by Deb Cupples | Last night, the U.S. Senate passed a Wall Street bailout bill on a 74-25 vote: a bill full of all kinds of other stuff, including mental health provisions, aid for rural schools, and tax breaks for corporations. I'm happy to say that my senator (Bill Nelson, FL) voted against it, though I can't take any credit for his decision (see roll call).
All I can think about is what a U.S. Treasury spokesperson told Forbes Magazine last week: that there was no real math behind the Bush Administration's $700 billion price tag for the proposed Wall Street bailout.
The spokesperson said: "It's not based on any particular data point.... We just wanted to choose a really large number."
Mission accomplished! That's a huge number -- and a blatant admission that Administration officials attempted to manipulate us taxpayers, our media, and our representatives in Congress.
Many media aren’t reporting the Forbes quote, which is a dereliction of duty. We media consumers have a right to know that government officials had no real basis for demanding so many truckloads of tax dollars.
Instead, our media merely repeated the $700 billion figure as though it had been divinely carved in stone.
The Administration’s plan was to let Treasury Secretary Henry Paulson (former CEO of Wall Street firm Goldman Sachs) spend $700 billion buying “toxic assets” (e.g., mortgages collateralized by houses worth less than the loans) from companies whose executives had chosen to buy obviously iffy “assets.”
The Administration wanted to let Sec. Paulson dole out tax dollars without accountability (i.e., no judicial review). The Administration even balked at restrictions on pay for executives whose firms receive tax dollars.
Some economists proposed an alternative: instead of buying toxic assets, we taxpayers could buy company stocks that aren’t publicly traded and get an “equity stake” (i.e., part ownership). Many corporations raise cash by selling equity stakes when they can’t get private loans.
Our nation’s corporate powers don’t mind taking government money, but they hate the idea of government’s permanently holding an equity stake in businesses. One way around that: we taxpayers could agree to sell the stocks back when the companies recover.
Congressional leaders drafted a bill that changed the Administration’s bailout plan. Instead of appropriating $700 billion now, the bill would give Sec. Paulson $250 billion now, $100 billion later if the White House certifies the need, and another $350 billion if Congress feels generous.
The bill, however, did not give taxpayers an equity stake in the companies that receive tax dollars.
On September 29, the U.S. House voted down that bill.
Hours later, many media began leading cheers for the bailout. They even stopped calling it a “bailout” and started calling it a “rescue plan.” Wonkette has interesting comments about the media's transparently manipulative name-changing efforts.
Media mis-steps aside, the bill’s failure seemed a good thing, because it gave Congress a chance to draft a more cautious and taxpayer-friendly bailout bill.
Why a full $250 billion up front -- followed by $100 billion if the White House says so? That’s $350 billion.
Though it’s "only" half of $700 billion, $350 billion is a TON of money: about 10% of our nation’s entire annual budget. Our nation's big drug companies (among the world's most profitable entities, even during economic slumps) don't collectively make $350 billion in annual profits.
Our national debt is about $9.9 trillion, and interest accrues daily. The interest our Treasury would earn on cash that we delay funneling to Wall Street firms could help pay down our national debt.
At a Senate Banking Committee hearing last month, Sen. Chuck Schumer asked Sec. Paulson how he came up with the $700 billion figure. Paulson said he figured the Treasury would hand out $50 billion a month.
Sen. Schumer then asked: why shouldn't Congress give only $150 billion now and give more in three months if there is need and if the bailout is working?
Like him or not, Schumer made a tres solid point.
Unfortunately, the Senate rushed to draft a new (and way bigger) bill, which the Senate passed last night: a bill (from what I can tell at this point) that still carries a $700 billion price tag and that would not give us taxpayers an equity stake.
Given that the House killed its bill on Monday by only 12 votes, it seems likely that the House will pass the Senate's new bill.
To bail out or not to bail out is not the question. We taxpayers will likely pay serious cash to prevent economic disaster. The real question is: how should we execute a bailout?
I vote that political officials proceed with caution and protect us taxpayers.
Last night, 74 senators seemed to throw caution off the cliff. When House members vote on the bailout bill within the next few days, I hope that 218 of them will rescue that caution and kill the bill.
I hope our taxpayer-funded representatives in Congress will come together over the weekend, refrain from engaging in nonsense, and draft a sensible and taxpayer-friendly bill.
Given the stakes, this is no time to rush -- and no time to make idiotic mistakes with severe long-term consequences.
Memeorandum has commentary
Other Buck Naked Politics Posts:
* Against Bailout Before he Was For it: Why Does Gingrich Even Talk?
* Did Bailout Really Cause Dow to Drop? Bailout Fans Say So.
