Nothing Is Too Good For Taxpayer Money; Not Even Foreign Investors

September 20, 2008

The Facts

Once again, our elected and appointed officials have issued another “get out of jail free” card to another public institution. The justification? Same as usual; “too big to fail”. According to CNBC this brings the total bailout cost to taxpayers to $850 billion so far this year. (Others put the number at $900 billion; some at $1.5 trillion when you add in hidden cost and interest.) The latest bailout, of course, is AIG (American International Group), contributing an initial cost of $85 billion to us taxpayers (some say the cost will be much higher). This is the largest bailout of a private company in US history (Fannie & Freddie is a GSE).

AIG is a major insurance corporation with investment arms. It’s the investments that got them into trouble. All insurance companies invest their money (customer premiums) so as to shore up insurance claims. They need to do that but the trick is to make good investments; obviously, AIG did not. So whose fault is that? There are already lots of people being blamed, not excluding us taxpayers (we are too greedy, we are told, as well as “whiners” [Phil Gramm]). But the man at the head of AIG for several years was Maurice R. Greenberg. Under his “leadership”, the company was found guilty of fraud in the mid-2000′s and fined $1.6 billion. Greenberg resigned in 2005 taking with him an average of $29 million per year for several of the previous years. He was replaced with Martin J. Sullivan. Sullivan was forced to resign in June of this year due to failing financial losses, taking with him a $47 million severance package on top of the tens of millions he was given each year as salary’s and compensations (successfully bankrupting a company is very prosperous for CEO’s). He was replaced by Robert Willumstad who had been Chairman of the Board since 2006. Willumstad will now depart AIG after just three months as CEO with $7 million. With salaries, compensations, and severance packages, these CEO’s cost AIG (and now it looks like us taxpayers) $200 million in less than 8 years. And to think, we still aren’t pissed enough to get off our rears and “storm” Washington.

The bailout of AIG is officially called “a loan”, although everybody in the business world is calling it a bailout. Supposedly, for the loan, the government will get 79.9% of the company stock. Unfortunately, 79.9% of nothing is nothing. To get our return (without interest) depends on three things; if the company survives, if we don’t have to invest more than the $85 billion, and if the stock price rises to $11 per share (three very big “ifs”). And the latter will work only if a buyer can be found, adding another big if. In the meantime, we taxpayers are must pay interest to someone (China, Russia, Japan, etc.) on the $85 billion we had to borrow to bail out AGI. As I said in another post, the trick is to convince us taxpayers into thinking we won’t really be holding the bag. Is calling it a “loan” just one of those “tricks”?

My View (and some more facts)

Lawmakers were concerned over being left out of the decision process. And concerned they should be. The current White House administration and their appointees have given right to be concerned. And this doesn’t just include the Democrats; many Republicans have expressed their concern. The senior Republican on the House Budget Committee said “My instincts and my gut tell me they made the wrong move. But I don’t have all the information they do”, speaking of the feds. Henry Paulson said just 5 days ago “no government bailouts would be offered to Wall Street”. Of course, Paulson was speaking of Lehman Brothers when he said that, but during that same meeting he told Merrill Lynch, Washington Mutual and AIG “there will be no government money to help any firm that ran into trouble next”. But now we are back to bailouts. So with Paulson changing (flip-flopping) on bailouts in just four short days, can we trust what he’s really saying? Sounds pretty much like double-talk to me.

Henry Paulson, Ben Bernanke, and Christopher Cox met with President Bush before going to congress to lay out their plan. They warned Bush there would be political fallout. Bush told them “don’t worry about politics, just do what you need to do”; something Bush has never worried about, given his underhanded track record. But when the trio met with lawmakers to give them the bad news and lay out their plan, there were a lot of questions from both sides of the isle. They wanted some sort of rules to apply to the bailouts. First, they wanted to restrict executive salaries and compensations. They also wanted the taxpayers to share in the profits if there turned out to be any, and they wanted to address the problem of homeowners being thrown out of their homes (the latter always being ignored). Paulson didn’t like those ideas, and “he showed his displeasure on his face”. Obviously he and the other two weren’t concerned about the taxpayers. After the meeting, a group of Republicans had a news conference calling for an end to “bailout mania” where they said “it is time to bail out the American Taxpayer”.

