Matt already touched on the hypocracy here, but let's let Sirota have a go, too:
Last month, the same government that says it "cannot just abrogate" executives' bonus contracts used its leverage to cancel unions' wage contracts. As the Wall Street Journal reported, federal loans to GM and Chrysler were made contingent on those manufacturers shredding their existing labor pacts and "extract(ing) financial concessions from workers." In other words, our government asks us to believe that it possesses total authority to adjust contracts at car companies it lends to, and yet has zero power to modify contracts at financial firms it owns. This, even though the latter set of covenants might be easily abolished.
Sirota also mentioned that these AIG bonuses were crafted after corporate executives knew the company was collapsing, which reminds me of this danger Galbraith mentioned in the article I highlighted yesterday:
Delay is not innocuous. When a bank's insolvency is ignored, the incentives for normal prudent banking collapse. Management has nothing to lose. It may take big new risks, in volatile markets like commodities, in the hope of salvation before the regulators close in. Or it may loot the institution-nomenklatura privatization, as the Russians would say-through unjustified bonuses, dividends, and options. It will never fully disclose the extent of insolvency on its own.
Seems to me that some of these banks are probably ripe for nationalization, restructuring, and reselling...
Update: Oh, and another thing, this kind of hijinks should serve as a glaring reminder that management should not be trusted when it suddenly starts expressing concern for workers' rights...
As McCain continued to try to pin the blame on Fannie & Freddie for the current banking crisis, we're all aware of what he's really saying: it's not the fault of Wall Street, deregulation, his economic advisor Phil Gramm, or anybody else wearing a $3,000 suit. It's the fault of the poor. In fact, that's been a popular line of reasoning among some.
As Steve T pointed out, that's pretty much a bunch of hooey, and links to a McClatchy report that debunks the theory with hard, cold facts:
Federal Reserve Board data show that:
- More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
- Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
- Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.
Etc & co. Facts are fun, but then there's the Rolling Stone's Matt Taibbi, who pretty much nails the National Review's Byron York to a door over his parroting of the conservative blame-game.
B.Y.: I think that Fannie Mae and Freddie Mac were also major factors. And I believe that many of the problems in the mortgage area can be attributed to the confluence of Democratic and Republican priorities: the Democrats' desire to give mortgages to people, particularly minorities, who could not afford them, and the Republicans' desire to achieve an "ownership society," in part by giving mortgages to people who could not afford them. Again, I believe that if you are suggesting that the financial crisis is a Republican creation, or even more specifically a McCain creation, I think you're on pretty shaky ground.
M.T.: Oh, come on. Tell me you're not ashamed to put this gigantic international financial Krakatoa at the feet of a bunch of poor black people who missed their mortgage payments. The CDS market, this market for credit default swaps that was created in 2000 by Phil Gramm's Commodities Future Modernization Act, this is now a $62 trillion market, up from $900 billion in 2000. That's like five times the size of the holdings in the NYSE. And it's all speculation by Wall Street traders. It's a classic bubble/Ponzi scheme. The effort of people like you to pin this whole thing on minorities, when in fact this whole thing has been caused by greedy traders dealing in unregulated markets, is despicable.
Man! That's how you deal with that accusation. The rest of this delicious exchange awaits you below the fold...
Unfortunately, I think this meme about Fannie & Freddie is starting to seep into the MSM's collective subconscious, because just the other day while I was listening to NPR, one of the newscasters glibly passed off the conservative line, placing part of the banking collapse on the backs of the poor and minorities.
The Senate's version of the bailout bill passed easily, 74-25. Senate Majority Leader Harry Reid cobbled together the bailout bill on top of the AMT fix and alternative energy tax credits -- talked about often enough here -- and kicked it through, with little opposition.
It's the ultimate Senate bill. Bloated. Perks for everybody. And pundits predict it's got enough of everything to make it through the House.
Why? Well, for starters, this bailout bill is a little too big to slick it through with pork and tax cuts. The bill should be stripped of all that garbage, and we should focus on the bailout. Crazy, I know.
For another thing, there are a few provisions in the bill that just aren't palatable. The alternative energy tax credits? Gives a boost to coal-to-liquid and tar sand developers, too. And let's not forget that those tax credits aren't offset in this bill. So - we throw hundreds of billions onto the banking crisis...and add more debt with the tax credits, without any increased revenue source to recoup our investments? With the built-in inequity of our tax code, working Americans will be stiffed with this bill. You and me. And our kids. And our grandkids.
And again, there's nothing in here to give homeowners concrete relief. And nothing in the bill to bring some regulation to bear on the problem. And nothing in the bill to bring revenue to the government from the same institutions we're bailing out.
