Entries in "Why the Wall Street bail out plan is bad"

September 30, 2008

Why the Wall Street bail out plan is bad-6: The credit ratings agencies scandal

In voting down the bailout proposal 228-205 yesterday, the House of Representatives struck a small blow for democracy. They refused to be steamrolled by Wall Street and its agents in Congress and the administration.

As usual, in the run up to the vote, the administration met in secret with the Congressional leadership, worked out some vague plan, gave the House members just a few hours to see the bill, and then ordered the House members to vote for it or else, saying "Trust us, we know what is best. If you immediately don't do what we say, the world will come to an end."

Why exactly is this so urgent? Why cannot a solution wait for weeks or even months? This crisis was not created in a day, why must it be 'solved' in a day? On the rare occasions when the question is posed of why this urgency is necessary, the response is incoherent, vaguely referring to the need for 'confidence' and 'calming the markets'.

This attempt by an elite to ram through a policy with major consequences without extended debate is an insult to the democratic process and is symptomatic of an oligarchic system, not a representative democracy.

There should be public hearings when such a major issue is involved. There should be open testimony from all relevant parties as to what exactly the problem is and the pros and cons of the various options. Everything should be out in the open and completely transparent.

To their credit, enough members resisted the president, Treasury Secretary, Fed Chair, and the leadership of both parties (such as that blustering bully Barney Frank) and said resoundingly "No!" Of course they will now come under intense pressure and blamed for losses on Wall Street. But the goal of the government should be the general welfare of people and the broader economy, not to protect stock prices in the short term.

The members of Congress who voted no should resist pressure and not capitulate until they get a deal that is genuinely in the interests of ordinary people and not Wall Street. The only way we are going to get any serious and meaningful reform of the deeply flawed financial system is in exchange for the bailout money. Once you give Paulson the ransom he is demanding, it's all over. You can forget about getting any long-term solutions.

And now we return to the regularly scheduled post . . .

In my post on the current financial mess, I pointed out the key, and scandalous, role played by the credit ratings agencies like Moody's and Standard and Poor which gave the highest ratings of AAA to these mortgage-based securities although they did not deserve them. This was important since major public funds (like pensions) that deal with the savings of many lower and middle-income people are required to only invest in the safest securities. So getting the AAA rating was essential if this vast pool of money was to be tapped.

An article in Bloomberg News reveals how the top executive at these ratings companies pressured their analysts to give these highest ratings without the normal scrutiny they should receive, because "Without those AAA ratings, the gold standard for debt, banks, insurance companies and pension funds wouldn't have bought the products."

Flawed AAA ratings on mortgage-backed securities that turned to junk now lie at the root of the world financial system's biggest crisis since the Great Depression, according to Raiter and more than 50 former ratings professionals, investment bankers, academics and consultants.

"I view the ratings agencies as one of the key culprits," says Joseph Stiglitz, 65, the Nobel laureate economist at Columbia University in New York. "They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies."

What these ratings agencies did was to take short cuts and depend on computer-driven mathematical models and their competitors' analyses rather than do their own field research. In fact, people were not interested in even seeing the properties on which their ratings were based.

In late 2005, First Pacific's Mann says, he invited East Coast investors to take a subprime mortgage tour up California's main interstate artery, to see the problem for themselves. The I-5 runs from San Diego to Sacramento, passing through Orange County, Bakersfield and Stockton.

"Nobody wanted to do it," he says. "Unfortunately, most of the models were constructed by people who hadn't seen most of America and certainly weren't familiar with the areas they were rating."

The article describes how the analysts were pressured.

"We must produce a credit estimate," Gugliada, a member of the structured-finance rating group's executive committee, wrote to Raiter in a March 2001 e-mail. "It is your responsibility to provide those credit estimates, and your responsibility to devise a method for doing so. Please provide the credit estimates requested!" he wrote, signing off with his nickname "Guido."

