[GPSCC-chat] Matt Taibbi Rides Again

Fri Jan 18 15:38:29 PST 2013

A fine harrumph about the Bailout.   My 1600-word digest of a 7500-word article appears below.

The article is in the January 17th, 2013 issue of Rolling
Stone.

http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104#ixzz2HQx5HDxw

                                Secrets and Lies of the Bailout
                                                                     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 

We were told that the bank bailout not only prevented a
Depression, but the money was all paid back.  No harm, no foul?  Not
so.  The bailout was one of the biggest and most elaborate falsehoods
ever sold to the American people.  While they said the taxpayers were
stepping in temporarily to prop up the economy, we were doing the
exact opposite: committing 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.  And all done in the name of creating
jobs and helping regular people.

The government gave Wall Street not just heaps of money but also
the right to hide the truth.  The most important mechanism of the
bailout was its lies. Investors stay in an obviously corrupt
financial marketplace not because they believe the bullshit (they
don't) but because the government's commitment to sell the idea that
2008's problems have been fixed impresses them.

THEY LIED TO PASS THE BAILOUT

The proposal was that Treasury buy $700 billion of troubled
mortgages from the banks and modify them to help struggling
homeowners, but as soon as the legislation was passed the Fed and the
Treasury abandoned the purchase in favor of direct injections of
billions in cash into companies like Goldman and Citigroup.  Larry
Summers, Obama's senior economic adviser, pitched the bailout in
January, 2009 as aid to homeowners in foreclosure and a stimulus to
bank lending to put people back to work.   But only $50 billion was
earmarked for homeowner relief, and of this only $4 billion has been
spent—just one percent of the total TARP spending.

THEY LIED ABOUT LENDING

Though Summers promised Congress that increased lending by banks
would be a condition for receiving bailout funds, officials decided
they would not even ask the banks to monitor what they did
with the bailout money, fearing that banks would reject money that
had strings attached.  Over four years, banks spent about 3.6 billion
for mortgage modifications, but during this time they mothballed
enormous sums at the Federal Reserve ($2 billion before the bailout
became $843 billion a few months after the bailout—and today $1,400
billion).  The interest rate is very low, but the $3.6 billion a year
the banks get returns more in one year than the total spent on
homeowner relief over 4 years. 

Though the bailouts were sold as a means of stimulating
economy-boosting lending, three months after the bailout TARP
recipients' lending had slowed at a rate double that of banks that
didn't receive TARP funds. The biggest bailout recipient, Citigroup,
cut lending by 3 percent.  The government found that among the nine
biggest TARP recipients, lending "did not, in fact, increase."
Instead, taxpayer money subsidized finance mergers (Chase-Bear
Stearns, Wells Fargo-Wachovia, Bank of America-Merrill Lynch). 

THEY
LIED ABOUT THE BANKS'
HEALTH

Congress had approved $700 billion to
buy up toxic mortgages, but $250 billion of the money was given as
direct capital injections for banks, half of it to nine of the
largest banks.  Though Paulson and Co. claimed that only "healthy
and viable" banks would get the cash, Tim Geithner admitted to
the inspector general, Neil Barofsky, that the first nine bailout
recipients were chosen for size, not viability.  "These
companies weren't really healthy and viable," said Barofsky.

This episode set the precedent:  unhealthy banks were allowed to
falsely claim health, and the government endorsed their claims.
Projecting an image of soundness and bolstering market confidence
were, to the government, more important than truth.  So now the
financial market had two tiers—those who knew how bad things were
and those who didn't.  Then-FDIC chief Sheila Bair expressed
astonishment when Citibank got an acceptable fitness rating from
regulators “when it was on the brink of failure", but FDIC
gave Citi bailout help.

For years the big banks had been falsely claiming financial
health.  Lehman Brothers, for instance, used funny accounting to book
tens of billions of loans as revenues each quarter, overstating its
cash holdings.  In 2007 Citi paid $10.7 billion in dividends though
it had lost $9.8 billion in one quarter of that year alone.  The
Ponzi-flavored financial sector depended on continual flows of new
money from things like subprime mortgage sales to cover up toxic
investments that, sooner or later, would explode.  Instead of
clearing the air, the government doubled down on such fraud, awarding
healthy ratings to failing banks and even twisting its numerical
audits and assessments to fit the cooked-up narrative, using lies as
a form of monetary aid as the economy becomes a vast confidence game
based not on real accounting and real numbers, but on belief. 

