[R-G] [BillTottenWeblog] The Greatest Swindle Ever Sold

[Bill Totten]

Six Ways the Financial Bailout Scams Taxpayers

How the Financial Bailout Scams Taxpayers, Subsidizes Wall Street, and
Props Up Our Broken Financial System

by Andy Kroll

Mother Jones (May 26 2009)

This story first appeared on the Tom Dispatch website.


On October 3rd, as the spreading economic meltdown threatened to topple
financial behemoths like American International Group (AIG) and Bank of
America and plunged global markets into freefall, the US government
responded with the largest bailout in American history. The Emergency
Economic Stabilization Act of 2008, better known as the Troubled Asset
Relief Program (TARP), authorized the use of $700 billion to stabilize
the nation's failing financial systems and restore the flow of credit in
the economy.

The legislation's guidelines for crafting the rescue plan were clear:
the TARP should protect home values and consumer savings, help citizens
keep their homes, and create jobs. Above all, with the government poised
to invest hundreds of billions of taxpayer dollars in various financial
institutions, the legislation urged the bailout's architects to maximize
returns to the American people.

That $700 billion bailout has since grown into a more than $12 trillion
commitment by the US government and the Federal Reserve. About $1.1
trillion of that is taxpayer money - the TARP money and an additional
$400 billion rescue of mortgage companies Fannie Mae and Freddie Mac.
The TARP now includes twelve separate programs, and recipients range
from megabanks like Citigroup and JPMorgan Chase to automakers Chrysler
and General Motors.

Seven months in, the bailout's impact is unclear. The Treasury
Department has used the recent "stress test" results it applied to
nineteen of the nation's largest banks to suggest that the worst might
be over; yet the International Monetary Fund as well as economists like
New York University professor and economist Nouriel Roubini and New York
Times columnist Paul Krugman predict greater losses in US markets,
rising unemployment, and generally tougher economic times ahead.

What cannot be disputed, however, is the financial bailout's biggest
loser: the American taxpayer. The US government, led by the Treasury
Department, has done little, if anything, to maximize returns on its
trillion-dollar, taxpayer-funded investment. So far, the bailout has
favored rescued financial institutions by subsidizing their losses to
the tune of $356 billion, shying away from much-needed management
changes and - with the exception of the automakers - letting companies
take taxpayer money without a coherent plan for how they might return to
viability.

The bailout's perks have been no less favorable for private investors
who are now picking over the economy's still-smoking rubble at the
taxpayers' expense. The newer bailout programs rolled out by Treasury
Secretary Timothy Geithner give private equity firms, hedge funds, and
other private investors significant leverage to buy "toxic" or
distressed assets, while leaving taxpayers stuck with the lion's share
of the risk and potential losses.

Given the lack of transparency and accountability, don't expect
taxpayers to be able to object too much. After all, remarkably little is
known about how TARP recipients have used the government aid received.
Nonetheless, recent government reports, Congressional testimony, and
commentaries offer those patient enough to pore over hundreds of pages
of material glimpses of just how Wall Street friendly the bailout
actually is. Here, then, based on the most definitive data and analyses
available, are six of the most blatant and alarming ways taxpayers have
been scammed by the government's $1.1-trillion, publicly-funded bailout.

1. By overpaying for its TARP investments, the Treasury Department
provided bailout recipients with generous subsidies at the taxpayer's
expense.

When the Treasury Department ditched its initial plan to buy up "toxic"
assets and instead invest directly in financial institutions,
then-Treasury Secretary Henry Paulson, Jr assured Americans that they'd
get a fair deal. "This is an investment, not an expenditure, and there
is no reason to expect this program will cost taxpayers anything", he
said in October 2008.

Yet the Congressional Oversight Panel (COP), a five-person group tasked
with ensuring that the Treasury Department acts in the public's best
interest, concluded in its monthly report for February that the
department had significantly overpaid by tens of billions of dollars for
its investments. For the ten largest TARP investments made in 2008,
totaling $184.2 billion, Treasury received on average only $66 worth of
assets for every $100 invested. Based on that shortfall, the panel
calculated that Treasury had received only $176 billion in assets for
its $254 billion investment, leaving a $78 billion hole in taxpayer pockets.

Not all investors subsidized the struggling banks so heavily while
investing in them. The COP report notes that private investors received
much closer to fair market value in investments made at the time of the
early TARP transactions. When, for instance, Berkshire Hathaway invested
$5 billion in Goldman Sachs in September, the Omaha-based company
received securities worth $110 for each $100 invested. And when
Mitsubishi invested in Morgan Stanley that same month, it received
securities worth $91 for every $100 invested.

As of May 15th, according to the Ethisphere TARP Index, which tracks the
government's bailout investments, its various investments had
depreciated in value by almost $147.7 billion. In other words, TARP's
losses come out to almost $1,300 per American taxpaying household.

