Paulson Cuts Goldman Sachs a Sweetheart Deal

An analysis of the bailout deals Treasury Secretary Henry Paulson has been cutting with taxpayer dollars reveals he's giving the culprits who created the nation's credit crisis what amount to sweetheart deals, including what one outraged critic calls a $5-billion "gift" to Goldman Sachs, the firm Paulson headed before joining the Bush team.

The analysis, performed for the United Steelworkers (USW) by a former investment banker using the widely-accepted Black-Scholes Pricing Model, compared the deal Warren Buffett secured by investing $5 billion to bail out Goldman Sachs with the $10 billion deal Paulson cut to rescue his former firm as part of the $125 billion bailout to nine banks.

Based on the analysis, USW President Leo W. Gerard asserted in a letter to Paulson, "Per dollar invested, Mr. Buffett received at least seven and perhaps up to fourteen times more warrants than Treasury did and his warrants have more favorable terms.

"In addition," Gerard's letter added, "Mr. Buffett's preferred stock has a higher dividend rate and can only be bought away from him at a premium, while Treasury's investment of taxpayers' money pays a lower dividend and can be repurchased at par."

Thus, the analysis concludes that the $10-billion bailout Treasury cut for Goldman Sachs with taxpayers' money is only half as good as the one Goldman gave Buffett - effectively a $5 billion "gift from the taxpayers of the United States to the shareholders of Goldman Sachs" in Gerard's words.

Worse yet, the rest of the $125 billion Paulson funneled to eight other banks was based on the same subpar terms. "Applied to the deals you made at the other eight institutions," Gerard's letter charged, "you paid $125 billion for securities for which a disinterested party would have paid $62.5 billion."

Bottom line, the nation's taxpayers will be shortchanged a staggering $350 billion compared to a private investor like Buffett, if the same model is used in doling out the rest of the authorized $700 billion.

Perhaps these revelations, shocking as they are, should not be surprising, for as Kevin Phillips pointed on this site Tuesday, back in 2006 Business Week characterized Paulson as "Mr. Risk" for "placing big bets on all sorts of exotic derivatives and other securities" in his role as Goldman Sachs' CEO.

With Mr. Risk now "investing" our tax dollars, next Tuesday couldn't come soon enough - let alone January.