The bailout bill has been a tangled mess ever since it appeared on the scene. It wasn't clear to we non-economists what it was supposed to fix; no one likes the bill, either in Congress, the administration, the financial world, or on this much-ballyhooed "Main St" we keep hearing out; and no one knows if it will work. It's a big payment, too. And we're told it's the only thing that will keep our economy from sinking into the toilet -- and they might be right, too.
In short, it's evoked anger, bewilderment, fear, and frustration for me over the past week or so. And, yes, I'm not angry at Obama, McCain, or Baucus for passing it through the Senate -- maybe a little dismayed they didn't take up some of the more practical, progressive suggestions.
We'll see what happens to this bill in the House. I'm guessing it goes through, and we're done.
Kevin Drum, on the opposition to the bailout bill:
The original opposition, after all, probably didn't reflect widespread sentiment so much as it did a narrow slice of highly motivated talk radio and Lou Dobbs fans.
I'm scheduled to appear on CNN at 3:30pm EST to discuss the House's extraordinary vote to reject the $700 billion Wall Street bailout. What I'm going to say is pretty simple: it's clear that Congress is facing a full on revolt from both the Right and Left - the very revolt that I predicted in my book, The Uprising. No longer is this a populist revolt merely scaring Wall Street and Washington - this is a populist revolt that has, to quote Markos, crashed the gate, and it represents a real victory for the progressive movement and voices who said Hell No.
You know, I understand why Drum wants to push all the opponents of the bailout bill into a corner and pretend that they're a mass of idiotic automatons: he's genuinely concerned about the effects of not passing some sort of relief, and quickly, to the country's banking system. But, really, given the outrage spurred by this bill, and the pressure put on Congress by its constituents all week, I think that's a tad naive. Sirota, I think, is closer to the truth. Personally I've never seen a U.S. political coalition like the opposition to the bailout bill before, one that spans all ideologies and political parties.
Chris Bowers has an eloquent defense of those, like himself, who opposed the bailout bill as it stood on Monday:
You didn't lose because your opponents are dumb. You lost because you failed to convince enough people you were right. That is actually a failing on your part, not of your opponents. In this specific case, it is a massive failing on the part of the people who supported the bailout. They had both presidential candidates, the leadership of both parties in both branches of Congress, virtually the entire national media, and all of the moneyed interests in their corner, and they still couldn't convince a majority of either the public or congressional backbenchers that it was a good idea. If you ask me, that is actually pretty frackin' pathetic. Some might even wonder if there is a fundamental stupidity at the core of this proposal if, with virtually all the levers of public influence supporting it, the majority of the country still thinks it is a bad idea.
That's not to say some form of legislation aiding the finance industry isn't warranted. Drum:
Our real problem is in the credit markets, and the credit markets are blinking fire engine red right now. Overnight bank lending rates have skyrocketed. Municipal bond markets have cratered. The two biggest providers of short-term credit to restaurant franchises, GE Capital and Bank of America, have exited the market. Rates on overnight commercial paper are up two points. This stuff doesn't hit you or me in the pocketbook immediately, but it does eventually as spending drops, companies can't get financing, and jobs get cut.
I know Obama's leading all the polls right now and, as a result, is averse to risk-taking, but he's ideally positioned to push for a bailout bill that's more friendly to the rest of us. Right now the media's not covering any of the proposed alternatives to the Paulson plan; Obama's support for, say, a progressive bill, the media would be forced to cover it, and Obama could cruise down the homestretch as the champion of everyday Americans during the present banking crisis. It's risky, though. Likely the punditocracy wouldn't go for it; they like it the way things are.
So. We're facing a banking crisis. Yesterday, the Dow dropped 700+ points; today, so far, it's up 228. Home prices are plummeting.
And the right is busy trying to affix the blame on the poor.
That is, they're laying blame on the Community Reinvestment Act (CRA) for pushing "Fannie and Freddie to aggressively lend to minority communities." The idea is that the CRA forced lenders to give money to shiftless, lazy dark-skinned people who obviously couldn't pay back the loans, and brought this mess down on all of our heads.
Robert Gordon examined these claims back in April. Gordon noticed that the timing is off -- CRA was enacted in 1977 and its greatest activity occured in the 1990s, not during the recent subprime lending spree -- that a full half of subprime lenders weren't working under the CRA, and that CRA lenders were actually more responsible during this mess, offering safer loans than those that weren't subject to CRA.
Get it? It was lenders outside the regulatory environment of CRA that were the worst and most irresponsible subprime lenders.
