Hello.
It seems like such a long time ago that they passed the bailout bill. The one that gave Hank Paulson, ex-CEO of Goldman Sachs and current Treasury Secretary, unprecedented power to intervene directly in our economy.
There's been so much to deal with recently, including Barack Obama's historic victory, that we haven't been able to digest everything that's going on. But now that Obama is officially America's next president, perhaps we have time to take a step back and look at just what has happened since then.
So, to the $700 billion question: just what is Hank Paulson doing with our money?
What is the money being used for?
If you'll recall, the bailout bill was sold to the public as a means of unfreezing the credit markets. The idea was that infusing government money into the banks--by buying up some of their toxic assets--would make them lend again. They told us that if the bill wasn't passed, a market crash would be imminent.
So, now that over a month has gone by since the bailout bill passed, we find that actually, Paulson didn't bother to actually buy up any of the banks' bad assets at all.
the Bush administration Wednesday abandoned the original centerpiece of its $700 billion effort to rescue the financial system and said it will not use the money to purchase troubled bank assets.
“Our assessment at this time is that this (the purchase of toxic assets) is not the most effective way to use funds,” Treasury Secretary Henry Paulson told a news conference.
OK, so maybe Paulson didn't actually buy any assets from the banks. But we did give them a lot of money; so are the banks making loans again and unfreezing those frozen credit markets?
Apparently not.
Secretary Paulson promised that the banks won't just "hoard" the money — they will quickly "deploy it" through the economy in the form of badly needed loans. There is just one hitch: Neither Paulson nor Simpson Thacher got that "deploy" part in writing — nor did they put in place any mechanism to require the banks to spend their taxpayer billions. Apparently, the part about lending the money to homeowners and small businesses was sort of implied.
"There is no obligation for banks to lend the money one way or the other," Jennifer Zuccarelli, a Treasury spokeswoman, tells Rolling Stone. "But the banks have the understanding" that the money is intended for loans. "We're not looking to control their operations."
Unfortunately, many of the banks appear to have no intention of wasting the money on loans. "At least for the next quarter, it's just going to be a cushion," said John Thain, the chief executive of Merrill Lynch.
We've been told point-blank that the banks aren't going to use the money to make loans, nor are they even required to do so. Moreover, despite the fact that no loans have been made, the market didn't crater instantly like they said it would. So much for the reasons why we had to pass this bailout RIGHT NOW.
So if they're not making loans, what are they doing with our money? One enterprising bank executive has come up with a spectacularly brilliant idea:
Gary Crittenden, chief financial officer of Citigroup, had an even better idea: He hinted that his company would use its share of the cash — $25 billion — to buy up competitors and swell even bigger. The handout, he told analysts, "does present the possibility of taking advantage of opportunities that might otherwise be closed to us."
No one told me that the big banks would be allowed to use federal money to fund some megalomaniacal scheme to buy out their competitors and consolidate the industry even further into a few giant mega-banks. I was just told we needed to go along in order to make the banks lend again. Which, as we have established, they ain't doing.
OK, so maybe the bailout money isn't being used for its stated purpose. And, worse, maybe it's being used for purposes that we had no idea it would be used for and which might be really, really destructive.
But maybe old Hank can at least be trusted to use the money only on the companies he said he was going to use it on--banks.
Maybe not.
Treasury Secretary Henry Paulson yesterday backed away from the original strategy behind the $700 billion US plan for propping up the limping economy, opening the door to pump government cash into credit card companies, auto financing firms, and other consumer lenders in addition to banks.
The initial concept behind the bailout plan called for buying troubled mortgage-backed securities from banks and investment firms, an approach Paulson had forcefully advocated just last month. But yesterday, he suggested the government would continue to buy stock in banks and extend its investments to include nonbank lenders. Another option he raised is to require firms that receive taxpayer funds to raise money from private investors...
Economists and analysts identified a plethora of firms likely to sell shares to the government under Paulson's revised strategy, some of which have already put out their hands. Candidates would include the financing arms of General Motors Corp. and Ford Motor Co., and student lenders like Sallie Mae, said Scott Talbott, senior vice president for the Financial Services Roundtable, a Washington, D.C., industry group whose members include such large institutions as Citigroup and Bank of America Corp., both of which have received government funds.
Now that the federal government is in the business of handing out money directly to private corporations--why should it stop at the banking industry? Why not give corporate welfare to everyone who asks? Maybe if the auto industry, or the insurance industry, yells loudly enough, they can get a taste of that sweet, sweet government candy for themselves. After all, it's no risk to them.
The only risk is to us, the taxpayers. Remember us? The ones who expect their hard-earned tax dollars to be used for the good of all the nation, not just a few fat cats at the top.
Not surprisingly, Paulson uses the same excuse for this plan that he used to justify the first plan: it'll stimulate lending and get the economy moving again. Well, since he never even bothered to put the first plan (buying toxic assets) into action--why should we believe him when he says that this plan will work, or that he will actually try to implement it, or that he won't change his mind and propose yet another plan, a month or two down the line?
The fine print
At this point, you may feel a little uneasy at how quickly things are moving.
"Well," you ask. "Surely there's some restriction in the bailout bill. Something that prevents the Treasury secretary from just giving away our hard-earned dollars to anyone who asks."
Let's take a look at the text of the bill:
(5) FINANCIAL INSTITUTION- The term `financial institution' means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.
