Sunday, November 30, 2008

Three, Two, One ... Bailout

Three, Two, One … Bailout
by Mort Malkin

Did you notice how through 2007 and most of 2008, the government was telling us that the fundamentals were sound and the economy was strong. The pronouncement was repeated even though we owed hundreds of billions to various countries around the world such as China, Japan, Malaysia, Saudi Arabia, and the United Arab Emirates, and our balance of payments was in deep scarlet Recession? Don’t be a Chicken Little.

Suddenly, when the stock markets dropped so precipitously, president Bush changed his tune. We were in serious financial straits he said, and Secretary of the Treasury Paulson needed taxpayer money to bail out our financial institutions (private banks). Bear Sterns was first — it had more debts than worthless assets. Then, in rapid order Lehman Bros failed, AIG needed rescue, and Merrill Lynch had to sell new stock at a discount to Singapore to raise money. Yet, all through 2007 and most of 2008, real estate sales were down and property values were declining, even as sub prime mortgages were still being written in an unintelligible language and packages of them were being sold to investors by calling them collateralized debt obligations (CDOs). But, the fundaments were sound. Even the rating agencies Standard & Poor’s and Moody’s called the CDOs investment grade.

Secretary Paulson (he, recently the CEO of Goldman Sachs) asked Congress to give him $700 billion, but don’t ask what he would do with it. The people’s reaction (over 90% of us) to giving away $700 billion to Wall Street was outrage. Members of The House of Representatives, all up for re-election, heard from constituents. Congress said to Paulson “Whoa, we’re not going to give you a blank check.” The $700 billion was voted down. So, the White House wordsmiths got busy and called it a “rescue” instead of a “bailout.” Paulson added concern for deposits that were insured for only $100,000 and a few words for homeowners who were having their homes foreclosed. He assembled a meeting with the banking industry and drafted a new bill. Being a “can do” guy he didn’t meet with any academic economists, especially not Nobel Laureate Paul Krugman of Princeton. The administration demanded partial ownership of each bank, but the stock the government would receive was only a token percentage of what could be bought openly on the stock exchange for the same money.

The complexity of the financial crisis goes way beyond sub prime adjustable mortgages, bubbled evaluations of real estate, rating agency “investment” inflation, and bundling of mortgages as CDOs. In 1999 the Gramm-Leach-Bliley Act [the same Phil Gramm who earlier in 2008 said we Americans were all complainers] erased any real regulations from/for the financial system. Banks could do most anything — savings banks could sell stocks & bonds, investment banks could create derivatives, not only CDOs but also tranches, credit default swaps, and probably some we haven’t heard about yet. For the $700 billion, Paulson was not demanding regulation of the financial “industry,” nor was he going to say anything when the Wall Street firms such as AIG continued to pay executive salaries in the millions, continued to pay stockholder dividends, and held fancy parties disguised as meetings at elite (expensive) resorts.

Just before Thanksgiving, two groups thought to get in on the handout. Citibank “needed” $25 billion to survive, and General Motors had only enough money to get through 2008. Paulson, with the president behind him and the vice president behind the president, said the two industries were entirely different. He was right. Citi makes only paper and financial legalese. The car companies (Ford and Chrysler decided to get in on the act) at least makes cars. Yet, the CEOs of the big three automakers had to go through a grilling by Congress, including why they didn’t drive hybrid autos from Detroit to Washington instead of taking corporate jets. We also may note that the three combined CEO salaries are about $80 million. None of the grillees offered to quit or serve without pay. A sensitive majority in Congress refused them any money until they came back with plans for improvement over the status quo. Citibank was something else. Paulson considered CitiGroup too big & too important to fail, and CEO Vikram Pandit never was called before anyone. But, he did the right thing — he fired 10,000 underlings at Citicorp.

What to do — other than to throw money by the hundreds of billions of our money at Wall Street?
• We can start by repealing the Gramm-Leach-Bliley Act and re-regulating all “investment vehicles.” Even Greenspan now says it was a mistake to deregulate derivatives. While we are at it, we can regulate hedge funds, and private equity funds.
• The CEO (and CFO and COO and anyone else who makes more than a million dollars a year) of any investment house that sustains losses must give back all the money. All CEOs and other mucky-mucks must be limited to salaries of $250,000 so they will qualify for Obama’s middle class tax cuts.
• All the people who got rich by selling mortgages and derivatives and collecting commissions at every repackaging have to give back the ill gotten money.
• All adjustable mortgages are forbidden. Three of five subprime mortgages were sold to individuals and families who qualified for long term, fixed rate mortgages anyway. So much for blaming the homeowners for the crisis.
• For the $700 billion the government can buy the subprime mortgages — Merrill sold a package of its sub prime mortgages to Singapore at about 22¢ on the dollar. Its a good model.

After we thusly straighten out Wall Street, we must raise the minimum wage, extend unemployment insurance limits, and have the federal and state Employment Agencies actually find jobs for people instead of just handing out checks. Then, we can attack health care reform. It all shouldn’t take more than a few months. Finally, we can tend to important things such as art and poetry.

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