Bailout digest: Wall Street’s sweetheart deal and its discontents

Steve Perry — Mon, 29 Sep 2008 14:19:05 +0000

Treasury Secretary Henry Paulson (left) and Fed chair Ben Bernanke: dancing as fast as they can

Poring over news accounts of the deal struck last night by congressional leaders, the only thing that seems clear is that the widely touted protections against taxpayers getting stuck with the ultimate tab are scant and vague. The pitch on behalf of the deal still emphasizes the potential resale of all the bad paper after the market recovers, but as you’ll see in the analysis pieces highlighted below, it’s unlikely that the sorts of assets the Treasury Department will be buying are ever going to be worth anything. The terms of this deal punt the question of recovering bailout funds from the financial sector five years down the road: “[I]f the Treasury program to purchase and resell troubled mortgage-backed securities has lost money after five years, the president must submit a plan to Congress to recover those losses from the financial industry. Presumably that plan would involve new fees or taxes, perhaps on securities transactions” (NYT).

Likewise, the broad call to provide help to foreclosure-stricken homeowners as part of the package has fallen by the wayside. In place of programs or provisions to rework the terms of onerous mortgages, “[the bailout legislation] calls on the Treasury, as an owner of mortgage securities, to ‘encourage the servicers of the underlying mortgages’ to minimize foreclosures” (WSJ). As guarantees go, that’s roughly the equivalent of promising to pray for a good outcome.

Similarly, any legislated limits on future executive compensation appear pretty much restricted to the banning of new golden parachute deals for execs departing firms that have taken bailout money.

Here are the must-reads from the past few days.

THE DEAL

Wall Street Journal, “US seals bailout deal”

Financial Times, “Bernanke confident on restoring credit flows”

New York Times, “Bailout plan in hand, House braces for tough vote”

BACKSTORY: LEHMAN, AIG, AND THE TUMBLING DOMINOES

WSJ, “Lehman’s demise triggered cash crunch around the globe”

NYT, “Behind insurer’s crisis, blind eye to a web of risk”

ANALYSIS OF THE CRISIS:

Michael Hudson, “The insanity of the $700 billion giveaway”

Joseph E. Stiglitz, “A better bailout”

Walden Bello, “Wall Street meltdown primer”

The great bailout of ‘08: must-reads of the week

Steve Perry — Wed, 24 Sep 2008 16:25:54 +0000

Every hour of every day brings reams of fresh news reports and commentaries on the Wall Street crisis and the competing bailout proposals wending their way through Congress, but that doesn’t mean you can learn anything from most of them. David Cay Johnston, the great NYT reporter and author (Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super-Rich and Cheat Everybody Else; Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense and Stick You With the Bill) who has done more to illuminate the flim-flammery at the heart of the US tax code and Wall Street’s post-Reagan machinations, offered this warning to journalists yesterday:

In covering the proposed $700 billion bailout of Wall Street don’t repeat the failed lapdog practices that so damaged our reputations in the rush to war in Iraq and the adoption of the Patriot Act. Don’t assume that Congress must act instantly, as so many news stories state as if it was an immutable fact. Don’t assume there is a case just because officials say there is.

The coverage of the Paulson plan focuses on the edges, on the details. The focus should be on the premise. And be skeptical of what gullible Congressional leaders, most of them up before the voters in a few weeks, say after being given a closed-door meeting on supposed horrors.

The Administration has scared the markets and some key legislative leaders, but it has not laid out a coherent, specific and compelling need for this enormous proposal, which is the equivalent of a one-time 55 percent income tax surcharge. (Instead the money will be borrowed, so ask from whom and how this much can be raised so quickly if the credit markets are nearly seized up with fear.)

Ask this question — are the credit markets really about to seize up?

If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.

Here are links to some of the most prescient and on-point analyses of the past several days, starting with Treasury Secretary Henry Paulson’s no-strings-attached bailout plan.

THE PAULSON PLAN

Text of the Paulson proposal

Glenn Greenwald, “The complete (though ever-changing) elite consensus about the financial collapse” (9/20)

Glenn Greenwald, “Growing right-wing opposition to the Paulson plan” (9/22)

Glenn Greenwald, “Interview with Notre Dame finance professor Richard Sheehan” (9/23)

William Greider, “Paulson bailout plan a historic swindle” (9/19)

Michael Hudson, “The Paulson-Bernanke bank bailout: Will the cure be worse than the disease?” (9/22)

Sean-Paul Kelley, “Text of the bailout is authoritarianism at its worst” (9/20)

Paul Krugman, “No Deal” (9/20)

Paul Krugman, “Balance Sheet Baloney” (9/23)

Robert Reich, “The bailout to end all bailouts” (9/23)

THE DODD PLAN