SAN FRANCISCO, Oct. 15, 2008
Will U.S. Taxpayers Need A Bailout?
Declan McCullagh Says Plan To Partially Nationalize U.S. Banks Has Many Potential Perils
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(AP)
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Timeline Financial Meltdown Track major events that lead to one of the most tumultuous times in Wall Street's history.
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Timeline Credit Crunch Feeling the squeeze? Here's a look at actions and statements from key players in Washington.
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President Bush says the move to partially nationalize large U.S. banks, including Bank of America and Wells Fargo, is necessary to "preserve" the free market.
He may be right. But left unmentioned during this week's flurry of announcements from the Federal Reserve, the White House, and other government agencies are the potential perils.
Not all the details are clear. It appears as though the Treasury will end up owning sizable chunks of U.S. banks for the foreseeable future, whether bank executives choose to participate or not.
The almost-nationalization will happen even if, as the Wall Street Journal
delicately put it it, bank executives and shareholders are "unhappy" and oppose the idea.
This invites micromanaging from Washington, D.C. Members of Congress will have a strong incentive to demand preferential treatment for borrowers in their home districts or among politically-favored constituencies. Politicians who are members of the committees overseeing the Treasury Department's budget will enjoy outsize influence. So will Treasury and other regulators that banks must please to stay in business.
Washington bureaucrats charged with writing billion-dollar checks may be tempted to favor their former banking colleagues, especially if they plan to return to their Wall Street jobs after departing the Bush administration. As the title of this inaugural column on CBSNews.com indicates, they're spending Other People's Money, and nobody is as careful and prudent doing that as they are when their own finances are at risk.
Over time, in other words, decisions made for illegitimate political reasons may end up crowding out ones made for legitimate business reasons.
Perhaps Treasury Secretary Henry Paulson and Neel Kashkari, a 35-year-old former investment banker at Goldman Sachs hired to oversee the bailout, will demonstrate their independence from politics. But in a political culture where influence-peddling has flourished (see Stevens, Ted; Rangel, Charles; Abramoff, Jack; and Jefferson, William), it's unclear if anyone in that position can do what's best for taxpayers instead of what will please influential special interests.
To be sure, Paulson has indicated that Treasury will be buying shares without voting rights, meaning the Feds won't be choosing board members. Bush said on Tuesday that "the government's role will be limited and temporary."
On the other hand, history is littered with "temporary" laws that became permanent fixtures -- a supposedly temporary tax imposed in 1898 to fund the Spanish-American War didn't
end until 2006.
And even coordinated action with other central banks wasn't enough to prop the stock market up; the Dow Jones index closed Tuesday at 9,310, down 0.8 percent for the day, and off 34 percent from last year's highs.
Some of these potential pitfalls might have been avoided if the $700 billion bailout bill that slid through Capitol Hill two weeks ago had been crafted more carefully (or not passed at all). Like the Patriot Act seven years ago, the bailout legislation was written hastily and rushed to a vote before most legislators had a chance to understand the intricacies of a complex 442-page regulatory measure.
One change that could have been made is setting a hard cap on how much this would cost taxpayers. The law says that the Feds can purchase and hold $700 billion of assets "at any one time." That permits the Treasury to buy $700 billion worth of assets in 2008, sell those assets off gradually over the next few months at a (probable) loss, and repeat the same process in 2009. Losses to taxpayers, in a worst-case scenario, could run into the trillions.
Another problem with the law is that it's possible for a bank to buy $100 billion of bad debt--perhaps in the form of subprime mortgages that are becoming quickly worthless--declare bankruptcy, and sell it to the Treasury Department for $200 billion.
Although the Treasury Department is supposed to look out for the best interests of taxpayers, a loophole permits those kinds of unjustified windfalls if the toxic mortgages were "acquired in a merger or acquisition" or purchased as part of a bankruptcy sale. Nowadays, at least, that's a pretty huge exception.
Some of these problems can be solved through careful legislative fixes. Others go hand-in-hand with the idea of nationalizing private companies.
You can't take politics out of Washington: banks may be first in line for a handout, but other politically influential industries are in the queue.
Take the example of how bank stocks jumped on this week's news. Bank of America and Goldman Sachs are each up about 30 percent from last Friday's close, far higher than the overall market. If their shareholders have already benefited so handsomely, does anyone think General Motors, Ford, and innumerable other troubled companies won't ask for the same treatment? (In exchange, taxpayers get stuck with assets of dubious value that nobody else was willing to pay that much to buy.)
The Bush administration's economists have no doubt concluded that the theoretical benefits of partial bank nationalization outweigh the costs.
But in the real world of Washington politics, what may work in theory may not work nearly as well in reality.
Declan McCullagh is the chief political correspondent for CNET. He previously was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is declan.mccullagh@cnet.com
By Declan McCullagh
© MMVIII, CBS Interactive Inc. All Rights Reserved.
Add a Comment See all 89 Comments
- Florida will put the GOP in the White House only because you denied us. McCain/Palin ''''08
Posted by maxify55 at 08:14 PM : Oct 17, 2008
LOL...don''t count on it this time. The only house McSame and McPalin will put YOU in is the poor house! - Reply to this comment
- What''s with these a**hole repugs any way? They are ALL scum bags as far as I''m concerned. This ALL goes back to reagan and his trickle down economics ***. Now WE THE PEOPLE (the middle class)are bailing these blood sucking welfare leeches out. Why don''t these repugs move to Russia where the socialist are
- Reply to this comment
- I''m still waiting for my Hurricane Ike FEMA bus, bag of food, check and free housing.
