Honest Answers about the Financial Collapse

The AIG bonuses are a magnitude ten on the political Richter scale. And that has some folks worried. Some public officials, newspapers and Sunday talk shows are telling Americans it’s time to move on – that the uproar over the bonuses is a “distraction” that might interfere with the economic recovery itself.

They’re right, but for the wrong reason. They’re worried about Wall Street’s reaction to tight controls on how banks, hedge funds and insurance firms spend the bailout money. Better not offend Wall Street or they might stop lending our money to us.

What the commentariat really should be worried about is Main Street.

Every once in awhile, a moment arrives in our country where all those Founding Principles about Democracy rise beyond platitudes. This is one of those moments. Our government operates by the consent of those it governs. At any given time, there will always be people complaining – with some degree of truth – that the government is operating outside its authority. Some people who’ve lost faith just don’t vote. But most people maintain sufficient confidence in the system that they obey the laws, pay their taxes, etc.

The confidence of the average American has been badly shaken lately. The destruction of our economy by those who called the shots on Wall Street and in Washington has delivered pain and hardship to Americans, who, on top of that, are being told that trillions of their taxpayer dollars have to be given to the greed-driven money-worshippers who did this to us. That the Treasury, the Congress and the White House did nothing to stop AIG from handing our taxpayer money over to those who don’t deserve it (or even need it) is a profound betrayal of the People of the United States. True, the bonuses are symbolic. But so’s the American flag.

The gravest threat to our country today is not an economic depression. It’s the possibility that Americans will lose their trust in the institutions of our Democracy.

Geez – has our outrage gone too far? Two separate articles in the New York Times report that the beneficiaries of our taxpayer-funded bonuses are really upset. An AIG exec “looked as if he was fighting back tears” describing how his privacy had been invaded over the last few days. Fear of losing their bonuses had sent employees “into his office in tears,” according to an unnamed bank executive.

It seems that things could get pretty bad for these folks. “Bank executives… said their employees were on edge and many would face severe financial hardship if they were severely taxed on money already paid,” the Times reported.

How bad? “‘It’ll impact tens of thousands or maybe hundreds of thousands of people,’ said Alan Johnson, managing director at Johnson Associates, a compensation consulting firm in New York, noting that the tax would apply to a bonus recipient with family income of more than $250,000. ‘If you’re a receptionist and your husband is a doctor, your $5,000 bonus just vaporized.’”

I guess we are supposed to feel bad for some of these people. Not me. I look around at what has happened to this country over the last six months – people’s jobs lost, life savings slashed, dreams of a home, a college education and a better life gone – and I really can’t muster a lot of sympathy for the folks who worked at the firms that turned our economy into a casino by speculating in “credit default swaps” and mortgage backed securities.

I felt the same way when Enron went bust after pillaging California’s economy by manipulating the price of electricity back in 2001. Once the company’s phony accounting practices became public and it went into bankruptcy, a lot of the mid-level execs became indignant victims, going public with behind-the-scenes stories of financial corruption at the firm. I thought it ludicrous that these people were being hailed as “heroes.” Why didn’t they come forward before it was too late, I wondered at the time. Answer: because they were too busy partaking in the riches generated by Enron’s fraudulent behavior.

As explained in Sold Out, our economy is in the toilet today because Wall Street invested $5 billion in Washington and got a gambling license in return. But now Wall Street has burned Washington: the AIG fiasco ignited a public firestorm of outrage over the weekend. What should Washington do? Here are a few suggestions:

• Seize control. Americans own AIG – but, apparently in order not to offend Wall Street, we do not control the company. This charade has got to stop. The federal government should take control over AIG, through the exercise of the government’s power of eminent domain, if necessary.

• Cancel the employment contracts. No one knows the terms of the compensation contracts between the company and its executives, including the speculators who now demand to be paid $165 million in bonuses, apparently part of a $600 million “retention pay” program. However, it is highly unlikely that there are no conditions to these contracts. (Would AIG employees who stole from the company or committed arson still be guaranteed payment?) The government should abrogate all such compensation contracts of AIG executives and speculators, not just the bonus deals. If necessary, the government can negotiate new contracts with employees who are truly essential. Let the rest sue the United States for the money and let a jury decide whether despite their catastrophic mistakes they deserve compensation.

