Bailout Oversight

Loook Out Below! They Call this Season 'Fall' for a Reason

dlindorff — Mon, 28 Sep 2009 10:54:48 -0400

By Dave Lindorff

So now it turns out that the whole Troubled Assets Relief Program
(TARP) was a flop or more likely a scam. Remember Bush Treasury
Secretary Henry Paulson telling us last September that credit markets
had locked up, and then, after half of the $750 billion that he
extorted out of Congress was handed out to Wall Street firms, new
President Barack Obama justifying the spending of the second half of
the money because we needed to “get the banks lending again”?

Well, now Neil Barofsky, the special inspector general for TARP, is
telling us that all that money, and another more than $2 trillion in
loans, accomplished nothing. In an interview
with Lagan Sebert, published in Huffington Post, Barofsky says, “We
were told by Treasury that the purpose of the TARP fund was to increase
lending. But we haven’t increased lending.”

Well yeah, that’s true. Just ask any ordinary working stiff. My
little bank, the Harleysville National Bank here in eastern
Pennsylvania, far from expanding lending, has been shutting down
customer credit lines. As a bank manager told me, they were “reviewing
all our equity lines” in light of declining property values (actually,
property values in our area north of Philadelphia have remained pretty
stable). In general, banks across the country have been canceling
credit lines, closing credit card accounts on customers deemed
risky—including small businesses—and making it very hard to get a new
mortgage. (They’ve also been raising all kinds of fees, ripping
customers off in other ways, but that’s another story.)

And that goes for the biggest banks that got billions of dollars in taxpayer bailout funds.

Barofsky has been trying doggedly to find out whatever happened to
all that money of ours that was shoveled out to the banks, and as he
reports, he’s been working not just without any help from the Treasury
Department, but actually against the active resistance of Treasury,
which he accuses of having tried to dissuade him from even looking into
it.

“My biggest surprise,” he says, “is when we announced an audit (of
TARP), Treasury went out of their way to say…it would be a big waste of
time.” He says Treasury officials including Treasury Secretary Tim
Geithner, claimed that it would be impossible to find out where the
money went, on the argument that money is “fungible”—that is to say all
money is the same. Of course this is a cynical and ridiculous
assertion. If it were true, there would be no job for auditors, since
all auditors do is look to find out where money went. (Imagine telling
an IRS auditor that it is a waste of time auditing your books, because
money is fungible!)

In any event, Barofsky has gone about his work, with or without the
backing of the Obama Treasury Department, and what he found is that
instead of lending out the money that they were provided with by
taxpayers, the banks have been “acquiring other institutions, sitting
on it, paying down credit lines,” and, of course, paying out obscene
bonuses to executives.

The one thing the banks are not doing is lending.

But then, as I wrote last February, it was silly to think that by
shoveling money into banks during a record recession, the banks would
then lend it out. First of all, there was the awkward reality that good
companies were and still are not looking to borrow money. Rather, they
are trying to pay down debt and get their balance sheets on more solid
ground to survive a period of low or declining sales and earnings. The
only companies that would be trying to borrow right now would be the
ones that were on the rocks, and wanted money just to stay afloat. And
what banker would lend to them? And second, if the banks could make
more money by investing their new cash instead of making risky loans
with it, why would they lend? So most of them just used the money to
invest in Treasury Bonds.

The long and the short of it is that we’ve been taken for a very
big and costly ride by banks that created a huge crisis and that then
got the government to bail them out of it with our money, and by two
administrations, one Republican and now one Democratic, that have been
submissive and willing servants of the big banks.

The big surprise to me has been Paul Volcker, who I mistakenly took
to be an over-the-hill relic and Wall Street patsy. The former Carter
and Reagan-era Federal Reserve Board chairman, currently chair of
President Obama’s economic advisory panel, is publicly warning
that the president’s bank policies are preserving a system of giant
banks that are “too big to fail,” and are risking further, even larger
bailouts.

Barofsky agrees, saying that since the bailout, under Obama’s bank
policies, big banks already deemed “too big to fail” have become even
bigger, and he concludes, “We may be in a far more dangerous place
today than we were in a year ago,” for having told certain financial
companies that we will not let them fail.

Little wonder that the smart money—that would be the insiders in
corporate boardrooms and executive suites—is reportedly selling shares
as fast as they can be sold, with the experts reporting
that insider sales of company stock are running 31:1 on the sell side.
The explanation: with layoffs still running at over 500,000 a month,
and nobody hiring, these executives don’t see anything in the year
ahead or even longer that is likely to put the economy on a renewed
growth path.

Putting these bits of news together doesn’t paint a pretty picture:
We’ve got an economy that appears headed for at best a long period of
stagnation and, more likely, for a second downturn, once the effect of
last March’s stimulus package wears off. We’ve got a financial system
that has been propped up artificially, its balance sheets soggy with
underwater mortgages and worthless derivatives, and its executives
holding assurances that they can count on the government bailing them
out no matter what stupid or self-serving decisions they make. We’ve
got an economy that is 70% based upon consumer spending, in which one
in five people is unemployed or involuntarily underemployed. We’ve got
a nation that hardly makes anything, at the same time that its currency
is sinking like a stone, making imports increasingly expensive, And we
have a stock market that has been inflated into a giant bubble, just
waiting to pop.

October should be an interesting month this year.
_______________
DAVE LINDORFF is a Philadelphia-area journalist. His latest book is
“The Case for Impeachment” (St. Martin’s Press, 2006). His work is
available at www.thiscantbehappening.net

Fantasy Finance and Real Fixes

davidswanson — Fri, 22 May 2009 12:48:16 -0400

By David Swanson

If you're like me you find it at least a bit disturbing that we're giving trillions of dollars to save the economy to the very people who wrecked it, and more disturbing that we're doing so without any solid basis for expecting to get much of it back and without making fundamental changes to prevent a repetition. But if you're like me, you also aren't 100 percent certain how a credit default swap works with a cubed collateralized debt obligation, much less whether such a monstrosity needs to be eliminated or reformed. What to do?