2. As the government has no real oversight over bailout funds, taxpayers
remain in the dark about how their money has been used and if it has
made any difference.

While the Treasury Department can make TARP recipients report on just
how they spend their government bailout funds, it has chosen not to do
so. As a result, it's unclear whether institutions receiving such funds
are using that money to increase lending - which would, in turn, boost
the economy - or merely to fill in holes in their balance sheets.

Neil M Barofsky, the special inspector general for TARP, summed the
situation up this way in his office's April quarterly report to
Congress: "The American people have a right to know how their tax
dollars are being used, particularly as billions of dollars are going to
institutions for which banking is certainly not part of the
institution's core business and may be little more than a way to gain
access to the low-cost capital provided under TARP".

This lack of transparency makes the bailout process highly susceptible
to fraud and corruption. Barofsky's report stated that twenty separate
criminal investigations were already underway involving corporate fraud,
insider trading, and public corruption. He also told the Financial Times
that his office was investigating whether banks manipulated their books
to secure bailout funds. "I hope we don't find a single bank that's
cooked its books to try to get money, but I don't think that's going to
be the case".

Economist Dean Baker, co-director of the Center for Economic and Policy
Research in Washington, suggested to TomDispatch in an interview that
the opaque and complicated nature of the bailout may not be entirely
unintentional, given the difficulties it raises for anyone wanting to
follow the trail of taxpayer dollars from the government to the banks.
"[Government officials] see this all as a Three Card Monte, moving
everything around really quickly so the public won't understand that
this really is an elaborate way to subsidize the banks", Baker says,
adding that the public "won't realize we gave money away to some of the
richest people".

3. The bailout's newer programs heavily favor the private sector, giving
investors an opportunity to earn lucrative profits and leaving taxpayers
with most of the risk.

Under Treasury Secretary Geithner, the Treasury Department has greatly
expanded the financial bailout to troubling new programs like the
Public-Private Investment Program (PPIP) and the Term
Asset-Backed-Securities Loan Facility (TALF). The PPIP, for example,
encourages private investors to buy "toxic" or risky assets on the books
of struggling banks. Doing so, we're told, will get banks lending again
because the burdensome assets won't weigh them down. Unfortunately, the
incentives the Treasury Department is offering to get private investors
to participate are so generous that the government - and, by extension,
American taxpayers - are left with all the downside.

Joseph Stiglitz, the Nobel-prize winning economist, described the PPIP
program in a New York Times op-ed this way:

"Consider an asset that has a 50-50 chance of being worth either zero or
$200 in a year's time. The average 'value' of the asset is $100.
Ignoring interest, this is what the asset would sell for in a
competitive market. It is what the asset is 'worth'. Under the plan by
Treasury Secretary Timothy Geithner, the government would provide about
92 percent of the money to buy the asset but would stand to receive only
fifty percent of any gains, and would absorb almost all of the losses.
Some partnership!

"Assume that one of the public-private partnerships the Treasury has
promised to create is willing to pay $150 for the asset. That's fifty
percent more than its true value, and the bank is more than happy to
sell. So the private partner puts up $12, and the government supplies
the rest - $12 in 'equity' plus $126 in the form of a guaranteed loan.

"If, in a year's time, it turns out that the true value of the asset is
zero, the private partner loses the $12, and the government loses $138.
If the true value is $200, the government and the private partner split
the $74 that's left over after paying back the $126 loan. In that rosy
scenario, the private partner more than triples his $12 investment. But
the taxpayer, having risked $138, gains a mere $37."


Worse still, the PPIP can be easily manipulated for private gain. As
economist Jeffrey Sachs has described it, a bank with worthless toxic
assets on its books could actually set up its own public-private fund to
bid on those assets. Since no true bidder would pay for a worthless
asset, the bank's public-private fund would win the bid, essentially
using government money for the purchase. All the public-private fund
would then have to do is quietly declare bankruptcy and disappear,
leaving the bank to make off with the government money it received. With
the PPIP deals set to begin in the coming months, time will tell whether
private investors actually take advantage of the program's flaws in this
fashion.

The Treasury Department's TALF program offers equally enticing
possibilities for potential bailout profiteers, providing investors with
a chance to double, triple, or even quadruple their investments. And
like the PPIP, if the deal goes bad, taxpayers absorb most of the
losses. "It beats any financing that the private sector could ever come
up with", a Wall Street trader commented in a recent Fortune magazine
story. "I almost want to say it is irresponsible".

4. The government has no coherent plan for returning failing financial
institutions to profitability and maximizing returns on taxpayers'
investments.

