Real Change Depends on Stopping the Bailout Profiteers

By Naomi Klein

November 4 2008

To understand the meaning of the U.S. election results, it is worth looking back to the moment when everything changed for the Obama campaign. It was, without question, the moment when the economic crisis hit Wall Street.

Up to that point, things weren’t looking all that good for Barack Obama. The Democratic National Convention barely delivered a bump, while the appointment of Sarah Palin seemed to have shifted the momentum decisively over to John McCain.

Then, Fannie Mae and Freddie Mac failed, followed by insurance giant AIG, then Lehman Brothers. It was in this moment of economic vertigo that Obama found a new language. With tremendous clarity, he turned his campaign into a referendum into the deregulation and trickle down policies that have dominated mainstream economic discourse since Ronald Reagan. He said his opponent represented more of the same while he stood for a new direction, one that would rebuild the economy from the ground up, rather than the top down. Obama stayed on this message for the rest of the campaign and, as we just saw, it worked.

The question now is whether Obama will have the courage to take the ideas that won him this election and turn them into policy. Or, alternately, whether he will use the financial crisis to rationalize a move to what pundits call “the middle” (if there is one thing this election has proved, it is that the real middle is far to the left of its previously advertised address). Predictably, Obama is already coming under enormous pressure to break his election promises, particularly those relating to raising taxes on the wealthy and imposing real environmental regulations on polluters. All day on the business networks, we hear that, in light of the economic crisis, corporations need lower taxes, and fewer regulations — in other words, more of the same.

The new president’s only hope of resisting this campaign being waged by the elites is if the remarkable grassroots movement that carried him to victory can somehow stay energized, networked, mobilized — and most of all, critical. Now that the election has been won, this movement’s new missions should be clear: loudly holding Obama to his campaign promises, and letting the Democrats know that there will be consequences for betrayal.

The first order of business — and one that cannot wait until inauguration — must be halting the robbery-in-progress known as the “economic bailout.” I have spent the past month examining the loopholes and conflicts of interest embedded in the U.S. Treasury Department’s plans. The results of that research can be found in a just published feature article in Rolling Stone, The Bailout Profiteers, as well as my most recent Nation column, Bush’s Final Pillage.

Both these pieces argue that the $700-billion “rescue plan” should be regarded as the Bush Administration’s final heist. Not only does it transfer billions of dollars of public wealth into the hands of politically connected corporations (a Bush specialty), but it passes on such an enormous debt burden to the next administration that it will make real investments in green infrastructure and universal health care close to impossible. If this final looting is not stopped (and yes, there is still time), we can forget about Obama making good on the more progressive aspects of his campaign platform, let alone the hope that he will offer the country some kind of grand Green New Deal.

Readers of The Shock Doctrine know that terrible thefts have a habit of taking place during periods of dramatic political transition. When societies are changing quickly, the media and the people are naturally focused on big “P” politics — who gets the top appointments, what was said in the most recent speech. Meanwhile, safe from public scrutiny, far reaching pro-corporate policies are locked into place, dramatically restricting future possibilities for real change.

It’s not too late to halt the robbery in progress, but it cannot wait until inauguration. Several great initiatives to shift the nature of the bailout are already underway, including http://bailoutmainstreet.com. I added my name to the “Call to Action: Time for a 21st Century Green America” and invite you to do the same.

Stopping the bailout profiteers is about more than money. It is about democracy. Specifically, it is about whether Americans will be able to afford the change they have just voted for so conclusively.

Source

Using Federal Money for Bonuses Is a ‘Betrayal

By DAVID MUIR

October 30 2008

News of the $700 billion financial rescue package funded by taxpayer dollars to bail out banks was already a tough pill for many critics to swallow.

But though members of Congress claim they have tackled the issues of CEO pay and “golden parachutes,” it turns out they have not taken substantial action to limit year-end bonus checks on Wall Street.

“People have been lining their pockets and are continuing to line their pockets today,” said Rep. Luis Guitierrez, D-Ill., who is raising concerns to Treasury Secretary Henry Paulson about executive compensation. “I want to make sure it doesn’t happen tomorrow, because, politically, that’s very embarrassing to me.”

Some industry analysts predict that the average managing director at an investment bank that is receiving government money could receive a bonus of $625,000 this year, according to data from Alan Johnson and Associates.

While that bonus is less than the $1.1 million investment bankers earned last year, it’s still 15 times the income of the average American household.

On Thursday, members of Congress, many of whom voted in favor of the bailout, demanded answers about how the bailout money will be put to use.

“We’re asking the hard question: What are you doing?” said Rep. Henry Waxman, D-Calif. “Are you actually going to be giving bonuses out and then coming to the government and saying, ‘Give us money because we’re short on cash?'”