Well, a coalition of concerned citizens called "A New Way Forward" ( http://anewwayforward.org ) is organizing teach-ins everywhere on June 10th ( http://anewwayforward.org/demonstrations ) and if you don't have people who feel up to the role of teachers, or even if you do, there's a terrific video at that website to download, show, and discuss. Just doing this much will make you more confident in discussing the single largest transfer of wealth any of us have seen, and it will connect you with others who share your concerns as well as your hesitations. There is also a wonderful collection of articles and books available on the right hand side of this page: http://anewwayforward.org/blog

A New Way Forward has digested this information and arrived at three proposals:

"NATIONALIZE: Experts agree on the means -- Insolvent banks that are too big to fail must incur a temporary FDIC intervention - no more blank check taxpayer handouts.
REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.
DECENTRALIZE: Banks must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place-- new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function."

I'm inclined to agree with those general ideas, but I've also just read an excellent new book that takes a broader view and offers broader solutions while calling into doubt the idea that the fixes listed above will be sufficient on their own. I recommend adding to any financial shenanigans reading list "The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity, And What We Can Do About It," by Les Leopold. The introduction to this book ends thus:

"And then there's the subprime-mortgage puzzle. The financial media has all but concluded the crash was caused by risky mortgages taken out by poor people and deadbeats who couldn't afford them, and issued by reckless lenders who should have known better. About $1.3 trillion worth of such mortgages are out there. Of that, about $300 billion are in default or nearly so…. Please, can someone explain how that amount (about 2 percent of household net worth, could devastate the world's financial system? To date, the taxpayer has put up about $2 trillion in bank bailouts and loan guarantees. Why didn't that take care of the problem long ago? Like some perverse modern-day miracle of fishes and loaves, how did $300 billion of bad debt multiply into trillions of dollars in financial toxic waste? Poor people did all that? In this book I go after these questions -- and I hope the answers will tell us a good deal about our economic woes and what to do about them. At the very least, I hope to contribute modestly to our collective financial literacy. In short, if I can understand this crap, so can you."

And you really can and it's really worth doing. The bulk of "The Looting of America" is devoted to the explanation of what's happened. And the root cause turns out not to be deregulation or oversized banks or a lack of accountability for fools and crooks, although all of those things helped. The tragic flaw in the system turns out to be the now-thirty-year-old divergence of productivity and income, the denial of a steady share of our own earnings to working people, the gradual transfer of great sums from the rest of us to a very small group of extremely wealthy people. Of course, such a transfer of wealth might seem offensive, but how could it actually cause the situation in which we needed to transfer another huge pile of wealth to the same people through our government? Well, essentially we created a situation in which investors couldn't find anything in the real economy to invest in anymore. All the real stuff was already invested in. Had someone created a way to invest in new industries, infrastructure, green energy, and mass transit, we might all be smiling about it now. Instead, investors figured out ways to invest in fantasies, to make bad investments look good, and to gamble other people's money on the fate of yet other people's investments without investing in anything real at all.

Credit: http://www.dilbert.com

So, when Leopold comes to his recommendations at the very end of the book, some of them may sound familiar and others harebrained, unless you've read the preceding chapters, in which case they all sound sensible or newly strengthened. The recommendations include (in a list I've created by pulling ideas out of the text):
1-Financial disaster insurance: we should collect premiums (or taxes) from all financial transactions to sure up the real economy against the next collapse of the fantasy one by investing in infrastructure and all the useful real investments that those with too much money on their hands don't always manage to find or create on their own.
2-Without expecting that we can prevent the next bubble and burst, we should attempt to lessen it by establishing a Financial Product Safety Commission that would ban dangerous financial "products" like collateralized debt obligations. Any product too difficult for skilled regulators to comprehend would be banned for that reason alone.
3-Undo the transfer of the wealth from our increased productivity: "If each billionaire inside the casino walked out with 'only' $100 million per person, they would leave $1.52 trillion sitting on the table. If these chips landed in the public coffers, let's say via steeply progressive income and wealth taxes, we could invest $150 billion a year in developing and deploying renewable energy alternatives -- ten times what President Obama called for during his campaign. Or we could provide free tuition for every student at every public college and university -- in perpetuity."
4-Re-unionize. Permit it by passing the Employee Free Choice Act.
5-Cap the salaries at any financial company taking government money at the salary level of the U.S. president ($400,000). Or do that for all companies taking public handouts.
6-Create single-payer health coverage, which would provide a significant stimulus to the economy.
7-Create a maximum wage.
8-Raise the minimum wage.

Another central concern for many worried about our financial fate is the role played by the Federal Reserve, which someone rightly remarked is no more federal than Federal Express. It's a private company running our financial policies and inventing and distributing money. Not only does the Constitution place such powers in Congress, but the Congress is currently not even permitted to know what the Fed is up to. It would be, however, if H.R. 1207, the Federal Reserve Transparency Act of 2009, were to pass the House of Representatives and an unprecedented avalanche of public pressure force the Senate to miraculously go along. The House bill has 179 cosponsors plus one sponsor. That's almost unheard of. No bill has that many cosponsors. It only takes 218 votes to pass. So, if we could get 38 more cosponsors we'd be getting somewhere. Here's a page on which to take action:
http://action.firedoglake.com/page/s/Fed1207

(And, by the way, applause to my congressman Tom Perriello who has signed onto this -- the second thing he's ever done that I applauded.)

There's also a particular regulation that ought to be enforceable and in fact used to be enforced fairly well, that would limit the ability of the non-working class to rip the rest of us off. I'm talking about a ban on usury. There are bills in both houses of congress to limit the interest that creditors can charge. Senator Bernie Sanders' bill (S. 582) would limit interest to 15 percent. Even those who believe we would all perish if billionaires had to fly on the same airplanes as other people and couldn't purchase that third yacht might support the idea of limiting the interest on their own credit cards to 15 percent. Surely the masters of the universe can make a dishonest living at 15 percent the same as at 22 percent or 400 percent, right? Now would be a good time to call your senator and representatives.

Teabag THIS

davidswanson — Sun, 12 Apr 2009 03:40:11 -0400

Flyers to take to teabag rallies:

Large jpg. PDF. Word. Old Word.

Politicized Accounting: No End to the Scams

dlindorff — Tue, 07 Apr 2009 11:55:46 -0400

By Dave Lindorff

The accounting profession might seem like the last place that you’d
find serious political hanky-panky going on, and it’s probably not on
very many people’s A-list of fun subjects to read about, but the
Financial Accounting Standards Board, a quasi-governmental body that
has statutory authority to regulate and establish the rules by which
public companies, including banks, do their books, has just caved in to
pressure from those banks and from the large number of members of
Congress who pocket huge piles of campaign swag and perks from those
banks and other public companies, and gravely undermined the integrity
of corporate balance sheets.

