Secrets of the Bailout

After two weeks of public wrangling between Congress against the Treasury and the Fed, we thought we knew all there was to know about the cost of the bailout. We were wrong. Old habits die hard. The same penchant for secrecy and partial disclosure that pervaded the last eight years of foreign policy, energy policy and domestic intelligence gathering is now slowly emerging in the bailout.

We are just now learning that the Fed has provided more than 2 trillion dollars of special lending, against poor collateral, to banks, insurers, and investment banks. When asked to identify the banks that received these loans, the Fed cites its longstanding policy to keep the discount and special facility loans private, lest the information spark a run on the neediest banks receiving this government help. At the Treasury, the criteria for deciding which banks will be given money from the initial allocation of the Troubled Asset Relief Fund are closely guarded secrets.

The Treasury Department controls tax policy. While the attention of the entire Congress, indeed the entire nation was focused on the bailout, the Treasury Department issued a notice that effectively repealed a section of the tax code that prevented banks from taking advantage of the tax losses of banks that they acquired to wipeout their own tax liabilities. The notice was so controversial that reporters have been unable to find anyone willing to say who wrote this new notice. Experts predict that this stealth notice will cost as much as 140 billion dollars of tax revenue.

These are very expensive secrets. However, it turns out that the biggest secret of all is that free-market, deregulators who have balked at consumer protection and foreclosure workouts for homeowners, do, after all, believe deeply in robust and aggressive government intervention in markets. It is no secret that this belief in the benefits of government intervention is limited to actions that will shore up the fortunes of the top 1% of the personal income scale, and the biggest banks. These institutions receive explicit bailout money through the front door and extremely valuable tax policy changes through the back door.

These secrets with a big price tag can hurt the ambitious promises and plans of brand new administration.

Follow Emma Coleman Jordan on Twitter: www.twitter.com/EconomicJustice

Comments

[mikey76]

This whole thing smells like a bank teller hiding all the money and then diappearing. Some body better be watching every penny.

[research]

It may be time to nationalize the Fed and perhaps temporarily, the big banks.

I see no other way to unwind these fractional mortgage derivatives.

What other apporaches can we take?

If we pass a low outlawing these derivatives, and you have one. It becomes worthless.

Who manages these derivatives? If each is a combination of several mortgages, couldn't they be revalued based on the health of the individual mortgage? Then the derivative company takes back the derivative for a "store credit" towards buying distinct rated whole mortgages.

[Carolab]

You can't nationalize the Fed. It's privately held.

You can go back to having Congress issue our own currency instead of borrowing it.

[MTGradwell]

If the fed was publicly held then that would disqualify it from nationalization (you can't nationalize something that's already nationalized), but being privately held makes it eligible.

[Carolab]

Better idea: community banks and credit unions--owned by their members.

[GTGTGT]

GM executives are not in the same league as the bailout players. Just found a web site that tracks compenstion for corporate executives. In 2007 GM execs took home about $40 Million while Goldman Sachs execs got nearlly $300 million. You can't expect poor folk to be invited to the party .

[Phil Waste]

Oh! Yeah!, we need to bail out the auto companies.

Remember when the Republicans were chanting "Drill baby drill" Well in a way they were right only we don't have to drill offshore all we need to do is drill the auto manufacturers.

We loan them money and connect those loans to retooling and put rules into effect that cars cannot weigh more than 2,000 pounds and have to get over 50 MPG. We don't use strings but stout cables on these requirements. No compliance, no money.

We raise the tax on gas to maintain over $4.00 per gallon and use the money to rebuild our infrastructure i.e. improved roads and national high speed rail system.

Just think with smaller cars we only have to repaint the lines on the highways to increase the number of lanes. Just think how many cars we can park in the same space.

I know pie in the sky. Makes to much sense so it won't happen.

[LOL123]

President Bush and his administration (daddy's old crew for the most part) can still do a lot of damage before the next one moves in and that's what scares me the most. It's not like in a divorce where you can freeze accounts, stop interactions that can upset the balance of equity or assets. The "group" is still very much in destructive mode for most us and setting policies that with have them sitting pretty when they leave office. I like the idea that congress isn't doing much with the bailout until January because it's as close to a "freeze " as we can get right now.