"He was asking me to just guess, put anything down," says Raiter, interviewed at his home in rural Virginia, 69 miles (111 kilometers) west of Washington. "I'm surprised that somebody didn't say, 'Richard, don't ever put this crap in writing.'"

Gugliada, like Raiter, now says that he views as flawed many of the ratings S&P and Moody's assigned.

"There was the self-delusion, which hit not just rating agencies but everybody, in the fact that the mortgage market had never, ever, had any problems, and nobody thought it ever would," Gugliada says.

But then came the reckoning.

Driven by competition for fees and market share, the New York-based companies stamped out top ratings on debt pools that included $3.2 trillion of loans to homebuyers with bad credit and undocumented incomes between 2002 and 2007. As subprime borrowers defaulted, the companies have downgraded more than three-quarters of the structured investment pools known as collateralized debt obligations issued in the last two years and rated AAA.
. . .
Bank writedowns and losses on the investments totaling $523.3 billion led to the collapse or disappearance of Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. and compelled the Bush administration to propose buying $700 billion of bad debt from distressed financial institutions.

At bottom, the problem was the incestuous relationship between the companies seeking the ratings and the ratings agencies that bestowed them.

Through it all, the rating companies had a basic conflict: They were paid by the businesses whose products they rated. Moody's told the Paris-based Committee of European Securities Regulators in November 2007 -- in the 49th footnote of a 35-page response to its questionnaire on structured-finance -- that it allowed managers who supervised analysts to "provide expert input" on fees "in a limited range of circumstances."

SEC Chief Cox said in June that the rating companies engaged in the "lucrative business of consulting with issuers on exactly how to go about getting" top ratings.

This what happens when you take away oversight and mindlessly extol the virtues of the 'free market' and blandly assume that 'the market will correct itself.' Greed runs rampant.

POST SCRIPT: McCain and the Keating Five scandal

Given the strong similarity of the current Wall Street bailout scandal to the earlier savings and loan scandal of the 1980s, you would have thought that the media would have paid more attention to that story, especially since John McCain was one of the five US senators fingered as being influenced by the notorious Charles Keating, who went to jail for his role. Keating was a benefactor of McCain and a close friend of Cindy McCain.

For those not familiar with that earlier episode here is the story of McCain and Keating told in less than two minutes.

September 29, 2008

Why the Wall Street bail out plan is bad-5: Rewarding greed

In this next-to-last post in this series (but probably not on this topic), I want to look at how senior Wall Street executives saw their profession as some sort of game in which the goal was to extract more personal benefit than the next executive, leading to a leap-frogging of various forms of compensation packages that would leave ordinary people gasping.

These executives were taking risks with other people's money that left many ordinary people ruined while they themselves were benefiting:

The chairman of Lehman Brothers, Richard Fuld, still has his mansion in Greenwich, CT, his oceanfront estate on Jupiter Island in FL, and his Park Avenue co-op in Manhattan.

Many at Lehman blame Fuld for dallying while his investment bank went bust, taking risks with other people's money while he cleared over $40 million in salary and stock in the last year alone.
. . .
Fuld isn't the only top executive who remains well-off despite his firm's collapse. Former Bear Stearns CEO Alan Schwartz collected more than $38 million in salary and bonuses in the last three years for which figures are available.

These people live in a different world from you and me. The report describes the 'hardships' being undergone by the Wall Street executives as a result of the current financial situation.

"A lot of those people will have to sell their homes, they're going to cut back on the private jets and the vacations. They may even have to take their kids out of private school," said Frank. "It's a total reworking of their lifestyle."

He added that it's going to be no easy task.

"It's going to be very hard psychologically for these people," Frank said. "I talked to one guy who had to give up his private jet recently. And he said of all the trials in his life, giving that up was the hardest thing he's ever done."

And now we are supposed to bail out such people when their actions have resulted in other people losing their jobs or their only (modest) homes?