This may sound incredibly arcane, but what the FASB has done is
declare that assets held by companies (including banks) on their books
will no longer have to be valued at their current market value. Under
new guidelines, effective retroactively to March 15, these assets can
now be valued at what the corporate managers think (or pretend to
think) they will be worth at some time in the future when they might
try to sell them.

Think about it for a minute. Say you own a house, which you might
have bought 10 years ago for $200,000, using a $180,000 mortgage.
Today, depending on where you live in the country, that house might be
worth as little as $100,000. If you still owe $100,000 on your
mortgage, that would give you a net worth of 0 (a lot more than what
Citibank and Bank of America are worth today). Now let’s say you want
to go out and buy a $20,000 car on credit. The auto dealer, before
extending you a car loan, will want to know what your net worth is.
Under market-to-market accounting rules, you would have to say that
your net worth is 0, and you probably wouldn’t get a loan—especially if
your employment, like that of many Americans, is iffy, and you’re
carrying a big balance on your credit cards. But under the new FASB
guidelines, if you were to be treated like a bank, you could estimate
the value of your house as $200,000 (the price you paid for it), or
perhaps even $250,000 (the price you “expect” it to get when you decide
to sell it). You have no real way of knowing whether your house will
ever return to being worth $200,000. For all you know, it could fall
further over the next five years to $75,000 or $50,000, but that
doesn’t matter. You, the owner, are saying that your “reasonable
expectation” is that this asset of yours is “worth” $200,000. And
bingo, thanks to the magic of modern FASB-approved accounting, your net
worth, instead of being 0, is now $100,000. You can buy your car.

This is what the FASB is now saying banks and other companies can do.

If you are an investor, or a potential investor, you now have to be
very wary. After all, how are you top establish what a company is
really worth, if the management is able to play games with the value of
its assets? The answer is you really can’t know. Things get much worse
when it comes specifically to banks, which after all, are all about the
assets.

Remember those “toxic” assets—the alphabet soup of debt products
with initials like CDO, CDS, SIV, all composed of diced and sliced debt
that for the most part is close to worthless? Well, thanks to the
FASB’s accommodating change in the rules, instead of valuing those debt
holdings (remember, loans are assets to a bank) at what they are worth
on the market today, the banks are now able to value them at what they
supposedly think they will be worth at some future date when the bank
might want to sell them. This is a wholly fictional figure, of course.
Nobody knows what, if anything, these crap debt instruments are going
to be worth, but it’s a fair bet that most of them won’t be worth any
more a decade hence than they are worth today (and maybe less). But who
cares? The important thing is that now the banks, who have huge black
holes in their balance sheets, can now fill those holes with
artificially inflated assets and make themselves look a whole lot
better financially than they really are.

There’s an irony here. The big banks that hold most of the toxic
debt (and especially the five largest banks that hold 96% of the
garbage) desperately wanted this FASB rule change because they wanted
to prettify their balance sheet in hopes of boosting their share values
and of maintaining the pretense that they are not zombies. But in doing
this, they are undermining a key goal of the Obama administration and
of Treasury Secretary Tim Geithner and Federal Reserve Chair Ben
Bernanke, who wanted to have the government and private investors start
buying those trillions of dollars’ worth of toxic assets off of the
banks’ hands.

Remember, if the banks declare that the toxic assets on their books
are worth some fictitious amount, they have to sell them at that price,
or stand accused of faking their books, i.e. fraud. But investors, like
hedge funds and other institutional investors, are not going to want to
buy those assets at anything but distressed bargain-basement prices,
because even with the government assuming 92 percent of the risk, they
are not going to buy these trash assets unless they see the chance for
a significant upside.

So with the new rule, the banks will end up being stuck holding the
very toxic assets that have sent them into a tailspin in the first
place.

The vote to end market-to-market accounting rules was controversial
even on the five-member FASB board, which ended up narrowly voting 3-2
in favor of the measure. One member who voted against the change,
Thomas Linsmeier, decried what he said was “pressure” on the board to
act. A House committee had threatened to introduce legislation that
would force the change if the FASB didn’t act on its own.

The US budget has long been a work of fiction. Now the books of the
nation’s banks and of many of its public companies will also be pure
works of fiction.

As columnist Jonathan Weil wrote in Bloomberg.com last month as the
FASB was considering making this change in its rules, “The FASB ought
to change its name to the Fraudulent Accounting Standards Board.”

The road to ruin, it turns out, is not paved with good intentions
after all. It is paved by powerful lobbyists buying short-term benefits
at the public’s expense.

By the way, if you think Citigroup is solvent, I have a great deal on a house for you.
________________________

DAVE LINDORFF is a journalist based in Philadelphia. His latest
book is “The Case for Impeachment” (St. Martin’s Press, 2006). His work
is available at www.thiscantbehappening.net

Now We Can See Why Open Government Is the Only Way to Go

dlindorff — Wed, 18 Mar 2009 12:53:41 -0400

By Dave Lindorff

For years, advocates of open government, mostly on the left, but
also on the right, have railed against the growing secrecy of the US
government. But the focus, particularly of left critics, has been on
the Intelligence budget, a $40+ billion “black box” that is completely
protected from public and even congressional scrutiny, and on large
swaths of the Pentagon budget, which are kept hidden allegedly for
“national security” reasons.

For the most part, the American public has adopted an ovine
attitude towards such secrecy, assuming that the “government knows
best.”

Now, however, with the economic crisis, and the collapse of AIG,
Citibank, Bank of America, Merrill Lynch, Bear Stearns, Lehman
Brothers, General Motors, Chrysler and other leading US firms, and with
bailouts that are putting taxpayers on the hook to the tune of
trillions of dollars, the people are waking up, or at least are
starting to get restless in their slumber.

Perhaps there will be a new awareness soon of the importance of transparency in all parts of government.

For now, the Obama administration, the Federal Reserve and Congress
are all trying desperately to ease the citizenry back into a state of
torpor by adopting a position of mock outrage at the $135 million in
bonuses paid out by AIG to the very employees who created the
disastrous and crooked Credit Default Swap market that precipitated the
global economic collapse.

