Once again, the Fed is using a crisis to enrich corporate interests.
The Federal Reserve Bank's decision last week to address the housing crisis by extending $200 billion of taxpayer-financed credit to Wall Street banks was met with a stunned reaction typical of surprising events. But really, the move was the expression of longstanding isms that routinely package corruption as sound public policy.
Some background: During the housing boom, banks doled out home loans to financially strapped borrowers, often on predatory terms. On the creditor side, these same banks packaged many of the loans as complex securities and sold them off to unwitting investors, generating a handsome profit on the paper transactions. At the same time, Wall Street used campaign contributions to coerce Congress into blocking anti-predatory-lending bills and repealing a landmark law regulating how banks could buy and sell securities.
Predictably, many borrowers are now defaulting on their loans, meaning losses for financial institutions that hold mortgages and mortgage-backed securities. The Fed responded with what author Naomi Klein calls disaster capitalism - the age-old practice of using a crisis to enrich corporate interests. In this case, the Fed is using the housing emergency to justify giving taxpayer cash to Wall Street in exchange for its worthless mortgages.
"What the Fed really did was lend money to banks and accept the counterfeit currency as collateral, treating it just as though it were real money," says Dean Baker, the co-director of the Center for Economic and Policy Research.
But this is not only disaster capitalism, it is also Big Boy Bailout-ism - the kind we've become accustomed to since the savings and loan scandal of the 1980s. It is an ideology that rewards wealthy political donors for irresponsible behavior and ignores the real victims.
If you are a banking executive whose risky loans go bad, your industry's campaign donations get you Big Boy Bailout-ism that makes taxpayers "take the bad loans off the banks' books," as one financial analyst gushed this week. If you are a regular Joe who can't pay your home loan, you get foreclosed on.
The Fed's scheme also embraces Feed-the-Beast-ism - an ideology that prescribes pumping taxpayer money into a crisis, rather than demanding reforms.
Confronting an energy and climate emergency, Republicans' answer was not massive alternative energy investments, but a 2005 energy bill giving tax breaks to the carbon-belching fossil fuel companies that finance the GOP. In the face of a health care catastrophe, the Bush administration's 2003 Medicare bill didn't crack down on pharmaceutical industry profiteering, but instead created a system that effectively subsidizes drug industry campaign donors. The list of examples goes on, and now includes the housing crisis.
The Fed's action says the solution to the credit crunch is not to re-regulate the banking industry or force it to clean house, but to loan Wall Street your hard-earned taxpayer money, allowing the same destructive system to remain and permitting the same vultures to stay in their jobs - and, of course, to keep writing big campaign checks.
But worst of all is the Trickle Down-ism. For three decades, our government has said economic challenges can be solved with tax cuts for the wealthy - the same people who, not coincidentally, underwrite political campaigns. Trickle Down-ism claims that the wealthy will spend the tax cuts and the benefits will "trickle down" to us commoners.
It's the same nonsense with housing today. The root of the financial crisis is mortgage defaults - brought on, in part, by Trickle Down-ism's original failure to raise wages. Yet, rather than help borrowers pay or restructure their mortgages, the government is covering the banks' losses, claiming that aid will eventually "trickle down" and benefit the rest of us.
During the Great Depression, Eleanor Roosevelt said, "We need not fear any isms if our democracy is achieving the ends for which it was established." It's the "if" part that has become the problem.
David Sirota is a nationally syndicated weekly newspaper columnist for Creators Syndicate. He is the New York Times bestselling author of Hostile Takeover: How Big Money and Corruption Conquered Our Government and How We Take It Back (Crown 2006). He is also a senior fellow at the Campaign for America's Future and a board member of the Progressive States Network. His second book, The Uprising, is due in the Spring of 2008.
Grassley Questions Bear Stearns Bailout
By J. Taylor Rushing
Thursday 20 March 2008
The Senate Finance Committee's top Republican on Thursday questioned the Federal Reserve's bailout of Bear Stearns and whether the action may have benefited top executives at the expense of shareholders.
"Corporate bigwigs shouldn't be able to profit from a deal while employees, shareholders and creditors have to carry the burden of a company's demise," Sen. Charles Grassley (Iowa) said in a statement. He said he had asked staffers to "delve into the details" of the Bear Stearns buyout by JP Morgan Chase.
