Chamber of Commerce Launches $100 Million Campaign to Protect Wall Street's Power at Our Expense
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Perhaps the greatest public deception surrounding today's financial meltdown is the notion that it is unique -- a once-in-a-lifetime crisis that reflects bad luck rather than any fundamental problem with the U.S. banking system's sway in global politics.
The truth is that throughout the 1980s, the major money center banks were in much the same situation they find themselves in today.
But the U.S. Chamber of Commerce plans to spend $100 million on a lobbying push to tell you the otherwise. It's a very careful strategy designed to ensure that Wall Street maintains the power to hijack the economy and demand epic bailouts from ordinary citizens as a reward for its own greed.
The name may sound like a coalition of your friendly neighborhood small-business proprietors, but in truth, the CoC is the world's most powerful lobbying machine for the corporate executive class.
Between 1998 and 2009, the CoC's campaign contributions dwarfed those of every other interest group in the United States -- over $447 million, more than double the next closest political influence peddler, according to the Center for Responsive Politics. If you add up the total contributions of Exxon Mobil, tobacco giant Altria (formerly known as Philip Morris) and GE, you won't even get close to what the CoC spends on congressional favors.
"The Chamber," as the group ominously refers to itself, opposes key issues like universal health care, expanded unionization, efforts to curb global warming and even pay restrictions for the CEOs of bailed-out banks. Their new lobby assault is an attack on regulation and any other attempt to control the economic wrecking crew in the U.S. banking sector.
"Our biggest worry is the issue with the Congress and then the follow-on regulations," CoC President and CEO Thomas Donohue said in a recent Fox News interview. "We supported the TARP funds, we supported issues to clear up the issues on General Motors, because this is a most extraordinary time. But now it is a moment to say 'OK, we've gone there, let's stop.' "
Donohue's argument is simple. With the economy on the verge of collapse, the government needs to funnel trillions of dollars to failed businesses just this one time, and then leave corporate execs to their own devices once the storm passes. Of course, Donohue's story is also a complete lie. Big bank bailouts have happened before, and without radical changes to the government's oversight of the financial sector, they will happen again.
In 1982, JPMorgan, Bank of America and Citibank were all facing financial ruin. They had made billions in expensive, high-interest loans to developing nations in Latin America, and the nations simply could not afford to repay them. These loans accounted for more than double the amount of money that the banks had set aside as a cushion against losses, according to FDIC data. Accounting for the loans accurately would have meant filing for bankruptcy.
"They were a lot like subprime mortgage loans," says William Black, a senior bank regulator from the 1980s, who now teaches law and economics at the University of Missouri at Kansas City. "They were never very good loans to begin with, so the borrowing never made a whole lot of sense."
But compliant U.S. regulators didn't make the banks record losses on the loans that were never going to be paid back. Between 1982 and 1987, no major money center bank realized any loss on a loan to a nation in Latin America. As the crisis dragged on, the International Monetary Fund eventually stepped in, amid heavy negotiations between foreign governments, the banks and the U.S. Treasury Department.
"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.
The IMF's economic strategy here was essentially the opposite of what President Barack Obama is doing with today's economic stimulus package. Instead of boosting government spending to make up for the drop-off in private-sector demand and counteract the recession, foreign governments were required to cut back dramatically, making the recession worse.
The IMF never imposed any penalties on the banks it bailed out. Management teams were not forced out, shareholders continued to enjoy high returns and no reforms in bank-lending practices were required.
This wasn't just unfair. It taught the banks that they could book big short-term profits on risky loans and rely on governments and the IMF to save them if the bets ever went bad. Economists call this phenomenon "moral hazard" -- the tendency for actors to behave recklessly if they are insulated form the consequences of their bad bets.
"We continuously propagate the moral hazard by bailing these institutions out," says William Darity, an expert on the Latin American Debt Crisis, who teaches economics at Duke University. "It always struck me as odd that we're more willing to sacrifice the moral hazard issue on the side of these big lenders than on the part of the borrowers."
So it's no surprise that today the big banks are coming back to both the taxpayers and the IMF for support. After gorging themselves on a different kind of predatory, high-interest debt -- the subprime mortgage -- banks find themselves on the brink of collapse.
And once again, with the global economy in crisis, political leaders in the U.S. and Europe want to bolster the IMF's funding to give it a broader role in the international bank bailout scam. Obama has pledged $108 billion in fresh financing for the global finance machine.
The irony is that the IMF's own destructiveness nearly wiped it out entirely. By 2007, the IMF had just $10 billion in loans outstanding, down from $105 billion four years earlier, as countries simply refused to work with the lender.
But despite a host of promises and rosy press releases from the IMF about its plans to treat countries fairly, its standard policies remain in place.
"The major source of demand for those funds is East Europe, and that's really a story about bailing out the banks," Baker says.
When the dot-com bubble burst earlier this decade, banks went searching for other places to charge high interest on loans, and Eastern European economies were a prime target.
Today, with the global economy slumping, banks are watching the mirror image of the U.S crisis unfold in developing countries. Here, banker excess fueled a massive recession. In much of Eastern Europe, the recession brought on by troubles in the U.S. is fueling a financial crisis -- the banks aren't getting paid because the economy is slowing down.
The IMF is still up to its old tricks. According to an analysis by Bhumika Muchhala of the Third World Network, the IMF has attached similar austerity measures it has used for decades to the emergency loans it made in 2008 to Georgia, Ukraine, Hungary, Iceland, Latvia, Pakistan, Serbia, Belarus and El Salvador.
If we give money to the IMF, we know what will happen: Eastern European nations will be forced to cut social-welfare programs and pay off big banks in the U.S. and Western Europe.
"I think the IMF could serve many purposes, but not without changing very significantly, and I don't see those changes happening," says Aldo Caliari, coordinator of the Rethinking Bretton Woods Project for the think tank Center of Concern.
The IMF helped create today's economic crisis by teaching U.S. banks that wrecking the economy could be profitable. We shouldn't give them money to do it again. But the argument launched by Donohue and the CoC is even more laughable. In the eyes of "The Chamber," the government's proper role in the economy is to funnel public money to corporate executives.
If we don't ban fake profits and fake bonuses, the bailout cycle will never end.