Chamber of Commerce Launches $100 Million Campaign to Protect Wall Street's Power at Our Expense
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"The banks were permanently in conversation with IMF or the Treasury, it was part of the game," says Luiz Carlos Bresser-Pereira, who served as finance minister for Brazil during the height of the debt crisis. "The debtors had to negotiate with this coalition."
The Treasury Department was intensely devoted to protecting the interests of U.S. banks and refused to sign off on rescue plans that required banks to reduce the amount that foreign governments owed. To make sure that banks were paid, the Treasury and the IMF worked out a plan where the IMF served as a bailout conduit, funneling money from the U.S. Treasury to the major banks such as Citi and Bank of America.
"Whenever the accountants are about to say to Citi, 'you have to recognize a loss,' the U.S. increases its contribution to the IMF, the IMF promptly makes a loan to Brazil, and Brazil promptly makes a payment to Citi," Black says.
"In a lot of ways, the IMF really can be blamed for this whole story," says economist Dean Baker, co-director of the Center for Economic and Policy Research. "They always wanted to lay down the law for everyone else, but when it comes to the banks, they're happy to come to the rescue."
Eventually the Treasury and the IMF began orchestrating "troubled-debt restructurings" between banks and overburdened nations. The result was an under-the-table bailout achieved by exploiting weak accounting rules.
Here's how the scam works: Banks get to say they've made a lot of money when they issue a loan with a 20 percent interest rate -- a lot more than if they extend the same loan with a 5 percent interest rate. Even if the borrowers have no hope of repaying these loans over the long term, bank executives get to pay themselves huge bonuses for a few years based on these illusory, short-term profits. But when the borrower finally runs out of financial rope, the bank is supposed to book a big loss -- the loan is not being paid back. It has extended money that is never coming back.
Under a troubled-debt restructuring, U.S. banks agreed to reduce how much foreign governments owed them on a particular loan. Instead of demanding their full 20 percent payment, they would dramatically reduce the payment -- to say, 5 percent.
But the IMF and the U.S. Treasury didn't require the banks to reflect these changes on their accounting statements -- so far as their balance sheets were concerned, the banks were still receiving a full 20 percent payment. Since they had previously accounted for these loans at full value, the banks were actually losing money and marking accounting statements as if they were still raking it in. The IMF and U.S. regulators were bailing them out.
This is precisely the dynamic that Donohue and the CoC want to preserve: CEOs book giant bonuses on debts that can never be repaid, and then turn to the taxpayer when the bet inevitably turns south.
But while the IMF went to great lengths to placate big banks, it was much harder on the countries who received its "assistance."
When the IMF provided countries with emergency funding, it attached a brutal set of strings to the loans known as "austerity measures." These were basically severe restrictions on government spending. For developing countries, much of this spending takes the form of absolutely crucial poverty-alleviation programs that provide basic necessities to citizens. Cutting off these funds meant deepening the recession and forcing the most vulnerable members of society to bear the brunt of the blow.