The excerpts below are from an article entitled “Secrets and Lies of the Bailout” by Matt Taibbi which appeared in the January 17, 2013, issue of Rolling Stone magazine. Taibbi has been a guest on Jon Stewart’s show and his investigative journalism is among the best in today’s business. Some of the points he makes deserve wider distribution, so here are a few quotes from the article that is subtitled: “The federal rescue of Wall Street didn’t fix the economy—it created a permanent bailout state based on a Ponzi-like confidence scheme. And the worst may be yet to come.”
Read on, Gentle Reader—if you dare! But buckle your seatbelts: it’s going to be a bumpy ride!
As Taibbi begins the article about the $700 billion in taxpayer money used to bail out Wall Street: “To listen to the bankers and their allies in Washington tell it, you’d think the bailout was the best thing to hit the American economy since the invention of the assembly line. Not only did it prevent another Great Depression, we’ve been told, but the money has all been paid back, and the government even made a profit. No harm, no foul—right! Wrong!
It 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 Citi-Group to increase risk rather than reduce it.” As Taibbi puts it, “We thought we were just letting a friend crash at the house for a few days, but we ended up with a family of hillbillies that moved in sleeping 9 to a bed and building a meth lab on the front lawn.”
Taibbi says, “Money wasn’t the only thing the government gave Wall Street” and cites the omnipresent lying and quotes former bailout Inspector General Neil Barofsky as calling it “the ultimate bait-and-switch.” The lies, he says, were the most important part of the mechanism. “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.” Says Taibbi, “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 itl”
Under the sub-heading: “They lied to pass the bail-out,” Taibbi mentions that George W. Bush ludicrously warned that Saddam was planning to send drones to spray poison over New York City to sell the Iraq War resolution. And, of course, anyone who has seen the Sean Penn movie about the “outing” of CIA agent Valeria Plane will remember the infamous plutonium rods used by the Republican administration as proof that Iraq had nuclear capability (or soon would have). Cautioning that, “it wasn’t like (Henry) Paulson could just go out and unilaterally commit trillions of public dollars to rescue Goldman Sachs and Citigroup from their own stupidity and bad management (although the government ended up doing just that, later on.”
Says Taibbi, on page 36 of his article, “At one meeting to discuss the original bailout bill—at 11 a.m. on September 18th, 2008, —Paulson actually told members of Congress that $5.5 trillion in wealth would disappear by 2 p.m. that day unless members took immediate action.” He added that the world economy would collapse “within 24 hours.” Paulson and Federal Reserve Chairman Ben Bernanke told Ohio Senator Sherrod Brown, “We need $700 billion, and we need it in 3 days.” The plan stipulated that Paulson could spend the money any way he chose without review “by any court or law or any administrative agency.” So, carte blanche, essentially, to do as he wished with the money.
The provision that got the bill passed (Emergency Economic Stabilization Act of 2008) was that the Treasury would buy up $700 billion of troubled mortgages from banks and modify them to help struggling homeowners. “That provision,” said Barofsky,” is what got the bill passed” on October 3, 2008. But, says Taibbi, “within days Section 109 was “unceremoniously ditched” and what was pitched as a bail-out of both banks and homeowners became a banks only operation.
Congress, feeling it had been lied to, put together a movement to cancel the remaining $350 billion of the TARP bailout. So, says Taibbi, “Bailout officials put together a proposal full of even bigger deceptions to get it passed a second time” beginning on January 12 and 15, 2009. Says Taibbi (and I’m skipping over portions of this long and detailed article), “A small slice of TARP was earmarked for foreclosure relief, but the resultant aid programs for homeowners turned out to be riddled with problems, for the perfectly logical reason that none of the bailout’s architects gave a shit about them.” Says Taibbi, “The promise of housing aid, in particular, turned out to be a paper tiger.”
As a person who attempted to use the TARP program to refinance a Chicago condo, I can attest to this. There are so many rules and regulations in place as to make the program virtually useless. After one full year (where I was assured it wasn’t MY credit that was the problem), I gave up and slunk away without a refinance in place and never heard from the eager Florida fellow again. Says Taibbi, “In fact, the amount of money that eventually got spent on homeowner aid now stands as a kind of grotesque joke compared to the Himalayan mountain range of cash that got moved onto the balance sheets of the big banks more or less instantly in the first months of the bailout.” For actual figures, at first, $50 billion was to help homeowners through HAMP; by 2010, the amount had shrunk to $30 billion and as of November, 2012, a mere $4 billion had been used for homeowner aid.