What they don’t want to happen is for people to start thinking
about the $183 billion that Congress and the Fed approved for AIG,
which we now have learned was simply a devious scheme for passing more
money in secret through to troubled banks and investment banks – among
them Citigroup, Bank of America, Goldman Sachs, Morgan Stanley and
others – that had bought these CDOs.

Recall that back in September, when the crisis first hit in earnest
and Treasury Secretary Henry Paulson first called for a bailout
program, he asked—in a three-page proposal to Congress which he
insisted they must pass or risk total economic collapse and the
imposition of martial law!—for absolute authority as Treasury Secretary
to hand out the $700 billion and for protection against any legal
action for whatever he might choose to do with it.

Congress didn’t accede to his imperious request, though it did give
him half the money he wanted: $350 billion, saying it would provide the
second $350 billion later (the new Congress did hand the second half of
the money over just before President Obama took office). A sizeable
chunk of that huge sum of taxpayer money went to AIG, the giant
insurance company that had devised a scheme to sell “insurance” for the
mortgage-backed securities that banks were gorging on. The term
insurance has to be placed in quotes, because since these contracts
were not backed by any assets, they were really not insurance at all.

As rumors spread that much of the so-called Troubled Assets Relief
Program (TARP) money that was provided to AIG was actually passed
through to banks and investment banks that were already receiving TARP
funds directly (including nearly $50 billion to foreign institutions),
Congress and some news organizations, notably Bloomberg, sought to
learn what firms were actually receiving the cash. AIG, the Treasury
Department and the Bush and later the Obama administration initially
fought such disclosure, as did all the bank recipients, claiming that
releasing the names of the recipients would make investors doubt their
stability.

Finally, thanks to the efforts of New York State Attorney General
Andrew Cuomo, whose office has been pursuing the issue in the courts,
we have the answer: the money was going primarily to the nation’s
biggest banks.

But most troubling is that a disproportionate amount of the AIG
bailout money--$13 billion -- went to Goldman Sachs, a company that
until July 2006 was headed by Treasury Secretary Paulson himself. No
wonder Paulson, AIG, Goldman Sachs and others wanted to keep this all
under wraps. No wonder too that Paulson initially tried to get Congress
to immunize him from the legal consequences of his bailout actions.

The truth is that Goldman Sachs and Paulson should be prosecuted
for corruption. The deal that Paulson engineered in secret for
shoveling taxpayer money into his former firm is surely one of the
largest acts of official larceny of public funds in the history of the
country.

Goldman Sachs even publicly announced in early February that it was
returning $10 billion in TARP funds it had received last fall, saying
it didn’t need the money. Well sure the company didn’t need the
money—because it was getting even more in secret via the AIG conduit.

With this backdrop, the rest of the bailout might well be seen as a
hugely expensive cover: give enough money to the rest of the big banks
and investment banks, and nobody in the industry will squeal about the
sweet deal Goldman Sachs was getting.

Of course, the corruption goes much deeper. While public money was
being funneled into the banks and other financial institutions, those
same institutions were using some of this taxpayer largesse to lobby
Congress to do even more. Just between October 1 and the end of 2008,
18 recipients of TARP funds reported spending nearly $15 million on
lobbying efforts in Washington. Among the biggest
bailout-recipient/lobbyists: American Express ($1.1 million), AIG ($1.1
million), B of A ($$880,000), Citigroup ($1.5 million), Goldman Sachs
($720,000), JPMorgan Chase ($1.1 million), Wells Fargo ($580,000).
These amounts represent quite an investment considering that these
firms all received, in return for their TARP lobbying efforts, billions
of dollars in bailout money.

Remember, Paulson’s original plan was to have even the TARP direct
bailout grants kept secret from the public. That idea didn’t fly. But
many of these companies that used their public funds to lobby for more
public funds also received secret bonus bailouts via AIG.

So here’s what happens when you have secret government. The public gets royally shafted.

Now that the story is coming out, the crooks in Congress, the White
House and at Treasury and the Fed are desperately trying to lull us all
back to sleep by feigning anger at the relatively paltry sums AIG is
handing out in bonuses to some of the crooks and scheisters on its
staff.

We should not put our heads down on the pillow being offered, though.

The lesson here is that we need open government, and that we need
to demand that our media not go for the cheap and easy story being
handed out by government press release.

Also, there’s this last thought: If you thought that the banking
mess was a horrible rip-off, just try to imagine what level of
corruption there must be in the Pentagon and the Intelligence programs
that have been operating in absolute secrecy and with no scrutiny for
decades!

Baa-a-a-a-a-a-a.
_________________
DAVE LINDORFF is a Philadelphia-based journalist. His latest book
is “The Case for Impeachment” (St. Martin’s Press, 2006 and now
available in paperback edition). His work is available at www.thiscantbehappening.net

Paulson and Bush Stole $78 Billion from You and Me

Bob Fertik — Fri, 06 Feb 2009 00:30:28 -0500

Harvard Law School professor Elizabeth Warren, who chairs the 5-member TARP oversight committee, told the Senate Banking Committee that Hank Paulson paid banks too much for their ~~worthless~~ troubled assets last fall. How much too much?

Treasury paid $254 billion for assets worth approximately $176 billion, a shortfall of $78 billion.

In other words, Hank Paulson and George Bush stole $78 billion from taxpayers to directly enrich the banksters. When will the prosecutions begin, and when will we get the stolen loot back?

Time for Obama and Us to Face the Economic and Political Music

dlindorff — Thu, 08 Jan 2009 15:48:20 -0500

By Dave Lindorff

The real cost of the Bush Administration’s trillion-dollar bailout
of Wall Street is becoming painfully apparent as the incoming Obama
administration attempts desperately to make a case for its own
$800-billion economic stimulus package, while warning about “trillion
dollar deficits as far as the eye can see.”

On its own merits, all other considerations aside, with the
economy slipping into a sinkhole, President-elect Barack Obama’s call
for $800 million in stimulus spending should be a slam dunk for
Congress. The problem is, Congress already caved in a hurry and
approved nearly that same amount--$700 billion—in a matter of days when
Bush’s Treasury Secretary Hank Paulson and his Federal Reserve Board
Chair Ben Bernanke said they needed the money to prevent a collapse of
the financial industry, as the nation’s biggest banks, investment banks
and insurance companies teetered on the brink of insolvency last fall.