Some lawmakers are furious at what they are being asked to approve by the Bush administration, the Federal Reserve, and their own leadership. One anonymous Congressperson sent an email in which, in addition to demanding major reforms in the financial sector in return for the bailout, he/she also wants them to be publicly humiliated for what they have done to the country, and demanding that Congress should not be bought off with some trivial considerations.

I don't want to trade a $700 billion dollar giveaway to the most unsympathetic human beings on the planet for a few [expletive] bridges. I want reforms of the industry, and I want it to be as punitive as possible.
. . .
I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me.

I think this congressperson is merely channeling the deep reservoir of anger in the general public at what they rightly see as little more than a fraud perpetrated on them.

When poor people get into trouble because they make stupid or greedy decisions, they are lectured to by the rich on the need to be prudent and live within their means and to suffer the consequences of their actions. When the very rich do the same thing, the government rides to their rescue. 'Throwing money at the problem' (a favorite phrase used by the rich to denigrate any attempt to fund initiatives that help ordinary people, like education or health care) becomes the desirable mode of action when the recipients are Wall Street or the defense industries.

Meanwhile on the House floor Rep. Marcy Kaptur of Ohio tells it like it is:

As I have said repeatedly, the leadership of both parties are already bought and sold by Wall Street like any of the other commodities they trade in. They are simply looking for a face-saving way to capitulate and give away the store and a grand 'bipartisan compromise' is what they seek, so that one party cannot take advantage of public anger by accusing the other of selling out to Wall Street. It is only the 'minor' members of Congress who are not beholden to these interests that can stage a revolt.

I think that most people, even if they are not sure exactly what is going on, are suspicious that this is a sweet deal for insiders by insiders. Apparently opposition to the bailout is running at between 10-to-1 to 100-to-1, if measured by the calls and emails received by members of Congress. But just like in the run up to the Iraq war, regular Congresspeople can be frightened into thinking that they will be blamed if they oppose their party leaders and the group of 'wise experts' who solemnly tell them that they know what the best of action is.

As former Labor Secretary Robert Reich says:

Put yourself in the shoes of a member of Congress, including our two presidential candidates. The Treasury Secretary and Fed Chair have told you this is necessary to save the economy. If you don't agree, you risk a meltdown of the entire global financial system. Your own constituents' savings could go down with it. An election is six weeks away. Besides, in the last two days of trading, since rumors spread that the Treasury and the Fed were planning something of this sort, stock prices revived.

Now - quick -- what do you do? You have no choice but to say yes.

But you might also set some conditions on Wall Street.

The public doesn't like a blank check. They think this whole bailout idea is nuts. They see fat cats on Wall Street who have raked in zillions for years, now extorting in effect $2,000 to $5,000 from every American family to make up for their own nonfeasance, malfeasance, greed, and just plain stupidity.

Reich lists five conditions, the first of which is that "The government (i.e. taxpayers) gets an equity stake in every Wall Street financial company proportional to the amount of bad debt that company shoves onto the public. So when and if Wall Street shares rise, taxpayers are rewarded for accepting so much risk."

There are alternatives. It has been pointed out that Sweden faced a similar crisis in 1992 but took a very different attitude and solved it with almost no cost to the taxpayers. (Thanks to Norm for the link.)

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

Why should we not get what, say, Warren Buffett or JP Morgan Chase got when they invested in troubled firms like Lehmans or Washington Mutual? Why should the taxpayers not be treated as investors and have the same risk/reward expectations as any other investor? Why should we pay for something for which there is no clearly discernible public good?

It is time for people to get really angry. We should not take the word of sober-voiced people in suits who soothingly tell us that although they were the ones who created this mess and did not even see it coming, we should now unquestioningly trust them to solve the mess by giving them virtually everything they want.

We are being told that it is imperative that we 'calm the markets', as if the trillion-dollar financial sector is a colicky baby in a restaurant. We are being told that we must restore 'confidence in the markets' as if the market is a shy teenager about to go on a first date. Why should we care about confidence? And whose confidence are we talking about?

