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Why the Bailout Stinks
MIKE WHITNEY
Counterpunch
Friday, Oct 3, 2008
For nearly a year, we have been asking ourselves why the investors
and foreign banks that bought up hundreds of billions of dollars of
worthless mortgage-backed securities (MBS) from US investment banks
have not taken legal action against these same banks or initiated
a boycott of US financial products to prevent more people from getting
ripped off?
Now we know the answer. It's because, behind the scenes, Henry Paulson
and Co. were working out a deal to dump the whole trillion dollar
mess on the US taxpayer. That's what this whole $700 billion boondoggle
is all about; wiping out the massive debts that were generated in
the biggest incident of fraud in history. Rep Brad Sherman explained
it Wednesday night to Larry Kudlow:
"It (The bill) provides hundreds of billions of dollars of
bailouts to foreign investors. It provides no real control of Paulson's
power. There is a critique board but not really a board that can
step in and change what he does. It's a $700 billion program run
by a part-time temporary employee and there is no limit on million
dollar a month salaries....... It's very clear. The Bank of Shanghai
can transfer all of its toxic assets to the Bank of Shanghai of
Los Angeles which can then sell them the next day to the Treasury.
I had a provision to say if it wasn't owned by an American entity
even a subsidiary, but at least an entity in the US, the Treasury
can't buy it. It was rejected.
“The bill is very clear. Assets now held in China and London
can be sold to US entities on Monday and then sold to the Treasury
on Tuesday. Paulson has made it clear he will recommend a veto of
any bill that contained a clear provision that said if Americans
did not own the asset on September 20 that it can't be sold to the
Treasury. Hundreds of billions of dollars are going to bail out
foreign investors. They know it, they demanded it and the bill has
been carefully written to make sure it can happen."
So, why hasn't the Treasury Secretary explained the real purpose
of the bailout to the American people? Could it be that he knows that
his $700 billion bailout would end up like the Hindenburg, vanishing
in sheets of flames?
This is a terrible bill, and it confers absolute authority on one
of the central players in the scandal, Henry Paulson, who was the
Chairman of Goldman Sachs at the time this MBS garbage was being peddled
around the planet to credulous investors. Now Paulson will be in a
position to buy up any "troubled asset" he that he believes
could pose a threat to "financial market stability". It
is clear that Paulson will use his unchecked powers to wipe the slate
clean and remove any possibility that foreign investors will take
legal action against the perpetrators; the giant Wall Street investment
banks.
So, how do the American people like paying off Paulson and Co. future
legal bills? Is that how taxpayer revenue should be spent instead
of on education, health care and infrastructure?
There's another reason why Paulson is working so hard to pass the
Bailout for Tycoons Bill; it's a windfall for the banking giants.
Citi did not simply pick up Wachovia by happenstance nor did JP Morgan
purchase Washington Mutual because it wanted to perform its civic
duty and prevent a full-system meltdown. No way; they were clearly
aware of the way the wind was blowing. In fact, neither case manages
to pass the smell test.
This is from AP's Sara Lepro:
"Citigroup agreed Monday to purchase Wachovia's banking operations
for $2.1 billion in a deal arranged by federal regulators, making
the Charlotte-based bank the latest casualty of the widening global
financial crisis.
“The deal greatly expands Citigroup's retail franchise—giving
it a total of more than 4,300 U.S. branches and $600 billion in
deposits—and secures its place among the U.S. banking industry's
Big Three, along with Bank of America Corp. and JP Morgan Chase
& Co.
“But it comes at a cost: Citigroup Inc. said
it will slash its quarterly dividend in half to 16 cents. It also
will dilute existing shareholders by selling $10 billion in common
stock to shore up its capital position. In addition to assuming $53
billion worth of debt, Citigroup will absorb up to $42 billion of
losses from Wachovia's $312 billion loan portfolio, with the Federal
Deposit Insurance Corp. agreeing to cover any remaining losses. Citigroup
also will issue $12 billion in preferred stock and warrants to the
FDIC.”
Here's Lepro’s punch line:
"The government's proposed $700 billion rescue plan for financial
institution, being voted on Monday by the House of Representatives,
likely will prove of added benefit to Citi.
“While the plan broadly aims to prevent banks from profiting
on the sale of troubled assets to the government, there is an exception
made for assets acquired in a merger or buyout, or from companies
that have filed for bankruptcy. This could allow Citigroup to sell
toxic mortgages and other assets it gained from Wachovia for a higher
price than the bank actually paid for them."
So Citi not only gets an army of depositors (the cheapest capital
available!) but, at the same time, is going to be able to dump its
mortgage-backed junk on the taxpayer? And, guess what? The JP Morgan
deal is nearly identical.
Is this "insider baseball" or not?
Does anyone want to wager that G-Sax will also get a privileged spot
at the public trough sucking up billions of taxpayer dollars to patch
together its tattered balance sheet?
And what will the net result of Paulson's Bankster Rip-off be; more
consolidation of the financial industry and the utter annihilation
of local and regional banks. That's a sure thing. The mom and pop
banks across the country are going to take it in the stern sheets
if this bill is passed. Bet on it.
The country has no time for this cynical scavenger-hunt. The system
is listing badly and we have ONE chance to get this emergency bill
right.
According to Bloomberg News , September 29:
"The Federal Reserve will pump an additional $630 billion
into the global financial system, flooding banks with cash to alleviate
the worst banking crisis since the Great Depression. The Fed increased
its existing currency swaps with foreign central banks by $330 billion
to $620 billion to make more dollars available worldwide. The Term
Auction Facility, the Fed's emergency loan program, will expand
by $300 billion to $450 billion. The European Central Bank, the
Bank of England and the Bank of Japan are among the participating
authorities.
"The crisis is reverberating through the global economy, causing
stocks to plunge and forcing European governments to rescue four
banks over the past two days alone." (Bloomberg)
Get it? The Fed has already brushed aside Congress's "No"
vote and pumped money into the system; and look what happened.
Nothing!
Libor is still at historic highs, the Ted spread has widened to record
levels and interbank lending is grinding to a standstill. There's
a run on the money markets that is reducing the ability of businesses
to turn over short term debt. The system is shutting down, folks,
and Paulson's snake oil won't help. 400 reputable economists--not
the "faith based" industry hacks that work for the Bush
administration--are opposed to this bailout.
This is a "real time" meltdown and it requires real solutions.
As Nouriel Roubini, chairman of Roubini Global Economics, points out,
we are on the verge of the "mother of all bank runs", a
cross-border savaging of reserves that would crash the entire financial
system. Here's Roubini on the next shoe to drop:
"The next step of this panic could become the
mother of all bank runs, i.e. a run on the trillion dollar plus of
the cross border short-term interbank liabilities of the US banking
and financial system as foreign banks as starting to worry about the
safety of their liquid exposures to US financial institutions; such
a silent cross border bank run has already started as foreign banks
are worried about the solvency of US banks and are starting to reduce
their exposure. And if this run accelerates - as it may now - a total
meltdown of the US financial system could occur. We are thus now in
a generalized panic mode and back to the risk of a systemic meltdown
of the entire financial system. And US and foreign policy authorities
seem to be clueless about what needs to be done next. Maybe they should
today start with a coordinated 100 bps reduction in policy rates in
all the major economies in the world to show that they are starting
to seriously recognize and address this rapidly worsening financial
crisis." (Nouriel Roubini's EconoMonitor)
Not one dime should go to this latest Wall Street swindle. No bailout!
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