US: The Greatest Swindle Ever Sold: How the Financial Bailout Scams Taxpayers, Subsidizes Wall Street, and Props Up Our Broken Financial System

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TomDispatch.com

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On October 3rd, as the spreading economic meltdown threatened to topple
financial behemoths like American International Group (AIG) and Bank of
America and plunged global markets into freefall, the U.S. government
responded with the largest bailout
in American history. The Emergency Economic Stabilization Act of 2008,
better known as the Troubled Asset Relief Program (TARP), authorized
the use of $700 billion to stabilize the nation's failing financial
systems and restore the flow of credit in the economy.

The legislation's guidelines for crafting the rescue plan were clear:
the TARP should protect home values and consumer savings, help citizens
keep their homes, and create jobs. Above all, with the government
poised to invest hundreds of billions of taxpayer dollars in various
financial institutions, the legislation urged the bailout's architects
to maximize returns to the American people.

That $700 billion bailout has since grown into a more than $12 trillion commitment by the U.S. government and the Federal Reserve. About $1.1 trillion
of that is taxpayer money -- the TARP money and an additional $400
billion rescue of mortgage companies Fannie Mae and Freddie Mac. The
TARP now includes 12 separate programs, and recipients range from
megabanks like Citigroup and JPMorgan Chase to automakers Chrysler and
General Motors.

Seven months in, the bailout's impact is unclear. The Treasury Department has used the recent "stress test" results it applied to 19 of the nation's largest banks to suggest that the worst might be over; yet the International Monetary Fund as well as economists like New York University professor and economist Nouriel Roubini and New York Times columnist Paul Krugman predict greater losses in U.S. markets, rising unemployment, and generally tougher economic times ahead.

What cannot be disputed, however, is the financial bailout's biggest
loser: the American taxpayer. The U.S. government, led by the Treasury
Department, has done little, if anything, to maximize returns on its
trillion-dollar, taxpayer-funded investment. So far, the bailout has
favored rescued financial institutions by subsidizing their losses to
the tune of $356 billion,
shying away from much-needed management changes and -- with the
exception of the automakers -- letting companies take taxpayer money
without a coherent plan for how they might return to viability.

The bailout's perks have been no less favorable for private
investors who are now picking over the economy's still-smoking rubble
at the taxpayers' expense. The newer bailout programs rolled out by
Treasury Secretary Timothy Geithner give private equity firms, hedge
funds, and other private investors significant leverage to buy "toxic"
or distressed assets, while leaving taxpayers stuck with the lion's
share of the risk and potential losses.

Given the lack of transparency and accountability, don't expect
taxpayers to be able to object too much. After all, remarkably little
is known about how TARP recipients have used the government aid
received. Nonetheless, recent government reports,
Congressional testimony, and commentaries offer those patient enough to
pore over hundreds of pages of material glimpses of just how Wall
Street friendly the bailout actually is. Here, then, based on the most
definitive data and analyses available, are six of the most blatant and
alarming ways taxpayers have been scammed by the government's
$1.1-trillion, publicly-funded bailout.

1. By overpaying for its TARP investments, the Treasury Department
provided bailout recipients with generous subsidies at the taxpayer's
expense.

When the Treasury Department ditched its initial plan to buy up "toxic"
assets and instead invest directly in financial institutions,
then-Treasury Secretary Henry Paulson, Jr. assured Americans that
they'd get a fair deal. "This is an investment, not an expenditure, and
there is no reason to expect this program will cost taxpayers
anything," he said in October 2008.

Yet the Congressional Oversight Panel (COP), a five-person group tasked
with ensuring that the Treasury Department acts in the public's best
interest, concluded in its monthly report
for February that the department had significantly overpaid by tens of
billions of dollars for its investments. For the 10 largest TARP
investments made in 2008, totaling $184.2 billion, Treasury received on
average only $66 worth of assets for every $100 invested. Based on that
shortfall, the panel calculated that Treasury had received only $176
billion in assets for its $254 billion investment, leaving a $78
billion hole in taxpayer pockets.

Not
all investors subsidized the struggling banks so heavily while
investing in them. The COP report notes that private investors received
much closer to fair market value in investments made at the time of the
early TARP transactions. When, for instance, Berkshire Hathaway invested $5 billion
in Goldman Sachs in September, the Omaha-based company received
securities worth $110 for each $100 invested. And when Mitsubishi invested in Morgan Stanley that same month, it received securities worth $91 for every $100 invested.

As of May 15th, according to the Ethisphere TARP Index,
which tracks the government's bailout investments, its various
investments had depreciated in value by almost $147.7 billion. In other
words, TARP's losses come out to almost $1,300 per American taxpaying
household.

2. As the government has no real oversight over bailout funds,
taxpayers remain in the dark about how their money has been used and if
it has made any difference.