They are taking us for suckers and we will have only ourselves to blame if we allow them to do so. We, the people, technically own the government but it has been co-opted by the financiers. It is time to take it back from these usurpers.

POST SCRIPT: Imminent threat, anyone?

Jon Stewart reminds how Bush is using the same scare tactics to push the $700 billion giveaway plan that he used to push the Iraq war.

September 26, 2008

Why the Wall Street bail out plan is bad-4

A large number of economists were quick to express their dislike of the Paulson plan and have been vociferous in urging Congress to not be stampeded by the administration but to use this opportunity to put back into place some of the regulations that were dismantled over the last three decades.

Meanwhile on NPR this morning, Allan Meltzer, a former Fed economist and a professor at Carnegie Mellon University says that he does not see that this 'crisis' hurts anyone other than a few major players on Wall Street and that all the scaremongering about a global financial catastrophe if nothing is done are nor warranted.

Meanwhile a group of 150 economists have also weighed in, saying that there is no need for this mad rush and we should think things through carefully before committing ourselves to the Paulson plan or some minor variation of it.

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:

1) Its fairness. . . .

2) Its ambiguity. . . .

3) Its long-term effects. . . .

For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

I am not optimistic that these cautions will be heeded. The administration and Congressional leadership is deep in the pockets of Wall Street and will find some face-saving way to give them everything they want.

Alexander Cockburn walks us through some of the highlights of the bipartisan deregulation that resulted in Wall Street firms playing fast and loose with other people's money for their own benefit. One key person who appears repeatedly in this sordid story is Phil Gramm, the former Senator from Texas who is now economics advisor to John McCain and reportedly his preferred choice to be Treasury Secretary. As US senator from Texas, he pushed through some of the key legislation that resulted in this mess.

In 1999 John McCain’s friend and now his closest economic counselor, then a senator from Texas, was the prime Republican force pushing through the Gramm-Leach-Bliley Act. It repealed the old Glass-Steagall Act, passed in the Great Depression, which prohibited a commercial bank from being in the investment and insurance business. President Bill Clinton cheerfully signed it into law.

A year later Gramm, chairman of the Senate Banking Committee, attached a 262-page amendment to an omnibus appropriations bill, voted on by Congress right before a recess. The amendment received no scrutiny and duly became the Commodity Futures Modernization Act which okayed deregulation of investment banks, exempting most over the counter derivatives, credit derivatives, credit defaults, and swaps from regulatory scrutiny. Thus were born the scams that produced the debacle of Enron, a company on whose board sat Gramm’s wife Wendy. She had served on the Commodity Futures Trading Commission from 1983 to 1993 and devised many of the rules coded into law by her husband in 2000.

Somewhat stained by the Enron debacle Gramm quit the senate in 2002 and began to enjoy the fruits of his own deregulatory efforts. He became a vice chairman of the giant Swiss bank UBS’ new investment arm in the US, lobbying Congress, the Federal Reserve and the Treasury Department about banking and mortgage issues in 2005 and 2006, urging Congress to roll back strong state rules trying to crimp the predatory tactics of the subprime mortgage industry.

Cockburn points out that the enabling of Wall Street shenanigans has always been a bipartisan affair.

But is [Gramm} Exhibit A? No. That honor should surely go to Robert Rubin and to the economic course he set for his boss, the eagerly complicit Bill Clinton. Gramm has been the hireling of the banking industry. Rubin is at the beating heart of Wall Street finance, and he and Lawrence Summers at Clinton’s Treasury, were the guiding forces for financial deregulation.

Obviously the Republicans hoped that the roof wouldn’t fall in on their watch, and the crisis could be deferred to 2008 and then blamed on the Democrats. But their insurance policy was that if the roof did cave, as it has now, the rescue policy would be identical in both cases. That’s why Obama has collected more money than McCain from the big Wall Street houses.