[we2plus4Rfree]

so how is congress taxed? and the house of representives?our votes put THEM in power, THEIR votes are what put THE MAN in power. so what are THEIR(is it i before e or is that one that breaks the rules; thier/their) rules?
how are THEIR taxes affected as to who is in office? will THEY also be paying this big payout bill? or is there some special rule that THEY can break? THEY"RE "public servants" who put these laws in place to protect and serve us, not "bail out" on the consequences that us "commoners" will experience as a result.

[silentknight65]

The saddest cut of all is that, after Obama becomes President, the Republicans are going to blame him for the debacle and completely forget that it was Bush & Co. who created this mess. If millions started writing to their Congressman telling them they're getting voted OUT in 2010, I bet you'd see some action.
We are going to be the next Roman Empire....­"Bush fiddled while Washington burned"...­.

[LinuxDude]

How can this hurt Mr. Obama? He voted for it.

Now Mrs. Pelosi want a multi-billion dollar package for the Auto industry, and Mr. Obama is right in tune with this as well.

Does this surprise you? I guess it does if you actually expected 'Change'.

[LOL123]

As much as it hurts me to say this .....you are correct. The few that stood their ground and voted Nay got cancelled out by some yea sayers in their own party.

[peterg76]

What secrets? There was never any subtlety to the scam.

[Bladernr1001]

I can't tell what you guys want.....f­ree markets, meaning no bailout (that is what I would prefer)...­...or a bailout because you have concluded free markets don't work.

And you keep talking about the secrecy and back room dealing on the bailout deal. Don't forget we have a solid democratic congress here not just a Bush administration. How can you pin this all on the republicans when democrats control congress? Pols are pols no matter what political stripe they are. They will grease any skid they think will personally benefit them. Don't think things like this won't happen in the Obama admin or congress after Bush leaves.

[flatus]

Democrats are not against a free market. However, we are against an UNREGULATED free market. This is because we understand that there will always be some group trying to game the system and piss on the rest of us.

The Democratic congress (of which you speak) understood that the deal would be to help the mortage holders NOT the banks as was the case later after Paulson's "Big Switcheroo". Sorry, it's your forever opaque government that now causing the frustration and anxiety, You may not suspect that corruption is having a field day, but many of us are do not share that opinion.

[cavegal]

Excuse me, but as a registered Independent I would like to point out that the very Democrats that you claim understood the deal would help mortgage holders are guilty of writing in serious oversight regulations regarding that same bailout money. It is preposterous to blame everything on the Republicans. Both sides are equally at fault here. These politicians are protecting their own backsides.

The only way out of this is for the American people is to threaten a major tax revolt. In other words if you owe send a letter stating that until Congress starts doing their job representing all Americans there will be no more funds forthcoming. If they owe you file.

I think things are getting so bad, that I am in the process of leaving the country.

[cavegal]

Meant to say guilty of NOT writing in oversight regulations.

[leftLibertarian]

flatus said - an 'UNREGULATED free market' is a contradiction in terms. That's like saying a peaceful war.

[Bladernr1001]

The question is....what regulation should there be? The federal register shows an ever increasing body of government regulations and yet here we are in this mess. Perhaps we should review the maze of regs already on the books and keep only the truly effective ones.

The original plan for the bailout was to purchase the distressed mortgage paper the banks were holding. I thought this a foolsh idea for the government to take on in the first place and I suspect that Pualson realized this as well after the legislation was passed. It was hastely and poorly written and now what we are probably really seeing is that Pauson now is trying to salvage something workable any way he can to save face. I don't think it is the proper role of government to "bailout" anyone or anything. This bailout in particular no matter how it is executed will only produce an inflatonary environment.

[Thermodynamics]

The Senate is composed of 49 Republicans, 49 Democrats and 2 Independents. VP Cheney has the tie-breaking vote, if the chamber is locked.

