Naomi Klein: The Borderline Illegal Deals Behind the $700 Billion Bailout
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Amy Goodman: World leaders from nearly two dozen countries met in Washington over the weekend to discuss plans to increase regulation of international financial activity. They acknowledged that a failure of market oversight in countries like the United States had precipitated the financial crisis.
Meanwhile, here at home, it's been a month into the Bush administration's more than $700 billion bank bailout. Last week, Treasury Secretary Henry Paulson outlined a new bailout strategy intended to boost consumer borrowing and promote financing for companies that give out loans. President-elect Obama's transition team is reportedly working on improving the management of the bailout come January 20th.
But that's two months away and according to the Washington Post, with $290 billion already committed, the Bush administration has taken no action to fill congressionally-mandated independent positions to oversee how the bailout is used.
According to Naomi Klein's latest article in The Nation, "The more details emerge, the clearer it becomes that Washington's handling of the Wall Street bailout is not merely incompetent. It is borderline criminal." The article is called " In Praise of a Rocky Transition." ... "Criminal"? Explain.
Naomi Klein: Well, there's a few elements now that are being described as illegal that we're finding out. First of all, the equity deals that were negotiated with the largest banks and also some smaller banks, representing $250 billion worth of the bailout money, this is the deal to inject capital into the banks in exchange for equity. The idea was to address the so-called credit crunch to get banks lending again. The legislation that enabled this was quite explicit that it had to encourage lending. Barney Frank, who was one of the architects of that legislation, has said that it violates the act if the money is not going to that purpose and is instead going to bonuses, is instead going to dividends, going to salaries, going to mergers. He said that violates the acts, i.e. it's illegal. But what we know is that it's going precisely to those purposes. It is going to bonuses. It is going to shareholders. And it is not going to lending. The banks have been quite explicit about this. Citibank has talked about using the money to buy other banks.
Then there's other aspects of this that are borderline illegal. We found out that in the midst of the crisis, the Bush Treasury Department pushed through a tax windfall for the banks, a piece of legislation that allows the banks to save a huge amount of money when they merge with each other. And the estimate is that this represents a loss of $140 billion worth of tax revenue for the US government. Many tax attorneys who were interviewed by the Washington Post said that they felt that the way in which the Treasury Department went about this by unilaterally changing the tax code was illegal, that this had to include Congress. Congress only found out about it after the fact.
There's another piece of this puzzle that is also borderline illegal, which is that in addition to the $700 billion that we are discussing, the $700 billion bailout, there's another $2 trillion that's been handed out by the Federal Reserve in emergency loans to financial institutions, to banks, that actually we don't really know who they're handing the money out to, because, apparently, it's a secret. They could be handing it out to a range of other corporations -- I think they are -- but they're saying that they won't disclose who has received these taxpayer loans, because it could cause a run on the banks, it could cause the market to lose confidence in the institutions that have taken these loans. Once again, that represents an additional $2 trillion.