Honest Answers about the Financial Collapse

Deregulation, Disaster, and What Happens Next
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Okay, Wall Street, Congress did what you demanded. $700 billion so you will go back to work. Is there anything else you need right now?

Let me tell you what Americans need — and didn’t get from Congress today.

First, we need across-the-board regulation of your business. That means ending the kind of speculation that generated trillions of dollars of paper wealth (and billions of dollars in compensation for you) but never built a school or hospital. And collapsed like a house of cards.

Second, we need you to stay out of the Capitol. Your lobbying of Congress led to deregulation. Our money should be put to work in the economy, not blocking or undermining the government oversight that had better be coming (see above). And we don’t want you advising our elected officials on who gets taxpayer bailout money, especially whether you get it.

Third, we need caps on how much you can charge us for interest when we come to you to borrow our money to buy homes or cars, send our kids to school or keep our small businesses afloat. We American consumers have kept this economy afloat for the last ten years, and it won’t come back until we do.

Fourth, we have no choice but to hope this bailout works — because we’re gonna want our money back from you.

Comments (1) Posted by Harvey Rosenfield on Friday, October 3rd, 2008

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A con game as “an attempt to defraud a person or people which involves gaining his or her confidence,” Wikipedia explains.

The Great Bailout of 08 is con game with a very special twist.

Wall Street speculators sold trillions of dollars of securities whose worth nobody really understood to supposedly sophisticated investors here and abroad. Cons work, as Wikipedia points out, because “persons of any level of intelligence are vulnerable to deception by experienced con artists.” Mortgages were packaged into securities that in turn were sliced into other securities, repackaged and sliced again, ad nauseum. A vast portion of our economy was a house of cards. Some of the con artists conned themselves and each other with these schemes.

Here’s the twist: once they got caught on the con, the grifters and the Bush Administration got together and demanded that taxpayers pay $700 billion to restore Wall Street’s confidence. The reason why no one has been able to explain the price tag is that Treasury Secretary Paulson figured that requiring Americans to buy so much bad debt would convince Wall Street to go back to work and start lending again. Remember, the crisis is a credit crunch – banks and other financial institutions refusing to lend money to each other or anybody, because of the original con. Not surprisingly, the con artists don’t trust each other anymore.

So today, Congress hopes to end the con with our money.

Comments Off on Con Game With a Special Twist Posted by Harvey Rosenfield on Monday, September 29th, 2008

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After sending a letter to the congressional leadership on Monday urging them to slow down and protect taxpayers, I flew to D.C. Tuesday morning at the request of my colleagues at Consumer Watchdog.

The appalling bailout bill drafted by the Bush Administration – a three page surrender of 700,000,000,000 taxpayer dollars and the authority of the legislative branch – was reason enough to catch the next flight. But there were also rumors that the insurance industry would try to sneak into the bailout bill separate legislation (HR 5840) that would authorize Treasury Department bureaucrats to nullify state insurance laws. Consumer Watchdog had worked with House Speaker Pelosi’s office to ensure that the author of that bill – Rep. Paul Kanjorski of Pennsylvania – amended the bill to protect California’s Proposition 103, but the rumors of last minute trickery got my attention. And it seemed that nobody in D.C. was really speaking up for taxpayers.

My main mission in DC was to see if I could develop some interest in the proposal I made on Monday: capping the interest rates that banks and credit card companies charge us to borrow our own money. Since March, the Federal Reserve has been lending banks and other Wall Street firms taxpayer money at 2.25%. But they’ve been turning around and lending that money to us at rates of around 6% for home loans and the usual 20% for credit cards. In recent days, mortgages rates have gone up, rather than down. It’s an outrage that we are going to give Wall Street billions of dollars of our money and let them borrow billions more at around 2% and then we have to borrow our own money back from them at two or three times what they pay.