This is not a Congress controlled by Democrats. Let us put the blame where it is due.

[Kassandra]

This is a coldly calculated move on the Bushies part to throw roadblocks in Obama's way to recover from the financial debacle. It is illegal, and yet, Congress is too scared of being blamed for the coming Depression that they won't take any action or even investigat­e...of course, by the time Obama take office, the damage will be irreversible.

Amazing what a "lame duck" president can accomplish aint it?

Naomi Klein has an excellent article in The Nation everyone should read:
The Bailout: Bush's Final Pillage
http://www.thenation.com/doc/20081117/klein

This is a good one too:
In Praise of a Rocky Transition
http://www.thenation.com/doc/20081201/klein

[NotMcCain]

We need to stop calling it a "bailout" and start calling it a "giveaway".

With total arrogance and no accountability, Paulsen (and BUSH) decided to provide no relief to homeowners and just give BILLIONS to banks with no strings attached.

It's a disgrace and legislation should be passed IMMEDIATELY to stop it.

[LinuxDude]

Paulson AND Bush AND Obama did this.

[boophus]

Paulson & Bush pushed for a totally without oversight power to Paulson to spend the bailout as he chose. Then they pushed it as necessary to save the economy. It is apparent that other countries had already done the same thing successfully. But not here, for some reason our president and his treasury sectary feel they don't have to follow rules or laws. The house and senate tried to write in some oversight and rules about how the money was to be used in line with successful bail-outs inother countries. Paulson is ignoring anything but his RULES for using the money. It is not congress, it is not the senate, it is not Obama--- it is Paulson and Bush ignoring rules and laws and doing whatever they damn well want against what congress passed.

I say write to the congress :the house & senate who are already angry about how the bailout package they wrote and passed is being totally ignored to encourage HUGE consolidation of the largest banks power with no possible benefit to citizens who are paying for it. Rage at them to refuse to give the rest of the bailout to the thieves, Paulson and Bush.

[schatsie]

REAGAN SAID TRUST AND VERIFY... Why is that so hard to understand­...

Hopefully the Euros will take the helm... You have to love the fact that Gordon Brown cut a better deal with the English banks than Warrent Buffett did with GS, Brown got 12% interest, board representation and caps on executive pay....

[rpahk]

Why should anyone be surprised? Corporate America owns the Federal Government.

[Newmann48]

Why should the people know anything about the people's business?

[MSF31538]

MAIN STREET RELIEF

Immediately pass a new bankruptcy reform act that does the following.
1. Revoke the 2005 amendment in its entirety.
2. Individuals can file bankruptcy under Chapters 7 or 11 with no "means test".
3. Cram down all the mortgages to present market value fixed by the court and reject all notes and mortgages as executory contracts.
4. Fannie mae will then issue a new 30 year mortgage on the current value, no down payment, interest only for 5 years to get the payments low, then amortize the balance over the remaining 25 years at a 5% fixed interest.
5. The BK judge will then determine who is the present owner, and set aside all of the slicing and dicing and credit default swaps.
6. No tax liability for foregiveness of indebtedness.
7. All credit card interest reduced to a max of 10% and all payments applied against principle.
8. Permit all student loans to be discharged with no tax liability.
9. If any banks, insurance companies, or investors are damaged by this cram down, then let then file a chapter 11.

All in favor call me.

Martin S Friedlander, Esq.
www.freedompost.typepad.com

[cavegal]

I really enjoyed your post and your blog. I especially found the information on Summers enlightening. I have been very disturbed about all of the talk regarding him becoming Treasury Secretary. Now I know my fears have a solid foundation.

[digdeeper]

Sounds an interesting plan to me.
I also like the idea of nationalising the Fed. I cannot believe that goon Poulson is still seeming to be acting on his own (and with all his previous involvement when at Goldman Sachs) and without supervision.
What the hell is happening? No problems with a free market, but one that is regulated and transparent.
How can so few people cause such havoc for the whole world.
GET THEM OUT now.