While the Treasury Department can make TARP recipients report on just
how they spend their government bailout funds, it has chosen not to do
so. As a result, it's unclear whether institutions receiving such funds
are using that money to increase lending -- which would, in turn, boost
the economy -- or merely to fill in holes in their balance sheets.

Neil M. Barofsky, the special inspector general for TARP, summed the
situation up this way in his office's April quarterly report to
Congress: "The American people have a right to know how their tax
dollars are being used, particularly as billions of dollars are going
to institutions for which banking is certainly not part of the
institution's core business and may be little more than a way to gain
access to the low-cost capital provided under TARP."

This lack of transparency makes the bailout process highly susceptible to fraud and corruption. Barofsky's report stated
that 20 separate criminal investigations were already underway
involving corporate fraud, insider trading, and public corruption. He
also told the Financial Times
that his office was investigating whether banks manipulated their books
to secure bailout funds. "I hope we don't find a single bank that's
cooked its books to try to get money, but I don't think that's going to
be the case."

Economist Dean Baker, co-director of the Center for Economic and
Policy Research in Washington, suggested to TomDispatch in an interview
that the opaque and complicated nature of the bailout may not be
entirely unintentional, given the difficulties it raises for anyone
wanting to follow the trail of taxpayer dollars from the government to
the banks. "[Government officials] see this all as a Three Card Monte,
moving everything around really quickly so the public won't understand
that this really is an elaborate way to subsidize the banks," Baker
says, adding that the public "won't realize we gave money away to some
of the richest people."

3. The bailout's newer programs heavily favor the private sector,
giving investors an opportunity to earn lucrative profits and leaving
taxpayers with most of the risk.

Under Treasury Secretary Geithner, the Treasury Department has greatly
expanded the financial bailout to troubling new programs like the
Public-Private Investment Program (PPIP) and the Term
Asset-Backed-Securities Loan Facility (TALF). The PPIP, for example,
encourages private investors to buy "toxic" or risky assets on the
books of struggling banks. Doing so, we're told, will get banks lending
again because the burdensome assets won't weigh them down.
Unfortunately, the incentives the Treasury Department is offering to
get private investors to participate are so generous that the
government -- and, by extension, American taxpayers -- are left with
all the downside.

Joseph Stiglitz, the Nobel-prize winning economist, described the PPIP program in a New York Times op-ed this way:

"Consider an asset that has a 50-50 chance of being
worth either zero or $200 in a year's time. The average 'value' of the
asset is $100. Ignoring interest, this is what the asset would sell for
in a competitive market. It is what the asset is 'worth.' Under the
plan by Treasury Secretary Timothy Geithner, the government would
provide about 92 percent of the money to buy the asset but would stand
to receive only 50 percent of any gains, and would absorb almost all of
the losses. Some partnership!

"Assume that one of the public-private partnerships the Treasury
has promised to create is willing to pay $150 for the asset. That's 50
percent more than its true value, and the bank is more than happy to
sell. So the private partner puts up $12, and the government supplies
the rest -- $12 in 'equity' plus $126 in the form of a guaranteed loan.

"If, in a year's time, it turns out that the true value of the asset
is zero, the private partner loses the $12, and the government loses
$138. If the true value is $200, the government and the private partner
split the $74 that's left over after paying back the $126 loan. In that
rosy scenario, the private partner more than triples his $12
investment. But the taxpayer, having risked $138, gains a mere $37."

Worse still, the PPIP can be easily manipulated for private gain. As economist Jeffrey Sachs has described it, a bank with worthless toxic assets on its books could actually set up its own
public-private fund to bid on those assets. Since no true bidder would
pay for a worthless asset, the bank's public-private fund would win the
bid, essentially using government money for the purchase. All the
public-private fund would then have to do is quietly declare bankruptcy
and disappear, leaving the bank to make off with the government money
it received. With the PPIP deals set to begin in the coming months,
time will tell whether private investors actually take advantage of the
program's flaws in this fashion.

The Treasury Department's TALF program offers equally enticing
possibilities for potential bailout profiteers, providing investors
with a chance to double, triple, or even quadruple their investments.
And like the PPIP, if the deal goes bad, taxpayers absorb most of the
losses. "It beats any financing that the private sector could ever come
up with," a Wall Street trader commented in a recent Fortune magazine story. "I almost want to say it is irresponsible."

4. The government has no coherent plan for returning failing
financial institutions to profitability and maximizing returns on
taxpayers' investments.