However, says Taibbi, “Obama’s HAMP program turns out to be one of the few bail-out promises that was even partially fulfilled. Virtually every other promise (Larry) Summers made in his letters turned out to be total bullshit.” (Larry Summers, you may remember, was the Harvard President who made some unfortunate remarks about women not being as able in math and the sciences as men that cost him his job; he subsequently became an economic advisor to Obama.) There was no monitoring attached to any aspect of the bailout and there never would be, says Taibbi:
“But even before Summers promised Congress that banks would be required to increase lending as a condition for receiving bailout funds, officials had already decided not to even ask the banks to use the money to increase lending. IN fact, they’d decided not to even ask banks to monitor what they did with the bailout money. Barofsky, the TARP inspector, asked Treasury to include a requirement forcing recipients to explain what they did with the taxpayer money. He was stunned when TARP administrator Kashkari rejected his proposal, telling him lenders would walk away from the program if they had to deal with too many conditions. ‘The banks won’t participate,’ Kashkari said.”
The first 9 bailout recipients were picked because of their size, not because of their economic “health” as was represented. Taibbi suggests that they have become, like AIG, “too big to fail.” The banks in question include all the Big Boys, even though Citi-Bank was deemed “likely to fail” at one point, and many could not pass the CAMELS test of solvency, which refers to Capital, Assets, Management, Earnings, Liquidity and Sensitivity to risk.
A telling paragraph:
“A month or so after the bailout team called the top 9 banks ‘healthy,’ it became clear that the biggest recipient, Citigroup, had actually flat-lined on the ER table. Only weeks after Paulson and Co. gave the firm $25 billion in TARP funds, Citi—which was in the midst of posting a quarterly loss of more than $17 billion—came back begging for more. In November, 2009, Citi received another $20 billion in cash and more than $300 billion in guarantees.”
Stress tests of the banks were then announced, and this telling passage results:
“Now, instead of using the bailouts as a clear-the-air moment, the government decided to double down on such fraud, awarding healthy ratings to these failing banks and even twisting its numerical audits and assessments to fit the cooked-up narrative. A major component of the original TARP bailout was a promise to ensure ‘full and regular stress tests’ of the bailout recipients. When Geithner announced his stress test plan in February, 2009, a reporter instantly blasted him with an obvious and damning question: Doesn’t the fact that you have to conduct these tests prove that bank regulators—who should know who is solvent and who isn’t—actually have no idea of who is solvent and who isn’t?”
From this point on, Taibbi outlines “meaningless parodies of oversight,” even citing a “SNL” skit. Bank of America (my bank) had a $50 billion dollar hole cut to $15 billion. Citigroup got its number slashed from $35 billion to $5.5 billion. Regulating the banks that took the bailout money, in other words, is a joke.
“Through behavior like this, the government has turned the entire financial system into a kind of vast confidence game—a Ponzi-like scam in which the value of just about everything in the system is inflated because of the widespread belief that the government will now step in to prevent losses. Clearly, a government that’s already in debt over its eyes for the next million years does not have enough capital on hand to rescue every Citigroup or Regions Bank in the land should they all go bust tomorrow.”
Lies About Bonuses
“That executive bonuses on Wall Street were a political hot potato was obvious from the start. That’s why Summers, in saving the bailout from the ire of Congress, vowed to “limit executive compensation’ and devote public money to prevent another financial crisis And it’s true. TARP did bar recipients from a whole range of exorbitant pay practices, which is one reason the biggest banks, like Goldman Sachs, worked so quickly to repay their TARP loans. But there were all sorts of ways to get around the restrictions.”
Taibbi goes on to say that, “In one of the worst episodes, the notorious lenders Fannie Mae and Feddie Mac paid out more than $200 million in bonuses between 2008 and 2010, even though the firms (a) lost more than $100 billion in 2008 alone, and (b) required nearly $400 billion in federal assistance during the bailout period. One of the ways around the TARP bonus restrictions was to give executives long-term stock options. ‘An independent research firm asked to analyze the stock options for the New York Times found that the top 5 executives of each of the 18 biggest bailout recipients, received a total of $142 million in stocks and options.”…The value of these options has soared to $457 million, an average of $4 million per executive.
