By Richard W. Behan
The American economy needs help, but there are other, far more equitable ways to accomplish it.
Not since the Bush administration's lies about Iraq's "weapons of mass destruction" have the American people been so despicably misled.
The Bush administration's proposal to buy, with taxpayers' money, $700 billion of toxic liabilities from the corporate financial titans of Wall Street is a fraud. It is by no means necessary, as Treasury Secretary Henry Paulson claims in the agency's Fact Sheet, "to promote market stability, and help protect American families and the U.S. economy."
It is necessary only to assure the financial survival of Wall Street banks and brokerages, the administration's most loyal supporters and its greatest political contributors -- and in large measure the cause of the financial meltdown the country is facing.
These financial corporations lobbied ferociously to be free of government regulation. Had they not succeeded, they could not have done what they did next: They created and leveraged trillions of dollars of complex "derivatives" -- mortgage-backed securities, collateralized debt obligations and credit default swaps -- all riding on an unprecedented real estate bubble stimulated by their frenzy of creative finance. When the bubble burst, as bubbles do, many of these financial titans faced bankruptcy, their obligations far exceeding their assets.
The $700 billion of taxpayers' money, in the plan suggested by Paulson, will buy enough of the toxic obligations to allow the companies to avoid bankruptcy. Not coincidentally, a major beneficiary of the scheme will be the investment bank Goldman Sachs. Paulson resigned as CEO of Goldman Sachs to become the Treasury secretary in 2006, having amassed a personal net worth of $700 million during his 32-year tenure at the bank (on average, $21.9 million per year).
We need to "remove the distressed assets from the financial system," Paulson suggests. Relieved of the burden, the great Wall Street banks can then regain, presumably, its folksy function: assuring that "money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs."
For the good of the American economy, Paulson is correct that credit needs to flow and the distressed assets need to be removed. He is not correct that credit needs to flow from Goldman Sachs and other Wall Street financial houses. And the distressed assets do not have to be assumed by the taxpayers.
There are other, far more equitable and justified ways to accomplish both.
The distressed assets -- that is, the losses -- can and should be absorbed by the executives, directors and stockholders of the corporate banks and other institutions that propagated the financial firestorm. They can and should, as the dictates of the free market insist, stand accountable for their actions and accept bankruptcy. It is not the responsibility of the American taxpayers to shield them.
Paulson wants to rescue Wall Street so Wall Street, he assures us, can get back to lending. That is certain to save Paulson's former firm and the others, but it is by no means certain that credit will then flow to "home loans, school loans and investments that create jobs." The Wall Street firms are far more likely to revive their lucrative trade in complex and esoteric financial "products."
Seven hundred billion dollars is a lot of money. It is more than we've spent so far on the administration's fraudulent "war on terror" (See "The Mega-Lie Called the 'War on Terror': A Masterpiece of Propaganda".) Is it not better public policy to channel the money to "households and businesses" in some other, more direct, more effective and far more reliable way?
There are hundreds, if not thousands, of Main Street banks and thrift institutions that played no part in the real estate securitization/derivatives game. Certainly the $700 billion could be made available to them instead, at low but positive interest. Or, special publicly held banks could be set up in statute and capitalized with the $700 billion.
The crisis is real, but there are ways to serve the nation's interests at large and even to earn a modest return on its assets. We do not need to subsidize the failure of Wall Street and hope thereafter for better days.The welfare of the Wall Street financiers should not be the focus of public policy, and this clever attempt by the Bush administration is a perversion of decent governance. We should not be stampeded into the greatest corporate theft of public assets, arguably, in the nation's history. Instead, to paraphrase one of our presidential campaigns, we need to put our country first and stop Paulson dead in his tracks.
If Wall Street gets away with this, it will represent an historic swindle of the American public.
By William Greider, TheNation.com
Financial-market wise guys, who had been seized with fear, are suddenly drunk with hope. They are rallying explosively because they think they have successfully stampeded Washington into accepting the Wall Street Journal solution to the crisis: Dump it all on the taxpayers. That is the meaning of the massive bailout Treasury Secretary Henry Paulson has shopped around Congress. It would relieve the major banks and investment firms of their mountainous rotten assets and make the public swallow their losses -- many hundreds of billions, maybe much more. What's not to like if you are a financial titan threatened with extinction?