So who’s next for a bailout? There are many standing in line and the automakers are close to the head of the line if not at the head. They want up to $50 billion in bailouts, although some are calling it a “loan” also. And you have to laugh out loud at the excuses used by some to “justify” these “loans”. Jim Hall of 2953 Analytics and CNBC’s Phil Lebeau basically say it’s our fault the automakers have to be bailed out. They claim that if we (meaning the public & lawmakers) demand autos with better mileage, we shouldn’t expect them to do it unless we ante up, as if they are going to give up that market if we don’t bail them out. And I’m sure the automakers would gladly return a reasonable profit to the taxpayers from the sales of these fuel efficient autos, right? This just indicates how these so-called “experts” in the field can justify any bailout no matter how ridicules; and just how stupid they think the public is.

Mark Haines of CNBC ask the question this morning “is the taxpayer going to get the bill on this?”, and Steve Liesman’s answer was a reluctant “yes”. Then Haines asked “we’re going to bail out Wall Street? Answer “yes”. All day long Haines kept asking “why should the taxpayers be taking this in the end”, and nobody seem to care about that. Haines also said he refuses to accept we had only two choices; a complete meltdown of our financial world or a bailout by the taxpayers. He insists there had to be other choices. But what Haines is not recognizing is when it comes to our government and the big business world, they consider only one option when they’re in trouble; taking more money from the working class people.

The White House idiot also spoke today on the financial crisis saying “our system of free enterprise rest on the conviction that the federal government should interfere in the market place only when necessary.”[bold & underline added]. But Bush considers it “necessary” only when it benefits big business and the wealthy, exemplifying his double standards. Of course, you have to remember Bush has never had a problem with recklessly spending taxpayer money, even back before he was governor of Texas (see details of his Texas Rangers venture). Although Bush doesn’t believe in the redistribution of wealth, he and others sure believe in redistribution of taxpayer money to the wealthy. In the same press conference he also said “bad guys will be caught and ‘persecuted’”. But I suspect that will end up like the Valerie Plame scandal when he said on July 18, 2005, “if someone committed a crime, they will no longer work in my administrations”. But I noticed Dick Cheney and a few others are still gainfully employed in his administration.

Congress is very upset because Ben Bernanke committed billions to “bail out Wall Street speculators”. (Where is Phil Gramm and the thousands of others now who have been shouting over the past four months or so that speculators are not in the middle of our financial & economic problems?) Basically, what this all means is that because of no regulation, a hand full of greedy people (compared to the millions affected), put the United States (and maybe other countries) is in a position of total collapse.

Let’s get to the real root cause of the problem here. The defenders are saying three things. First is that deregulation (or no regulation) didn’t play a role; second that the problem was caused by bad lending practices, lumping in the borrowers who agreed with the financial institutes that their income was more than it actually was; and third, the bad housing market. It wasn’t bad lending, or bad borrowing practices, or the collapsed housing market that caused the problem. That’s like saying an iceberg didn’t sink the Titanic; it was the water rushing into the hole caused by the iceberg that caused the Titanic to sink. The real root cause here is greed; greed among many people; greed accessible by deregulation (thanks Reagan), mainly by those who run the corporations and those wanting to make bigger fortunes by short selling stocks (drives down stock prices). John Gutfreund, former CEO of Solomon Brothers, asked the rhetorical questions today of Bank of America “who can protect them from their greed?” Gutfreund pointed out that he was not a proponent of regulations but said “people without rules just get into trouble”, meaning we must have some sort of effective oversight regulation. But relative to the mess we’ve seen this week, it’s the taxpayers who are in trouble because of no rules and oversight. The wealthy & powerful will make out just fine just as CNBC’s Mark Haines pointed out to Byron Wien of Pequot Capital. Haines said “the Wall Street big wigs and fat cats will walk away with the lions share of the money” (meaning bailout money), rather than the taxpayer getting any of it back. He continued on by pointing out that “the (past) fat cats already have their money and moved on”. And there’s no one who doesn’t really know that in the end it will be those fat cats that profit the most. There may be those who deny it, but history has proven otherwise (Chrysler was a true loan without strings attached).