* Failed Republican Tactic: Timing Problem with Anti-bailout Ad
* McCain Strategists Make Palin Seem Moronic Again
* Fed Pumps $630 Billion into Economy
* Door in Face: Administration Dupes Congress re: Bailout Deal
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I say Ignorance and freedom is incompatible let wall street take it on the chin I would have too, wouldn’t u?
http://rawdawgb.blogspot.com/2008/03/ignorance-and-freedom-are-incompatible.html
http://rawdawgb.blogspot.com/2008/10/take-it-on-chin.html
Posted by: rawdawgbuffalo | October 02, 2008 at 09:08 AM
Hi Deb,
I agree with you completely. This bailout deal full of pork should never be passed and I am just amazed that Obama and McCain are willing to sign on and vote yes on such a horrible package for Americans.
Posted by: Danny | October 02, 2008 at 12:05 PM
The Paulson/Dodd/Frank plan is severely flawed, but it does give some equity stake and would end up costing a lot less than $700B. It would cost too much, for sure, but not $700B. I pretty much agree with this:
http://www.prospect.org/cs/articles?article=how_much_will_it_cost_and_will_it_come_soon_enough
I'm a big fan of the George Soros plan:
http://www.ft.com/cms/s/d68e10cc-8f45-11dd-946c-0000779fd18c,dwp_uuid=73adc504-2ffa-11da-ba9f-00000e2511c8,print=yes.html
The other good idea I've heard is to simply issue capital loans to banks to shore up credit, and/or force any participating lenders to suspend dividend payments until they are out of trouble.
Posted by: Adam | October 02, 2008 at 05:28 PM
Rawdawg,
Unfortunately, it seems that if we let them take their lumps, we ordinary folks will suffer too.
Posted by: Deb Cupples (Buck Naked Politics) | October 02, 2008 at 08:22 PM
Danny,
A LOT of Senators joined forces to support the bailout. I suspect that it's sort of like the war: if they all stand in a cowering group and support it, there's a smaller chance that they'll be singled out and voted out.
I could be wrong, of course.
Posted by: Deb Cupples (Buck Naked Politics) | October 02, 2008 at 08:23 PM
Adam,
Thanks for the Prospect link. I looked at AP/Yahoo and a couple other articles (Politico and one or two others).
Unfortunately, none of the articles I read gave details: they just iterated the sound bites about $700 billion and buying toxic assets.
I was frustrated by the media's lack of explanation of the new plan -- while taking a cheer-leading stance.
Posted by: Deb Cupples (Buck Naked Politics) | October 02, 2008 at 08:25 PM
"To bail out or not to bail out is not the question. We taxpayers will likely pay serious cash to prevent economic disaster. The real question is: how should we execute a bailout?"
Yes. This is spot on. The public is buying into the false choice first presented by Paulson, accepted by congress, and blindly accepted by the main stream press and the public.
The financially savvy should read Soros on this:
http://www.ft.com/cms/s/d68e10cc-8f45-11dd-946c-0000779fd18c,dwp_uuid=73adc504-2ffa-11da-ba9f-00000e2511c8,print=yes.html
A simpler, similar plan was described in the NYT:
http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html
Posted by: Mark in SF | October 02, 2008 at 08:36 PM
Adam,
I just read the Prospect piece. I agree that the actual costs would not be $700 billion even if all of that money were released at once.
That figure is a form of shorthand.
Though not a full $700 billion, I agree with you that the costs would likely be too high -- especially if Congress doesn't outright limit executive pay for firms' taking tax dollars.
One thing that bothers me about the article: the author seems to assume that it would be a GOOD thing for housing prices to re-inflate.
I submit that the housing bubble hasn't fully deflated yet in all areas of our nation. Thus, I think that prices should still come down further.
Looking at this in a simplified way, how would we taxpayers make money off the "toxic assets" if we paid more for the mortgages/securities than the houses (collateral) are worth?
It seems to me that the only way we could make money is to sell off the collateral.
If housing prices were to come down still further (as I think they should for the long-term health of our nation), we taxpayers would get less of a return on our investment in toxic CDOs.
If housing prices were to go up again, we'd still likely get less of a return, because most people would be unable to afford to take the collateral (houses) off our government's hands.
In know: everyone's speculating. Eventually, we'll see how it actually plays out.
Posted by: Deb Cupples (Buck Naked Politics) | October 02, 2008 at 08:45 PM
"Looking at this in a simplified way, how would we taxpayers make money off the "toxic assets" if we paid more for the mortgages/securities than the houses (collateral) are worth?"
Exactly. The real issue is that nobody actually knows how much they are worth. So we may lose only a small amount off the purchase price, or we may lose most of it. We just don't know. Getting a small equity stake as colateral helps cushion the risk, which was one of the main improvements Dodd and Frank made to the original plan. But there's still too much financial risk to the taxpayer in my opinion.
This is why the Soros plan is so good - just force participating banks to issue new stock, and buy it at market prices. This gives the banks the cash they need to start lending again, which solves the pressing problem of the moment. And it's a much, much safer investment of taxpayer dollars.
Once we've taken care of the current credit crunch, we can probably sit back and take a few months (until, say, January 20th or so) to deal with the underlying mortgage and financial regulation problems.
Posted by: Adam | October 03, 2008 at 11:10 AM