Working with Public Citizen, the Washington-based consumer group, we formulated a set of principles we called a “Patriotic Plan” for the bailout, featuring the interest rate cap and some other protections. Drawing on the lessons we learned in the California electricity deregulation debacle, we proposed conflict of interest rules that would bar the Wall Street firms who get bailouts from also being paid to “consult” with the federal government. And we don’t want federal officials who give out billions of our money to then go to work for the companies that get it. The opportunities for graft and corruption in this bailout are enormous.

You can read my statement here along with the other materials we distributed to members of Congress and the news media.

Then we went up to Capitol Hill, to the Rayburn office building where the House Banking Committee was meeting. The room was already full of bankers, lobbyists, etc. There was a long line to get in – I was told that lobbyists hire people to stand in line for them so they can do their dirty work and still get a seat. Like most other Americans, I was on the outside looking in. It was not a pretty sight.

The members of congress I talked to seemed stunned.

By issuing his three page bailout bill last Friday, Treasury Secretary Paulson cleverly set Wall Street’s expectations that the full $700B would be paid right away. (No one has ever explained the amount; it seems to be a number that Paulson thought would be so huge it would comfort Wall Street.) When public outrage led some in Congress to demand more details, Wall Street got angry. The market went down, lending slowed to a crawl, Paulson and Fed Chair Bernanke warned of economic ruin, and the panic that Paulson invited in the financial markets became political panic in Washington. Meeting with the Bush appointees behind closed doors, members of congress were told that the country would collapse into a Great Depression if the bailout didn’t happen ASAP.

So, I was told, the bailout was a done deal and that it had to be done by Friday. And while there will be congressional lip service paid to taxpayers – some kind of ridiculously weak limits on the salaries the Wall Street losers can get – and perhaps help for the relatively few Americans facing foreclosure, there really won’t be anything like a quid pro quo for most Americans. At least not now. Some people on the Hill told me that reforms needed to safeguard the public’s money, and regulation to prevent future debacles like this one, will be taken up by congress “later.”

I am dubious. After all, we’ve been through this before in California, on a smaller but still ridiculous scale. The deregulation of electricity rates in 1998 very quickly led to “shortages” and skyrocketing prices. Pretty soon, the utility companies were facing bankruptcy. So Wall Street and the energy companies joined together to threaten Gov. Gray Davis and state lawmakers that they would downgrade California’s credit rating and refuse to lend to the State of California unless they agreed to use taxpayer money to pay the energy companies’ bills. Davis and the Legislature capitulated, hiring those same Wall Street firms to float bonds to cover the exorbitant cost of the electricity bought by the state. Only later did we obtain proof of our suspicion that the shortages were manufactured by ….Wall Street energy speculators. Meanwhile, the debacle cost the people of California $70 billion, and its economy has never fully recovered.

Today’s “crisis,” like the electricity “crisis,” is all about the greed of schemers and speculators. And with the “bipartisan” agreement that the bailout is absolutely necessary, there is no opportunity for anyone to get answers to questions like whether the bailout will even solve the problem. (The Congressional Budget Office concluded this week that it might not, but nobody’s paying attention to CBO.)

Meanwhile, the California Legislature never went back to restore regulation of electricity rates. My guess is that once Wall Street gets its $700 billion, Congress will be just as happy to move on. I know I won’t. Will you?

Comments Off on A Report on My Trip to D.C. Posted by Harvey Rosenfield on Thursday, September 25th, 2008

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The Generals in charge of our economy have taken a page out of the Administration’s Iraq strategy. They have decided that only a massive infusion of resources – an astounding $700,000,000,000 in taxpayer money – can save Wall Street from the terrible forces of the marketplace.

This is a make or break moment in American history, and it’s becoming clear that Congress is not up to the task.

Wall Street’s demand for a bailout of every imaginable “bad debt” ought to be rejected out of hand. Instead, we are seeing draft legislation paying lip service to Main Street as a face saving gesture that will cloak passage of a bailout by Friday, so that members of Congress can leave town Friday night. No one on the Hill wants to be responsible for slowing things down – even though that’s exactly what’s needed.