I found it interesting that Byron Wien said in the same interview referenced above that “Wall Street is in a deep recession here”. Although Wien had some sensible things to say in this interview, he and many others like him, including our President, were still denying up until this week that the country is in a recession. But, boy when Wall Street is in a financial mess, they are quick to admit to a recession; although I suspect in their definition of recession, there never is one unless Wall Street is being adversely affected. Wien tried defending the bailouts by saying we don’t want all financial institutions moving to someplace like London. Haines suggested that if this is what it means to be where all the financial transactions take place, maybe we ought to let them move overseas. I agree, as I’m sure many others do. Haines pointed out one last thing; most assets owned by those being bailout are not held by Americans, but by overseas investors. So he asked Wien if they (foreign investors) can now come to the RTC for help. Wein danced around that point a bit, but basically said they could. So now we taxpayers are not only in the business of bailing out greedy, wealthy Americans, but also wealthy foreigners. By the way; it’s because of Mark Haines and two others on CNBC that Rupert Murdoch (owner of Fox News and about 190 other news outlets worldwide) insisted that the reason he started his business network was because “CNBC is too anti-business”. I guess if one or two people advocate speaking up for the working class as well as businesses, you are anti-business. But Murdoch’s definition of anti-business and most other people’s definition is two completely different things.

Carl Icahn granted an interview yesterday. He said “companies are much worse than you think”. Icahn, although despised by many, bought up several companies over the years that he believed was doomed for failure due to greed and bad management. He said he had never seen wealth destroyed on this scale. He says it was because “old-boy boards” collected checks and cozied up to CEO’s while it was obvious the company was failing. In other words, to hell with the company, investors, and taxpayers; let’s get ours and run.

As a result of the bailout of AIG this week a lot of rich people got a lot richer, and will continue to get richer. The Dow had a 1000 point down turn in three days, then a 1000 point up turn in two days because of the AIG failure & resulting bailout. Just on the mention that an RTC type resolution had been agreed up, the stock market soared upward to 400 points in one day. The big boys knew the taxpayer calvary was on the way. But you can rest assured working class people made little or no money at all off this. And later on down the road when it becomes public knowledge that the taxpayers never did really make a “loan” to AIG and others, that it really was a bailout with no taxpayer returns, big businesses and their advocates will dismiss that fact with something like “that was yesterday’s news; nobody wants to talk about that”. They’ll also laugh off the fact that socialized cost & privatized profits is alive & well here in America, the democracy.

You would think we (taxpayers) would eventually get enough of our officials literally forcing us to bailout big businesses. Especially when the corporate leaders and Wall Street continue to walk away untouched and laughing all the way to their bank. But the list is long and still growing, with the biggest bailout in history being the 1980′s Savings & Loan industry ($200 billion in today’s dollars). The list is also long for failed banks, which cost us billions. Then to add insult to injury there are companies that have declared bankruptcy, mostly due to greed which, although not a bailout, cost the public extremely large sums of money. But for some reason, we just bitch about it a little and go on with our pitiful lives (although many defend it because their favorite politicians and/or news outlet told them to do so). Bill Fleckenstein wrote an article he called “The Repugnant Bailout Nation” where he said “folks act as though all is well, even as financial institutions continue to implode”. Maybe someday we’ll get enough and “march” on big businesses great protector, Washington DC.