In fact, there was no need for panic. Paulson reportedly warned
assembled Congressional leaders in late September that a financial
Armageddon loomed, which would lead to mass runs on the banks, rioting
in the streets, and ultimately martial law. Although the number of
Americans who have more than the insured amount of $100,000 in a bank
is not enough to make for one small staged bank run, the Congress
blinked, and gave him essenntially a blank check to spend $350 billion
right away. Paulson and Bernanke took that authorization and ran with
it, spending most of it to invest in those institutions, and adding
even more money using all kinds of tricks that ultimately could put the
taxpayer on the hook for as much as $8 trillion dollars. They cranked
up the printing presses too, and, like a North Korean counterfeiting
ring, ran off an extra $2 trillion in greenbacks, just for good measure.

No wonder that now that Obama comes in asking for another $800
billion over the next two years—just a tenth of the sum the Bush/Cheney
regime has pissed away over a couple of months—Congress is balking.

In fact, Obama actually caved before he even began, making half his
request for stimulus money actually a in the form of a proposed
$500/per/taxpayer tax rebate. We already saw how successful that idea
was when we got the Bush tax rebate last year. The money was used by
most hard-strapped citizens to pay down debt. When they actually went
out and bought stuff with their rebate—which was the intent of the
program—since almost nothing is actually made in the US, the money
ended up just being shipped abroad to Mexico, China, Sri Lanka and
India. Some stimulus!

The same thing will happen to the Obama tax rebate. It will go to
paying down debt, or it will be spent on imports. But unless he talks
straight to the American people, politically, Obama has to include a
rebate in any bailout, or he won’t get any Republican support in
Congress for his stimulus package.

Meanwhile, the evidence is that the Bush/Cheney boondoggle, while
it enriched the owners and investors in the big banks that got the
investments (many used the federal largesse to pay executive bonuses,
or to buy other banks at firesale prices), did nothing to loosen up
credit. Banks that found themselves with more cash on hand, instead of
lending it out to businesses or homeowners, reportedly simply deposited
it at the Fed to collect the interest. Company financial executives and
industry economists say nothing has really changed in credit markets in
response to the blowing of hundreds of billions of dollars on the
financial industry.

So what we have here is either a monumental and unprecedented
rip-off of the taxpayer, which has now jeopardized the ability of the
incoming administration and Congress to do what needs to be done:
namely to relieve the financial distress of ordinary people and to try
and kick-start the economy, or an example of true financial stupidity
on the part of the current administration, compounded by the gutless
acquiescence of a Congress that already showed, in the run-up to the
Iraq War, that it is no longer up to the task of monitoring and
challenging the executive.

Either way, we’re in a heap of trouble going forward. The Obama
administration, even if it wants to, will not have the resources to
finance a recovery. Take away the $400 billion that Obama wants to
waste on tax rebates, and you have left a paltry $400 billion, to be
spread over two years, which we’re expected to believe is going to
revive a depressed US economy that last year was running at $15
trillion.

The other thing to consider is the impact of all this incredible
borrowing on he soundness of the US dollar. We know that China is
thinking more and more seriously about unloading its trillions of
dollars of reserves. If it does, Japan and other major holders of US
currency will likely do the same thing, as will the oil producing
states in OPEC and outside of OPEC. (If you thought buying oil in
dollars was painful last year, wait until you see how expensive it is
when you are paying in Euros or Renminbi or Yen!). Some economists are
warning that because of all the US borrowing of recent months, the
dollar could take a 40-percent hit in value against other key
currencies in the coming year or two. That would slam consumers hard,
since so much of what we need for our daily lives—food, clothes, cars,
furniture, etc.—is produced overseas and would become instantly 40
percent more expensive. It would also be a death blow to any economic
recovery, because the Federal Reserve would be compelled to raise US
interest rates in hopes of slowing down the decline of the dollar.
Higher interest rates would cripple any Obama administration economic
stimulus efforts.

What we need at this point is a new realism. The US economy is in a
shambles because we Americans have been living in a fool’s paradise,
with the government boosting domestic incomes and consumer spending by
inflating housing prices to absurd levels, and pumping up the Wall
Street casino with easy credit and a blind eye to scandal. Now that it
has all come crashing down, there will not be the usual rebound. The
housing market will not recover. Neither will the stock market.
Americans will not, in a year or two or three, feel as wealthy as they
did before it all fell apart. The wealth people thought they had last
year was an illusion, and now it’s gone, like a morning mist.

The remaining unspent Treasury Assets Relief Program (TARP) money
Congress authorized should be withdrawn and applied to a real stimulus
program, and the tax rebate Obama is proposing should be dropped. If
the new president wants to help lower income individuals, that’s one
thing, but just giving everyone a tax credit is nonsense.

Economist James Galbraith, a professor of economics in Texas, has
proposed some good uses for federal stimulus dollars—a Home Owners Loan
Corp. that would refinance bad mortgages at the true value of the homes
in question, and grants to struggling state and local governments that
are otherwise going to be laying off workers and killing critical
programs like health and education. He is also calling for a supplement
to Social Security for people nearing retirement whose private 401(k)
funds and IRAs have been killed.

These are all good ideas. A better one would be to slash military
spending by 50 percent and to close the 800 or more US military bases
that are scattered across the globe.

Do all this and the country has a shot at avoiding a new depression and a slow slide into third world status.
______________
DAVE LINDORFF is a Philadelphia-based journalist and columnist. His
latest book is “The Case for Impeachment” (St. Martin’s Press, 2006).
His work is available at www.thiscantbehappening.net

You’re Scaring Me, Obama: Let the Bush Years Die

Heather Wokusch — Fri, 21 Nov 2008 00:39:34 -0500

To be honest, Obama, you lost me when you voted for the PATRIOT Act reauthorization in 2006. You lost me again when you voted for the Foreign Intelligence Surveillance Act (FISA) amendment in 2008. And you lost me every single time you voted for yet more war funding.

Don't even get me started on your vote for the $700 billion Wall Street bailout.

I cast a ballot for you in November, but I just can't share in this moment of collective euphoria over your election.

So, if your transition team really wants feedback on "where President-Elect Obama should lead this country," here's a Top Five list:

1. Dump the Bush Doctrine and don’t start more wars

You've made it clear that the US has to "take out Osama bin Laden and his lieutenants if we have them in our sights" and you’ve argued for "more resources and more troops to finish the fight against the terrorists who actually attacked us on 9/11."