The Federal Reserve engineered the buyout, which JP Morgan agreed to after the Fed said it would assume $30 billion of risky Bear Stearns mortgage bonds. Bear Stearns would have filed for bankruptcy if the deal had not gone through, which the Fed worried would cause more serious problems for the U.S. economy.
Grassley stopped short of calling for hearings for the Federal Reserve's actions. He also said he was not questioning the decision to prevent Bear Stearns from sliding into bankruptcy.
"My point is not that bankruptcy would've been the better course for Bear Stearns," he said. "I'm looking at a slice of the consequences. The top executives shouldn't be treated better than anyone else when a company goes under."
He also said he wanted to understand what the downside risk of the deal is for taxpayers, as well as whether there could be "upside potential."
The New York Times | Editorial
Friday 21 March 2008
How can one feel sorry for James Cayne? The potential losses of the chairman and former chief executive of Bear Stearns must rank up there with the biggest in modern history. The value of his stake in Bear Stearns collapsed from about $1 billion a year ago to as little as $14 million at the price JPMorgan Chase offered for the teetering bank on Sunday.
Still, Mr. Cayne was paid some $40 million in cash between 2004 and 2006, the last year on record, as well as stocks and options. In the past few years, he has sold shares worth millions more. There should be financial accountability for the man who led Bear Stearns as it gorged on dubious subprime securities to boost its profits and share price, helping to set up one of the biggest financial collapses since the savings-and-loan crisis in the 1980s. Some might argue that he should have lost it all.
But that's not how it works. The ongoing bailout of the financial system by the Federal Reserve underscores the extent to which financial barons socialize the costs of private bets gone bad. Not a week goes by that the Fed doesn't inaugurate a new way to provide liquidity - meaning money - to the financial system. Bear Stearns isn't enormous. It doesn't take deposits from the public. Yet the Fed believed that letting it implode could unleash a domino effect among other banks, and the Fed provided a $30 billion guarantee for JPMorgan to snap it up.
Compared to the cold shoulder given to struggling homeowners, the cash and attention lavished by the government on the nation's financial titans provides telling insight into the priorities of the Bush administration. It's not simply a matter of fairness, though. The Fed is probably right to be doing all it can think of to avoid worse damage than the economy is already suffering. But if the objective is to encourage prudent banking and keep Wall Street's wizards from periodically driving financial markets over the cliff, it is imperative to devise a remuneration system for bankers that puts more of their skin in the game.
Financiers, of course, dispute that they are being insufficiently penalized. "I received no bonus for 2007, no severance pay, no golden parachute," E. Stanley O'Neal, the former chief executive of Merrill Lynch, told a House committee recently. That doesn't seem like much of a blow to Mr. O'Neal, who was removed earlier this year following gargantuan subprime-related losses.
Indeed, the pain that is being inflicted on financial-industry executives as a result of their own actions and decisions is not proving much of an encouragement. Rather, the knuckle-rapping seems only to encourage bankers to make up for any losses they may suffer by finding another way to navigate their companies, the financial system and the economy into the next maelstrom - from Internet stocks to what the industry calls zero-down, negative amortization, no-doc, adjustable-rate mortgages.
(Translation: derivatives based on incomprehensible mortgages with unpredictable interest rates given to people who have no reasonable chance of understanding them, let alone paying them back. )
Bankers operate under a system that provides stellar rewards when the investment strategies do well yet puts a floor on their losses when they go bad. They might have to forgo a bonus if investments turn sour. They might even be fired. Their equity might become worthless - or not, if the Fed feels it must step in. But as a rule, they won't have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down.
The costs of such a lopsided system of incentives are by now clear. Better regulation of mortgage markets would help avoid repeating current excesses. But more fundamental correctives are needed to curb financiers' appetite for walking a tightrope. Some economists have suggested making their remuneration contingent on the performance of their investments over several years - releasing their compensation gradually.
That's an idea worth studying. Certainly, trying to put specific limits on bankers' salaries is a nonstarter. But until bankers face a real risk of losing their shirts, they will continue blithely ratcheting up the risks to collect the rewards while letting the rest of us carry the bag when their punts go bad.