The Bailouts Are Doomed - All of Them

Thanks to Barbara Baty.

The Bailouts Are Doomed - All of Them
by Alan Geik

A confession: I am fascinated by scams and frauds. Give me a National Geographic TV segment with Interpol following an art forger across Europe and I am a captive, even through the commercial breaks.

I anticipate years of television shows exploring the still smoldering Mortgage Meltdown. Indictments, law suits, and exposes of the criminality embedded in this travesty will intrigue me with the same frisson as do WWII spy documentaries or reenactments of The Brink's Job.

I have written here before about the two simultaneous bailouts engineered by bank lobbyists in the 1980s. The first bailout scam came "out of the blue" in 1982 when Mexico defaulted on its multi-billion dollar loans, some of the dozens made by New York banks to corrupt Third World governments in the 1970s.

The US Congress needed a public relations hook to vote against any regulation of those loans to military juntas. The lobbyists were happy to give it to them: the loans would "improve the standard of living of the developing countries." How could anyone want to stop that? Not a dime ever served that purpose of course.

After Mexico, then Brazil, Argentina and other countries defaulted. The money centers turned their pockets inside out and said "we never expected governments to default and so we never kept sufficient reserves." Then came the familiar "if Congress doesn't bail us out, the banking system will crash."

I was in Havana in 1985 at Fidel Castro's Third World Debt Repudiation Conference. Both Castro, and his unlikely literary ally in this matter, the National Review, correctly predicted massive government bailouts for the third world debt bubble as well as for the even bigger money center bank created scam, The S&L fraud. I wrote about this last year as Paulson and his banking buddies were readying the still-fast-asleep Congress into signing off on this current mother of all bailouts.

Incidentally, the hook for Congress to keep their hands off of the 1980s' S&L fraud was "banks are loaning to small businesses all over the nation without all of those cumbersome regulations." That too sounded great, didn't it?

The current bailout scam began with the same lobbyists slapping congressional hands away from predatory loan regulation, while crafting the new theme; "these loans are to help minority and working class families buy houses and live the American Dream." Simple, easy to understand, and of course, self serving. They were ably assisted by the Bushes, a family that has loved every unfettered giveaway they could get their hands around. (Two of the Bush boys were responsible for $1.5 billion in government payouts to their friends and associates in the S&L fraud.)

In 2006, some (myself included) wrote about the massive fraud expected from the bailouts to come. I imagined that, during a decade without any oversight, some mortgage "packagers" must have slid the same sure-to-default mortgage into as many packages as they could. Who would ever know if the same mortgage was in an Oslo fireman's pension fund and in a boutique Tokyo bank's portfolio?

Whatever regulators were still around had been lulled to sleep with visions of $1 million a year private sector jobs (SEC attorneys cost a little more). While this particular scam has not yet been uncovered, dozens of similar ones are already percolating to the surface.

This is why the bailouts will do little except to enrich those who can get their fingerprints on the funds. Simply put; who is going to provide oversight?
Three Quotes That Tell Us the Bailouts Are Doomed

1. "The air was sucked out of the room." (Senator Christopher Dodd)

On an evening in September, members of Congress came out of a meeting with Bernanke and Paulson, during which they were given "grim news" about the state of the economy. Paulson, despite his supposed ideological opposition to government intervention, had unfurled a $700 billion bailout bomb. Contemptuous of his hapless prey he even insisted that Congress deal themselves out of oversight of the funds.

Sen. Chris Dodd, who gets my vote for congress' biggest dolt, offered the tired cliche; "when we heard about the actual state of the economy the air was sucked out of the room." Really? Where was this Chairman of the Senate Banking Committee for the past 8 years?

Why should he be "shocked?" Why should the air have been "sucked out of the room;" a room filled with so many participants in the previous two bailouts!

My quick count of a US Congressional seniority roster indicates that 38 current members of the Senate had signed off on one or both of the 1980s bailouts, and the several fundings of the Resolution Trust Corporation that, when its doors finally closed in 1995, had left billions unaccounted for.

Were any of these senators, or the 163 (!!!) members of the House of Representatives (out of 435),who were there for those role calls, not aware that another bailout was being cued up by the same lobbyists using "the banking system will crash if we don't....." sound bites? Or did they really believe up until that Grim Meeting that the economy was "fundamentally sound" as Bush and McCain kept repeating, right up until the huge bailout request was made?

Didn't the retreaded sound bite from the 80s; "a bailout now will cost less than it will cost later without a bailout" sound familiar to any of them? Will they be "disappointed" and "angry" this time around when the initial bailout estimates once again prove to be vastly understated and the funds once again untraceable.

2. "We need to get this bailout approved by Monday morning before the Asian markets open." Secretary of the Treasury Henry Paulson

In this one simple sentence Paulson expressed his low esteem for the Congresspeople sitting across the table from him. Similar perhaps to an auto salesman telling a customer that his manager will get a monthly bonus with just one more closing and so they will give him/her a "special deal" if a sale is made immediately. The Asian markets? Who cares about the Asian markets? So what if the Shanghai stock market went down for the day, or week? Yet this preoccupation was repeated several times by the legislators as a consideration in their hasty deliberations.