About $125 billion from the $700 billion financial rescue package has been allocated to nine troubled banks, including Goldman Sachs and JP Morgan Chase, according to the Treasury Department.

Ed Lazear, chairman of the Council of Economic Advisers, ensured critics Thursday that the government will monitor and regulate how the banks use the bailout dollars.

“We’re going to follow the law and make sure there are not abuses, but we want to make sure we get the economy going,” Lazear said, defending the White House’s handling of the stimulus package.

But taxpayers, whose money has gone to give firms a lifeline, wonder why these issues were not addressed before the $700 billion financial rescue plan was passed.

Source

I think a lot of people might like to know where their money is really going.

And then we have this take on things.

The “Dirty Little Secret” Of the US Bank Bailout

By Barry Grey

In an unusually frank article published in Saturday’s New York Times, the newspaper’s economic columnist, Joe Nocera, reveals what he calls “the dirty little secret of the banking industry”–namely, that “it has no intention of using the [government bailout] money to make new loans.”

As Nocera explains, the plan announced October 13 by Treasury Secretary Henry Paulson to hand over $250 billion in taxpayer money to the biggest banks, in exchange for non-voting stock, was never really intended to get them to resume lending to businesses and consumers–the ostensible purpose of the bailout. Its essential aim was to engineer a rapid consolidation of the American banking system by subsidizing a wave of takeovers of smaller financial firms by the most powerful banks.

Nocera cites an employee-only conference call held October 17 by a top executive of JPMorgan Chase, the beneficiary of $25 billion in public funds. Nocera explains that he obtained the call-in number and was able to listen to a recording of the proceedings, unbeknownst to the executive, whom he declines to name.

Asked by one of the participants whether the $25 billion in federal funding will “change our strategic lending policy,” the executive replies: “What we do think, it will help us to be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling.”

Referring to JPMorgan’s recent government-backed acquisition of two large competitors, the executive continues: “And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way, and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

As Nocera notes: “Read that answer as many times as you want–you are not going to find a single word in there about making loans to help the American economy.”

Later in the conference call the same executive states, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.”

“It is starting to appear,” the Times columnist writes, “as if one of the Treasury’s key rationales for the recapitalization program–namely, that it will cause banks to start lending again–is a fig leaf…. In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation.”

Early this month, he explains, “in a nearly unnoticed move,” Paulson, the former CEO of Goldman Sachs, put in place a new tax break worth billions of dollars that is designed to encourage bank mergers. It allows the acquiring bank to immediately deduct any losses on the books of the acquired bank.

Paulson and other Treasury officials have made public statements calling on the banks that receive public funds to use them to increase their lending activities. That, however, is for public consumption. The bailout program imposes no lending requirements on the banks in return for government cash.

Already, the credit crisis has been used to engineer the takeover of Bear Stearns and Washington Mutual by JPMorgan, Merrill Lynch by Bank of America, Wachovia by Wells Fargo and, last Friday, National City by PNC.

What the Wall Street Journal on Saturday called the “strong-arm sale” of National City provides a taste of what is to come. The Treasury Department sealed the fate of the Cleveland-based bank by deciding not to include it among the regional banks that will receive government handouts. It then gave Pittsburgh-based PNC $7.7 billion from the bailout fund to help defray the costs of a takeover of National City. PNC will also benefit greatly from the tax write-off on mergers enacted by Treasury.

All of the claims that were made to justify the bank bailout have been exposed as lies. President Bush, Federal Reserve Chairman Ben Bernanke and Paulson were joined by the Democratic congressional leadership and Barack Obama in warning that the bailout had to be passed, and passed immediately, despite massive popular opposition. Those who opposed the plan were denounced for jeopardizing the well being of the American people.

In a nationally televised speech delivered September 24, in advance of the congressional vote on the bailout plan, Bush said it would “help American consumers and businessmen get credit to meet their daily needs and create jobs.” If the bailout was not passed, he warned, “More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account…. More businesses would close their doors, and millions of Americans could lose their jobs … ultimately, our country could experience a long and painful recession.”

One month later, the bailout has been enacted, and all of the dire developments–banks and businesses disappearing, the stock market plunging, unemployment skyrocketing–which the American people were told it would prevent are unfolding with accelerating speed.

While Obama talks about the need for all Americans to “come together” in a spirit of “shared sacrifice”–meaning drastic cuts in Medicare, Medicaid, Social Security and other social programs–and the cost of the bailout is cited to justify fiscal austerity, the bankers proceed to ruthlessly prosecute their class interests.

