Bailout Nation (35 page)

A
modified version of the TARP, sweetened with pork to assure passage, flew though the House and Senate in early October. It was quickly signed into law by President Bush.
²²
Treasury Secretary Paulson called the government bailout plan “extensive, powerful and transformative.”
²³

Shortly after the TARP was passed, Paulson added to its original intent—to use the funds to buy toxic debt from the banks—with a mishmash of programs and schemes, including:

Beyond those massive expenditures, Uncle Sam was to “temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in noninterest-bearing accounts, mainly used by businesses.”
²⁴

All told, the costs of the “bailout package came to $2.25 trillion, triple the size of the original $700 billion rescue package.”
²⁵

Now for the punch line: It was all an elaborate ruse, a coverup of the fact that Citigroup was busted.

As of October 2008, the other banks, while somewhat worse for wear, neither wanted nor needed the capital injection. None of them were in the same trouble as Citi. Even Bank of America's problems via Merrill Lynch wouldn't become acute until December 2008. Washington Mutual, the most troubled on the list, had
already been put into FDIC receivership
the month before.
²⁶
JPMorgan bought WaMu from the FDIC for under $2 billion, and Wachovia was swept up by Wells Fargo for about $15 billion. Thanks to a change in the tax law, Wells Fargo got to shelter $74 billion in profits from taxation. Instead of the FDIC absorbing a few billion in losses from Wachovia's bad assets, the taxpayers lost 35 times that amount.
²⁷

At the time of Paulson's gambit, only Citigroup was in dire straits. Paulson apparently feared what might happen if the rest of the world realized Citi was insolvent at the same moment the markets were cratering. Rather than stigmatize one reckless, poorly managed, overleveraged bank, the Treasury secretary decided to paint the entire banking sector with the same slanderous brush.

The solvent bankers chafed at the latest TARP plan. Paulson called a meeting of heads of the biggest banks—it was reminiscent of the Long-Term Capital Management meeting at the New York Federal Reserve, with a touch of
The Godfather
thrown in. The Treasury secretary presented his plan as an offer the banks could not refuse. “It was a take it or take it offer,” said one person who was briefed on the meeting, speaking on condition of anonymity because the discussions were private. “Everyone knew there was only one answer.”
²⁸

What a bizarre twist on the film's famous horse head scene: “Take this $25 billion or else.”

A
s 2008 progressed, the usual snafus and foul-ups of any huge government program followed: The Federal Reserve refused to identify who were the recipients of nearly $2 trillion of emergency loans funded by taxpayers;
²⁹
(Bloomberg sued the Fed under the U.S. Freedom of Information Act for a full disclosure) .
³⁰
A GAO report criticized the TARP's internal controls.
³¹

But the real outrage began once financial institutions began using TARP bailout money to pay executive bonuses. The firms, of course, say it's different money and bonuses are key to retaining top employees. But if you need to come to the government for a handout, shouldn't your executives forgo a bonus? Or, as was the case in Europe, shouldn't the government make canceling bonuses a condition of getting aid?

Adding to the growing anger were new tax giveaways to bailout recipients. The Treasury department provided a tax break to banks involved in acquisitions that could amount to $140 billion. The
Washington Post
revealed the IRS quietly made changes to the tax code issued on September 30, while Congress was debating the $700 billion TARP bill.
³²

All the while, Citi and Bank of America executives kept returning for more handouts. They may not have been very good at managing risk, but they sure were quick studies. After the first round of TARP money, it became apparent that their capital-raising options were limited. Following the first $25 billion in TARP cash, Citi went back for another $20 billion, and then the big one—$250 billion in full faith and credit from the U.S. government guaranteeing its toxic assets. Bank of America—a.k.a. “Bank owned by America”—also came calling thrice: $25 billion, $20 billion, and then $300 billion in asset guarantees. The winner (and still champ) for multiple trips to handout junction remains AIG; it took four trips to wrangle a total of $173 billion of bailout green.

Don't you think they earned their bonuses for
that
?

2
009 was a new year
. . .
with a new president, a new Treasury secretary, and a new bailout plan. And as this book was going to press, Treasury Secretary Tim Geithner's long-awaited successor to TARP was finally out. He chose to extend and replace the TARP with PPIP—a Public-Private Investment Program. Administered by the FDIC, the program's focus is to move toxic assets—typically CDOs, mortgage-backed securities, and commercial real estate loans—off of the books of troubled banks.

The PPIP has two unique twists. The first is the private-partnership aspect of it. The FDIC will lend qualified funds up to 7 times leverage to buy bank holdings. These funds need only put up $12 to purchase $84 worth of distressed assets via an auction. The United States is apparently going to use more leverage to work its way out of a situation created by using too much leverage. That seems a bit like trying to drink yourself sober.

The second twist is the end run on Congress that the PPIP manages. Since it is administered by the FDIC and these are technically secured loans, no congressional approval is required.
³³

Treasury has come up with prior clever ways to backdoor Congress. As Felix Salmon wrote on the
New York Times
Op-Ed page:

Just what the nation needs—another page from the playbook of Robert Rubin. Meet the new boss
. . .
same as the old boss.

W
ho's next? Ironically, this part of the chapter has been rewritten six times. Originally, it was about Fannie Mae, but then I had to switch it to Lehman Brothers, then AIG, then General Motors, now Citi.

That was the last straw, for I began to wonder if it wasn't me who was damning these companies by even thinking about writing them up.

When the Detroit bailout occurred, I decided to swear off writing anything titled “Who's Next?” Besides, it was no longer a valid viewpoint. Perhaps a more appropriate title might be “Who's Left?” Rather than guess who is next, and thereby destroy that poor firm, I'd suggest you turn the page. Let's see how we got into this jam in the first place.

—Mark Twain

 

Over the past two years of bailouts, the collection of clueless dolts, political hacks, and—oh, let's just be blunt and call them what they are—total idiots continues to expand into an ever wider circle.

While the republic burns due to the unsavory combination of incompetence, radical ideology, and casino capitalism, the clowns seem ever more determined to avoid any and all personal responsibility for the damage they have wrought. Instead, they flail about blindly, blaming everything and everyone—except their own horrific negligence.

This is financial incompetence writ on a scale far grander than anything seen for centuries.

As a nation, our institutions have failed us: Under Alan Greenspan, the Federal Reserve slept through the most reckless and irresponsible expansion of bank lending in history for reasons of ideological purity. As recently as March 2009 Greenspan actually contributed a
Wall Street Journal
op-ed renouncing any blame for the housing bubble.
³⁵
In addition to his unprecedented monetary policy, his nonfeasance in failing to perform the Fed's regulatory role reached the point of criminal negligence long ago. History will be unkind to the Maestro.

As a nation, we have a choice to make: Either we place some reasonable regulations upon the banks and investment houses or we allow the vagaries of the free markets to punish those who trade with, or place their assets in, the wrong institutions.

If the taxpayers are ultimately on the hook for the losses of the financial sector, do they not have the right to insist that the riskiest of behaviors be restricted? If a business model is so inherently flawed that it causes a worldwide economic collapse, shouldn't the behavior that contributes to that collapse be prevented?