By Kevin Zeese
So far the U.S. taxpayer has given Wall Street, Fannie Mae/Freddie Mac and the big banks $1.2 trillion. Did anyone hear a thank you? How about an apology for their risky gambling with the world’s economy?
What we have seen has been disconcerting. Big Finance seems is still living high on the hog, spending freely on parties and bonuses while the world’s poor go deeper into poverty and Americans worry about their jobs, retirement, health care and making ends meet.
The first post-bailout outrage was the massive insurance giant AIG. After receiving an $84 billion tax payer bailout they had a party for their executives – the cost $440,000. There was outrage on Capitol Hill including threats to ‘get the money back.’ “They were getting their manicures, their pedicures, massages, their facials while the American people were paying their bills,” thundered Rep. Elijah E. Cummings (D-MD). But, instead the Federal Reserve gave them $38 billion more after their party.
While there were lots of comments from the presidential candidates and congressional leadership about not letting CEO’s profit from the bailout, after the bill was signed into law the Wall Street Journal reported that Neel Kashkari, the bailout czar, told a group of Wall Street executives that the restrictions on executive compensation in the bailout bill really don't mean anything. As Dean Baker, co-director of the Center for Economic and Policy Research, wrote “Of course anyone who bothered to look at the bill already knew that the compensation restrictions were meaningless before the bill passed. So why do we only see this reported in the media after the fact?”
The Guardian of the UK reports that people at Wall Street’s top banks are to receive pay deals, in large part discretionary bonuses, totaling more than $70 billion. Bonuses appear to ignore their failed performance, bear no relation to the losses incurred by investors or plunging the global financial system into a crash with their casino-style investments. They estimate a tenth of the bailout will be spent on enormous salaries and bonuses.
It will be difficult for the media and public to find out about executive compensation and the bailout. The Treasury Department is taking the approach of blacking out the compensation section of their contracts, see e.g., the blacked out compensation section of its contract with Bank of New York Mellon. Treasury is also blacking out some of the payment schedules for those they are hiring to work on the bailout. Treasury blacked-out sections of text in the contracts it issued to Bank of New York Mellon and another advisor, the law firm of Simpson Thacher & Bartlett LLP had its hourly rate blacked out. The Bank of New York Mellon will be running the auctions to sell the “toxic assets” and Simpson Thatcher will provide advice on the injection of capital into major banks. Transparency, rather than being enhanced, is an early victim of the bailout.
And, it seems like the bailout process is being privatized with some of the same people who got us into this mess being hired to get us out of it. Bloomberg reports that Treasury Secretary Henry Paulson is hiring as many as 10 asset-management firms to join the lawyers and bankers he is recruiting to implement the government's new $700 billion bank-rescue program.
Rather than bailing out the mortgage markets, Paulsen has been providing cash to big banks -- $125 billion of the first $250 billion. The EconomicPolicyJournal reports that Citigroup and JPMorgan Chase would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same amount for its purchase of Merrill Lynch.
What do Americans get in return? The deals Paulsen is making with his former Wall Street colleagues do not ask for much. Paulsen is evidently no Warren Buffet when it comes to negotiating deals but maybe that is because Paulsen is not using his own money but the taxpayers. While Buffett received a 10% dividend on his $5 billion investment in Goldman Sachs, Paulsen only got 5% for his. While the UK was able to get a seat at the board table for their injection of cash into banks, Paulsen didn’t. Nor did Paulsen demand any more stringent banking regulations or greater transparency going forward.
The Chairman of the Federal Deposit Insurance Corporation, Sheila Bair told The Wall Street Journal she was frustrated at the failure of the bailout to provide direct help to struggling homeowners. Mortgage defaults are “what's causing the distress at the institution level,” Bair says, “so why not tackle the borrower problem?” Maybe Paulsen is not directly focusing on the mortgage problems because bad mortgages are not the problem. Maybe it is the gigantic derivative bets that have been made? Derivatives are more than an unregulated $500 trillion market – ten times bigger than the world economy.
But, the banking class has looked to shift the blame. Perhaps most obnoxious is the effort to blame the poor and working class for the finance crisis. They point to the Community Reinvestment Act – designed to encourage banks to make efforts to loan to minority applicants, who they had not loaned to in the past. Now, they become the scapegoat for the wealthy bankers – rather than pointing to their own gambling on risky investments and unregulated derivatives.
