The Bailout Is An Outrage

iVillage Member
Registered: 08-19-2007
The Bailout Is An Outrage
173
Sat, 09-20-2008 - 1:36pm

This trillion dollar plus bailout of the people who not only created the economic meltdown, but profited from it, is a travesty. All of our tax money will be used to ensure that the gamblers and speculators in our economy will feel no pain. With this economic legislation the underlying assumption is and has always been that what is good for the owners of mega-business is always good for the rest of us. Americans need to seriously consider this bailout. Do we really want to commit all of our treasure to a bailout of the speculators? The follow-up question to that is, if we commit a trillion dollars to rescue the speculators of our aristocratic class, will there be any money left to invest in public works programs or New Deal style job creation programs? Shifting all this public money away from the middle class - the class that actually fuels the economy the most- and into the hands of the wealthy is another major experiment in trickle down futility. Make no mistake, this bailout is a momentous decision that will have a huge impact on our lives. Consider it carefully. I'm not saying there is really anything we can do about it because our political class will ram this rotten bailout through, but it's useful to remember these moments so you can measure their consequences later and know exactly what ideology enabled them and who the proponents of that ideology are. 


Greenwald has some excellent commentary on these events:



David Herszenhorn,New York Times, today, "Congressional Leaders Stunned by Warnings":


It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.


Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.


"When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.


As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program "Good Morning America," the congressional leaders were told "that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally."


Mr. Schumer added, "History was sort of hanging over it, like this was a moment."


When Mr. Schumer described the meeting as "somber," Mr. Dodd cut in. "Somber doesn't begin to justify the words," he said. "We have never heard language like this."


"What you heard last evening," he added, "is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly."


Leave aside for the moment whether this gargantuan nationalization/bailout is "necessary" in some utilitarian sense. One doesn't have to be an economics expert in order for several facts to be crystal clear:



First, the fact that Democrats are on board with this scheme means absolutely nothing. When it comes to things the Bush administration wants, Congressional Democrats don't say "no" to anything. They say "yes" to everything. That's what they're for.


They say "yes" regardless of whether they understand what they're endorsing. They say "yes" regardless of whether they've been told even the most basic facts about what they're being told to endorse. They say "yes" anytime doing so is politically less risky than saying "no," which is essentially always and is certainly the case here. They say "yes" whenever the political establishment -- meaning establishment media outlets and the corporate class that funds them -- wants them to say "yes," which is the case here. And they say "yes" with particular speed and eagerness when told to do so by the Serious Trans-Partisan Republican Experts like Hank Paulson and Ben Bernake (or Mike McConnell and Robert Gates and, before them, Donald Rumsfeld and Colin Powell).


So nothing could be less reassuring or more meaningless than the fact that the Democratic leadership has announced that what they heard scared them so much that they are certain all of this is necessary -- whatever "all this" might be. It may be "necessary" or may not be, but the fact that Congressional Democrats are saying this is irrelevant, since they would not have done anything else -- they're incapable of doing anything else -- other than giving their stamp of approval when they're told to.


Second, whatever else is true, the events of the last week are the most momentous events of the Bush era in terms of defining what kind of country we are and how we function -- and before this week, the last eight years have been quite momentous, so that is saying a lot. Again, regardless of whether this nationalization/bailout scheme is "necessary" or makes utilitarian sense, it is a crime of the highest order -- not a "crime" in the legal sense but in a more meaningful sense.


What is more intrinsically corrupt than allowing people to engage in high-reward/no-risk capitalism -- where they reaped tens of millions of dollars and more every year while their reckless gambles were paying off only to then have the Government shift their losses to the citizenry at large once their schemes collapsed? We've retroactively created a win-only system where the wealthiest corporations and their shareholders are free to gamble for as long as they win and then force others who have no upside to pay for their losses. Watching Wall St. erupt with an orgy of celebration on Friday after it became clear the Government (i.e., you) would pay for their disaster was literally nauseating, as the very people who wreaked this havoc are now being rewarded.