As the World Socialist Web Site warned when it was first proposed in mid-September, the “economic rescue” plan has been revealed to be a scheme to plunder society for the benefit of the financial aristocracy. The American ruling elite, utilizing its domination of the state and the two-party political system, is exploiting a crisis of its own making to carry through an economic agenda, long in preparation, that could not be imposed under normal conditions.

The result will be greater economic hardship for ordinary Americans. The big banks will have even greater market power to set interest rates and control access to credit for workers, students and small businesses.

While no serious measures are being proposed, either by the Bush administration, the Republican presidential candidate or his Democratic opponent, to prevent a social catastrophe from overtaking working people, the government is organizing a restructuring of the financial system that will enable a handful of mega-banks to increase their power over society.

Source

I really do think taxpayers should keep a watchful eye on things and events, to see what will actually transpire. What they say and what they actully do are two very different things.

Global gamble: the fightback begins…

October 9 2008

The world’s central banks and governments appear to be running out of ammo in the face of a financial crisis that has been intensifying by the hour.

Even the unprecedented global interest-rate cut of half a percentage point yesterday had only the most limited effect, while the IMF called the credit crisis “the most dangerous shock in mature financial markets since the 1930s” and warned of a recession in the UK and elsewhere next year.

The government action was, as one analyst summed it up, “like throwing a pistol at the problem once you’ve emptied the chamber”.

The longest day in the global economy started at first light in Downing Street as Gordon Brown and the Chancellor, Alistair Darling, went public to announce up to £500bn of new capital to prop up Britain’s ailing banks. Within an hour of the opening of trading, the FTSE 100 index had fallen by 7 per cent,

Then, at lunchtime, news broke that the Federal Reserve, with the Bank of England, the European Central Bank, and the central banks of China, Canada, Sweden and Switzerland had cut their interest rates by a half a percentage point. In Britain, that meant a cut in the base rate from 5 to 4.5 per cent – a day sooner than expected; and the first time such an emergency move has taken place since the September 11 attacks in 2001.

As a result, the US Dow Jones and other indices did rally. But not for long, as trading soon returned to its characteristically febrile, volatile state.

The Dow now stands some 33 per cent below its peak last year and the US Treasury Secretary, Henry Paulson, warned yesterday: “One thing we must recognise – even with the new Treasury authorities – is that some financial institutions will fail.”

Late last night, it emerged that the US Federal Reserve had agreed to provide the insurance giant American International Group (AIG) with a loan of up to $37.8bn (£21.8bn) on top of another for $85bn made last month.

By now, Americans have lost some $2trln (£1.15trln) from their retirement funds – they are “disappearing faster than you can count” in the words of Barack Obama. He echoed the words of Ronald Reagan’s election campaigns, when he asked the voters to ask themselves if they were better off than they were four years ago: “The rate things are going you should ask whether you’re better off than you were four weeks ago.”

The Bank of England’s move and the Treasury’s £500bn package have also failed to reassure in any sustained sense. The FTSE 100 index finished the day extending the huge losses already witnessed this week and this year; down another 5.8 per cent, completing the global round of losses that saw the Tokyo index down 9.4 per cent to a five-year low. Trading in Indonesia and Russia was so chaotic the exchanges were suspended. France’s Cac 40 index ended 6.3 per cent lower and Germany’s Dax lost 5.9 per cent.

In London, traders and investors were encouraged by the sheer scale of the package – £500bn, of which some £400bn can be counted as “new money”, but still fretted that it would not be enough. The Prime Minister told a Downing Street news conference: “Extraordinary times call for the bold and far-reaching solutions that the Treasury has announced.” He said the plan would be funded through increased borrowing but added: “All these are investments being made by the Government which will earn a proper return for the taxpayer.”

Speculation was mounting in Washington last night that Mr Brown and other leaders would join finance ministers for their G7 meeting at the IMF in Washington tomorrow for an impromptu global economic summit.

Some of the most beleaguered British banks reacted well to the news that up to £50bn will be available in the form of government loans and purchases of shares, the price and terms subject to negotiation with the Treasury. Halifax Bank of Scotland, the UK’s largest home lender and the subject of wave after wave of pressure, ended up 24.5 per cent, and Royal Bank of Scotland was 0.8 per cent higher. But shares in Lloyds TSB, due to buy HBOS, fell 7 per cent and Barclays was down 2.4 per cent – all this despite a further £100bn being available in short-term loans from the Bank of England’s Special Liquidity Scheme, on top of the existing outlay of £100bn and an extra £250bn in loan guarantees to encourage banks to lend to each other. Banks will also be made to subscribe to a Financial Services Authority agreement on executive pay.

