-Bloomberg: “Bush Seeks “Dictatorial Power” in Bailout Plan” + Ten Reasons Why Bush’s Proposed Bailout Is Larceny.

Posted: September 22, 2008 in 2008, Articles
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Bloomberg:

Alison Fitzgerald and John Brinsley
September 21, 2008

The Bush administration asked Congress for unchecked power to buy $700 billion in bad mortgage investments from U.S. financial companies in what would be an unprecedented government intrusion into the markets.

The plan, designed by Treasury Secretary Henry Paulson, is aimed at averting a credit freeze that would bring the financial system and economic growth to a standstill. The bill would bar courts from reviewing actions taken under its authority.

“It sounds like Paulson is asking to be a financial dictator, for a limited period of time,” said historian John Steele Gordon, author of “Hamilton’s Blessing,” a chronicle of the national debt. “This is a much-needed declaration of power for the Treasury secretary. We can’t wait until the next administration in January.”

As congressional aides and officials scrutinized the proposal, the Treasury late today clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage-related assets and, after consultation with the Federal Reserve chairman, “other assets, as deemed necessary to effectively stabilize financial markets,” the Treasury said in a statement.

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Ten Reasons Why Bush’s Proposed Bailout Is Larceny

TEN REASONS WHY BUSH’S PROPOSED BAILOUT IS LARCENY

* 1. Lack of accountability or transparency, resulting in a “blank check” of up to $1 trillion. Section 8 of the Draft Proposal for Bailout Plan2 reads, “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion… ”

That means that the American people can never review and will never know how the $1 trillion was spent by the Bush administration.

* 2. Lack of legal recourse for inappropriate use of $1 trillion in funds. Section 8 of the Draft Proposal for Bailout Plan3 concludes, “… and may not be reviewed by any court of law or any administrative agency.”

That means that no matter how the Bush administration spends the $1 trillion, they can’t be sued or otherwise held liable for it. Even if the funds are used fraudulently or for any improper or unrelated purpose.

* 3. Lack of specific or objective criteria to determine who should be bailed out, which could result in cronyism, fraud, favoritism based on political affiliation or other misuse of taxpayers’ funds.

Recipients of bailout funds are determined solely by the Treasury Secretary. There are no financial benchmarks, nor prohibitions of giving funds to related parties or based on partisan or other discriminatory factors. There are also no prohibitions of kickbacks.

* 4. Lack of specific valuation criteria for “illiquid assets” acquired by the federal government, which would result in overpayments to institutions who made or purchased the bad investments.

The Bush bailout plan is silent on what price the Treasury Secretary must pay the financial services industry to bailout their bad mortgage loans. Will the Secretary pay fair market value (i.e. what the “illiquid asset” is worth today) or will he pay the premium value of what the bad loan used to be worth before the market dropped?

This is important because if the Secretary pays the higher premium price, then American taxpayers are automatically stuck with losses that likely can never be recouped.

Normal business, and consumer, practice is to pay for an asset what it’s actually worth on that day (i.e. fair market value). Princeton economist Paul Krugman describes4 “having taxpayers pay premium prices for lousy assets” as “in effect throwing taxpayers’ money at the financial world.”

For more, see Concerns about the Treasury Rescue Plan5 by the Brookings Institute.

* 5. Lack of plan, budget or staff to oversee and account for this massive new Treasury Department function, which will inevitably cause a significant expansion in federal government bureaucracy.

This would be a massive undertaking on an unprecedented scale, and would cost billions of dollars in new federal government bureaucracy needs…. costs that would be passed on (coincidentally?) to the next presidential administration, and not borne by George Bush.

And yet, Section 76 of the Bush bailout plan gives unlimited powers to the Treasury Secretary: “Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.”

* 6. Lack of reform or regulation of, or any measure control over, institutions bailed out. Incredibly, the Bush bailout plan requires no changes in the failed practices of the financial services industry.

Economist Robert Reich is spot-on when he writes that7 as a bailout condition, Wall Street firms must “agree to comply with new regulations over disclosure, capital requirements, conflicts of interest, and market manipulation.

The regulations would “emerge in ninety days from a bi-partisan working group, to be convened immediately. After all, inadequate regulation and lack of oversight got us into this mess.”

Sep 22 2008

# 7. Lack of restrictions on salaries, bonuses, stock options or any other compensation for executives bailed out. Treasury Secretary Henry Paulson, former chairman of Goldman Sachs, one of the world’s largest investment banking firms, regards limits on compensation of Wall Street executives as a “poison pill.”8

The Bush bailout plan proposal is silent on limits on salaries, bonuses, stock options or any financial penalties of any kinds for executives of firms bailed out by taxpayers…. despite that fact that top investment firm executives each take home millions annually.

For a glaring example, see Fury at $2.5 Billion Bonus for Lehman’s New York Staff9.

In essence, Wall Street executives are protected by the Bush bailout plan, while “Main Street” Americans take 100% of the fiscal responsibility for the executives’ bad decisions.

# 8. Lack of punitive measures for institutions or executives bailed out. Likewise, the Bush White House proposal for bailout plan10 is entirely silent on punitive measures or penalties for either the firms bailed out or or the executives of those firms.

# 9. Lack of any homeowner protections or any for individual investors. No protections of any kind are given to homeowners whose mortgages may be foisted on the federal government. In fact, the Bush White House proposal for bailout plan gives the Treasury Department several incentives to accelerate foreclosure on homes to generate more cash for Treasury Department use.

# 10. Lack of any plan to reimburse taxpayers, and lack of any plan to recoup taxpayer losses on these bad loans from future profits of institutions that made these bad loans.

Read the included analysis.

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