I was a lobbyist for Public Citizen, the D.C.-based citizen advocacy group, back in the late 1970s when Congress panicked in the face of the Gulf states’ oil embargo and passed $20 billion in federal subsidies for “synthetic fuels” and a $37 billion publicly-financed, privately-owned natural gas pipeline from Alaska. Both were boondoggles whose beneficiaries were banks and energy companies, not Americans.

Buying a house requires ten times the amount of paperwork that this $700,000,000,000 bailout is going to require if Congress just rubber-stamps the Treasury plan.

A hasty financial “surge” is going to be a catastrophe for taxpayers.

Comments Off on Congress to Okay “Surge,” Get Out of Town? Posted by Harvey Rosenfield on Monday, September 22nd, 2008

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If Wall Street has its way, Congress is going to fast-track a bailout that will prove to be the most expensive boondoggle in American history. Here’s a letter I wrote today to congressional leaders:

September 22, 2008

The Honorable Nancy Pelosi
U.S. House of Representatives
Washington, D.C. 20515

The Honorable Harry Reid
Majority Leader
U.S. Senate
Washington, D.C. 20510

Dear Speaker Pelosi and Majority Leader Reid:

I write to offer some initial perspective on behalf of the hundreds of millions of Americans who do not have lobbyists in Washington, D.C., and whose money – potentially trillions of dollars – is to be used to rescue Wall Street.

1. Slow Down.

The absence of oversight and accountability led to the current crisis. It cannot be solved by more of the same.

The legislation proposed by the Treasury guarantees nothing to taxpayers in exchange for the $700 billion they are asked to pay to bail out Wall Street. It contains no regulation of the firms or industries to be bailed out. It contains no provisions requiring transparency in the decision-making of federal officials in charge of doling out taxpayer money and no disclosure of how the funds are utilized by the recipients. Over the weekend, Treasury changed the terms of the deal to permit it to buy any “distressed” financial instrument, not just mortgages, in effect blowing open the doors of the Treasury. Failure to specify restraints or conditions on the use of public money will lead to unprecedented graft and corruption. These are crucial matters that are the responsibility of Congress to consider and to address through comprehensive legislation.

The short-term actions undertaken by the Fed and the Treasury last week have made billions of dollars available to financial institutions, addressing the immediate liquidity crisis. There is no reason for the Congress to join the panic and pass an ill-conceived and poorly understood proposal.

Finally, during the 2001 meltdown in California associated with electricity deregulation, energy companies manufactured a phony power shortage in order to press state lawmakers into bailing out the utilities companies, which had run out of money to pay skyrocketing wholesale electricity charges. It would not be surprising if Wall Street sought to pressure lawmakers into hasty action by once again closing down the financial spigots. Congress should ignore – and law enforcement should speedily prosecute – any such efforts. Indeed, access to the Fed’s overnight window and other resources should be made contingent upon each firm’s agreement to maintain stable operations in the marketplace.

2. Give Taxpayers a Stake.

Credit markets have arrested because no one knows the value of the trillions of dollars of various arcane securities that have been traded in recent years. How these so-called distressed assets will be valued when they are bought by the taxpayers is a serious issue; current accounting rules do not necessarily reflect the actual value of these financial instruments. Outright purchase could prove a windfall for the Wall Street firms – or not. The taxpayer’s largesse should not be a one-way street. Any bailout should give taxpayers ownership in the firms that are revived as a result.

3. Limit Interest Rates on Credit Cards and Mortgages.

For some time, banks have been accessing taxpayer money through the Fed at low rates – presently 2%. Yet Americans will attest that the interest rates on their mortgages and credit cards remain exorbitant, and there is little doubt that in the aftermath of this debacle, banks will attempt to raise the cost of consumer credit still further. Consumers should not have to pay interest rates of 7%-25% to borrow their own money from the bailed out banks. Congress should include floating caps on consumer credit in the bailout legislation – say, the fed funds rate plus three points. Since consumer spending has been the core of the U.S. economy, lower interest rates will also speed the economy’s recovery.