Paulson, and all of the CEOs appearing before congress, understand that government bureaucrats are no match for corporate accountants, lawyers, and lobbyists who have spent years sidestepping regulations, evading taxes and when challenged, mounting overwhelming defenses to whatever agency manifests a bit of curiosity.

Even a more benign view of the relationship between congress and bankers would have to take into account that the RTC (which is now being seen as a model for bailout oversight) had in 1991 over 8,000 employees. Many of them were drawn from the FDIC. They were from the beginning overwhelmed by their own inability to evaluate existing deals and often couldn't determine which branch of the RTC had authority to manage a specific "resolution."

Into what monstrous size and shape will this New Age RTC have to morph in order to administer bailouts of $$ trillions, instead of $$ billions?

Management of current bailout funds will have even more difficult challenges; instead of selling off just S&L assets, this new bureaucracy will have to unravel thousands of deals between investment banks,central banks, mortgage bankers, and also contracts of the auto manufacturers with their legions of vendors, and of course any other industries whose lobbyists can extract funds this year.

Who will judge the appropriateness of a now all-but-bankrupt bank's short position in the gold futures market, for instance? Or the purchase of a foreign auto plant by one of our home grown Big Three dead whales? Barney Frank? He sadly waddles after the Treasury, trying to extract "oversight" provisions after he signs off on deals.

3. "We wanted to change some of the credit card regulations but the credit card industry strongly objected." Senator Christopher Dodd

Yes, Senator Dolt, a truth you must bravely confront is that the "credit card industry," i.e. their lobbyists, are supposed to object strongly to proposals that will negatively affect their clients' business models. That, Senator, is exactly what they are paid to do.

You however are paid to withstand their objections and to proceed with legislation that protects the public. Even you lifers in congress, who have been wined and dined by every lobbyist in Washington, should consider at some point attempting to rise to the occasion.

Every attempt to manage the bailout funds will be fought by recipients emboldened by the simple fact that the money is already in their pockets. Congress and their appointed watchdogs will be shown, once again, to be as hapless and as outflanked as ever. Sad, isn't it?

It is clear that corporate America has learned how to improve the bailout scam with each successful application far better than befuddled Congress has ever learned how to prevent it.

Dim Dumb Bankers

Thanks to Teresa Ramsey.

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Thomas L. Friedman commentary: Reckless, irresponsible executives stoked the financial meltdown
Friday, November 28, 2008 3:14 AM
By Thomas L. Friedman

I spent an afternoon brooding over a great piece of New York Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn't the right word. The front-page article, headlined "Citigroup pays for a rush to risk," left me totally disgusted.

Why? Because in searing detail it exposed -- using Citigroup as Exhibit A -- how some of our country's best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn't only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.

So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

Citigroup made money from almost every link in that chain. And the bank's executives, including, sad to see, former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank's risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.

These are the people whom taxpayers bailed out on Monday to the tune of what could be more than $300 billion. We probably had no choice. Just letting Citigroup melt down could have been catastrophic. But when the government throws together a bailout that could end up being hundreds of billions of dollars in 48 hours, you can bet there will be unintended consequences -- many, many, many.

Also check out Michael Lewis' superb essay, "The End of Wall Street's Boom," on Portfolio.com. Lewis, who first chronicled Wall Street's excesses in Liar's Poker, profiles some of the decent people on Wall Street who tried to expose the credit binge, including Meredith Whitney, a little-known banking analyst who declared, more than a year ago, that "Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust," wrote Lewis.

"This woman wasn't saying that Wall Street bankers were corrupt," he added. "She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they'd fetch in a fire sale. . . . For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You're wrong. You're still not facing up to how badly you have mismanaged your business."

Lewis also tracked down Steve Eisman, the hedge-fund investor who early on saw through the subprime mortgages and shorted the companies engaged in them, like Long Beach Financial, owned by Washington Mutual.

"Long Beach Financial," wrote Lewis, "was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, Calif., a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000."

Lewis continued: Eisman knew that subprime lenders could be disreputable. "What he underestimated was the total unabashed complicity of the upper class of American capitalism . . . 'We always asked the same question,' says Eisman. 'Where are the rating agencies in all of this? And I'd always get the same reaction. It was a smirk.' He called Standard & Poor's and asked what would happen to default rates if real estate prices fell. The man at S&P couldn't say; its model for home prices had no ability to accept a negative number. 'They were just assuming home prices would keep going up,' Eisman says."

That's how we got here -- a near-total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins.

I used to say our kids will pay dearly for this. But actually, it's our problem. For the next few years we're all going to be working harder for less money and fewer government services -- if we're lucky.

Thomas L. Friedman writes for The New York Times.