If Wall Street gets away with this, it will represent an historic swindle of the American public -- all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called "responsible opinion." If this deal succeeds, I predict it will become a transforming event in American politics -- exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice.
Christopher Whalen of Institutional Risk Analytics, a brave conservative critic, put it plainly: "The joyous reception from Congressional Democrats to Paulson's latest massive bailout proposal smells an awful lot like yet another corporatist lovefest between Washington's one-party government and the Sell Side investment banks."
A kindred critic, Josh Rosner of Graham Fisher in New York, defined the sponsors of this stampede to action: "Let us be clear, it is not citizen groups, private investors, equity investors or institutional investors broadly who are calling for this government purchase fund. It is almost exclusively being lobbied for by precisely those institutions that believed they were 'smarter than the rest of us,' institutions who need to get those assets off their balance sheet at an inflated value lest they be at risk of large losses or worse."
Let me be clear. The scandal is not that government is acting. The scandal is that government is not acting forcefully enough -- using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets. Stop the music, so to speak, instead of allowing individual financiers and traders to take opportunistic moves to save themselves at the expense of the system. The step-by-step rescues that the Federal Reserve and Treasury have executed to date have failed utterly to reverse the flight of investors and banks worldwide from lending or buying in doubtful times. There is no obvious reason to assume this bailout proposal will change their minds, though it will certainly feel good to the financial houses that get to dump their bad paper on the government.
A serious intervention in which Washington takes charge would, first, require a new central authority to supervise the financial institutions and compel them to support the government's actions to stabilize the system. Government can apply killer leverage to the financial players: Accept our objectives and follow our instructions or you are left on your own -- cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government's orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed.
Only with these conditions, and some others, should the federal government be willing to take ownership -- temporarily -- of the rotten financial assets that are dragging down funds, banks and brokerages. Paulson and the Federal Reserve are trying to replay the bailout approach used in the 1980s for the savings and loan crisis, but this situation is utterly different. The failed S&Ls held real assets -- property, houses, shopping centers -- that could be readily resold by the Resolution Trust Corporation at bargain prices. This crisis involves ethereal financial instruments of unknowable value -- not just the notorious mortgage securities but various derivative contracts and other esoteric deals that may be virtually worthless.
Despite what the pols in Washington think, the RTC bailout was also a Wall Street scandal. Many of the financial firms that had financed the S&L industry's reckless lending got to buy back the same properties for pennies from the RTC -- profiting on the upside, then again on the downside. Guess who picked up the tab? I suspect Wall Street is envisioning a similar bonanza -- the chance to harvest new profit from their own fraud and criminal irresponsibility.
If government acts responsibly, it will impose some other conditions on any broad rescue for the bankers. First, take due bills from any financial firms that get to hand off their spoiled assets, that is, a hard contract that repays government from any future profits once the crisis is over. Second, when the politicians get around to reforming financial regulations and dismantling the gimmicks and "too big to fail" institutions, Wall Street firms must be prohibited from exercising their usual manipulations of the political system. Call off their lobbyists, bar them from the bribery disguised as campaign contributions. Any contact or conversations between the assisted bankers and financial houses with government agencies or elected politicians must be promptly reported to the public, just as regulated industries are required to do when they call on government regulars.
More important, if the taxpayers are compelled to refinance the villains in this drama, then Americans at large are entitled to equivalent treatment in their crisis. That means the suspension of home foreclosures and personal bankruptcies for debt-soaked families during the duration of this crisis. The debtors will not escape injury and loss -- their situation is too dire -- but they deserve equal protection from government, the chance to work out things gradually over some years on reasonable terms.
The government, meanwhile, may have to create another emergency agency, something like the New Deal, that lends directly to the real economy -- businesses, solvent banks, buyers and sellers in consumer markets. We don't know how much damage has been done to economic growth or how long the cold spell will last, but I don't trust the bankers in the meantime to provide investment capital and credit. If necessary, Washington has to fill that role, too.