Thank you for your attention.


Harvey Rosenfield

Comments (1) Posted by Harvey Rosenfield on Monday, September 22nd, 2008

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Remember the “ownership society,” the catchy encapsulation of the free-marketeers’ faith in market forces? “The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country,” President Bush proclaimed a few months before his re-election in 2004. The plan behind the “ownership society” was to take government out of the picture – deregulate everything and “make every citizen an agent of his or her own destiny.” Health care prices too high? Set up a tax-free health savings account at a newly deregulated bank, insurance company or mutual fund. Worried about whether you’ll have enough money to retire? Privatize Social Security and invest your retirement funds in…you guessed it.

Congress didn’t hand Social Security over to Wall Street, luckily. (Think about where we’d be right now if it had.) But decades of “free market” worship led to Wall Street’s invention of arcane financing schemes like “credit default swaps,” “securitization” and “collateral debt obligations,” in which loans were hacked into pieces, re-assembled into packages and sold and re-sold. A single invested dollar was leveraged over and over and over again, in a shadow system of Vegas-style speculation that operated outside any scrutiny. One of the problems we face now is that it’s not even clear who owns the mortgages, college loans and credit cards we took out. But our elected officials saw nothing wrong with this system, which made a small group of people an astonishing amount of money.

The “ownership society” today looks pretty different from the way its promoters described it. Many Americans are struggling just to hold on to their homes and jobs. Meanwhile, we are now the owners of 80% of the world’s biggest insurance company, which cost us $85 billion even though on paper it’s worthless. And then there are the other “investments” we have made recently: $200 billion in a couple of huge banks (Fannie and Freddie); $30 billion for the investment firm Bear Stearns. More billions of our money have been loaned by the Federal Reserve to other private firms that are “a little short on cash.”

The “ownership society” may end up bankrupting us.

Comments Off on What the “Ownership Society” Owns Today Posted by Harvey Rosenfield on Thursday, September 18th, 2008

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There was Maurice “Hank” Greenberg on Monday, the former wheeler-dealer who once led the world’s largest insurance company, all over the newspapers saying that the United States government needed to give AIG $85 billion in public money as a “bridge loan.” Yup, that’s the same guy who in 2005 was at the center of a corruption investigation by federal and state prosecutors that included complex kickback schemes between AIG and various off-shore “entities” the company effectively controlled. Back in 2005, Hank castigated the federal government in an interview with the Wall Street Journal, complaining that “you couldn’t build an AIG today” because of, as the WSJ described it, “overbearing regulators, new corporate governance rules, protectionism, a failing tort system, prosecutors unleashed.” Greenberg told the WSJ that “‘one of the biggest problems’ facing America’s competitiveness at the moment ‘is regulation.'”

Not long ago, a retired California judge told me how Hank Greenberg had bitterly complained to him that Proposition 103 – the law I wrote that stringently regulates the rates and practices of insurance companies – got in the way of AIG raising insurance premiums. Greenberg is one of those guys who could not abide any form of government intervention in the “free market.” Or was.

Yesterday, of course, Hank needed the government. And today, he’s laughing all the way to the bank. Last night, the Bush Administration granted Hank’s wish and agreed to give $85 billion of taxpayers’ money to the private insurance company. Though Greenberg was forced out of AIG in 2005, he still controls 243 million worth of AIG shares that would have been worth nothing were it not for the government’s “protectionism.”

So, with this inaugural blog post, I ask, for what will be the first of many times, this question: What’s in the AIG bailout for the average American whose money is going to be spent to keep Greenberg and countless other Wall Street fat cats fat? We just bought AIG. How about a “bridge loan” for the tens of millions of Americans whose modest investments and home values have evaporated over the last year because of the shenanigans of companies like AIG?

Comments Off on “Bridge Loan” to Nowhere for AIG Posted by Harvey Rosenfield on Wednesday, September 17th, 2008