Tax and Spend

Rolling Stone reports on the secrets and lies of the Wall Street bailout.

"[The story of the bailout] was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyperconcentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it. The result is one of those deals where one wrong decision early on blossoms into a lush nightmare of unintended consequences. We thought we were just letting a friend crash at the house for a few days; we ended up with a family of hillbillies who moved in forever, sleeping nine to a bed and building a meth lab on the front lawn."

That's pretty good.

"The bailout deceptions came early, late and in between. There were lies told in the first moments of their inception, and others still being told four years later. The lies, in fact, were the most important mechanisms of the bailout. The only reason investors haven't run screaming from an obviously corrupt financial marketplace is because the government has gone to such extraordinary lengths to sell the narrative that the problems of 2008 have been fixed. Investors may not actually believe the lie, but they are impressed by how totally committed the government has been, from the very beginning, to selling it."

I doubt it had ever been so obvious the government works first and foremost for the bankers.

"In October 2010, Obama signed a new bailout bill creating a program called the Small Business Lending Fund, in which firms with fewer than $10 billion in assets could apply to share in a pool of $4 billion in public money. As it turned out, however, about a third of the 332 companies that took part in the program used at least some of the money to repay their original TARP loans. Small banks that still owed TARP money essentially took out cheaper loans from the government to repay their more expensive TARP loans – a move that conveniently exempted them from the limits on executive bonuses mandated by the bailout. All told, studies show, $2.2 billion of the $4 billion ended up being spent not on small-business loans, but on TARP repayment. "It's a bit of a shell game," admitted John Schmidt, chief operating officer of Iowa-based Heartland Financial, which took $81.7 million from the SBLF and used every penny of it to repay TARP."

GM did something similar.

"Even worse, the $700 billion in TARP loans ended up being dwarfed by more than $7.7 trillion in secret emergency lending that the Fed awarded to Wall Street – loans that were only disclosed to the public after Congress forced an extraordinary one-time audit of the Federal Reserve."

Thanks, Ron Paul.

"Goldman Sachs, which had made such a big show of being reluctant about accepting $10 billion in TARP money, was quick to cash in on the secret loans being offered by the Fed. By the end of 2008, Goldman had snarfed up $34 billion in federal loans – and it was paying an interest rate of as low as just 0.01 percent for the huge cash infusion. Yet that funding was never disclosed to shareholders or taxpayers, a fact Goldman confirms. "We did not disclose the amount of our participation in the two programs you identify," says Goldman spokesman Michael Duvally."

I believe that failure to disclose is a crime, but don't count on anybody getting arrested.

"Meanwhile, at the same moment that leading banks were taking trillions in secret loans from the Fed, top officials at those firms were buying up stock in their companies, privy to insider info that was not available to the public at large."

Of course. Why wouldn't they? That sounds like insider trading, but don't expect anybody to be arrested for that either.

"The implications here go far beyond the question of whether Dimon and Co. committed insider trading by buying and selling stock while they had access to material nonpublic information about the bailouts. The broader and more pressing concern is the clear implication that by failing to act, federal regulators­ have tacitly approved the nondisclosure. Instead of trusting the markets to do the right thing when provided with accurate information, the government has instead channeled Jack Nicholson – and decided that the public just can't handle the truth."

The author seems surprised, but the function of regulators is to protect the giant corporations they regulate.

"America's six largest banks – Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – now have a combined 14,420 subsidiaries, making them so big as to be effectively beyond regulation. A recent study by the Kansas City Fed found that it would take 70,000 examiners to inspect such trillion-dollar banks with the same level of attention normally given to a community bank."

I couldn't care less about regulation, but those banks are clearly unmanageable. What's funny is the author doesn't conclude that the much larger federal government is even more unmanageable. He still thinks it should be the solution to this problem.

"Worst of all, the Implicit Guarantee has led to a dangerous shift in banking behavior. With an apparently endless stream of free or almost-free money available to banks – coupled with a well-founded feeling among bankers that the government will back them up if anything goes wrong – banks have made a dramatic move into riskier and more speculative investments, including everything from high-risk corporate bonds to mortgage­backed securities to payday loans, the sleaziest and most disreputable end of the financial system. In 2011, banks increased their investments in junk-rated companies by 74 percent, and began systematically easing their lending standards in search of more high-yield customers to lend to."

This is just the tip of the iceberg of the damage that's coming.

"This is a virtual repeat of the financial crisis, in which a wave of greed caused bankers to recklessly chase yield everywhere, to the point where lowering lending standards became the norm."

It became the norm because government ordered them to do it and funded it by printing money. The government caused this problem. The bankers just took advantage of it.

"Now the government, with its Implicit Guarantee, is causing exactly the same behavior – meaning the bailouts have brought us right back to where we started. "Government intervention," says Klaus Schaeck, an expert on bailouts who has served as a World Bank consultant, "has definitely resulted in increased risk.""

This was already happening before the crisis because the Fed guaranteed the banks would not fail. This is what caused the crisis. This is why it was predicted by Austrian economists. What's changed is that previously, semi-secret guarantee has become an explicit guarantee. The author talks a lot about how the banks screwed over home owners to create the financial crisis, but he fails to mention government's role in that.

You know how schools always promise to cut the most popular programs, never cutting bureaucrats, as a way to pressure people into voting for increased taxes? The Air Force is doing the same thing to avoid the minor spending cuts that got delayed two months in the fiscal cliff deal.

Democrats want Obama to unilaterally raise the debt ceiling.

"Democratic leaders in the Senate on Friday urged President Obama to consider bypassing Congress to prevent the nation from defaulting on its spending obligations if lawmakers cannot agree to raise the nation’s $16.4 trillion debt ceiling next month.
In a joint letter that served as a warning to congressional Republicans, Senate Majority Leader Harry M. Reid (D-Nev.) and his leadership team encouraged Obama to “take any lawful steps” to avoid default — “without Congressional approval, if necessary.”"

I like how they use the word lawful to mean lawless.