fix it by borrowing MORE money?

  • Report this Comment On October 02, 2008, at 1:26 AM, jacobchiong wrote:

    This crisis stemming from sub-prime mortgage foreclosures has me feeling somewhat vindicated – not that I am feeling smug whilst many are reeling from this crisis in one way or another. I am from Singapore and, back in 1986 when I first bought my first public apartment, it cost me about US$ 76,000. From then on, the price of real estate was artificially made to go up by our government’s implementation of development charges and the private sector’s perception that cost of land has only one direction to go, and that is, up and up. Five years later, I sold it for about US$ 186,000. During those years, I do not see the productivity of the working population doubling and I suspect this rise simply cannot be sustained. Today, a similar apartment costs about US$ 460,000, with demands outstripping supply. Whether our productivity now has increased 6 times since 1986 is debatable. True, back here in Singapore we have yet to taste the crisis facing U.S. today. If this Wall Street crisis has not happened, I would still be scratching my head bald wondering how the property market can be sustained when it is quite obvious we are not now working 6 times as hard or as effectively as we did in the past. Now that U.S. is in the grips of this behemoth of a crisis, it may be time for other governments to take a cue from this and take steps to prevent such from happening in their respective countries.

    As a non-U.S. citizen, I can only guess at the complexity Paulson and company have to work through to prevent the U.S. economy from spiraling down further. But handing over US$700b to folks who brought about the crisis is a move that is beyond my understanding. My common sense tells me that once you hand a sum of money over to someone else, you have no more control over it. It would have been better for the U.S. government to quickly draft up laws to prevent many of these foreclosed properties and other unsold properties from falling into foreign hands; notably those from the Middle East. Then, allow these Wall Street companies to collapse and auction off these properties to Americans. There are several benefits in this approach. First off, this will help to adjust property prices to sustainable levels. Secondly, you do not sell off pieces of American soil to oil-rich countries. Thirdly, you save US$700b which ultimately means less taxes and more money in the average American’s pockets (which always translate to greater consumer spending and what that entails). Fourthly, the major group of people losing out are those who used money (borrowed or otherwise) to make more money, instead of going out there to do real value-add work.

    Of course, I want to think what I have mentioned to be common sense coming from someone not familiar with the workings of Wall Street. But considering the scale of the damages these Wall Street geniuses are capable of, might it not be time to ‘disarm’ them? Give the US$700b to Wall Street? That is equivalent to about US$2,300 to each American. Or about US$11,500 for an American family of 5.

  • Report this Comment On October 02, 2008, at 2:09 PM, fraudexposer wrote:

    Warren Buffett would give Paulson a blank check. He told this to Charlie Rose on Oct. 1, 2008. Buffett is losing it. He needs to read the reports on Motley Fool.

    Not his first serious mistake. When Buffett invested in a viatical/life settlements company and then allowed his name to be used to promote the investment, he was completely insensitive to the effect on other seniors, people who cannot afford the losses his name encouraged.

    When Buffett chose to invest with a new viatical/life settlements company that rose out of the ashes of a defunct viatical company, one that went bankrupt after purchasing and reselling fraudulently acquired life insurance, he used poor judgment or followed the advice of people with ulterior motives.

    And now he urges us to place complete trust in Paulson?

    Thank goodness the politicians are, at last, listening to their constituents. Those CEOs who created this mess and profited from it should be heavily taxed on every dollar of earnings that is greater than the amount paid to federal court judges.

  • Report this Comment On November 15, 2008, at 11:03 AM, toolzfoolz wrote:

    Of course I am mad at this. I know there are a few out there who have invested responsibly, and bought everything with cash, and haven't gotten themselves over their heads and live within their means, but I would say that is not the majority in the last 10 years. My problem is this: I have made mistakes. I have now learned from them. I see the government giving money at my expense to large corporations who have not learned. How about bailing me out, because you will be assured a return on your investment, and with interest. Are we assured of a return on our current bailout investment? Heck no, and I think it will get worse, with it hitting bottom before it ever improves. This is crazy, and indebting taxpayers for generations for something that is so unsure. And the idea of giving CEO's large exit bonuses? Reprehensible! They can live on those bonuses for the rest of their lives if need anyone offering me an exit bonus? No. I have to work even harder to fix my mistakes and theirs, but they don't have to. Everyone should be infuriated at this.

  • Report this Comment On November 18, 2008, at 2:58 AM, autoprt wrote:

    everyone should have know when Greenspan retired something big was coming. i'm sure he wanted to die in office as Fed Chairman but didn't want the mess to laid at his doorstep.

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