Gordon:
It's telling that, amid all the recent recriminations, even lenders have not fingered CRA. That's because CRA didn't bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA -- or any federal regulator. Law didn't make them lend. The profit motive did.
The fuss against the CRA is really more pro-corporate rhetoric justifying deregulation in the wake of the current banking crisis. Unfortunately it's cloaked in the racist language and assumptions of the populist right. And leads to people like this:
Worried that welfare costs are rising as the number of taxpayers declines, state Rep. John LaBruzzo, R-Metairie, said Tuesday he is studying a plan to pay poor women $1,000 to have their Fallopian tubes tied.
"We're on a train headed to the future and there's a bridge out, " LaBruzzo said of what he suspects are dangerous demographic trends. "And nobody wants to talk about it."
LaBruzzo said he worries that people receiving government aid such as food stamps and publicly subsidized housing are reproducing at a faster rate than more affluent, better-educated people who presumably pay more tax revenue to the government.
As you have heard, the bailout bill failed in the House.
The bickering starts. House Minority Leader John Boehner fires the first, and very absurd, salvo: it's Nancy Pelosi's fault! "'I do believe that we could have gotten there today had it not been for this partisan speech that the speaker gave on the floor of the House,' House Minority Leader John Boehner (R-Ohio) said, adding that Pelosi 'poisoned' the GOP conference." That's the mark of a true leader: when something goes wrong on your team, blame...someone else?
Barney Frank fires back:
"And because somebody hurt their feelings, they decide to punish the country."
The market reacted and the Dow dropped 778 points, "knocking out approximately $1.2 trillion in market value" -- the first day ever the market lost that much value.
I know some folks are disappointed that the bailout bill failed today, but I have to say, this is the way our political system is supposed to work. That is, responsive. As Nate Silver demonstrates, it was the swing district House Representatives -- both Republican and Democratic -- that sunk the bill. And the political cost of being an ardent backer of the bill is high; just ask Mitch McConnell, who finds himself in a "free-for-all in the polls" and could very well see his seat turn over to his challenger, Bruce Lunsford.
Looks like that cap for executive compensation was toothless: "The plan ostensibly prohibits golden parachute payments to CEOs and other "C-level" execs at bailed-out companies. However, it really only prevents payments on severance deals that are struck AFTER the bailout (specifically, it prohibits these deals completely). There is nothing about cancelling the severance payments that the executives are ALREADY contractually entitled to. What this means in practice is that bailed-out companies will have trouble hiring the best talent...because why would you work at Bailed Out Company A when you could go across the street and get a fat severance deal? It also doesn't mean the companies can't pay their CEOs $500 million a year."
Some folks see the failed bailout bill as an opportunity to reconsider, and then do it right. Kossak Meteor Blades agrees, and has a roundup of what some liberal economists are suggesting. Here's MB's advice for the Congressional Democrats: "None of those alternatives may succeed in getting the necessary votes. But one of the problems with what the Democratic leadership does on so many occasions is compromise first (which often means capitulate), then vote. It's not the losses that are irksome, it's the unwillingness to put up a solid proposal, then fight for it. As if the voters will be upset with them for being uncooperative.
"If they would put a fight, a real fight, and then lose, they would have a perfect argument when they went to the voters. They could say: "Look, first we tried to get the best possible deal. The Republicans shot it down. So then we compromised, and they shot that down. So finally we gave in because something had to be done. But you see who the problem is here, right?"
Nouriel Roubini opines that we should be following the action during the Scandanavian banking crisis: "In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead - in most cases in which it was used - made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico)."
Roubini offers this little parting jab: "This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners."
I like the way MarkT thinks: "A couple of ideas are out there, but not seriously considered. They have to do with making the people caused the mess clean it up. One would be a surtax on high income taxpayers to pay for the bailout. The second idea is a small tax, say a quarter percent (.0025) on all stock transactions. It would raise about $150 billion per year, and would make Wall Street pay for Wall Street's problems."
And finally Kevin Drum: "An awful lot of people really, really still don't get it. I swear, if I hear one more blogger or pundit suggesting that maybe it's actually a good thing the bailout bill failed because now we have a chance to pass an even better bill, I'm going to scream."
There's a bailout deal on the table. It includes oversight, caps for executive compensation, and equity appreciation. (The Chicago Sun Times has a handy summary of the bill online.)
For homeowners, the deal is not so sweet. Yes, the government will purchase some troubled mortgages, effectively lessening pressure to foreclose; yes, the plan includes a program to assist troubled homeowners; but the bill did not give bankruptcy judges the power to "modify a troubled borrower's primary mortgage," which means it will still be difficult for homeowners to restructure their mortgages.
