The $700 Billion Bailout: Bush's Last Robbery

Today, as I write this, I am stunned and angry at what I have seen on the news media from the U.S. in the last two weeks.

I believe yesterday, Oct. 3, was the darkest day I have ever seen in American business and politics. In the place called America, where everyone is supposed to be rewarded for the work they do and the risks they take, we were told those who lie, cheat, and manipulate are the ones who are rewarded.

History
I was against the bailout of Chrysler in 1975 and the bailout of Long-Term Capital (a large hedge fund) in 1996. In the case of Chrysler, the government was saying, in effect, that we will reward you for making bad, non-fuel efficient cars (reminder the 1973 energy crisis?) and (in the case of LTC) for making huge and risky hedge fund bets.

The result? The entire U.S. car industry has continued to make bad, non-fuel efficient cars for another 30 years (and steadily lost market share to foreign competition), and the hedge fund industry has continued to make ever larger and riskier bets. This is the opposite of the way capitalism is supposed to work. If a company makes the wrong product or a bad product, or makes the wrong bets, it is supposed to change strategies or else go out of business. This is the “marketplace.”

But all this was just a warm-up for what we have seen in the last 14 days.


Heads I Win, Tails You Lose
Last spring, the government bailed out the investment bank Bear Stearns. Treasury Secretary Henry Paulson led this effort, which I strongly opposed. Bear Stearns was well-know as loose, risky, aggressive, bullying firm. At the time Paulson was doing this, he went on the Sunday morning talk shows, and said, “The economy is sound and there are no problems with the basics.” We now know this was not true (OK, maybe it wasn’t a lie. Maybe he couldn’t figure out what was happening. So he has his choice of being a) a lair or b) incompetent. Take your pick). I’m going with the guess the Republicans hoped to delay the crisis until after the elections.

The problems have been well known for many years: the elaborate betting by hedge funds on increasingly exotic investment instruments (apparently making money from nothing); Alan Greenspan's feverish cutting of interest rates (to lowest in 40 years) in the early 2000s in an effort to forestall even a mild recession (heaven forbid there should be a natural correction on Bush Jr.’s watch!), which had the effect of super-heating the U.S. housing market; Bush Jr.’s program in the early part of the 2000s to encourage the poor to buy homes (“Everybody should own a home,” he said); the lending practices which defied all common sense (since the days of the Medici in the fourteenth century, and far before this, lending has been based on common rules: down payments, collateral, and regular payment of principle and interest). These common-sense rules have been ignored in the past few years (“You don’t have to pay the principle, just interest for a year!” “No collateral!” “We’ll even pay your first installment!”). Finally, there is the bundling of mortgages into securities, which were then rated AAA (i.e. very safe) and then re-bundled on up the line, with everyone taking their piece of the pie (real estate agents, mortgage broker, bankers, investment houses, etc).

I’m not a financial genius; it’s not my job. But even I, in my gut, knew that this was going to end badly. Why doesn’t the Secretary of the Treasury know what I know?

The people who sold and rated these worthless securities should go to jail. But instead we are giving them money. The banks that made these ridiculous loans should take the loss and /or go out of business. Let the U.S. government, through the FDIC, bail out individual depositors on a case-by-case basis.


Fannie Mae, Freddie Mac, The World
A few weeks ago (it seems like years) Paulson had the government take over the mortgage companies Fannie Mae and Freddie Mac. As disappointing as this was (they should never have gotten to this point, and this in and of itself is a major scandal), it was generally recognized they are quasi-governmental agencies. Like Ronald Reagan’s brilliant plan to de-regulate the Savings & Loan industry in the 1980s (which cost taxpayers an estimated $500 billion in bailouts), the U.S government is saying “On the upside, investors’ ability to make profits is unlimited. On the downside, the taxpayers will bear the burden.” Still, on the day Paulson nationalized these companies, it was probably the only thing to do. But there was more to come.

The first travesty was the bailout of AIG (on Sept. 17), a private insurer that had been taking ridiculous bets by insuring derivative contracts. So now the government was in both the mortgage and the insurance business. The next day, the Dow Jones went down a few percentage points. One day later, Paulson said the whole banking system would collapse unless the government intervened, by giving the companies that held bad securitized mortgage bundles a bailout. When asked to name a figure, he said “hundreds of billions.” He sharpened his pencil over the weekend, and on Sept. 22 he said what was needed was $700 billion for banks and investment houses. $700 billion, right away, with no strings attached. $700 billion!