Compare the treatment of the auto industry and the financial sector,
and a troubling double standard emerges: As a condition for taking
bailout aid, the government required Chrysler and General Motors to
present detailed plans
on how the companies would return to profitability. Yet the Treasury
Department attached minimal conditions to the billions injected into
the largest bailed-out financial institutions. Moreover, neither
Geithner nor Lawrence Summers, one of President Barack Obama's top
economic advisors, nor the president himself has articulated any
substantive plan or vision for how the bailout will help these
institutions recover and, hopefully, maximize taxpayers' investment
returns.

The Congressional Oversight Panel highlighted the absence of such a comprehensive plan in its January report.
Three months into the bailout, the Treasury Department "has not yet
explained its strategy," the report stated. "Treasury has identified
its goals and announced its programs, but it has not yet explained how
the programs chosen constitute a coherent plan to achieve those goals."

Today, the department's endgame for the bailout still remains vague.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, wrote in the Financial Times
in May that the government's response to the financial meltdown has
been "ad hoc, resulting in inequitable outcomes among firms, creditors,
and investors." Rather than perpetually prop up banks with endless
taxpayer funds, Hoenig suggests that the government should allow banks
to fail. Only then, he believes, can crippled financial institutions
and systems be fixed. "Because we still have far to go in this crisis,
there remains time to define a clear process for resolving large
institutional failure. Without one, the consequences will involve a
series of short-term events and far more uncertainty for the global
economy in the long run."

The healthier and more profitable bailout recipients are once
financial markets rebound, the more taxpayers will earn on their
investments. Without a plan, however, banks may limp back to viability
while taxpayers lose their investments or even absorb further losses.

5. The bailout's focus on Wall Street mega-banks ignores smaller
banks serving millions of American taxpayers that face an equally
uncertain future.

The government may not have a long-term strategy for its
trillion-dollar bailout, but its guiding principle, however misguided,
is clear: What's good for Wall Street will be best for the rest of the
country.

On the day the mega-bank stress tests were officially released,
another set of stress-test results came out to much less fanfare. In
its quarterly report
on the health of individual banks and the banking industry as a whole,
Institutional Risk Analytics (IRA), a respected financial services
organization, found that the stress levels among more than 7,500
FDIC-reporting banks nationwide had risen dramatically. For 1,575 of
the banks, net incomes had turned negative due to decreased lending and
less risk-taking.

The conclusion IRA drew was telling: "Our overall observation is
that U.S. policy makers may very well have been distracted by focusing
on 19 large stress test banks designed to save Wall Street and the
world's central bank bondholders, this while a trend is emerging of a
going concern viability crash taking shape under the radar." The report
concluded with a question: "Has the time come to shift the policy focus
away from the things that we love, namely big zombie banks, to tackle
things that are truly hurting us?"

6. The bailout encourages the very behaviors that created the
economic crisis in the first place instead of overhauling our broken
financial system and helping the individuals most affected by the
crisis.

As Joseph Stiglitz explained in the New York Times, one
major cause of the economic crisis was bank overleveraging. "[U]sing
relatively little capital of their own," he wrote, "[banks] borrowed
heavily to buy extremely risky real estate assets. In the process, they
used overly complex instruments like collateralized debt obligations."
Financial institutions engaged in overleveraging in pursuit of the
lucrative profits such deals promised -- even if those profits came
with staggering levels of risk.

Sound familiar? It should, because in the PPIP and TALF bailout
programs the Treasury Department has essentially replicated the very
overleveraged, risky, complex system that got us into this mess in the
first place: in other words, the government hopes to repair our
financial system by using the flawed practices that caused this crisis.

Then there are the institutions deemed "too big to fail." These
financial giants -- among them AIG, Citigroup, and Bank of America --
have been kept afloat by billions of dollars in bottomless bailout aid.
Yet reinforcing the notion that any institution is "too big to fail" is
dangerous to the economy. When a company like AIG grows so large that
it becomes "too big to fail," the risk it carries is systemic, meaning
failure could drag down the entire economy. The government should force
"too big to fail" institutions to slim down to a safer, more modest
size; instead, the Treasury Department continues to subsidize these
financial giants, reinforcing their place in our economy.

Of even greater concern is the message the bailout sends to banks
and lenders -- namely, that the risky investments that crippled the
economy are fair game in the future. After all, if banks fail and
teeter at the edge of collapse, the government promises to be there
with a taxpayer-funded, potentially profitable safety net.

The handling of the bailout makes at least one thing clear, however:
It's not your health that the government is focused on, it's theirs --
the very banks and lenders whose convoluted financial systems provided
the underpinnings for staggering salaries and bonuses while bringing
our economy to the brink of another Great Depression.

Andy Kroll is a writer based in Ann Arbor, Michigan. His writing has
appeared at TheNation.com, Alternet, CNN.com, CBSNews.com, and
Truthout, among other places. He welcomes feedback, and can be reached
at his website.

AMP Section Name:Financial Services, Insurance and Banking