In short, between the price tag and unprecedented powers given to the administration and the failure of Congress to discuss alternatives, there's something in this bill that everybody dislikes. The bill's fate in the House is unsure, despite leadership from both parties signing on to the deal.
This bailout's mission is to protect the obscene amount of wealth that has been accumulated in the last eight years. It's to protect the top shareholders who own and control corporate America. It's to make sure their yachts and mansions and "way of life" go uninterrupted while the rest of America suffers and struggles to pay the bills. Let the rich suffer for once. Let them pay for the bailout. We are spending 400 million dollars a day on the war in Iraq. Let them end the war immediately and save us all another half-trillion dollars!
I don't think our Congress has faced a more important decision than whether or not to pass the bailout bill in decades, perhaps longer. (Summary here; CBO analysis here.) To state what is beyond obvious: it is incredibly important to set aside our preconceptions, whatever they may be, and really think hard about whether to support this bill or not. If you're easily alarmed by predictions of disaster, think long and hard about how long it will take to pay this off. If you're inclined to think that experts telling you that you need to fork over large sums of money are necessarily wrong, go back and listen to the audio clips near the end of my last post. Look at the graphs and the pictures. Think hard.
The costs of being wrong, in either direction, are staggering. This is not a time to leap to conclusions....
For my part, I support it. There are a lot of people who I respect who are genuinely worried that we might be on the brink of a serious depression, and who think this would help avert or mitigate it. But I hate this.
Things are really heating up against the bailout. You have to think passing something by Monday would be a political disaster for whoever is involved. Check out this CNN report on the bailout buzz in Montana:
Suzanne Studer is patient and polite, her greeting constant: "Congressman Denny Rehberg's office, Suzanne speaking .."
Bush addressed the nation Wednesday night to sell the administration's financial rescue package.
To spend an hour with her on Wednesday was to understand firsthand why consensus in the Congress is proving hard to come by, and why President Bush felt compelled to address the nation in a prime time effort to sell the administration's $700 billion financial rescue package.
"Absolutely not on the bailout," Studer repeated as she took notes on one call.
"Protest on the bailout, OK," as she took another.
"You are calling to protest -- well you know I have heard a lot of those so let me just get this written down," she says politely to yet another frustrated constituent.
Studer has worked in the office two years now and says she has never experienced anything like the flood of calls in recent days, and not a one in support of the package....
Montana's two senators report similar calls, e-mails, faxes and in some cases walk-in complaints from constituents who don't trust what they are hearing from Washington, and increasingly worry they will get stuck with the bill but not share in any economic benefits.
And the report comes with, naturally, a money quote from the Good Guv:
"They say, 'My God, this looks like a condition where the powerful are going to give money to the rich. What's new?' " Schweitzer told CNN in an interview at a ranch on the outskirts of Helena.
Curiously, Schweitzer thinks Congress should hold off a few days before voting for a bailout bill.
Meanwhile, the latest bailout terms are something like this: $250 billion immediately, another hundred available, and the last $350 billion only with Congressional approval; caps on executive compensation; and an equity stake for taxpayers in the companies helped by the bailout. Having bankruptcy judges modify mortgage terms is still being debated.
In this scenario, it seems House Republicans (without Dennis Rehberg?) are the heroes: they oppose using taxpayer funds to bail out Wall Street:
Instead, they issued a statement of economic rescue principles that calls for Wall Street to fund the recovery by injecting private capital...into the financial markets. Easing tax laws would prompt investors to put in their own dollars, they said.
But you knew more deregulation would be part of their plan, didn't you?
Senator Richard Shelby (R-AL) wants to ditch the Treasury plan unless there is "serious consideration of the alternatives." That's what I like to hear!
And I love what I hear from Bernie Sanders: "Larry, if I ask you that the government should intervene like every other industrialized country does and provide health care for all people, you'd say 'oh no!' And if I ask you to support government intervention so that we don't have the highest rate of childhood poverty in the world, you'd say 'oh no!' But when Wall Street screws up because of their greed, you say, 'oh yes, it's a great idea!'"
Update: It appears McCain is playing a political gambit with the bailout and has derailed it (for now). He's offered up an alternative plan. So...what's the alternative?
BOB ORR: We're told at the White House Senator McCain offered an alternative plan that would include fewer regulations and more corporate tax breaks for businesses, kind of a private solution.
Yeah, because deregulation and tax cuts worked so well with the finance industry in the past.
Okay, so I didn't intend to keep writing about this bailout bill. But here I am. I blame the fact that just about everybody out there seems to be freaking out over this thing. Seven hundred billion dollars! Or is it eight hundred billion? Or a trillion?
