Tuesday, November 18, 2008

Is Washington Stealing the Bailout for Corporate Buddies?

I have made the point repeatedly that the Bush Administration
took advantage of al Qua'ida's 9/11 attack to pursue militarist foreign policy
goals they already had but did not know how to persuade the American people to
support. Are we now seeing a repeat with the financial crisis?

According to investigative reporter Naomi Klein on Democracy Now:

If we think about the way the Bush administration handled the occupation of Iraq, the working assumption was that everything that could be privatized, everything that could be outsourced, would be outsourced. And it has been very much a corporate war, as you well know. But at the same time, the handing out of the contracts in the early days was done very, very quickly, because, of course, there was this manufactured emergency that we all know was based on lies, in retrospect. But that was used, that state of emergency was used to justify no-bid contracts, to justify the fact that there was very little oversight of the contractors.

She claims that the Bush Administration's behavior in response to the financial crisis represents a huge theft of taxpayer funds to reward the rich and borders on or actually is criminal deserves very careful analysis. Her key points:

First of all, the equity deals that were negotiated with the largest banks and also some smaller banks, representing $250 billion worth of the bailout money, this is the deal to inject equity into the banks in—to inject capital into the banks in exchange for equity. The idea was to address the so-called credit crunch to get banks lending again. The legislation that enabled this was quite explicit that it had to encourage lending. Barney Frank, who was one of the architects of that legislation, has said that it violates the act if the money is not going to that purpose and is instead going to bonuses, is instead going to dividends, going to salaries, going to mergers. He said that violates the acts, i.e. it’s illegal. But what we know is that it’s going precisely to those purposes. It is going to bonuses. It is going to shareholders. And it is not going to lending. The banks have been quite explicit about this. Citibank has talked about using the money to buy other banks.
Then there’s other aspects of this that are borderline illegal. We found out that in the midst of the crisis, the Bush—the Treasury Department pushed through a tax windfall for the banks, a piece of legislation that allows the banks to save a huge amount of money when they merge with each other. And the estimate is that this represents a loss of $140 billion worth of tax revenue for the US government. Many tax attorneys who were interviewed by the Washington Post said that they felt that the way in which the Treasury Department went about this by unilaterally changing the tax code was illegal, that this had to be—this had to include Congress. Congress only found out about it after the fact.
There’s another piece of this puzzle that is also borderline illegal, which is that in addition to the $700 billion that we are discussing, the $700 billion bailout, there’s another $2 trillion that’s been handed out by the Federal Reserve in emergency loans to financial institutions, to banks, that actually we don’t really know who they’re handing the money out to, because, apparently, it’s a secret. They could be handing it out to a range of other corporations—I think they are—but they’re saying that they won’t disclose who has received these taxpayer loans, because it could cause a run on the banks, it could cause the market to lose confidence in the institutions that have taken these loans. Once again, that represents an additional $2 trillion.
The other thing that the Fed won’t disclose is what they have accepted as collateral in exchange for these loans. This is a really key point, because, of course, at the heart of the financial crisis is—are these so- called distressed assets. The value of these assets is enormously controversial. They may be worth very little. So if the Fed has accepted distressed assets as collateral in exchange for these loans, there’s a very good chance the taxpayers aren’t going to be getting this money back. So Bloomberg News has launched a lawsuit in federal court to find out who has received the loans and what has been accepted as collateral, because they believe that this lack of transparency is illegal. So that’s why we’re calling this the “trillion-dollar crime scene” or the “multi-trillion-dollar crime scene.” And they’re really challenging lawmakers to call them out, the Treasury is.
And I think, you know, Amy, the last time I was on Democracy Now!, we were talking about Henry Paulson’s original three-page proposal, the $700 trillion stickup, where he basically said, “Give me $700 trillion. Don’t ask any questions. I can never be challenged by any arm of government or any court of law.” Now, that aspect of the bailout was supposedly dealt with, and we were all reassured that there was going to be transparency, accountability, legality. But now we’re finding out that, in fact, Henry Paulson has achieved his original goal by stealth, because there is no accountability, and lawmakers are very hesitant to challenge this, because they’re afraid of causing a run on the banks, of causing more market instability. So, essentially, what the Bush administration has done is said, you know, “We dare you to challenge us and be responsible for the great depression.” And the Democrats, not known for their firm spines, have so far failed to challenge them in anything other than rhetoric.

Are Klein's concerns overstated or is the lame duck gilding the feathers of its friends?

Congressional leaders from both parties have expressed written concern about misuse of bailout funds to line the pockets of top executives of financial firms.

Barney Frank, Chairman of the House Financial Service Committee, said, “I am deeply disappointed that a number of financial institutions are distorting the legislation that Congress passed at the president’s request to respond to the credit crisis by making funds available for increased lending." He continued by asserting clearly that “Any use of these funds for any purpose other than lending — for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. — is a violation of the terms of the act.”

It is also noteworthy that the huge original $85 billion bailout of AIG (the company whose executives were exposed by Congress as partying with bailout funds) has already proven such a disastrous failure that it has now been expanded to $150 billion. Now the U.S. auto makers are asking for handouts - even though as recently as September they received a $25 billion loan to retool.

How much of what is going on is legally criminal, as opposed to "just" morally criminal is open for debate, but it certainly seems clear that, despite the outflooding of funds, decision makers know very little about what they are buying or what may be the impact of the purchases on either the millionaire welfare recepients themselves or the country as a whole.

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