The gang that successfully got out of Dodge in time was the Clinton-Rubin-Summers gang, just before the last bubble -–the stock market bubble -- burst in March of 2001. They knew what was coming.

Rubin is one of Obama's advisors, Gramm is McCain's so whoever becomes president, as usual Wall Street has its friends in high places. They make money from public investments when the going is good and make money directly from the taxpayers when the going is bad. The only way their hands can be taken out of the till is if the public angrily tell their representatives that there should be no bailout until massive reforms and regulations are put into place so that people's money is safeguarded from these rapacious predators.

This episode illustrates better than any civics class exactly who runs the country and for whose benefit.

POST SCRIPT: Jon Stewart on the Paulson plan

September 25, 2008

Why the Wall Street bail out plan is bad-3: More doubts

I have described before how the subprime mortgage debacle lies at the root of this mess. But how did it come about that mortgage lending, once the most conservative and transparent and regulated of banking practices, became the basis of a massive shadow economy in which trillions of dollars flowed around, free from any oversight? And what is the government bailout meant to do?

The foundations of the mess lies with the neoliberal deregulation policies that began under the Carter administration and was enthusiastically followed by every subsequent administration of both parties. The driving idea behind all this loosening was that the banking and investment sector was being shackled by too many regulations and too much oversight. The protective firewalls that had been put up between banks and investment houses following the excesses that led to the Great Depression were targeted. It was argued that if the banks were freed from these onerous restrictions, capitalism would bloom.

Since Wall Street executives have always formed the core advisory group around any government (and currently are deeply enmeshed in the Obama and McCain campaigns) and also have strong ties with the congressional leadership of both parties, it was not hard to persuade the government to loosen the restrictions that had been put into place following the last debacle of the financial sector during the Great Depression of 1929.

The same Wall Street types who put into place the conditions that caused the current mess are now the ones who claim they are the ones who can solve it. They are trying to panic everyone into accepting a plan that will rescue themselves from their own actions by passing the cost on to us.

Since the main problem now is that all these banks and investment firms are being dragged down by having on their books all these mortgage-based securitized investments whose value is doubtful (to the extent that they can even figure out its value), what the rescue plan seeks to do is to use taxpayer money to buy these possibly worthless investments at values far more than they are worth, essentially taking these liabilities off the hands of the banks and putting them in the hands of taxpayers. It is like going to a garage sale and paying original list price for the junk that is being sold.

While this is clearly a good deal for the banks and Wall Street, rescuing them from the consequences of their bad decisions by letting them unload their bad debts and giving them a huge infusion of cash, what is in it for the taxpayer? As far as I can see, very little. We greatly increase the national debt and the interest on that debt (which will eventually have to be paid in the form of higher taxes) while getting ownership of assets whose value is unknown. The only possible bright spot is that these doubtful assets may, over time, rise in value. But that is a big gamble, and I would not be surprised if there are also conditions in the agreement that will take such profits (if they ever materialize) and give it back to the banks. After all, what these people seek is to entirely privatize all profits while having the taxpayers pay for all losses.

Economist Paul Krugman, comparing this plan with the savings and loan bailout of the 1980s, explains clearly why he thinks this is a bad plan and should be rejected. (Incidentally, John McCain was implicated in that earlier influence-peddling scandal, as one of the infamous 'Keating Five'.)

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.
. . .
Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

In fact, as Atrios points out, the plan seeks to give the Treasury extraordinary freedom from any oversight. They have added wording that says: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

In other words, Paulson is telling Congress to just give him the money to do what he wants. The Treasury Secretary, like many of his predecessors, is from Wall Street (he spent three decades at Goldman Sachs) and thus is sympathetic to the plight of this particular group. They are his base.

William Greider, in a must-read article, writes that we are currently witnessing an attempt to pull off one of the biggest swindles of modern times:

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.

He quotes others in support of his thesis that what is being proposed is an insider deal:

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."

Greider points out that the government, if it were truly acting in the interests of the people, has a lot of power to use the crisis to reform the system:

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.