More amazingly, they're free to walk away without having to disgorge their gains; at worst, they're just "forced" to walk away without any further stake in the gamble. How can these bailouts not at least be categorically conditioned on the disgorgement of ill-gotten gains from those who are responsible? The mere fact that shareholders might lose their stake doesn't resolve that concern; why should those who so fantastically profited from these schemes they couldn't support walk away with their gains? This is "redistribution of wealth" and "government takeover of industry" on the grandest scale imaginable -- the buzzphrases that have been thrown around for decades to represent all that is evil and bad in the world. That's all this is; it's not an "investment" by the Government in any real sense but just a magical transfer of losses away from those who are responsible for these losses to those who aren't.


And all of this was both foreseeable as well as foreseen -- see the 2002 grave warnings from Warren Buffett on pages 14-15 of his shareholders letter (.pdf), among many other things -- and it's also happened before, when the Federal Government bailed out the S&L industry that (with John McCain's help) was able to gamble recklessly and then force the country to protect them from their losses. The people who did this have no fear of anything -- they lack the kind of healthy fear that impede reckless behavior -- because they know how our Government works and that they control it and thus believe that their capacity to suffer is limited in the extreme. And they're right about that.


What's most vital to underscore is that the beneficiaries of these extraordinary Government schemes aren't just the coincidental recipients of largesse out of some incredible good luck. The people on whose behalf these schemes are being implemented -- the true beneficiaries -- are the very same people who have been running and owning our Government -- both parties -- for decades, which is why they have been able to do what they've been doing without interference. They were able to gamble without limit because they control the Government, and now they're having others bear the brunt of their collapse for the same reason -- because the Government is largely run for their benefit.


If there is any "pitchfork moment" -- an episode that understandably would send people into the streets in mass outrage -- it would be this, or at least should be. Nobody really even seems to know how much of these losses "the Government" -- meaning working people who had no part in the profits from these transactions -- is undertaking virtually overnight but it's at least a trillion dollars, an amount so vast it's hard to comprehend, let alone analyze in terms of consequences. The transactions are way too complex even for the most sophisticated financial analysts to understand, let alone value. Whatever else is true, generations of Americans are almost certainly going to be severely burdened in untold ways by the events of the last week -- ones that have been carried out largely without any debate and mostly in secret.


Third, what's probably most amazing of all is the contrast between how gargantuan all of this is and the complete absence of debate or disagreement over what's taking place. It's not just that, as usual, Democrats and Republicans are embracing the same core premises ("this is regrettable but necessary"). It's that there's almost no real discussion of what happened, who is responsible, and what the consequences are. It's basically as though the elite class is getting together and discussing this all in whispers, coordinating their views, and releasing just enough information to keep the stupid masses content and calm.


Can anyone point to any discussion of what the implications are for having the Federal Government seize control of the largest and most powerful insurance company in the country, as well as virtually the entire mortgage industry and other key swaths of financial services? Haven't we heard all these years that national health care was an extremely risky and dangerous undertaking because of what happens when the Federal Government gets too involved in an industry? What happened in the last month dwarfs all of that by magnitudes.


The Treasury Secretary is dictating to these companies how they should be run and who should run them. The Federal Government now controls what were -- up until last month -- vast private assets. These are extreme -- truly radical -- changes to how our society functions. Does anyone have any disagreement with any of it or is anyone alarmed by what the consequences are -- not the economic consequences but the consequences of so radically changing how things function so fundamentally and so quickly?


Other countries are debating it. The headline in the largest Brazilian newspaper this week was: "Capitalist Socialism??" and articles all week have questioned -- with alarm -- whether what the U.S. Government did has just radically and permanently altered the world economic system and ushered in some perverse form of "socialism" where industries are nationalized and massive debt imposed on workers in order to protect the wealthiest. If Latin America is shocked at the degree of nationalization and government-mandate transfer of wealth, that is a pretty compelling reflection of how extreme -- unprecedented -- it all is.


But there's virtually no discussion of that in America's dominant media outlets. All one hears is that everything that is happening is necessary to save us all from economic doom. And what's most amazing about that is that the Natural, Unchallenged Consensus That Nobody Questions can shift drastically in a matter of days and still nobody questions anything. This is what Atrios observed as I was writing this post:
It's fascinating to watch how easily consensus is manufactured. A few days ago elite opinion seemed to be cheering Paulson's "no bailout" line, and now they're cheering a trillion bucks thrown down the crapper. All the Very Serious People will spend their days coming up with their pony plans, oblivious to the fact that the pony plan is not an option. The Bush administration's plan is the option.