What exactly does that mean?

Take troops out of Iraq and shove them into Afghanistan? Further destabilize Pakistan?

The whole idea of preemptive war (a.k.a. the Bush Doctrine) has no place in a civilized society and must be laid to rest, along with those sacrificed in Bush's military adventurism these past eight years.

Yet your approach to preemptive war, Mr. Obama, is nuanced at best.

During the January 2008 Democratic presidential debate, you said that if the US had "actionable intelligence" and Pakistan didn’t "take on Al Qaida in their territory," then "I would strike." You added, " And that's the flaw of the Bush doctrine. It wasn't that he went after those who attacked America. It was that he went after those who didn't."

No, the flaw of the Bush Doctrine is that it's just plain wrong. We've learned that the hard way.

2. Ditch the warmongers

What's with all of the hawks in your new administration?

You presented yourself as a peace candidate and then chose Joe Biden as your VP. Yes, he brought in the white male vote, but he also backed the invasions and occupations of Afghanistan and Iraq.

Just last month Biden warned that if you were elected, there would be "an international crisis, a generated crisis, to test the mettle of this guy." He said that you would make some "incredibly tough decisions" that could alienate the Democratic base, because if decisions are "popular, they're probably not sound."

In other words, a popular decision, one that the majority of the people wants, is probably not a good decision. Democracy to Biden…

And then there's Robert Gates, widely rumored to be staying on as your Defense Secretary. Questions about Gates’ role in Iran-Contra, not to mention his skewing of intelligence about Russia, still linger.

But especially disturbing is his recent push for beefing up the US nuclear arsenal: "As long as other nations have or seek nuclear weapons – and can potentially threaten us, our allies and friends – then we must have a deterrent capacity that makes it clear that challenging the United States in the nuclear arena, or with weapons of mass destruction, could result in an overwhelming, catastrophic response."

Let's get this straight: if other nations are even imagined to "seek" nuclear weapons, that "could result in an overwhelming, catastrophic response" from the US.

Obama, you've often insisted on taking "no options off the table" in dealing with Iran. How does Gates' proposal for the preemptive use of nuclear weapons factor in there?

While we're on the topic of warmongers in your midst… Rahm Emanuel as Chief of Staff? Yet another hawk, hell-bent on Iran and enamored with nuclear weapons.

And now we've got Clinton as Secretary of State.

Why is it that none of the 23 senators and 133 House Reps who voted against the war in Iraq are even on a short-list for these critical posts?

3. Close Guantanamo – and the whole system of secret prisons

Shutting down Gitmo is said to be a priority for your new administration. Terrific.

But what about Bagram? What about the other CIA "black site" secret prisons set up in Afghanistan, Thailand, Eastern Europe and elsewhere? What about the CIA torture flights? Will those end too?

Closing Gitmo also raises questions over how "high value" defendants will be handled. Your administration is reportedly considering setting up an alternative court system to deal with sensitive cases. But what safeguards will be in place to be sure that this new system won't degenerate into kangaroo courts, like Bush's military commissions?

It's a disturbing signal that you’ve appointed John Brennan, who has supported extraordinary rendition and warrantless wiretapping, to help review intelligence agencies for your administration. As former CIA and State Department analyst Mel Goodman noted, Brennan "sat there at [former CIA Director George] Tenet's knee when they passed judgment on torture and abuse, on extraordinary renditions, on black sites, on secret prisons. He was part of all of that decision making."

And this is who will help lead us out of this mess?

You've criticized the use of torture, yet reportedly will not bring criminal charges against those who authorized or conducted torture during the Bush years. Your administration doesn't see it as politically expedient, and Bush might give "preemptive" pardons anyway.

But can we really end this dark chapter in our nation's history without even an investigation? A Truth Commission, perhaps? Providing blanket immunity to all low-level and senior government officials won’t prevent possible war crimes from happening again. Quite the opposite.

4. Expose Bush & Co., and ditch the national surveillance state

Speaking of war crimes, how about Bush, Cheney and the rest? You'll soon be given access to Bush-era secret orders and opinions authorizing everything from surveillance to detention. You'll no doubt rescind many, to great fanfare, but what about sharing this evidence of Bush-year excesses with the public?

Yes, Bush could file a lawsuit and invoke executive privilege, but it's worth the fight. The only other option is shielding Bush & Co., similar to how you will reportedly shield those government officials involved in torture. But the public deserves to know. And if Bush administration officials violated the law, they should be prosecuted.

Now, back to your vote for both the PATRIOT Act reauthorization in 2006 and the Foreign Intelligence Surveillance Act amendment in 2008. These and other rollbacks in domestic civil liberties under Bush are inexcusable and must be addressed. We'll be waiting for you to do that.

5. Choose Main Street (not Wall Street)

Just this month you promised Americans that they can "turn the page on policies that have put the greed and irresponsibility of Wall Street before the hard work and sacrifice of folks on Main Street."

Yet, as Bloomberg notes, "almost half the people" on your Transition Economic Advisory Board "have held fiduciary positions at companies that, to one degree or another, either fried their financial statements, helped send the world into an economic tailspin, or both."

This includes, for example, Anne Mulcahy and Richard Parsons, both of whom were Fannie Mae directors when the company fudged accounting rules. Ditto for another of your team members, William Daley.

Mulcahy and Parsons additionally held executive posts when their companies (Xerox Corp. and Time Warner Inc., respectively) got busted for accounting fraud by the Securities and Exchange Commission.

Also on your team is Richard Rubin, who as Bloomberg notes, was "chairman of Citigroup Inc.'s executive committee when the bank pushed bogus analyst research, helped Enron Corp. cook its books, and got caught baking its own. He was a director from 2000 to 2006 at Ford Motor Co., which also committed accounting fouls and now is begging Uncle Sam for Citigroup-style bailout cash."

The list of questionable appointees to your Transitional Economic Advisory Board goes on and on, begging the question: Is this really the best you could come up with? How about Joseph Stiglitz, Sheila Bair, Nouriel Roubini or James K. Galbraith, for starters? Someone who represents labor?

Meanwhile, we're stuck with this nasty bailout bill – which you voted for.