The financial services industry, which has spent billions on lobbying and campaign contributions over the last decade, is scrambling to make its case for a proposed $700 billion bailout plan amid deep public skepticism.
Wall Street firms, commercial banks and insurers are lobbying on an array of issues - from beating back proposals to make it easier to reduce mortgage debts in bankruptcy courts to fighting, unsuccessfully so far, to retain control over executive pay.
You think the current deregulatory market and recent obsequiousness from both parties towards the financial industry has anything to do with lobbyists? You bet it does!
And finally, a bit of wisdom from Paul Krugman on the Bush administration's sudden reliance on "price discovery" as a basis to support this bill:
But there's another possible explanation, which I find terrifyingly plausible: the plan came first, and all this stuff about price discovery is an after-the-fact rationalization, invented when people started asking questions.
It has seemed very strange to me that such a supposedly crucial economic program would be based on such an exotic argument. My sneaking suspicion is that they started with a determination to throw money at the financial industry, and everything else is just an excuse.
The Director of the Congressional Budget Office, Peter Orszag:
...Orszag yesterday questioned the wisdom of the plan itself, testifying that "it therefore remains uncertain whether the program will be sufficient to restore trust."
In yesterday's interview, Orszag said, "The key question is: What are we buying and what are we paying for it?"
Orszag offered alternatives, such as equity injections into particularly troubled companies, but allowed that those could lead to further problems, as well. In the end, he said, Congress must pass some sort of relief, if only because Wall Street is expecting it.
"If we did nothing, there is a significant risk of another collapse of confidence in the financial markets," he said.
The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans."
With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.
Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.
With this solution, the systemic financial threat should go away.
Man, the more I hear about this bailout bill, the less I like it, and the less I'd like to see something written up and passed by Monday, even if it does include the demands from the Democratic leadership.
Chris Bowers, too, is "suspicious" of the crisis. He wonders at the timing of the crisis, at the fact that this bill was written months ago, that financially secure firms are included in the bailout, and at the specific amount of the bailout. He also distrusts Paulson.
(And why not? Besides being a member of the Bush administration, Paulson's also got a lot of history and buddies on Wall Street, and he stands to benefit mightily from the bailout.)
But we're in this mess, ultimately, because our political elites thought it was good social policy to encourage banks to give mortgages to uncreditworthy people, resulting in what Sailer months ago called the "Diversity Recession" (if this doesn't work, make that the Diversity Depression). In other words, if poor people in general, or blacks or Hispanics in particular, were less likely to be approved for a mortgage, the only possible reason was racism or classism or whatever. Thus "creditworthiness" was an illegitimate, dead-white-male concept, like middleclassness. Because, after all, isn't everyone entitled to credit? Therefore, I propose any bailout bill start with these words: "It is the sense of Congress that credit is not a civil right."
For five long and intense hours Tuesday, U.S. Sen. Jon Tester, D-Mont., sat through the Senate Banking Committee hearing and listened to the country's top financial experts explain why Congress needs to pass President Bush's $700 billion banking bailout bill by Friday, and without significant changes.
Tester was not impressed.
"They said, 'Trust us. You give us a blank check. We feel as much frustration with this process as you do, but just trust us,' " he said. "That's not good enough for me."
As promised, I'm digging up some of Jackie Corr's emails and giving them light.
His last few emails were remarkably prescient: ostensibly they were about the legislation and the economic pressures that led us to our present crisis. In fact, his last email to me contained a link to the obituary of Dennis Weatherstone, the JP Morgan banker who, as much as anyone, is responsible for the present banking crisis:
Mr. Weatherstone laid the groundwork for transforming J.P. Morgan into a diversified global bank and could be considered a prototype for today's Wall Street chiefs....He also was a fixture on the global banking scene, using his experience and charm to help the industry successfully head off calls for greater regulation of financial derivatives.
By winning authority from the Federal Reserve to trade and sell corporate stocks in 1990, he made J.P. Morgan the first commercial bank in six decades to return to the business of underwriting securities.
That helped set the stage for the repeal of the Glass-Steagall Act, a Depression-era law that barred commercial banks from combining with brokerage houses, and established the modern financial services conglomerate. It also led to a wave of Wall Street mergers, including the 2000 deal between J.P. Morgan and Chase Manhattan bank.
"It was the beginning of the crack in the door," said John Reed, the former co-chairman of Citigroup. "He clearly felt the future of J.P. Morgan was to become more and more of an investment bank. But he left before that occurred."
Weatherstone started the push to repeal the New Deal legislation, which the Clinton administration and GOP Congress would abet in 1999.