In fact, the CRA does not require banks to make loans that are unsafe or unprofitable – the law states that CRA lending must be done consistent with safe and sound banking practices. Loans that qualify for CRA credit are often prime loans with fixed rates and consequently, have good performance records. Banks that have made mortgages to low- and moderate-income borrowers to fulfill their CRA obligations have found low default rates and have fewer foreclosures. In fact, non-CRA lenders made 84.3% of high-cost loans in the 15 largest metropolitan areas. In addition, only a few of the top 25 subprime lenders in 2006 were institutions with CRA obligations and the vast majority of the top 20 producers of risky interest-only and option ARM loans were not covered by CRA. In fact, the CRA was passed in 1977 and the rapid growth in subprime lending occurred more than two decades later from 2001-2006 alone. No major changes to CRA were enacted during this time.
This class warfare by the rich against the poor and working class is ugly. During the time of paper profits from derivatives, the housing bubble and the internet bubble those in the middle class and below have seen stagnate and shrinking wages. The percentage of poor Americans who are living in severe poverty has reached a 32-year high, millions of working Americans are falling closer to the poverty line, nearly 16 million Americans are living in deep or severe poverty. The number of severely poor Americans grew by 26 percent from 2000 to 2005. During this time the extreme wealthy have hoarded a larger and larger percentage of the nation’s wealth. Now the top 1% has wealth equal to the bottom 95% combined.
In the midst of the finance bailout, the Congress showed its lack of loyalty to the American worker when it gave up on legislation to provide health care to the September 11, 2001 recovery workers. The legislation would have provided long-term care to these workers at a cost of about $5 billion as well as provided funding for the Victim’s Compensation Fund at a cost of $6 billion. A drop in the bucket compared to the more than $1 trillion provided so far to the top of the economic pyramid.
If you are angry and ripped-off – turn it into productive action. The time is now.
Round II of the bailout of the U.S. economy is moving forward. The congressional leadership, Sen. Obama, President Bush and Paul Bernake all support an economic stimulus package. The Congress will come back after the election to pass it. The contours of that stimulus are not defined, so this is a good time to tell your Member of Congress what you want in the next American economy. Here are some suggestions:
Democratize the economy. All Americans deserve a stake in the economy because, as John McCain says, workers are the foundation of the economy. A democratized economy is a real ownership society. This includes more employees having shared ownership in the businesses they work for, shareholders having a real say in the priorities and direction of the corporations they invest in and corporate welfare being transformed into taxpayers having an equity share in the companies that receive tax benefits. It also includes allowing workers to organize so their collective voice can balance the power of capital. For an economy to be more democratized it requires greater transparency than currently exists.
Equity in the economy. This includes a tax system that taxes wealth more and labor less e.g. a Tobin tax on the purchase of stocks, bonds and derivatives, tax on super wealth, tax on war profits and methods of sharing the wealth. One example, with green energy there will be a great deal of distributed energy production down to communities, homes and cars. Individuals and communities should profit from the production of energy. Perhaps there are ways that the Alaska model of returning a percentage of oil profits can be applied to the new economy, e.g. in Denmark communities with wind farms share the profit of those farms.
A sustainable economy. The world is in the midst of the end of the fossil fuel economy and the development of a clean, sustainable energy economy. The infrastructure of this new economy will require major investment e.g., in power grids that transport wind, large-scale solar and ocean energy; in community-based solar energy plants; in parking lots where cars can provide energy to the grid while parked; in mass transit within cities and regional rapid transit. A sustainable economy also requires a more locally-oriented economy that does not rely on shipping across the world to feed its inhabitants and where money re-circulates in the economy through local businesses rather than national chains which take the profit back to the home office
The contours of the new economy are going to begin with the next round of economic recovery legislation, so the time to act is now.
If we want a more transparent, democratic, equitable and sustainable economy it is only going to happen if we advocate for it. Talk about it with your neighbors, in your community, with family and friends. Urge people to get into a dialogue with their political representatives. This is a time where dramatic change is going to happen. The question is whether that change will benefit the top of the pyramid or the rest of the pyramid? This is an opportunity to change the economy in the direction you want. Take the opportunity – get involved and become even more active.
Kevin Zeese is the director of the Campaign for Fresh Air and Clean Politics (www.FreshAirCleanPolitics.net) whose projects include Voters for Peace (www.VotersForPeace.US), True Vote (www.TrueVote.US) and Climate Security (www.GlobalClimateSecurity.org).