Right now it looks like the Congress is getting ready to cave in to this deal in exchange for only some purely symbolic concessions like limits on executive compensation. The fix seems to be in. Only strong public opposition will prevent this giveaway of public funds to the very people who caused this crisis.

POST SCRIPT: Intelligent Design trial talk

Judge John E. Jones, who presided over the Dover intelligent design trial in 2005, will speak today from 5:00-6:00 pm in Strosacker Auditorium, followed by half and hour for questions.

September 24, 2008

Why the Wall Street bail out plan is bad-2: Manufactured crisis?

I have been getting increasingly suspicious that this so-called financial crisis may be a bogus one to enrich this administration's base of Wall Street cronies before Bush leaves office. While I am not an economist and do not have the inside knowledge that Henry Paulson (Treasury Secretary) and Ben Bernanke (head of the Federal Reserve) have, there is something about this mad rush to pass major legislation that strikes me as very suspicious. It reminds me too much of the way the administration flat-out lied about the danger that Iraq posed in order to get Congressional authorization for the invasion.

People like Paulson and Bernanke lied when they said they had the situation under control earlier when they bailed out Bear Stearns, Fannie Mae, Freddie Mac, and AIG. How do we know that they are not lying again now in order to push a covert agenda? While I accept that the financial sector is in trouble, what I want to know is what evidence has been produced that we need to act immediately. The stock market might go down if no immediate action is taken but that is not sufficient reason because they are betting on a bailout and their potential disappointment is not a reason for throwing more money into their trough.

When one of the senators at yesterday's hearings asked Paulson why he needed $700 billion all at once and why he could not initially accept a 'smaller' amount like $150 billion now and the rest staggered over time, he replied that the markets needed the larger amount to show 'confidence'. What kind of answer is that? Why should we care if the market has 'confidence'? What he really means is that he wants stock prices to go up by giving away taxpayer money. We need to go back to basics where stock prices reflect the real value of companies.

How do we know there is really a crisis except for the fact that we are being told so repeatedly in screaming headlines? What evidence do we have that the credit markets are really freezing up? Are industries not functioning because they can't get credit? Are ordinary people not being able to buy a car because they cannot get a car loan? Paulson and Bernanke keep saying that if they don't get all the money right now, this minute with absolutely no conditions, there will be a financial Armageddon and ordinary people will suffer. But the evidence produced so far is that only some banks and Wall Street financial firms will suffer.

I am not the only one who is deeply skeptical. Pulitzer Prize winning reporter on tax policy David Cay Johnson (author of the book Perfectly Legal that described how tax policies have been systematically used to siphon money away from the poor and middle class to the rich) sounds similar cautions about being pressured by a phony crisis:

In covering the proposed $700 billion bailout of Wall Street don't repeat the failed lapdog practices that so damaged our reputations in the rush to war in Iraq and the adoption of the Patriot Act. Don't assume that Congress must act instantly, as so many news stories state as if it was an immutable fact. Don't assume there is a case just because officials say there is.

The coverage of the Paulson plan focuses on the edges, on the details. The focus should be on the premise. And be skeptical of what gullible Congressional leaders, most of them up before the voters in a few weeks, say after being given a closed-door meeting on supposed horrors.

The Administration has scared the markets and some key legislative leaders, but it has not laid out a coherent, specific and compelling need for this enormous proposal, which is the equivalent of a one-time 55 percent income tax surcharge. (Instead the money will be borrowed, so ask from whom and how this much can be raised so quickly if the credit markets are nearly seized up with fear.)

Ask this question -- are the credit markets really about to seize up?

If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.

If the problem is toxic mortgages then how come they are still being offered all over the Internet? On the main page AOL generates for me there is an ad for a 1.9% loan (which means you pay that interest rate and the rest of the interest is added to your balance due.) Why oh why or why would taxpayers be bailing out banks that are continuing to sell these toxic loans?