THEY
LIED ABOUT BONUSES
TARP's restrictions on executive bonuses
had loopholes, and Fannie Mae and Freddie Mac gave more than $200
million in bonuses between 2008 and 2010, even though they (a)
lost $100 billion in 2008 alone, and (b) required nearly $400 billion
in federal assistance during the bailout period.  AIG paid $1 million
each to 73 employees of AIG Financial Products.  The top five
executives at each of the 18 biggest bailout recipients received a
total of $142 million in stocks and options which then, due to
government support of the banks, soared to $457 million, an average
of $4 million per executive.

THEY LIED ABOUT THE BAILOUT
BEING TEMPORARY
Tens of billions in deferred tax assets
constitute an off-the-books bailout for companies like AIG, GM and
Citigroup as they keep future tax bills down.  "That's never
going to appear on any report," says Barofsky.  The losses from
the same toxic deals that cratered the economy can be written off for
years to come, depriving the government of tax revenues that might
have helped homeowners and small businesses who were screwed over by
the banks in the first place.

Even worse, only in late 2011 did news of a “secret bailout”
of $7.7 trillion in loans become public, and this was only after
Congress forced an extraordinary one-time audit of the Federal
Reserve, and Bloomberg Markets went to court to win the
right to publish the data.  By late 2008, Goldman Sachs had snarfed
up $34 billion in federal loans that were not disclosed to
shareholders or taxpayers.  Stephen Friedman, a Goldman director who
was also chairman of the New York Fed, bought $4 million of Goldman
stock in 2008 and 2009 – years before the Federal lifeline was made
public.  Citigroup CEO Vikram Pandit bought nearly $7 million in Citi
stock just as his firm was secretly taking out $99.5 billion in Fed
loans. Jamie Dimon bought $11 million in Chase stock at a time when
his firm was receiving as much as $60 billion in secret Fed loans and
more than a year before it was disclosed to shareholders in March
2010.  In late 2011, the SEC sent letters to five megabanks asking
why they hadn't fully disclosed their secret borrowing. All five
essentially replied that their massive borrowing from the Fed was not
"material," or that its piecemeal disclosure was adequate.
By failing to act, federal regulators have tacitly approved the
nondisclosure. The government has decided that the markets can't
handle the truth.

Willingness to call dying banks healthy,
sham tests, failure to enforce bonus rules, indifference to public
disclosure, not to mention the lack of criminal investigations into
pre-bailout fraud—these comprise the largest and most valuable
bailout of all.  The government promises the banks:    No matter how
much you screw up, we will lie for you and let you get away with just
about anything. We will make this ongoing bailout a pervasive and
permanent part of the financial system.   Geithner's program of
“capital support” was an Implicit Guarantee that the banks would
not be allowed to fail.  Its cash value shows in the interest rates. 
Just before the crisis began, Big Finance ($100 billion or more in
assets) paid about 0.29 percent less to borrow money than smaller
firms did.  Once the bailouts were in full swing, the spread was 0.78
percent and it remains at 0.5 percent today—an annual subsidy of
$34 billion a year to the nation's 18 biggest banks. 

While
more than 300 smaller firms are still struggling to repay their
bailout debts, the
megabanks
have all
paid back their TARP loans, and
have
grown even bigger and more unmanageable, concentrating
and endangering the economy
more
than
ever.
  With
their combined
14,420 subsidiaries, the
six largest banks would need 70,000
examiners to get
the
same attention normally given to a community bank.  They're
beyond regulation even while free or nearly-free
money has inspired the megabanks to take on riskier and more
speculative investments.  2011 saw banks increase their investments
in junk-rated companies by 74 percent, systematically easing
standards in search of more high-yield lending business.  The
bailouts have brought us right back where we started, bringing a
banking system that discriminates against community banks, makes Too
Big to Fail banks even Too Bigger to Failier, increases risk,
discourages sound business lending, and punishes savings.  The
bailout makes lying on behalf of our biggest and most corrupt banks
the official policy of the United States government. 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.

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