The way it works is that Bush officials decree how things will be, and then everyone -- from Congressional Democrats to the Serious Pundits -- jump uncritically and obediently on board, even if they were on board with the complete opposite approach just days earlier, and then all real dissent vanishes. That's how the country in general works. As Atrios says: "We've seen this game played before."



I don't pretend to know anywhere near enough -- in terms of either raw information or expertise -- in order to opine on the Latest Plan. But what I do know is that an injustice so grave and extreme that it defies words is taking place; that the greatest beneficiaries are those who are most culpable; and that the same hopelessly broken and deeply rotted institutions and elite class that gave rise to all of this are the very ones that are -- yet again -- being blindly entrusted to solve this. http://www.salon.com/opinion/greenwald/2008/09/20/bailout/index.html


    




Edited 9/20/2008 2:55 pm ET by glitter_girl_5000

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iVillage Member
Registered: 08-19-2007
Sat, 09-20-2008 - 1:43pm

Here's the text from the Warren Buffet .pdf Greenwald links to:



The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”


I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.


Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.


Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.


In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain.


When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives. Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.


Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.


On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.


Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred 15 people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market for weeks, was far from a worst-case scenario.


One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.


Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running.


The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.


Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal. http://image.guardian.co.uk/sys-files/Business/pdf/2008/09/15/2002pdf.pdf

iVillage Member
Registered: 08-19-2007
Sat, 09-20-2008 - 2:01pm

"Financial innovation" has been

iVillage Member
Registered: 09-18-2008
Sat, 09-20-2008 - 2:06pm
All I can say is that I sincerely hope
iVillage Member
Registered: 08-19-2007
Sat, 09-20-2008 - 2:19pm

And here's another example of how rotten our financial system, under Republican governance for decades, has become:



When I open an annual financial report today, one of the first things I ask myself is, "Can I believe the numbers that I'm seeing?" I never used to think that way. I used to think that any corporate financial report audited by a certified public accountant truly was prepared with the public's interests in mind.


The financial scandals of the late 1990s and early 2000s destroyed my confidence in those numbers, as they did for millions of other US investors who lost billions in the stock market crash that followed after many of those scandals came to light. Sure, a stock bubble (a period of rising stock prices that stems from a buying frenzy) had burst, but financial reports that hid companies' financial problems fueled the bubble and helped companies put on a bright, smiling face for the public. After these financial reporting scandals came to light, more than 400 public companies had to restate their earnings.


I still wonder what government regulators and public accountants were thinking and doing during this entire fiasco. How did the system break down so dramatically and so quickly? Although a few voices raised the red flags, their pleas were drowned out by the euphoria of a building stock-market bubble. (Reading Financial Reports For Dummies, Lita

iVillage Member
Registered: 09-15-2008
Sat, 09-20-2008 - 2:20pm

"This trillion dollar plus bailout of the people

iVillage Member
Registered: 08-19-2007
Sat, 09-20-2008 - 2:31pm
I'm with you.
iVillage Member
Registered: 08-19-2007
Sat, 09-20-2008 - 2:35pm

The good thing is the US has a progressive tax system.

iVillage Member
Registered: 03-26-2003
Sat, 09-20-2008 - 2:37pm
Glad you finally see the light. Let's have them pay a little more.
iVillage Member
Registered: 09-15-2008
Sat, 09-20-2008 - 2:54pm
"That means the wealthy are paying for their own bailout.

Uh no, it doesn't mean that. "


iVillage Member
Registered: 08-19-2007
Sat, 09-20-2008 - 3:02pm

Because we all pay taxes and we're all on the hook for it, not to mention that the bailout will do nothing for the middle class.


Here's Greenwald's latest update:



UPDATE: Here is the current draft for the latest plan. It's elegantly simple. The three key provisions: (1) The Treasury Secretary is authorized to buy up to $700 billion of any mortgage-related assets (so he can just transfer that amount to any corporations in exchange for their worthless or severely crippled "assets") ; (2) The ceiling on the national debt is raised to $11.3 trillion to accommodate this scheme ; and (3) best of all: "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" .


Put another way, this authorizes Hank Paulson to transfer $700 billion of taxpayer money to private industry in his sole discretion, and nobody has the right or ability to review or challenge any decision he makes.

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