Spreading the [Bailout] Wealth Around

If spreading the wealth around through progressive tax policies is a form of socialism, then what does spreading public wealth amongst bankers mean? Is it socialism for Wall Street? In these last, furious days leading up to the election, our Treasury Secretary is working hard to spend the first installment of the $700 billion Wall Street bailout. Remember the arguments they used to gain support for the bailout? We were led to believe that buying up banks' toxic securities was the fastest way to get those banks loaning money again. This was supposed to be a necessary first step toward a broader economic recovery: in order to save Main Street, we had to save Wall Street. Now that funds are being doled out, how do we, the public investors, make sure the banks are using those funds to get the economy moving again, instead of simply enriching themselves and their friends? Early evidence suggests that Wall Street bankers are still more interested in self-enrichment than the public good.

To understand more fully how the bailout is being used to ‘spread the wealth’ from the public to big bankers, check out these three stories:

1) Joe Nocera, business reporter for the New York Times, exposes a banking industry secret: they are not planning to use bailout dollars to make more loans. Nocera was on an employee conference call held by JP Morgan Chase just days after the mega-bank agreed to take a $25 billion capital injection from the Treasury Department. One employee asked: “(We) just received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?" The answer, to paraphase: “The loan volume will continue to go down as we continue to tighten our credit.” So what will the $25 billion go toward? Financing more mergers and acquisitions.

Nocera has good evidence that this is industry-wide. Treasury Secretary Paulson Jr. is targeting some of the bailout money to help his favorite banks buy other banks. Treasury also created a new tax break that is meant to encourage mergers. Which means that, just as many of us feared, the Treasury Secretary is deciding, on his own, who wins and who loses. He is single-handedly reshaping the banking and finance industry. This is not exactly what reluctant supporters of the bailout had in mind.

2) A recent article from the Washington Post reports that banks are spending more than half of their bailout money to pay dividends to shareholders.

33 banks have signed up for Treasury funds that are supposed to be free up credit for Main Street. But Treasury has agreed that these banks can continue to make normal dividend payments, which, at the current rate, will consume over fifty percent of the Treasury’s investment over three years. Companies typically pay quarterly dividends to shareholders. The dividends come from capital that banks have in their vaults. Companies like to be consistent with these payments; it is good for investor confidence. Paulson says, since the loan program is voluntary, he needed to add in some inducements for banks to sign up.

Some members of Congress are asking: why should banks get government money if they already have enough money to pay dividends --  or conversely, why are banks that need government money still spending so much on dividends?

In Britain and Germany, banks that accept public investments have to
agree to suspend dividend payments until the government is repaid. This
is also what our government did when we bailed out Chrysler in 1979.
Unfortunately, Congress was in such a hurry to approve the massive
bailout plan that they forgot to weigh in on the question of suspending
dividend payments. Paulson is taking advantage of this to enact his
version of spreading the wealth around.

Senator Charles Schumer (D-NY) put it this way: "The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program.” Schumer has called for the government to require a suspension of dividend payments. We should get behind Schumer on this one.

But wait, there’s more:

3) William Greider exposes another bailout scandal. We, the people, are buying up a lot of stocks. Turns out we are paying nearly double what the stocks are worth. This means, half of the bailout money is a gift to Wall Street. We will get no returns on it.

Greider references research done by the United Steelworkers’ Union. Their Director of corporate research, who once worked for a Wall Street firm, did a careful market analysis to calculate the real value of what the Treasury Department has bought so far. He found that a private investor would get more favorable returns, a 10 percent dividend, while the public’s shares will yield only 5 percent.

Paulson’s bailout staff includes a number of Wall Street veterans. It sure looks like these guys are cutting deals for their old firms. What should we do about it? Here’s Greider’s advice: “Stop payment on the Treasury checks before the bankers can cash them. Open an immediate Congressional investigation into how Paulson and his staff determined such a sweetheart deal for leading players in the financial sector.”

These three stories expose the ways in which the public is being taken for a ride. There are better ways to stimulate the economy: think about what states and local governments could do if they could get some of that $700 billion in the form of an economic stimulus package. They could keep vital services going, make needed infrastructure repairs, take some of the burden off their strapped budgets, and even have some funds for green tech conversion. Think of what unemployed workers could do this season if their unemployment benefits were extended, and what small businesses could do if they got access to credit again. These are the kinds of things we should be investing in, not bank mergers and shareholder dividend payments.

I guess the friends of Wall Street are hoping we’ll be so busy pondering whether a tax increase on the wealthy is socialism that we won’t notice how they are spreading our wealth amongst big banks and their shareholders. Let's prove them wrong.

--Sandra Hinson


It's not clear how much the bailout is working

It's not clear how much the bailout would cost the taxpayers, but Congress has authorized up to $200 billion for the job. In July, the Congressional Budget Office estimated a bailout would cost $25 billion in 2009-10, but some experts think that's too low.
Apparently, $700 Billion in relief is just not enough. Secretary of the Treasury Henry Paulson, and his Troubled Asset Relief Program, or TARP, hasn’t turned into the credit repair that many consumers need at this point. However, now that the chairperson of the FDIC, Sheila Blair, is able to weigh in on the situation, things are going our way a little bit more. She has pushed a $24.5 billion program to assist more than 1.5 million homeowners in danger of foreclosure, and it is very simple. Lenders will be given $1,000 for every loan that they renegotiate with homeowners that are facing foreclosure, and if default can’t be avoided, the FDIC will take on up to 50% of the loss. Paulson says it is a huge mistake that will bankrupt the FDIC. Others hail it as a route to re-establishing the liquidity for the mortgage market. It may not solve all the problems, but it’s an attempt to help repair credit.
Click to read more on Credit Repair