Others, such as Sen. Russ Feingold (D-WI), realized the bill's problems and voted against it. Feingold said that the Wall Street bailout legislation, "fails to reform the flawed regulatory structure that permitted this crisis to arise in the first place. And it doesn’t do enough to address the root cause of the credit market collapse, namely the housing crisis. Taxpayers deserve a plan that puts their concerns ahead of those who got us into this mess."

Feingold was right.

In short, Mr. President-elect, you promised "Change we can believe in," but across the board it's looking a lot more like "Business as usual."

Kucinich: Congress Should Withhold Second Part of Bailout from Treasury

davidswanson — Mon, 17 Nov 2008 18:54:55 -0500

Citing Administration’s Failure and Unwillingness to use funds to Prevent Foreclosures, as Congress Intended

Washington D.C. (November 17, 2008) – Representative Dennis Kucinich (D-OH) today sent a letter to Representative Barney Frank, Chairman of the House Financial Services Committee, recommending that Congress inform the White House that it will not authorize the second $350 billion tranche of the bailout funds to the Treasury Department. The Financial Services Committee is scheduled to hold a hearing tomorrow examining oversight of the implementation of the bailout and of government lending and insurance facilities.

Kucinich heads the Domestic Policy Subcommittee, which held a hearing last Friday at which Mr. Neel Kashkari, the Interim Assistant Secretary for Financial Stability, testified. Two days prior, Treasury Secretary Henry M. Paulson announced that the Troubled Asset Relief Program, a fund created by Congress to unfreeze credit markets and purchase troubled mortgage assets to prevent their foreclosure, would not be used to purchase mortgage assets.

“It was clear from Interim Assistant Secretary Kashkari’s testimony that, contrary to Congressional intent, the Treasury Department has not and does not intend to use TARP for foreclosure prevention. In addition to breaking with Congressional intent, Secretary Paulson’s policy reversal contradicts public assurances previously made by the Treasury Department and leaves the federal government without an adequate mechanism to stem the rising tide of home foreclosures. Because the Treasury Department refuses to spend the resources Congress made available for foreclosure prevention, I recommend that we inform the President that we will withhold the second installment of $350 billion until a new administration takes office.” Kucinich writes.

The full text of the letter follows:

November 17, 2008

The Honorable Barney Frank

Chairman

Committee on Financial Services

2129 Rayburn HOB

Washington, DC 20515

Dear Chairman Frank:

I write to commend you for your leadership in addressing the foreclosure crisis and repairing its effects on neighborhoods and to outline what I believe are the insufficient efforts of the Department of Treasury to combat the crisis. When the magnitude of the subprime and Alt-A mortgage crisis threatened the entire financial system, you led Congressional efforts in negotiating and drafting the Emergency Economic Stabilization Act of 2008 (EESA) to achieve the twin objectives of unfreezing capital markets and preventing unnecessary foreclosures. Giving the Department of Treasury broad latitude, EESA nonetheless explicitly authorized the purchase of troubled mortgage assets by the Troubled Asset Relief Program (TARP), to be accompanied by a plan to minimize foreclosures on those properties. Unfortunately, the Department of Treasury has not exercised its authority properly.

On November 12, 2008, Treasury Secretary Henry M. Paulson, Jr. announced that TARP would not acquire troubled mortgage assets, as Congress had envisioned. My Subcommittee held a hearing on November 14, 2008, where we heard testimony from Interim Assistant Secretary for Financial Stability Neel Kashkari, the top Treasury official in charge of the TARP, as well as a number of noted industry, academic, and legal experts. It was clear from Interim Assistant Secretary Kashkari’s testimony that, contrary to Congressional intent, the Treasury Department has not and does not intend to use TARP for foreclosure prevention. In addition to breaking with Congressional intent, Secretary Paulson’s policy reversal contradicts public assurances previously made by the Treasury Department and leaves the federal government without an adequate mechanism to stem the rising tide of home foreclosures. Because the Treasury Department refuses to spend the resources Congress made available for foreclosure prevention, I recommend that we inform the President that we will withhold the second installment of $350 billion until a new administration takes office.

Treasury Profoundly Misunderstands the EESA and the Mortgage Crisis

At the hearing, Interim Assistant Secretary Kashkari demonstrated a profound misunderstanding of both the purposes of EESA and the mortgage crisis underlying the financial crisis. Mr. Kashkari testified that the TARP must be limited to “investments” rather than other uses, such as the proposal by Chairman Sheila Bair of the Federal Deposit Insurance Corporation for federally guaranteed loan modifications. Not only is his interpretation inconsistent with the clear statutory authority granted the Treasury Department in EESA,[1] it is inconsistently applied by Mr. Kashkari. As Ranking Minority Member Darrell Issa pointed out at the hearing, the Treasury Department’s use of TARP to make preferred equity purchases under its Capital Purchase Program hardly qualify as pursuing an investment strategy with TARP funds, if investment is understood as a means of maximizing profit. Mr. Kashkari was forced to admit that the equity purchases were subsidies, rather than investments: “our objective was to create a program that would encourage thousands of banks across our country to voluntarily apply… so we intentionally made it attractive for them to want to apply.”

Second, Mr. Kashkari displayed a misunderstanding of the cause of and solution to the mortgage crisis. For instance, he testified, “[B]ringing mortgage rates down for borrowers is the best thing we could do to try to help homeowners avoid foreclosure and stabilizing our housing sector.” While low interest rates would help to stimulate home sales and new home construction, they would neither protect current borrowers from imminent foreclosure nor provide certainty to lenders or the secondary market about the true cost of existing toxic mortgage assets, a crucial building block to restoring mortgage lending.

Third, Mr. Kashkari employed a verbal sleight of hand to create the impression that the EESA was being implemented to help prevent foreclosures, when in fact it was not. Mr. Kashkari often referred to “Treasury” to discuss foreclosure prevention efforts, when the subject of his testimony and his relevant job responsibilities is “TARP.” We know, of course, that these terms relate to distinct entities and are not interchangeable. TARP is an asset acquisition fund, a subdivision of Treasury Department, created by EESA. Treasury, meanwhile, is the overarching regulator of the financial services industry and chief interpreter of the nation’s tax laws. The Treasury Department issued three Revenue Procedures in the past year aimed at encouraging mortgage servicers to perform more loan modifications. TARP was created by Congress after those Revenue Procedures failed on their own to effect a sufficient increase in loan modifications.

