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A Bailout for the Rich

November 05, 2008

Scanning the financial news online, here is what I discovered about two of the companies that benefit from the $700 billion bailout. First, after getting $10 billion from our government (from us) Morgan Stanley is handing out $6.44 billion in bonuses. That’s after their profits fell 41%.
Goldman Sachs is getting $10 billion from the bailout plan and paying out $6.85 billion in bonuses. Yes you read that right. Despite a 47% drop in profits and a 53% drop in share price, the bonuses are going out. That averages out to over $200,000 per employee, although I suspect the ones at the top get a much bigger share than that.

Warren Buffet recently invested $5 billion in Goldman Sachs, by the way. He got preferred stock as well as warrants to purchase common stock in the future (these are a kind of option). His preferred shares pay a 10% dividend while he waits to make a killing on the warrants some time in the future. Now that’s a deal.

Twenty days later Treasury Secretary Hank Paulson comes along and hands over 10 billion of our money to Goldman Sachs. Does he get the deal Buffet got? Not even close. In fact, not even half! We get less than a seventh of the number of warrants and receive just a 5% dividend on the shares. Based on this, we shouldn’t be surprised if we overpay by double or more for all the other bailout “investments.” That suggests that 350 billion (or more) of the bailout money will be thrown away.

Average Americans are being tapped for hundreds of billions of dollars to keep those bonuses going. We are in the midst of another massive redistribution of wealth from the poor and middle class to some of the wealthiest people in America.

Speaking of wealthy, Paulson, whose net worth is estimated at $700 million, was the chief executive of Goldman Sachs until two years ago. He made $37 million in 2005, presumably doing some of the things that lead the company to need this bailout. Talk about the fox guarding the hen house!

Oh, and by the way, in Paulson’s first major speech as Treasury Secretary in August of 2006, what did he name as one of the most important issues to be addressed? The widening gap between the richest and poorest Americans. No, I didn’t make that up or pull it from an Obama speech.

The Christian Science Monitor of August 3, 2006, said of the speech, “Paulson’s comments were not merely a blunt acknowledgment of the problem but also a call for solutions – a sign that the income inequality may rise higher on the US policy agenda in the years ahead.” Yes, well it has risen higher on the agenda, hasn’t it? But apparently the agenda calls for using the power of government to make the rich/poor gap even bigger.

If conservatives wonder why we just elected such a liberal president, they might consider this and many other examples of the rich getting richer at the expense of the poor and middle class – examples which I’ll be covering over the coming weeks. It is true that both McCain and Obama voted for this bailout, which was sold as necessary to save the entire world. But I think most people rightly suspect that the redistribution of wealth will more likely be from rich to poor under Obama – rather than the other way around – and many like that idea better than what they have been seeing for years.

I don’t like the idea of taking money from any group of people just to give to another, but on the other hand, if it is going to be in one direction or the other, I think perhaps “spreading the wealth” from rich to poor is the lesser of evils.

One last note: Some may think that it’s extreme to call this “redistribution of wealth from the poor to the rich,” because they claim that the poor don’t pay taxes. But we all pay various taxes, and those workers who do not pay federal income tax pay social security taxes. Social security taxes don’t constitute a retirement plan, given that the money has never set aside, and paying them is not optional. It is as real a tax as any other.

Note: This is part of a series. You can find all of the pages listed and linked to here:

The Redistribution of Wealth to the Wealthy

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Bailout for the Rich