(Permission to use Klein's articles
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This article is of critical importance for everyone to read and thoroughly digest. Here are extended excerpts, but please see link for complete piece.
The Bailout ProfiteersBy Naomi Klein
October 31st, 2008
Editors note: The online version of this story has been amended to reflect developments since the publication of the print edition. On October 13th, when the U.S. Treasury Department announced the team of "seasoned financial veterans" that will be handling the $700 billion bailout of Wall Street, one name jumped out: Reuben Jeffery III, who was initially tapped to serve as chief investment officer for the massive new program.
On the surface, Jeffery looks like a classic Bush appointment. Like Treasury Secretary Henry Paulson, he's an alum of Goldman Sachs, having worked on Wall Street for 18 years. And as chairman of the Commodity Futures Trading Commission from 2005 to 2007, he proudly advocated "flexibility" in regulation a laissez-faire approach that failed to rein in the high-risk trading at the heart of the meltdown.
Bankers watching bankers, regulators who don't believe in regulating that's all standard fare for the Bush crew. What's most striking about Jeffery's rιsumι, however, is an item omitted when his new job was announced: He served as executive director of Paul Bremer's infamous Coalition Provisional Authority in Baghdad, during the early days of the Iraq War. Part of his job was to hire civilian staff, which made him an integral part of the partisan machine that filled the Green Zone with Young Republicans, investment bankers and Dick Cheney interns. Qualifications weren't a big issue back then, because the staff's main function was to hand over stacks of taxpayer money to private contractors, who were the ones actually running the occupation. It was this nonstop cash conveyor belt that earned the Green Zone a reputation, in the words of one CPA official, as "a free-fraud zone." During Senate hearings last year, when Jeffery was asked what he had learned from his experience at the CPA, he said he thought that contracts should be handed out with more "speed and flexibility" the same philosophy he cited back when he was in charge of regulating Wall Street traders.
The Bush Administration has since reversed the Jeffery appointment, perhaps thinking better of giving a CPA alum such a central role in the Wall Street bailout. Still, the original impulse underscores the many worrying parallels between the administration's approach to the financial crisis and its approach to the Iraq War. Under cover of an emergency, Treasury is rapidly turning into an economic Green Zone, overrun with private companies collecting lucrative contracts. Fittingly, one of the first to line up at the new trough was none other than the law firm of Bracewell & Giuliani yes, that Giuliani. The firm's chairman, Patrick Oxford, could scarcely conceal his glee over the prospect of cashing in on the bailout. "This one," he told reporters, "is very, very big." At least four times bigger, in fact, than the post-9/11 homeland-security bubble, from which Giuliani and his various outfits have profited so extravagantly. Even bigger, potentially, than the price tag for the Iraq War itself.
.....
Secretary Paulson promised that the banks won't just "hoard" the money they will quickly "deploy it" through the economy in the form of badly needed loans. There is just one hitch: Neither Paulson nor Simpson Thacher got that "deploy" part in writing nor did they put in place any mechanism to require the banks to spend their taxpayer billions. Apparently, the part about lending the money to homeowners and small businesses was sort of implied.
.....
Unfortunately, many of the banks appear to have no intention of wasting the money on loans. "At least for the next quarter, it's just going to be a cushion," said John Thain, the chief executive of Merrill Lynch. Gary Crittenden, chief financial officer of Citigroup, had an even better idea: He hinted that his company would use its share of the cash $25 billion to buy up competitors and swell even bigger. The handout, he told analysts, "does present the possibility of taking advantage of opportunities that might otherwise be closed to us."
And the folks at Morgan Stanley? They're planning to pay themselves $10.7 billion this year, much of it in bonuses almost exactly the amount they are receiving in the first phase of the bailout. "You can imagine the devilish grins on the faces of Morgan Stanley employees," writes Bloomberg columnist Jonathan Weil. "Not only did we, the taxpayers, save their company...we funded their 2008 bonus pool."