Fourth, Mr. Kashkari argued that TARP’s primary function was reestablishing liquidity and stability to the financial system. It is commonly known, however, that the troubles of the broader financial system trace their roots to millions of troubled subprime and Alt-A mortgages. Without addressing the underlying damage posed by troubled mortgage assets, Mr. Kashkari’s strategy cannot accomplish the stabilization goal of EESA.

Reducing Principal is the Necessary Federal Objective

TARP is being misused from the standpoint of EESA’s twin objectives of unfreezing credit markets and preventing foreclosures. Loan modifications, rather than low interest rates, hold the key to realizing EESA’s objectives. Indeed, as Professor Anthony Sanders testified, “[I]t is clear that home preservation and solving system risk problems can be accomplished with a sensible loan modification template of Treasury decides to deploy it.” Treasury should be pursuing

mechanism by which troubled mortgage loans can be modified in large numbers to achieve the twin goals simultaneously.

However, not all loan modifications are equal. Research by Credit Suisse demonstrates that traditional loan modifications, including extensions of term, temporarily lower interest rate, and forbearance have high redefault rates, indicating that many borrowers are not more able to make mortgage payments after receiving traditional loan modifications.[2] However, two kinds of modifications demonstrated much lower redefault (higher success) rates: interest rate freezes for loans facing imminent reset of an adjustable rate mortgage, and principal reduction modifications for loans in default.

There is ample evidence that so-called “reset modifications” are being aggressively deployed by mortgage servicers. According to Credit Suisse, the real growth in loss- mitigation activity is largely attributable to reset modifications,[3] while other traditional modifications that result in a lower monthly payment—including forbearance, repayment plans, extension of loan terms, lower interest rate—have also grown to a lesser extent. Notably, the servicing industry increased its performance of reset modifications after Treasury issued a Rev. Proc. 2007-72, creating a safe harbor from loss of the REMIC tax status for performance of reset modifications.

Principal reductions are seen by experts as solving both a borrower’s inability to make mortgage payments and unwillingness to make mortgage payments when the loan greatly exceeds the value of the house. Providing for a solution to this latter problem is extremely significant, especially in large portions of the nation where housing prices inflated fastest and longest. As Professor Sanders testified, “[W]e are in unchartered territory to the extent that there has never been a period in our history where homeowners could be as much as 50% upside down on the mortgage.”

However, the mortgage servicing industry has not moved toward making large numbers of principal modifications. In fact, all but a few servicers avoid performing principal modifications. Only one company, Ocwen, accounted for 70 percent of all principal modifications found by Credit Suisse.[4] In spite of Rev. Proc. 2008-28, which created a safe harbor for principal modifications,[5] they remain a rarely exercised option by mortgage servicers.[6]

Thus, principal reduction must be at the centerpiece of a program of loan modifications, and the role of the Federal government should be to facilitate massive numbers of them. Clearly, the private market is unable or unwilling to perform principal modifications in sufficient numbers, and the Treasury Department’s rulemaking is not an adequate stimulus on its own. In addition, the federal government should learn lessons from mortgage servicers that have distinguished themselves for aggressively performing principal modifications. Mr. Larry Litton, Chairman, Litton Loan Servicing LP, and one of the nation’s leading performers of principal modifications, testified that while principal modifications are necessary, they are not sufficient if they do not go far enough to make the loan affordable to the borrower. In an effort to curb redefault rates among loans receiving principal modifications, his company is now aiming toward reducing enough principal to result in a debt-to-income ratio of 31%, down from 39%. Many others also believe that modified loan-to-value ratio should not exceed 100% to 110%.

Options for the TARP to Prevent Foreclosures

Witnesses at the Subcommittee’s hearing testified to a number of ways to use TARP to facilitate a massive program of principal modifications. For example, Professor Michael Barr’s written testimony outlined a mechanism where the Treasury Department would use TARP to purchase whole troubled mortgages out of securitized trusts. While there are a number of technical challenges to doing this, testimony at my hearing made clear that the industry believes they can be overcome. Indeed, Mr. Tom Deutsch of the American Securitization Forum, a trade association representing all parties to asset-backed securitizations, testified that the barriers are surmountable and investors would be willing to sell troubled assets to the government at a discount from face value. TARP funds could be used to guarantee home mortgages meeting Treasury Department guidelines, similar to a recent proposal by FDIC. This idea was effectively disqualified by the Treasury Department for violating the fictitious “investment” rule. Professor Barr also recommended that TARP could find a way to pay servicers to restructure loans according to Treasury Department guidelines.

Conclusion

It is also possible that a new Treasury Department and Congress will want to consider further rulemakings and legislation. Barring some acute financial breakdown, I believe Congress should withhold the second installment of $350 billion for the TARP, and that we should inform the President before his administration requests it. In fact, every expert that testified in front of my Subcommittee last Friday agreed that it would be prudent of Congress to preserve these resources pending the new Administration. Withholding the second installment would preserve the ability of the incoming administration to reconsider Secretary Paulson’s policy reversal, and allow Congress to legislate further, while preserving a significant portion of the funds Congress has already made available for the purpose of preventing foreclosures.

Sincerely,

Dennis J. Kucinich

Chairman

Domestic Policy Subcommittee

cc: Darrell Issa

Ranking Minority Member

###

[1] See EESA, Section 109(a) (“[T]he Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.”).

[2] Credit Suisse, Subprime Loan Modifications Update, (October 1, 2008).

[3] Id., at Exhibit 3.

[4] Id., at 7.

[5] Rev. Proc. 2008-28 allows principal write-downs for residential mortgage loans on dwellings of less than 5 units. Treasury imposes a relatively loose standard allowing servicers considerable latitude: the servicer “reasonably” believes that the loan faces a “significant risk of foreclosure,” and “reasonably” believes his loan modification is less risky than the terms of the original loan. Treasury goes on to explain that “[t]his reasonable belief may be based on guidelines developed as part of a foreclosure prevention program similar to that described in … this revenue procedure or may be based on any other credible systematic determination.” Rev. Proc. 2008-28’s effective duration is until December 2010.

[6] Three month rolling average of principal modifications, as a percent of total modifications, has risen from 1.4% in September 2007, to 3.9% in August 2008. Source: Staff calculations from Credit Suisse data.

Cummings Calls Kashkari a Chump, Kucinich Proposes Congress Undo Paulson's Plunder

davidswanson — Fri, 14 Nov 2008 21:34:40 -0500