With those four little words--"but not limited to"--they allow the Treasury secretary to deem anybody a "financial institution." So really, Hank Paulson can hand over the Treasury's cash to whomever he wants to. If he wished, he could call his own sweet grandmother a "financial institution" and bail her out. Not that I would deeply begrudge him that, if she's in dire circumstances--but shouldn't he have told us up front that he was planning to do that?
Not only that, he is allowed to buy whatever he wants to with our money:
(9) TROUBLED ASSETS- The term `troubled assets' means--
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and
(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
According to part B, Hank Paulson can call anything a "troubled asset". All he needs to do is get Ben Bernanke's approval--which shouldn't be terribly difficult--and then send a letter to the "appropriate committees of Congress". Paulson's not even required to submit himself to a vote of Congressional approval whenever he decides to call something a "troubled asset." As long as he mails a piece of paper to Congress, he can buy up whatever he wants. Or not, as we've seen in the case of the mortgage-backed securities he was supposedly buying up.
Oversight; or the role of Congress
We were told by Congressional Democrats, including Chris Dodd and our new president-elect, that Congress would exercise oversight of this bailout by appointing independent overseers, so that there was some hope that someone responsible would be looking over Paulson's shoulder.
Six weeks and several changes of plan later, it appears that that hope was totally empty.
In the six weeks since lawmakers approved the Treasury's massive bailout of financial firms, the government has poured money into the country's largest banks, recruited smaller banks into the program and repeatedly widened its scope to cover yet other types of businesses, from insurers to consumer lenders.
Along the way, the Bush administration has committed $290 billion of the $700 billion rescue package.
Yet for all this activity, no formal action has been taken to fill the independent oversight posts established by Congress when it approved the bailout to prevent corruption and government waste. Nor has the first monitoring report required by lawmakers been completed, though the initial deadline has passed.
Effectively, there is no oversight whatsoever! Paulson can do what he wants, and no, Congress isn't bothering to keep an eye on him. This is incredibly troubling, given the unprecedented powers that were granted the Treasury Secretary, the enormous amounts of taxpayer money that are being spent ($290 billion so far), and the repeated, abrupt alterations the bailout plan has undergone.
Once again Congress has abdicated its duty to exercise oversight of the activities of the executive branch--a common occurrence under this administration, and a pattern that spells trouble for our republic, given that the current administration has pushed the limits of executive power far beyond where they have ever gone.
Implications for the next Administration
President-elect Obama voted for the bailout. Not only that, he lobbied for its passage after the first version was defeated in the House. He was quite firm about keeping the heart of the Paulson plan:
"The bill rejected yesterday was a marked improvement over the original blank check proposed by the Bush Administration. It included restraints on CEO pay, protections for homeowners, strict oversight as to how the money is spent, and an assurance that taxpayers will recover their money once the economy recovers. Given the progress we have made, I believe we are unlikely to succeed if we start from scratch or reopen negotiations about the core elements of the agreement.
The run-up to this bailout reminded many, including myself and Kos, of the run-up to the Iraq war and the AUMF. The establishment and the media pressured us into a false choice: either grant enormous power and authority to the executive immediately, no questions asked, or face imminent disaster. And in both cases, the "imminent disaster" turned out to be a trumped-up fear that did not reflect reality, and the decision to grant such power and authority to the executive turned out to be the real cause of disaster.
Those Congresspeople who voted "yes" on the AUMF were politically tainted. No matter how carefully they explained their vote, all of them were viewed as having voted for Bush's war. Several of them had their presidential aspirations badly damaged by their decision.
So, if this bailout turns out to be a disaster in the way that the war in Iraq turned out to be, there will be a severe backlash against President-elect Obama, as he will have been perceived to have supported a blank check for "Paulson's bailout", just as others were perceived as having supported a blank check for "Bush's war." This will make it extremely difficult for him to change course and repair the damage to the country once he is in office, quite aside from the fact that we will have given away most of our Treasury to Paulson's merry band of thieves by the time of Obama's inauguration.
Where do we go from here?
With many industries hurting due to the imminent economic crash, it is not surprising that they, too, want a spot at the government trough. The automotive industry has stepped up the pressure on the Democrats; they want to be bailed out too.
Not surprisingly, Paulson is skeptical of such a plan. As the ex-CEO of Goldman Sachs, it's understandable that he would want to keep others away from the trough at which he and his Wall Street cronies are currently feeding. Bush, too, is opposed to a bailout of the auto industry.
So the question is now: will the Democrats rush us into another hasty, ill-conceived industry bailout with little to no oversight?
If this auto bailout goes through, responsibility lies on the shoulders of the Democrats alone. If anything goes wrong, the Democrats will take the blame. And given how poorly Paulson's bailout was handled, it is, at best, questionable whether the Democrats will be able to give us a sensibly designed bill, rather than the hastily thrown-together bunch of industry giveaways that they gave us with the bailout bill.
The Paulson bailout has created a new model for government intervention in our economy: programs for massive infusions of cash directly into entire sectors of private industry, with few or no conditions on how the money is to be spent and no meaningful government supervision of the process. In a word, legalized theft.
We enter a brave new era in which the government and private enterprise have merged together into one giant hybrid entity, one indistinguishable from the other, and the Treasury is treated as a personal banker to entire sectors of industry. It remains to be seen what will become of it all once--as we all now expect to happen--it all comes crashing down.