Financial reporter and New York Times columnist Gretchen Morgenson in an interview on Fresh Air tells host Terry Gross that she too does not trust these people to tell the truth now given that they have lied to us before. In a column, she argues that the fix is in to benefit Wall Street, because we, the people, have no lobbyists working on our behalf. In theory our congresspeople should be our lobbyists but given the corrupt, money-driven political system we have, even the suggestion that Congress will look out for us is laughable.

Morgenson provided some information that was new to me. She said that AIG had written $441 billion in credit insurance on mortgage-related securities that had gone sour, three –quarters of it to European banks. Furthermore, the total value of the credit default swap market (the quasi-insurance that propped up the value of the subprime mortgages) is $62 trillion. And all this was unregulated. And now we are supposed to trust Paulson, Benanke, Robert Rubin and all the other people in suits who created this unregulated monster to take us out of this mess.

When reporters for mainstream media like Morgenson say flat out that they suspect the government is lying to the people in order to reward the financial giants and their lobbyists who pour vast amounts of money into the system, it indicates that a sea change is occurring.

Chris Bowers manages to flesh out my vague fears into some very pertinent and concrete questions.

The more I think about this deal, the more it starts to look like a fraud on the American taxpayer. It is time to put the brakes on the Paulson-Bernanke-Bush juggernaut and start looking very, very carefully at how to take the gamblers out of the financial markets.

What we should watch out for is when Paulson and Bernanke meet with congressional leaders in a secret session and then they all come out and say that due to facts they cannot reveal to us, they have to do what Paulson wants (with some window dressing added) to avoid a terrible outcome. That is exactly what happened with the Iraq war and is a sure sign that the fix is in and that the reasons for taking the action will not stand scrutiny.

We should not accept this under any circumstances and should demand total transparency. This whole mess was caused by opaque trillion dollar financial transactions hidden from the world. It is not going to be solved by more secrecy.

POST SCRIPT: Silver lining?

The only silver lining to be found in this mess is that it may make it less likely that Bush will launch an attack on Iran before he leaves office. I had been fearful that the neoconservative cabal that have such influence over the Bush-Cheney regime might persuade them that carrying out such an insane plan was a good idea. Given the preoccupation with the financial crisis and its cost, such an action now seems unlikely.

Meanwhile, you can listen to (and read the transcript of) the interview NPR had with Iranian President Ahmadinejad. He repeatedly challenged the bland assumption that the US spoke for the entire world, that the things that bothered the US also bothered the world. His questioning of the assumptions so rattled the interviewer (US journalists rarely examine the assumptions of the government-corporate elite in the US that frames the discussions) that the latter started an idiotic line of questioning as to whether the Iranian leader watched western TV and whether he listened to the Beatles and Led Zeppelin.

The interviewer seemed to assume that Ahmedinejad is some kind of ignorant isolationist. The fact that he is a university academic who is well aware of what is going on in the world and capable of matching wits with western journalists seemed to have taken the interviewer by surprise.

September 23, 2008

Why the Wall Street bail out plan is bad-1

I wrote last Friday of the reasons behind the current financial mess. Over the weekend, as everyone is aware by now, the US government issued a plan to put up a huge amount of money (initially about $700 billion but likely to grow to well over a trillion) to bail Wall Street out of the financial difficulties caused by its own greed and recklessness.

The public and the Congress are being stampeded with 'the sky is falling' rhetoric into giving the Treasury Secretary Henry Paulson a blank check, with no oversight and almost no reforms, to dole out money to his cronies in the financial sector so that they can continue the reckless practices that have led to the present situation. We should not forget that Paulson spent almost his entire career (over three decades) at Goldman Sachs, one of the investment banks at the center of the current mess.

Paulson says he wants a 'quick and clean' plan approved by the Congress. To translate, 'quick' means he wants Congress to approve the plan immediately without looking too closely at it, and 'clean' means he does not want them to demand accountability and reforms in return for shelling out taxpayer money to the very firms and executives who caused this crisis.

