Economy -- An Unfair And Ineffective Bailout

September 23, 2008

by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, and Ryan Powers

ECONOMY

An Unfair And Ineffective Bailout

The Bush administration's initial plan to bail out Wall Street's ailing financial markets was just three pages long. It called for Treasury Secretary Henry Paulson to be given unprecedented and unilateral authority to buy up $700 billion in souring mortgage assets from the very financial institutions that "engineered the current crisis." Section 8 of the proposed legislation ensured that none of Paulson's actions could be challenged by any court or federal agency. The section read: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Across the political spectrum, economic and financial analysts immediately questioned the fairness and effectiveness of the plan. Indeed, economist Paul Krugman wrote yesterday in the New York Times, "If this plan goes through in anything like its current form, we'll all be very sorry in the not-too-distant future." In a rare moment of agreement, New York Times columnist Bill Kristol wrote similarly that he is "not convinced" that the Bush administration "has even the basics right." In addition to offering nothing in the way of oversight, the Paulson plan provided no relief for struggling homeowners and gave tax payers nothing in return for taking on the bad debts of Wall Street. While congressional negotiators made significant headway yesterday toward a progressive version of the Paulson plan, it is not there yet.

BUSINESS AS USUAL: The Bush administration's initial attempt to railroad anyone skeptical of the Paulson plan is reminiscent of some of its previous legislative initiatives. The Bush administration has a long track record of using times of crisis to demand -- and then mismanage -- unprecedented amounts of power and money. Just as troubling, the Wall Street Journal reported yesterday that lobbyists for Wall Street firms have launched an aggressive campaign to ensure that the terms of the Treasury's proposed bailout are as favorable to the finance industry as possible. A major player in this effort is the Financial Services Roundtable, a "lobbying group representing the nation's banks." Over the weekend, the Roundtable successfully lobbied the Treasury to make the proposed bailout "broad enough to include different types of assets" -- possibly including assets held by foreign banks. Further, the Roundtable said yesterday that including relief for struggling homeowners in the bill would be a "deal breaker." The Los Angeles Times notes that finance sector is well-positioned to shape the legislation because it has "given lavishly to both parties in Congress."

CONGRESSIONAL PUSH BACK: Yesterday, members of Congress pushed back against the Paulson plan, successfully securing key concessions from the Bush administration. The Wall Street Journal reports this morning that Rep. Barney Frank (D-MA) and the Bush administration agreed on a plan to appoint an "independent board to monitor the bailout and report on its progress to Congress and the public." The board, however, "wouldn't have authority to veto Treasury investment decisions, and the bailout's launch wouldn't be delayed while a board was being put in place." In addition, "both sides have also agreed to a measure that would allow -- but not require -- the Treasury to take an equity stake in a financial institution that sells assets to the government." Such an equity stake could allow taxpayers to eventually realize some profit in exchange for taking on a given institution's bad assets. Further, Krugman notes that the equity stake provision allows the government to, if necessary, infuse struggling institutions with capital. Finally, the Treasury agreed to cursory support for struggling homeowners, promising to deploy officials from the FDIC, Fannie Mae, and Freddie Mac to "help adjust the loans of borrowers who were behind on payments but deemed credit-worthy" and ensure that "renters in homes headed for foreclosure aren't evicted." Restructuring the mortgages that Treasury will control is crucial not only for helping the homeowners but for wiping out the risk in the securities that are linked to those mortgages. As David M. Abromowitz and Andrew Jakabovics write for the Center for American Progress, without such a provision, "taxpayers will be saddled with increasingly worthless [assets] as many of the underlying mortgages fail."

BUT STILL NOT THERE: Early yesterday, Sen. Chris Dodd (D-CT) released his own plan for the proposed bailout. Some of the provisions proposed by Dodd have been accepted by the Bush administration, but several of the most promising aspects of Dodd's plan have yet to appear in the negotiated agreement between Congress and the Treasury. A significant aspect of the Dodd proposal is to allow bankruptcy judges "to restructure mortgages for homeowners facing foreclosure." The Center for Responsible Lending explains that "current law makes a mortgage on a primary residence the only debt that bankruptcy courts are not permitted to modify in chapter 13 payment plans." This means that struggling homeowners are excluded from debt relief that is available to "yacht owners," "subprime lenders," and even individuals with mortgages on second and third homes. Dodd's plan would also "give the Treasury secretary the power to prevent payment of bonuses if executives took excessive risk or if they were predicated on earnings targets that weren't met." Members of Congress will have an opportunity to push for modifications to the current plan when when Paulson and Federal Reserve Chairman Ben Bernake testify before Congress today and tomorrow.

IRAQ -- EX-IRAQI INVESTIGATOR REPORTS $13 BILLIION IN U.S. TAXPAYER MONEY WASTED OR STOLEN: The Washington Post reports that yesterday, a former Iraqi official estimated yesterday that "more than $13 billion meant for reconstruction projects in Iraq was wasted or stolen through elaborate fraud schemes." Salam Adhoob, a former chief investigator for Iraq's Commission on Public Integrity, told the Senate that an Iraqi auditing bureau "could not properly account for" the money. In one example, "Iraqi Defense Ministry officials helped set up two front companies that were to buy airplanes, armored vehicles, guns and other equipment with $1.7 billion in U.S. funds. The companies were paid, but in some cases they delivered only 'a small percentage' of the equipment that had been ordered." Sen. Byron Dorgan (D-ND), who has led the charge in uncovering waste, fraud, and abuse in Iraq, said that "taxpayers have been bled dry with massive misuse of public dollars." The Progress Report has rounded up examples of wasted U.S. taxpayer money in Iraq here.