Lies About the Bailout Being Temporary
“What’s more, some parts of the bailout were designed to extend far into the future Companies like AIG, GM and Citigroup, for instance, were given tens of billions of deferred tax assets, allowing them to carry losses from 2008 forward to offset future profits and keep future tax bills down…Citigroup, all by itself, boasts more than $50 billion in deferred tax credits—which is how the firm managed to pay less in taxes in 2011 (it actually received a $144 million credit) than it paid in compensation that year to its since-ousted dingbat CEO, Vikram Pandit, who pocketed $14.9 million The bailout, in short, enabled the very banks and financial institutions that cratered the global economy to write off the losses from their toxic deals for years to come—further depriving the government of much-needed tax revenues it could have used to help homeowners and small businesses who were screwed over by the banks in the first place.”
“There is also the matter of the $7.7 trillion in secret emergency lending that the Fed okayed to Wall Street—loans that were only revealed to the public after Congress forced a one-time audit of the Federal Reserve. The result of this ‘secret audit’ did not come out until November, 2011, when Bloomberg Markets—which went to court to win the right to publish the data—revealed how the country’s biggest firms secretly received trillions in near-free money throughout the crisis.”
“By the end of 2008, Goldman Sachs had snarfed up $34 billion in loans and was paying an interest rate as low as just 0.01% for the cash infusion. Barofsky in his book Bailout: Paulson told him that Goldman was just ‘days from collapse” before the government’s gigantic infusion. Bernanke later admitted that “Goldman would have been the next to fall.”
Bank Executive Use Unfair Insider Trading Advantage
“Meanwhile, while officials were taking trillions in secret loans from the Feds, top officials were using their positions of influence and insider knowledge to buy up stock in their companies:
“Steven Friedman, a Goldman director who was chairman of the New York Fed, bought more than $4 million in Goldman stock in 5 weeks between Dec., 2008 and Jan., 2009. Vikram Pandit, Citigroup CEO, bought nearly $7 million in Citigroup stock, just as his bank was taking $99.5 billion in Fed loans. Jamie Dimon bought more than $11 million in Chase stock in early 2009, at a time when his firm was receiving as much as $60 billion in secret Fed loans.” (p. 40) In fact, at the end of 2011, the SEC sent letters to executives of: Citibank, Wells Fargo, Goldman Sachs, Chase and Bank of America asking them why they were not revealing their large purchases of stock at a time when their banks were receiving such large public bailouts. All 5 replied, absurdly, that this was “not material.”
Taibbi paragraph, p. 42:
“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.’”
“Bailout officials have spent years building the government’s great Implicit Guarantee to the biggest companies on Wall Street: we will be there for you always, no matter how much you screw up.”
Also, says Taibbi, “The big banks have grown even bigger and more unmanageable, making the economy far more concentrated and dangerous than it was before. America’s 6 largest banks: Bank of America, JP Morgan Chase, Citi-Group, Wells Fargo, Goldman Sachs, and Morgan Stanley, now have a combined 14,420 subsidiaries, making them so big as to be effectively beyond regulation.” Says Taibbi, “A recent study by the Kansas City Fed found that it would take 70,000 bank examiners to inspect such trillion-dollar banks with the same level of attention normally given to a community bank. (And, daughter of a community bank President, I remember how daunting the Bank Examiners’ visit always was.)
“The complexity is so overwhelming that no regulator can follow it well enough to regulate the way we need to,” says Senator Brown, who is drafting a bill to break up the megabanks (but also announced he is not running again since this article appeared in January, 2013).
Therefore, says Taibbi, “banks have made a dramatic move into riskier and more speculative investments, including everything from high-risk corporate bonds to mortgage-backed securities to payday loans, the sleaziest and most disreputable end of the financial system.”..The bailouts have brought us right back to where we started. Says World Bank Consultant Klaus Schaeck, “Government intervention has definitely resulted in increased risk.”
The closing paragraphs (3) of the article say this:
“And while the economy still mostly sucks overall, there’s never been a better time to be a Too Big to Fail bank. Wells Fargo reported a 3rd quarter profit of $5 billion last year. J.P. Morgan: $5.3 billion—roughly double what both banks earned in the 3rd quarter of 2006, at the height of the mortgage bubble. As the driver of their success, both banks cite strong performance in, you guessed it, the mortgage market.
So, what, exactly, did the bailout accomplish?
It built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failer, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors. The bailout has also made lying on behalf of our biggest and most corrupt banks the official policy of the U.S. government. And if any one of those banks fails, it will cause another financial crisis, meaning we’re essentially wedded to that policy for the rest of eternity—or at least until the markets call our bluff, which could happen any minute now.
Other than that, the bailout was a smashing success,” says Taibbi.