Compare the treatment of the auto industry and the financial sector, and
a troubling double standard emerges: As a condition for taking bailout
aid, the government required Chrysler and General Motors to present
detailed plans on how the companies would return to profitability. Yet
the Treasury Department attached minimal conditions to the billions
injected into the largest bailed-out financial institutions. Moreover,
neither Geithner nor Lawrence Summers, one of President Barack Obama's
top economic advisors, nor the president himself has articulated any
substantive plan or vision for how the bailout will help these
institutions recover and, hopefully, maximize taxpayers' investment returns.

The Congressional Oversight Panel highlighted the absence of such a
comprehensive plan in its January report. Three months into the bailout,
the Treasury Department "has not yet explained its strategy", the report
stated. "Treasury has identified its goals and announced its programs,
but it has not yet explained how the programs chosen constitute a
coherent plan to achieve those goals".

Today, the department's endgame for the bailout still remains vague.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City,
wrote in the Financial Times in May that the government's response to
the financial meltdown has been "ad hoc, resulting in inequitable
outcomes among firms, creditors, and investors". Rather than perpetually
prop up banks with endless taxpayer funds, Hoenig suggests that the
government should allow banks to fail. Only then, he believes, can
crippled financial institutions and systems be fixed. "Because we still
have far to go in this crisis, there remains time to define a clear
process for resolving large institutional failure. Without one, the
consequences will involve a series of short-term events and far more
uncertainty for the global economy in the long run."

The healthier and more profitable bailout recipients are once financial
markets rebound, the more taxpayers will earn on their investments.
Without a plan, however, banks may limp back to viability while
taxpayers lose their investments or even absorb further losses.

5. The bailout's focus on Wall Street mega-banks ignores smaller banks
serving millions of American taxpayers that face an equally uncertain
future.

The government may not have a long-term strategy for its trillion-dollar
bailout, but its guiding principle, however misguided, is clear: What's
good for Wall Street will be best for the rest of the country.

On the day the mega-bank stress tests were officially released, another
set of stress-test results came out to much less fanfare. In its
quarterly report on the health of individual banks and the banking
industry as a whole, Institutional Risk Analytics (IRA), a respected
financial services organization, found that the stress levels among more
than 7,500 FDIC-reporting banks nationwide had risen dramatically. For
1,575 of the banks, net incomes had turned negative due to decreased
lending and less risk-taking.

The conclusion IRA drew was telling: "Our overall observation is that US
policy makers may very well have been distracted by focusing on nineteen
large stress test banks designed to save Wall Street and the world's
central bank bondholders, this while a trend is emerging of a going
concern viability crash taking shape under the radar". The report
concluded with a question: "Has the time come to shift the policy focus
away from the things that we love, namely big zombie banks, to tackle
things that are truly hurting us?"

6. The bailout encourages the very behaviors that created the economic
crisis in the first place instead of overhauling our broken financial
system and helping the individuals most affected by the crisis.

As Joseph Stiglitz explained in the New York Times, one major cause of
the economic crisis was bank overleveraging. "[U]sing relatively little
capital of their own", he wrote, "[banks] borrowed heavily to buy
extremely risky real estate assets. In the process, they used overly
complex instruments like collateralized debt obligations." Financial
institutions engaged in overleveraging in pursuit of the lucrative
profits such deals promised - even if those profits came with staggering
levels of risk.

Sound familiar? It should, because in the PPIP and TALF bailout programs
the Treasury Department has essentially replicated the very
overleveraged, risky, complex system that got us into this mess in the
first place: in other words, the government hopes to repair our
financial system by using the flawed practices that caused this crisis.

Then there are the institutions deemed "too big to fail". These
financial giants - among them AIG, Citigroup, and Bank of America - have
been kept afloat by billions of dollars in bottomless bailout aid. Yet
reinforcing the notion that any institution is "too big to fail" is
dangerous to the economy. When a company like AIG grows so large that it
becomes "too big to fail", the risk it carries is systemic, meaning
failure could drag down the entire economy. The government should force
"too big to fail" institutions to slim down to a safer, more modest
size; instead, the Treasury Department continues to subsidize these
financial giants, reinforcing their place in our economy.

Of even greater concern is the message the bailout sends to banks and
lenders - namely, that the risky investments that crippled the economy
are fair game in the future. After all, if banks fail and teeter at the
edge of collapse, the government promises to be there with a
taxpayer-funded, potentially profitable safety net.

The handling of the bailout makes at least one thing clear, however:
It's not your health that the government is focused on, it's theirs -
the very banks and lenders whose convoluted financial systems provided
the underpinnings for staggering salaries and bonuses while bringing our
economy to the brink of another Great Depression.

_____

Andy Kroll is a writer based in Ann Arbor, Michigan. He welcomes
feedback, and can be reached at his website.

http://www.motherjones.com/politics/2009/05/six-ways-financial-bailout-scams-taxpayers


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