• Suspend payments for credit default swaps. So far, the Treasury has committed $170 billion of public money to AIG, without disclosing to the public what AIG is doing with it. Thanks to AIG’s hasty move over the weekend to deflect attention from the bonuses, we now know that former Treasury Secretary Paulson’s investment firm got over $10 billion from AIG, but it is not clear whether the information AIG has disclosed so far constitutes the complete list of recipients. So we have no way to judge whether taxpayers must continue to bail out AIG in order to avoid a collapse of the entire system, as now Treasury Secretary Geithner has contended since he helped arrange the first AIG bailout last year. Once in control of AIG, the federal government should publish the complete list of “counter-parties” – the “insurance” buyers on the other end of AIG’s swaps. The “systemic risk” can then be assessed accurately and honestly. Threats from Wall Street that taxpayers must continue to bail out AIG and (many other financial firms) in perpetuity are economic extortion. The cost of this fiasco to the American people has grown so large that it’s time to determine what will hurt our economy more: tens of trillions of taxpayer dollars going into the vaults of a few firms and their executives, or the bankruptcy of those firms?

The federal government bailed out Citigroup for the third time a few weeks ago, and bailouts 4, 5 and 6 could be just around the corner. At this point, the US government has already put more public money into Citigroup then it is worth. Yet American taxpayers now own only about 36% of the company’s common stock.

There’s another blatantly bogus aspect of the latest deal the US government has made with Citi: apparently under pressure from the US Treasury, the firm has promised to reconstitute its board of directors so that a majority of its members are “independent.” But Citi execs are picking the new members, not the government.

Citi execs says they’re having a hard time finding people to serve – even though board members are paid $75,000 per year (plus stock).

What that tells you is that the Citi fat cats are looking for other fat cats. And these days most fat cats are fat enough that they can afford not to serve on companies whose stock is trading at $1 a share.

Boards aren’t really independent if they’re made up of wealthy corporate types who do business the Wall Street Way. The government’s “independent majority” requirement is a kabuki dance designed to placate the American public without upsetting Citi or its shareholders.

Here’s a better idea: why not put regular Americans on the board? Say, a few folks from Main Street, maybe a couple of small business people. Maybe they could be chosen by lottery. I’m betting there’s a lot of citizens in this country who’d serve for a fraction of the pay the board members get right now.

“Nationalized” or not, Americans own Citigroup, and to restore public confidence in the firm – and what it is doing with our money – it ought to be supervised by people who bring to it good old fashioned American values.

Four months ago, it became clear to me that blogging about the financial calamity wasn’t going to cut it. We needed to do something about it.

It was clear even then – just days after the presidential election – that the Money Industry was still conducting business as usual on Wall Street and in Washington. There was a great danger that those with a vested interest in the status quo – the people whose greed caused this mess, and those who could have stopped them, but looked the other way – would hide the truth from the American people about how we ended up in this economic disaster. The commentators were already starting to blame average Americans – as if the entire financial system collapsed because we used our credit cards or tried to buy a nicer home. I could already see that they were rewriting history.

And if no one knows the truth about how we got into this mess, then there’s no way we’re going to figure out how to get out of it.

So I got in touch with the hard-working, smart people at Essential Information, a Washington, D.C. non-profit that’s been investigating and educating people, the press and policymakers about complex issues for more than two decades. We came up with a plan:

First, convene a conference of experts – economists and advocates independent of the government and the Money Industry – and spend a day discussing solutions to the crisis.

Next, research and write a report on exactly what caused this economic disaster.

Then start pushing for solutions that will work.

We moved very fast.

The conference was held on January 9th, nearly a week before the Inauguration of President Obama. The economic crisis had grown significantly worse since November, and the experts foresaw even tougher times ahead. But the most troubling news was that President-elect Obama was relying almost exclusively on people from within the institutions that were responsible for the debacle to advise him on how to fix it. You can watch videos of the speakers and conference panels at the special web page we’ve set up: WallStreetWatch.org.

Today, Wednesday March 4, we completed the second step in our plan: we published a 231 report whose title explains it all: “Sold Out: How Wall Street and Washington Betrayed America.” After four months of exhaustive research, we came up with twelve things that Washington did – or failed to do – that led to the collapse of our economy. Then we figured out why: between 1998 and 2008, the Money Industry invested over $5 billion in Washington, in the form of campaign contributions and literally thousands of lobbyists. You can download the report at the WallStreetWatch site.

Now we need to take this information and insist that our elected officials sever their ties to the fat cats and start serving the needs of the voters who elected them.

This is going to require the support of the public. You can’t afford just to read this blog or the report. You need to join the fight and do something about it.

We turned our outrage into action. Now it’s your turn.

PS The blog is back. You can follow our work right here.