Finally, the crisis is global, obviously, and requires concerted global action. Robert A. Johnson, a veteran of global finance now working with the Campaign for America's Future, suggests that our global trading partners may recognize the need for self-interested cooperation and can negotiate temporary -- maybe permanent -- reforms to balance the trading system and keep it functioning, while leading nations work to put the global financial system back in business.
The agenda is staggering. The United States is ill equipped to deal with it smartly, not to mention wisely. We have a brain-dead lame duck in the White House. The two presidential candidates are trapped by events, trying to say something relevant without getting blamed for the disaster. The people should make themselves heard in Washington, even if only to share their outrage.
John McCain's critical of the bailout of AIG. But it turns out the insurance giant is one of the largest donors to his pet think tank.
John McCain is making a big show of criticizing the government "bailout" of insurance giant AIG. But it turns out that AIG, which received $85 billion in US tax dollars earlier this week, is one of the largest donors to McCain's pet think tank, the comically named "Reform Institute," which he co-founded in 2001 "in direct response to the millions of Americans who, during the 2000 presidential campaign, expressed profound disillusionment with corrupt fundraising activities."
Apparently, AIG was so troubled over the issue of corrupt fundraising activities that they loaded in as one of the top VIP donors in McCain's nonprofit think-tank, whose website lists AIG in the "over $50,000" donor category -- although exactly how much over that $50,000 is still unclear. Nor is it clear why AIG had any business donating so much money to a think tank whose work in no way overlapped with the insurance company's -- unless, of course, that money was just meant to gain access to McCain.
The "Reform Institute" has taken a lot of heat as a front organization designed to funnel money to McCain's political career. As Ari Berman wrote, McCain's campaign co-chair, Rick Davis, served as the president of the nonprofit Reform Institute for three years, earning $395,000 in salary. Davis also headquartered his lobbying firm, Davis Manafort, in the Reform Institute's offices at that time. He is just one of several McCain people who passed through the Reform Institute's revolving door while McCain prepared for the 2008 campaign. McCain formally stepped down from his own institute in 2005, but he remains deeply linked to the Reform Institute to this day.
So when McCain declared this week that "The government was forced to commit $85 billion" to his mega-donor AIG, the question becomes, "What forced you to do it?" The American taxpayers never got a red cent in donations from AIG -- but now, they're being forced by people like McCain, whose career profited from AIG donations, to buy his backer's massively indebted trash heap in what can only be described as the worst business deal in this nation's history, or the worst example of crony nationalization. AIG isn't just funding McCain's policy think tank, it's also quite literally thinking for the presidential hopeful. Martin Feldstein, who serves on the board of AIG, is one of McCain's top economic advisers. Earlier this month, Feldstein gushed in the Wall Street Journal over McCain's plans to cut taxes even further, and to shift healthcare costs from employers to employees in a "tax credit" scheme that many believe will solely benefit insurance companies, at the expense of workers. Since AIG is -- or was -- the world's largest insurance company, it stood to gain from McCain's policies.
The one thing Feldstein does understand is insurance. Feldstein and his cronies at AIG essentially bought themselves an insurance policy -- you might call this type of insurance "in case our insanely corrupt, hyper-leveraged operation should ever go bankrupt" insurance -- with donations like the "over $50,000" given to McCain's Reform Institute. That insurance paid off handsomely and like clockwork with the government's $85 billion nationalization. It's exactly the kind of insurance policy deal that every American has dreamed about, but never known. And never will know.
Now that Feldstein and McCain have successfully worked the American public in the AIG scheme, they have a plan for the entire American economy. They're calling it "reform." And the first thing they want to get their hands on is your health insurance, or what's left of it. So if you've been asking yourself lately, "Can it get any worse?" the answer was put best in a horrible '70s classic rock song by Bachman-Turner Overdrive: "B-b-b-baby you just ain't seen nuthin' yet!"
Americans should attempt to get Universal Health Care for all and rid themselves of Insurance Companies controlling Health Care. I do believe it would benefit all Americans.
Insurance Companies go bankrupt. They really can't be trusted.