Yesterday’s unparalleled peace-time extension of state ownership and control, and the interest-rate cut was given only a nervous welcome. Researchers at Capital Economics said: “The provision of massive amounts of liquidity and enhanced depositor protection are all very well, but they do not get to the root of the problem. We are dealing with a crisis of solvency that is not going to disappear until banks are adequately recapitalised. The UK Government has finally got the message, albeit late in the day. But this is not a domestic problem. It is a global problem. And until the financial sector in the world’s largest economy is recapitalised, there will be negative spill-over effects in equity markets around the world.”

Pressure is growing on the US Treasury to take more equity stakes or make more loans to the large American banks and even other, non-bank corporations.

Yet such measures may not be enough to prevent recession and further financial meltdown.

Yesterday was a day when the world woke up to the historic nature of the times, and the realisation that the downturn will almost certainly now turn into recession and may even turn into a slump of a kind not seen since the Great Depression. The real fear is that no bank rescue plan or internationally co-ordinated interest-rate cut or programme of tax reductions and public spending can do much now to stave off the inevitable unemployment and company failures as the credit crunch spreads. The IMF’s latest World Economic Outlook said “the major advanced economies are already in or close to recession” with “a cascading series of bankruptcies, forced mergers and public interventions” battering the West’s banks.

Perhaps the only bright news is the belief that inflation will soon peak and then decline rapidly. Few disagreed with yesterday’s Bank of England statement that: “Inflation is likely to rise further, to above 5 per cent in the next month or two. But inflation should then drop back, as the contribution from retail energy prices wanes and the margin of spare capacity in the economy increases.” On the back of such an upbeat assessment, many City economists see interest rates falling to as low as 2.5 per cent, their lowest since 1951. For those in secure, well-paid work and with good credit ratings, the credit crunch may not hurt too much; for everyone else, the pain will be intense.

The rescue plan at a glance

* Gordon Brown unveils a £500bn package of measures aimed at rescuing the banking system.

* The Bank of England cuts interest rates, from 5 to 4.5 per cent.

* The Government confirms that all UK savers with accounts in the closed Icelandic internet bank Icesave will get all their money back.

* The IMF predicts the UK economy will contract by 0.1 per cent next year. Unemployment will rise to 6 per cent.

* European stock markets close down as investors remain unconvinced that the co-ordinated rate cuts and bank rescues will solve the financial crisis.

Source

US Spending and mismanagement was a contibuter to this problem.

£50bn ($88bn)UK Bailout Plan Announced

The UK government has announced details of a rescue package for the banking system worth up to £50bn ($88bn).

It will initially make the extra capital available to eight of the UK’s largest banks and building societies in return for preference shares in them.

It is “designed to put the British banking system on a sounder footing”, said Prime Minister Gordon Brown.

But the FTSE 100 in London fell 4%. HBOS shares rose 52% but Barclays fell 8% and Standard Chartered dropped 13%.

The key points of the plan are:

• Banks will have to increase their capital by at least £25bn and can borrow from the government to do so.
• An additional £25bn in extra capital will be available in exchange for preference shares.
• £200bn will be available in short-term loans from the Bank of England, up from £100bn.
• Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other.
• To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends.

Special company

Much of the current crisis has been caused by the banks’ unwillingness to lend to each other, so the government hopes that if those loans can be guaranteed then lending will resume.

“This is beginning a process of un-bunging a big problem where banks won’t lend to each other for long periods,” Mr Darling said.

The lenders that have confirmed they will take part in aspects of the scheme are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

The Treasury said that other banks and building societies would be able to apply for inclusion in the plan.

Possible profit

Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights.

Taxpayers may even end up making a profit from the shares, but that is by no means guaranteed.

BBC business editor Robert Peston said there would be strings attached for banks that take the government money.

“Taking taxpayers’ money will not be a licence to trade as normal,” he said.

Negotiations will take place with each participating institution that will require them to extend normal credit lines to homeowners and small businesses, in addition to rules on executive pay and dividends to other shareholders.

‘Stop the panic’

It is hoped that the deal will get the money markets going again and assure the future of the banking system.

“They’ve got additional capital now if they want it, they’ve got an unlimited source of liquidity,” said Terry Smith, chief executive of the money brokers, Tullett Prebon.

“That certainly should stop the panic in terms of people wondering whether or not the banks are safe.”

The deal has also been welcomed by the banks.

“The government’s announcement represents a very real and serious intention on the part of the authorities, following consultation with the banking industry, to bring stability and certainty to the UK banking system,” HBOS said in a statement.

Barclays, Lloyds TSB and RBS also issued statement welcoming it.

HSBC also welcomed the plan but said it did not intend to use the recapitalisation scheme.