It didn't have to be this way. Five days before Paulson struck his deal with the banks, British Prime Minister Gordon Brown negotiated a similar bailout only he extracted meaningful guarantees for taxpayers: voting rights at the banks, seats on their boards, 12 percent in annual dividend payments to the government, a suspension of dividend payments to shareholders, restrictions on executive bonuses, and a legal requirement that the banks lend money to homeowners and small businesses.
In sharp contrast, this is what U.S. taxpayers received: no controlling interest, no voting rights, no seats on the bank boards and just five percent in dividend payouts to the government, while shareholders continue to collect billions in dividends every quarter. What's more, golden parachutes and bonuses already promised by the banks will still be paid out to executives all before taxpayers are paid back.
No wonder it took just one hour for Paulson to convince all nine CEOs to accept his offer less than seven minutes per bank. Not even the firms' own lawyers could have drafted a sweeter deal.
The day after it met with the nation's top banks, Treasury announced that it had selected the firm that would receive the juiciest contract of all: that of "master custodian." The winning company will be to the bailout what Halliburton is to the military: the contractor of contractors. It will purchase toxic debts from Wall Street, service them and auction them off in the future a so-called "end-to-end process." The contract is for a minimum of three years.
..... the winner was Bank of New York Mellon. Describing the scope of the megacontract, bank president Gerald Hassell said, "It's the ultimate outsourcing because the Federal Reserve and the Treasury do not have the mechanics to run the entire program, and we're essentially the general contractor across the entire program. It's going to cross our entire company."
This raises an interesting point: Has the Treasury partially nationalized the private banks, as we have been told? Or is it the other way around? Is it Treasury that has been partially privatized by Wall Street, its massive rescue plan now entirely in the hands of a private bank it is directly subsidizing?
.....
Bank of New York Mellon has a bad record for mischief. It is embroiled in a $22.5 billion money-laundering lawsuit in Moscow and has been forced to pay out a $14 million settlement in a related case. Though the bank's "master custodian" contract with Treasury prohibits unethical conduct, the arrangement seems rife with opportunities for abuse. According to its most recent earnings report, Bank of New York Mellon holds $1.2 billion in subprime mortgage securities. That means that in addition to the $3 billion it will receive as part of the equity program, it will also be eligible to apply for taxpayer money from the program it is being paid to administer. Neither the bank nor Treasury would comment on this direct conflict of interest.
On the same day that he allocated the first $125 billion to the banks, Secretary Paulson announced the largest federal budget deficit in U.S. history. Buried in his statement was a preview of the next phase of the financial disaster. The deficit numbers, he declared, reinforce the need to "pursue policies that promote economic growth and fiscal responsibility, and address entitlement reform." He was referring to Americans who feel entitled to receive Social Security in their old age and Medicaid when they are sick. Those programs, Paulson implied, might not be able to survive the budget crisis he is currently creating for the next administration.
This is why the stakes of the bailout are so high: Unless we get a good deal, there will be nothing left over after the banks are done feeding to pay for the meager services now provided in exchange for taxation, let alone for the more ambitious initiatives promised on the campaign trail. The spiraling cost of saving Wall Street from its bad bets is already being used as an excuse for why we can't solve our many other crises, from health care to climate change.
There is a better way to fix a broken financial system. Treasury's plan to buy up the toxic debts never made sense and should be immediately scrapped a move that would also handily get rid of most of the crony contractors. As for purchasing equity in banks, the next round of deals and there will be more has to start from the premise that the banks are bankrupt and will therefore accept whatever terms we choose to impose, including real regulatory oversight. The possibilities of what could be done if a chunk of the banking system were genuinely under public control from a moratorium on home foreclosures to mandatory investment in green community redevelopment are limitless.
Because here is what George Bush and Henry Paulson are hoping we won't figure out: When a society no longer has enough money to pay for its most pressing needs, there are worse things than discovering you own the banks.
Keep this Klein article front and center when contacting your members of Congress before the lame duck session, especially those members who voted for this unprecedented authority for Bush/Paulson to conduct the final heist of Americans' treasure.
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