ENERGY -- T. BOONE PICKENS: I'M HAVING MORE PROBLEMS WORKING WITH DRILL-ONLY REPUBLICANS THAN DEMOCRATS: Yesterday, while speaking at the National Press Club about his "Pickens Plan," Texas oil-tycoon and alternative energy spokesman T. Boone Pickens was asked if he's having trouble working with Democrats to promote his plan, given his past opposition to progressives. He replied that he is actually having trouble working with conservatives, because his plan involves more than offshore oil drilling. "So I am having no problem working with the Democrats," he said. "Having a little problem working with the Republicans. They don't like it because I want to do more than just drill." Pickens added that conservatives "somehow have gotten it - a lot of them have -- that you can drill your way out of this. But you can't do it. There's not enough oil there to do it." Pickens made it clear that, despite five straight weeks of calls for an "all of the above" energy strategy, congressional conservatives are interested in little besides drilling. In fact, last week, when the House passed an energy bill that included conservatives’ demand for offshore drilling, House conservatives opposed it because it would have repealed Big Oil tax breaks to invest in renewable energy.

JUSTICE -- COURTS DELIVER SETBACKS FOR BUSH AND CHENEY: Yesterday, an appeals court ruled that the Bush administration "must release 20 photographs of U.S. soldiers and detainees in Iraq and Afghanistan," rejecting "the government's claim that releasing the photos would endanger the lives or physical safety of U.S. troops and civilians in Iraq and Afghanistan." "The 2nd U.S. Circuit Court of Appeals agreed with a 2006 ruling by Judge Alvin K. Hellerstein ordering the release of the pictures to the American Civil Liberties Union," which is seeking information on prisoner abuse. Additionally, last week, U.S. District Judge Colleen Kollar-Kotelly dealt a "setback for the Bush administration in its effort to promote a narrow definition of materials that must be safeguarded under by the Presidential Records Act" by ruling that Vice President Dick Cheney must preserve his records. Kollar-Kotelly said that the Bush administration's legal position "heightens the court's concern" that some records may not be preserved. The lawsuit, brought by CREW and several historian organizations, was prompted in part by Cheney’s claim that he is not part of the executive branch.

Lobbyists are rallying to defeat Sen. Chris Dodd’s (D-CT) alternative bailout proposal, with the banking industry particularly up in arms about a provision allowing bankruptcy judges to lower mortgages for distressed homeowners. "We are vigorously opposing that," said Steve Verdier, a lobbyist for the Independent Community Bankers Association (ICBA).

The lobbying firm of William Timmons Sr., who John McCain tapped to run his presidential transition team, "earned more than a quarter of a million dollars this year representing Freddie Mac, one of the companies McCain blames for the nation’s financial crisis." Timmons himself has been personally "registered to lobby for Freddie Mac from 2000 through this month."

According to 2007 data released by the U.S. Census Bureau today, more than 7.5 million people "are spending half of their income or more on housing costs." The government considers "a homeowner spending 30 percent or more of their income on housing costs to be financially burdened," a definition that now covers almost 38 percent of U.S. homeowners with a mortgage.

The White House said yesterday that it opposed the Credit Card Bill of Rights, a bill currently being debated in the House, "saying it would constrain banks' ability to price risk." The proposal would end double-billing and would force companies to mail bills 25 days before payment is due, rather than the current 14 days. Read more about why the bill is so important here.

Last week, The Rachel Maddow Show was the No. 2 program in cable news in the age 25-54 demographic and in total viewers at 9 p.m. ET, beating CNN's Larry King Live. "On Friday, Maddow's was the #1 show in the demo at 9 p.m. ET topping a 'Hannity-less' Hannity and Colmes."

With two more months to go in the presidential election season, "women have given $109 million to presidential candidates in checks of $200 or more -- triple the amount female donors delivered in 2000." Overall, the new study released today by the Women's Campaign Forum Foundation finds that women still comprise just 27 percent of all donors.

And finally: Comedian Tiny Fey is not happy over Carly Fiorina's allegations that her Saturday Night Live skit portraying Gov. Sarah Palin (R-AK) was "sexist." "I saw one lady trying to form a thought that it was sexist on the news," Fey said of Fiorina. "But she didn’t really get it together. Probably because she was a lady and she was dumb. [pause] Wait. Is that sexist?" Watch Fey’s response here.

"The government plans to substantially increase disability benefits for veterans with mild traumatic brain injuries, acknowledging for the first time that veterans suffering from this less severe version of the Iraq war's signature wound will struggle to make a living."

THINK PROGRESS: President Bush backs unlimited compensation for disgraced CEOs: Now is not the time for "punitive measures."

WONK ROOM: Americans for Prosperity? Nope, Americans for doing nothing.

YGLESIAS: Calling a $700 billion bailout a "blank check" doesn't quite work as a metaphor.

TAPPED: Conservatives rush to blame the financial crisis on past efforts to increase minority home ownership.

CALIFORNIA: "No on Proposition 8" releases first TV advertisement.

ENVIRONMENT: The rankings of the greenest cities in the United States

HEALTH CARE: States work to avert nurse shortage.

"Our institutions, our banks and investment banks, are strong."
-- Treasury Secretary Henry Paulson, 3/08

VERSUS

"The events leading us here began many years ago, starting with bad lending practices by banks and financial institutions, and by borrowers taking out mortgages they couldn't afford."
-- Paulson, 9/23/08

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An Unfair And Ineffective Bailout

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