$700 billion : The Magic Number
Not $100 billion, not $300 billion, but $700 billion! I can just see the strategy session over the weekend (“Well, if we ask for a trillion, if will sound like we’re asking for too much” – I have been in many pricing sessions like this in both the computer and magazine publishing industries – you ask for what you think you can get away with). At first I thought the figure was a misprint. Then I figured it was a bargaining position, that what they really wanted was $200 billion. Yet from that day to this, this number has stuck -- I have not seen one article in the press explaining or analyzing how this figure was derived. Neither Paulson, the President, or Congressional leaders have explained how they arrived at this figure (at the same time, they’ll admit that they have no idea how bad the problem with toxic mortgage securities is -- but in two days they have exact number to fix it). The news media fell into lockstep: it’s $700 billon or else: you may lose your home, your pension, your future life.

Since Paulson never foresaw this crisis in the first place, why do we now trust him to come up with the exact figure to fix the crisis? Paulson, former CEO of investment banker Goldman Sachs, is saying we must bail out investment bankers. This has as much credibility as Dick Cheney, former CEO of Halliburton (the world's largest oil driller), saying we must invade Iraq .


Bush Jr. Chimes in
Bush Jr., of course, immediately endorsed the figure and the concept (heck, it’s not his money). He urged for quick passage (though he was not quick with a solution of how to pay for it). Bush Jr., in his best fear-mongering since the start of the Iraq war, told us we better cough up the $700 billion immediately, no questions asked, or we would lose our homes and savings. Thanks George. You’re the greatest leader we’ve ever had.

This is the same guy who told us we needed to bomb children, women and men in one of the world’s most populous cities, Bagdad, with “shock and awe” right away, or else America would be attacked by them with poison gas or worse. For a guy who’s so quick with figures, how come he has never produced a figure on the number of civilian deaths caused by the war he started in Iraq ?


Congress to the Rescue
I’ve never in my life seen Congress move so fast on major legislation. A third of America has no health care coverage, but boy, but when it it comes to bailing out Wall Street bankers, are they ever quick!

Last Monday (Sept. 29), after very little debate and no serous alternatives presented, the House of Representatives voted on this $700 billion bill. A contingent of conservative Republicans, along with some Democrats, questioned it. I watched the vote on live TV here in Germany . And it was defeated. Wow, I thought, the system works. There are still some adults in Washington who have conviction.

While I watched the vote on CNN, in lower right-hand corner of the screen was a ticker showing how the Dow Jones index went up and down during the vote. The Dow closed the day down 777 points, which is not surprising since the all leaders told us the world was coming to end if the bill didn’t pass. Though the 777 point drop (about 7%) was not even in the top ten point losses in history, near panic set it. The headlines all read, “Record Point Drop in the Market” etc. Even normally level-headed journalists like David Gergen (U.S. News) and Bill Saporito (Fortune) squawked about the “$1 .5 trillion loss,” like it was a permanent thing. The next day, when the Dow went back up 4%, they didn’t write stories.

Ignored is the fact that unemployment is the U.S. is currently at historical lows, the stock market is still at historical highs (based on P/E ratios), the GDP as has increased every quarter for the past 5 years, etc. The reportage reflects a trend in U.S. journalism of simply presented the scariest factoid and and/or figure in a headline, with no context. It’s like a press release that says “‘Batman Returns’ in All-time Top Ten of Films” (ignoring the fact that the inflation in ticket prices is what places it in the top ten of movie grosses. In terms of people who actually saw the film, the movie is not even in the top 50).


The New God: The Big Board
The Dow Jones Index is made up of 30 companies. 30. In other words, how short-term stock speculators buy and sell the shares of these 30 companies on any given day now determines our nation’s legislative policy. Picking up on the cue from CNN, why not just put a Dow Jones ticker on the floor of Congress? Members could vote based on how it goes up and down.

The truth is stocks, housing prices and the general economy have been gong up for so long we now feel it is our right to have good returns, forever. We have been encouraged to put our savings, retirement, and college funds in stocks (Bush Jr. even wanted to put the nation's Social Security trust fund into the market). I believe so many people have bought into the stock market myth of permanent riches that their judgment is clouded (“Screw by the great-great grandkids and the $11 trillion U.S. debt. I just want 10% annual returns on my portfolio.”). How many journalists and government leaders have money in the stock market?