The bankers themselves want taxpayer money with no restrictions at all and even want to prevent the courts from having any jurisdiction in the matter, which strikes me as an open invitation to swindle.

Paulson, Ben Bernanke (head of the Federal Reserve Board), and George W. Bush are acting as if there are only two alternatives: giving Paulson this blank check or a collapse of the global financial markets. This is false. Even within this short time, economists have been able to come up with possible alternatives, as has senator Christopher Dodd. I am not endorsing these alternative proposals by any means. I don't think they go far enough in providing regulatory oversight. But the point is that alternatives exist, more proposals can be created, and all should be discussed when such a large amount of money is involved.

The Paulson plan is a bad plan and should be opposed. Paulson, Bernanke, and Bush are saying that the necessary reforms and oversight can be added later after the crisis has passed, but only a sucker would accept that deal. Once the administration and the Wall Street firms get their hands on the money, you can be sure that they will fight any reforms tooth and nail. It is only now, when they are over a barrel and desperately seeking relief, that Congress has any leverage at all to get the needed reforms enacted.

We need to be wary of false compromises. After all, the leadership of both parties and the Bush administration are almost all bought and sold by Wall Street interests and they have every intention of capitulating to the demands of those interests. They will look for a way to do so while seeming to represent the interests of ordinary people. So we will hear loud grandstanding talk of needing to cap executive salaries (which those executives can easily circumvent) and some crumbs thrown to those whose homes have been foreclosed, while ignoring the fact that the real need is re-regulation of the financial markets, to put back in place those features that prevent executives at these banks and other financial institutions from acting like high rolling gamblers using other people's money. All this talk of a possible financial apocalypse is meant to steamroll those few people who oppose what is likely to be a blatant rip-off of taxpayers.

Major legislation that is rushed under panic conditions (whether real or simulated) almost always leads to bad results because the authors of the legislation use the rush to stealthily advance their covert agendas. For an example, we need go no further than the abominable USA PATRIOT Act that was rushed through in the wake of the events of September 11, 2001 under conditions of fake panic and which has resulted in the massive violations of citizen rights and protections that were once taken for granted. Or the Iraq war authorization act that was stampeded through Congress because of fake panic created that Iraq was building a nuclear bomb. We know how well those turned out. The plan for the federal bailout of Wall Street has all the signs of being a repetition of those two events.

To get a scale of the amounts currently involved, see this exchange between the hosts of the PRI program Marketplace. The 'credit default swap' market referred to is a rough measure of the amount of money that was swirling around in the subprime mortgage dealings.

BOB MOON: OK, I'm about to unload some numbers on you here, so I'll speak slowly so you can follow this.

The value of the entire U.S. Treasuries market: $4.5 trillion.

The value of the entire mortgage market: $7 trillion.

The size of the U.S. stock market: $22 trillion.

OK, you ready?

The size of the credit default swap market last year: $45 trillion.

KAI RYSSDAL: That's a lot of money, Bob.

Yes, sirree, Bob, that is a lot of money. And all of it in a shadow economy, without any supervision by the government.

If there was any doubt as to who runs the country and for whose benefit, this episode should remove them, because both the Democratic and Republican parties colluded to create the conditions which gave rise to the current crisis and now both are colluding to save their rich supporters from the consequences of their actions.

What we clearly have now is government of the rich, by the rich, and for the rich.

POST SCRIPT: Religious nuts

Recently John McCain and Barack Obama were interviewed separately by Rick Warren, pastor of the Saddleback evangelical megachurch. Jackie Broyles and Dunlap from Red State Update engaged outside the forum with protestors from the Westboro Baptist Church, a group that is so viciously and irrationally antigay that I sometimes wonder if they are actually a bunch of performance artists, cleverly playing a prank on all of us.

I have written before that humor and ridicule is the best way to deal with such people, and Jackie and Dunlap seem to share that view.