Wednesday, November 19, 2008

Parting Gift: Borderline Illegal Bailout

Naomi Klein: The Borderline Illegal Deals Behind the $700 Billion Bailout

The bailout is a parting gift to the people that George Bush once referred to jokingly as "my base."
Amy Goodman, Democracy Now:

Amy Goodman: ...According to Naomi Klein's latest article in The Nation, "The more details emerge, the clearer it becomes that Washington's handling of the Wall Street bailout is not merely incompetent. It is borderline criminal." The article is called "In Praise of a Rocky Transition." ... "Criminal"? Explain.

Naomi Klein: Well, there's a few elements now that are being described as illegal that we're finding out. 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 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. [. . .] 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 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 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. [. . .] 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. [. . .]

Goodman: Just underscoring what you wrote on the whole issue of the difference in the bailouts, the British Prime Minister Gordon Brown extracting meaningful guarantees for taxpayers, voting rights on banks, seats on their boards, 12 percent in annual dividend payments to the government, a suspension of dividend payments to shareholders, restrictions on executive bonuses, a legal requirement banks lend money to homeowners and small businesses. Here in the United States, Washington Post reporting major US banks are on pace to spend more than half their bailout money on rewarding their shareholders. The thirty-three banks are set to receive some $163 billion in government bailouts; half of that sum will go to paying off shareholders over the next three years.

Klein: Yeah, this bailout is really not a bailout at all; it's a parting gift to the people that the Bush -- that George Bush once referred to jokingly as "my base." You know, in one of my columns recently, I likened it to what European colonial rulers used to do when they finally realized they had to hand over power; they would loot the treasury on the way out the door.

And the reason why there has been this dramatic change in policy just in recent days, where Henry Paulson has said, "OK, well, we're not going to do what we originally had said at all," which is use the bailout money to buy distressed assets, to buy bad debts, "Now we're going to go from these equity deals with the banks to bailing out credit card companies" -- the reason for that is that that first $250 billion was essentially money down the drain. They are admitting that it didn't do what it was supposed to do, which was increase lending. So, now they're making it up as they go along. It's take three, take four, take five. But we're supposed to somehow not notice that $250 billion, an astronomical sum, was just wasted, going to bonuses, going to shareholder payouts, going to CEO salaries. And now they're trying another method to get lending going. But it really was the parting gift.

And if we think about what this money means, and this is -- you know, this crisis isn't over, and the same people who justified this bailout, who clamored for this bailout, are the very people who are going to turn around and say to Barack Obama, "We can't afford for you to make good on your election promises. We can't afford universal healthcare. In fact, we can't afford what meager services Americans get in exchange for their tax dollars, like Social Security payments." We're already hearing this lowering of expectations now in the national discourse. So, the money -- this really is, you know, reverse Robin Hood gone mad. The money has been given to the people who needed it least, and it's going to be used to justify austerity measures imposed against those who need it most. It's going to be used to justify cuts to food stamps. It's going to be used to justify cuts to Social Security, to healthcare, let alone being used to justify why more ambitious plans for a national healthcare program, for green energy are not affordable. So people have to be ready for this. You know, the next shock is yet to come.

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