Thank God it’s Friday
Anyway, the fear mongers did their job, and bill passed yesterday (Friday Oct. 3). Turns out that those House members were not voting against the bill out of conviction – they just wanted some more pork for their districts. And the final bill actually included tax cuts! It should have been the opposite: tax increases to pay for it.

I read the NY Times, Newsweek, Time, The Economist, US News and the CNN news Web site almost daily. But still, I have found few details of the actual legislation. Apparently the final bill was 400 pages long. I seriously doubt even most of the Members who voted for it know exactly what’s in it.

Much was said about “capping executive pay.” But in one version of the bill this proviso was only for bailouts of $300 million or more. Oversight? Federal Reserve Chairman Ben Bernanke, SEC Chairman Christopher Cox, and Paulson, the same guys that got us into this mess, are in charge.

There was some talk of adopting a plan like Sweden had in the early 1990s, where a bailout was used to take equity potions (i.e. partial ownership) in companies being rescued, so the government would have some control over how the money was spent, and even potentially make a profit. But, in the end, they elected to just give the fat cats the cash.

Also, there was no law passed on how to pay for this bailout, or to limit the same problems from happening again!


What are the People Thinking?
Where are the polls? I have seen a couple of “instant polls” (non-scientific) showing people are against the bill 3 to 1. Calls to Congress are running 10 to one against the legislation. So much for representative government. For myself, I spent two weeks e-mailing my Senators and my Representative, asking them to vote against the bill.

Since passage yesterday, I kept waiting for the reaction — would there be rioting in the streets of American cities? But: almost nothing. The coverage of Hurricane Ivan was bigger. The news outlets were reporting about how Sarah Palin did in the Thursday night debate, and speculating which magazines she read, and the fact that her glasses were poplar with people in Japan . Oh, let's not forget the sports scores and Paul Newman tributes.

Sidelight: During all the brouhaha of the last two weeks, the U.S. car industry received a $25 billion bailout from the U.S. Government. Hardy worth mentioning.


Thanks Ronnie
All this started with Ronald Reagan. 30 years of years of Reagan-style de-regulation has given America a medical industry run by insurance companies, tainted food, a dirty environment, poor airlines, gas-guzzling cars, and _______________ (fill in the blank). But we don’t have to pay for anything: Ronnie also pioneered the idea of tax cuts without spending cuts, which helped pave the way for our present $11 trillion debt. When Reagan was in the White House, I said the debt would be paid for by our children. In the first few years of the Bush Jr. White House, with its tax cuts, tax “refunds” and Iraq war, all of which pushed the deficit toward the $10 trillion level, I said the debt would still be with my grandchildren. Now, with this bailout legislation, we’re up to my great-grandchildren. But actually the debt (which is mostly held by foreign investors, such as the Chinese) has a very real effect on our day-to-day lives: the interest on this debt is now one of biggest yearly items in the federal budget. So this is money not going to healthcare or schools.


Obama
I was as disappointed that Obama didn’t seriously challenge this bill. But, in the glare of the Presidential election, he realistically had no choice. If the bill was defeated, he would have been blamed for every economic problem now and for the next four years. But the U.S. Representatives have no such excuse. I am urging my friends to vote against any Member of Congress who voted for this bill.


By the way: We’re Screwed Anyway
I don’t want you to get the wrong idea from the above. I believe America is in big trouble and due for some very tough economic times in the next few years. The over-valuing of real estate and stocks has been going on for years; personal, corporate and government debt has grown monumentally; and the government has been asleep at the wheel for decades. It’s just that the $700 billion bailout is not the solution – it’s the wrong plan at the wrong time to the wrong people. All it will do is save some business people that shouldn’t be saved, and have a minimal effect on an already deteriorating financial situation. If we really had $700 billion to spare (this is as much as has been spent on the Iraq War in 5 years), we could establish universal health care, or develop the fuel-efficient cars and factories to challenge climate change.


A Silver Lining
During the last year the price of food and fuel has doubled. This has the greatest affect on poor people (i.e. most of the people in the world). The rising prices of all commodities has been greatly exacerbated, in my opinion, by the super-heated economy and speculation described above. As the word “de-leverages,” this will actually make these commodities more affordable for real people. To say nothing of reducing pollution.



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