You mean I should expect economic bailout money from Uncle Sam too?
Who do I need to vote for to get my check?
If I stop working can I expect another check too?
Dang, I love the Great Society. Utopia has finally arrived.
NOT!!!!!!!!!!!!!! - Reply to this comment
- See, socialism is not that bad. Now that we have nationalized the banking industry, next we should do the oil and health care industries. Then we can have some profitable companies working for We the People. These industries are just too vital to leave in the hands of greedy right wing wackos.
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- Those most dependent on government hand-outs are defense contractors and their unlimited overrides. Then there is foreign aid; that transfers tax dollars from poor Americans to the wealthy dictators of the third world. Those attacking aid to dependent children are parroting right wing propaganda. Try a new line you sick creeps.
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- chatmandu002 said: "The usual Democrat philosophy of taking from me and giving to those who won''t work which will inevitably leads to socialism. "
The usual Republican philosophy is the not take from you, but to spend on your government services anyway. It may not be socialism, but the end result is that your children and grandchildren end up paying for your roads, sewers, bridges, and military.
It may not be socialism. It may be immorality. It IS immorality. People like you just LOVE charging the children for your $10 trillion in government services you refused to pay for while you were collecting it. Shame on you. You''re not even American, in my book. - Reply to this comment
- Obama''s tax cut for the 90% that pay taxes is an easy one. Just cut their taxes by $1 and he has met his promise. But of course everyone knows he will give away billions of dollars to the poor and make them more dependent on government hand-outs and entitlements. The usual Democrat philosophy of taking from me and giving to those who won''t work which will inevitably leads to socialism.
- Reply to this comment
- Xlib
Give me the Messiah over the Idiot anyday...
And I think you fall into the latter catagory! - Reply to this comment
- One last thing, would one of you brilliant dems explain something to this typical white woman?? Thanks.
So the messiah is giving tax cuts to "95%" of Americans AND if 40% of that 95% don''t pay taxes does that mean 95% of the taxpaying 60% will get a tax cut?
OR, is the messiah planning on "spreading the wealth" by giving that 40% nonpaying tax population money??
Please, explain. - Reply to this comment
- Aother thought, how about the rich dems that made big, big bucks with the sub prime scam paying for another bailout?? Sounds good to me.
- Reply to this comment
- I understand reid and queen nance are looking for another 300 billion. Sweet, isn''t it??? But of course it will be taken from those nasty, nasty capitalistic rich SOB''s.
Comrade, we won''t need wallets. - Reply to this comment
- Yes and Yes again. Any one for the bailout, is as dumb as the bailout. I hope everyone who like the bailout goes broke.
- Reply to this comment
- The ''bailout'' should have gone to the taxpaying American citizen PEOPLE, not corporations, who have already proven they can''t manage money. Throwing crack at a crack addict will not cure his habit.
- Reply to this comment
- It looks like White House, Congress and our economical advisers don''t know what they''re doing; now they are afraid of falling in a recession; personally, I''m in recession since 2003, my son just lost His house as another 10,000 American do everyday, but our authorities are just finding out that "we" may fall in a recession,believe me most of American are already in the depression. Mr Mccain & Mr. Obama help main st.
sending a million dollars to every working American and you will spend less than 300 million dollars or at least send a million dollars to every household in America instead of the 850 million to wall st.and we will be saving a lot of money, last time you approved the plan to send $300.00 to $600.00 to every household and that did nothing any problem but you waisted 165 billion dollars, please send a million and we will keep our houses and will improve the economy. - Reply to this comment
- In other words, the top 5% have more wealth than the combined wealth of other 95% of population
Posted by bobnjersey at 05:36 PM : Oct 15, 2008
And you point is...?
Does this contradict the statement that the top half of wage earners pay 97% of all taxes?
If they own 97% of all assets, then it''s only fair. - Reply to this comment
- Hey, nice headline.
THEY GOT IT OFF OF THESE DISCUSSION BOARDS!!!
How many times have you seen it posted??? - Reply to this comment
- Money to the people, we will buy (and not on credit). Let the fat cat bankers stay out of the loop and my money will put people to work as well as your money. (if allowed to make a choice) Don''t see much if any trickle down in the plan as enacted!
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- Democratic administrations use regulation and Keynesian (demand side) economic theory to drive their policies.
Republican administrations use deregulation and supply side economic theory to drive their policies.
Neither has a socialistic basis. George W Bush is now using a partly socialistic plan to try to re-boot the credit markets, so far not very effectively.
Over the past 80 years, the Democratic Presidents have presided over real GDP growth per capita of 3.8% vs. 0.8% for Republicans. They''ve averaged 9% annual gains in stock market prices vs. 0.4% for Republicans. The Republicans have presided over the two major crises that have nearly destroyed the capitalist system in 1929 and 2008. Who are you gonna vote for this fall? - Reply to this comment
- Why does the goverment need to come to the rescue? It is just prolonging the pain. We are headed for a fall. Let the banks fail, keep the goverment out, let those who''s greed caused them to write bad paper fail. In a year or two we will climb out of the mess, and maybe we can learn a lesson.
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- [Remember, it is Congress that makes the laws and spends our money -not the President.]
[Posted by lwc777 at 01:34 PM : Oct 15, 2008]
and it''s the president (gwb) who ignores the law ... adds signing statements to each bill he signs to re-iterate that ... and between 2000 and 2006 ... he signed every spending bill that passed his desk. - Reply to this comment
The road ahead in Afghanistan, and the crucial decision Obama faces.
