Naomi Klein: The Borderline Illegal Deals Behind the $700 Billion Bailout

By Amy Goodman, Democracy Now!. Posted November 18, 2008.

So, we find out that there has been this backdoor, illegal tax break handed over to the banks. And, by the way, Amy, this is an example, a classic example, of what I call disaster capitalism or the shock doctrine -- right? -- where the banks had been pushing for this tax break for many, many years, they weren't able to get it through during normal circumstances, but in a crisis they push it through the back door when everybody is focused on -- well, at the point that they pushed this through, which was September 30th, this was the worst of the economic crisis and people were focused on the collapse of Lehman, and they were focused on the fact that they couldn't get the bailout legislation through. So nobody even noticed this until it was too late.

And so, this is what I mean by the strategy of the Bush administration, is now they are saying to Congress, "We dare you to stand in the way of these bank mergers, because if you do that" -- because the tax break that they handed out is what encouraged a wave of bank mergers. And I really do think it is worth pausing to question this idea that what Treasury should be doing at this point is encouraging very large bank mergers, because one of the other problems that, you know, is at the root of this crisis, and certainly at the root of this unprecedented bailout, is that you have so many banks that are considered too big to fail, right? So why is it that we are not questioning this solution, the so-called solution to the crisis, which is creating even bigger banks, banks that will, once again, be too big to fail? 

We're really heading to a future where there will be, you know, three or four large banks, all of them too big to fail, which means that if they take more -- they take more and more risks, which nobody is asking them not to. It's important to understand that in exchange for the bailout money, the banks are not being told that they can't carry the incredible leverage rates that we saw, for instance, at Bear Stearns, thirty-three to one. They aren't being told that they can't invest in these high-risk, complex financial instruments. They can still do whatever they want, but now they're even bigger, which means that if they get themselves into trouble again, they will be bailed out again. So why is it that the government is cutting their taxes to encourage these mergers? The Democrats are saying, "Well, we can't do anything now, because if we do, we will gum up these deals." So I think we should question all of it. Across the board, I think the assumptions are faulty.

Goodman: ... I also want to talk to you about your piece in the Rolling Stone, "The Bailout Profiteers."

Klein: Well, what I do in the Rolling Stone piece is talk about the really uncomfortable parallels between what we saw in Iraq in the Green Zone and what we're seeing in the US Treasury. It's sort of the Green Zoning of the US Treasury. If we think about the way the Bush administration handled the occupation of Iraq, the working assumption was that everything that could be privatized, everything that could be outsourced, would be outsourced. And it has been very much a corporate war, as you well know. But at the same time, the handing out of the contracts in the early days was done very, very quickly, because, of course, there was this manufactured emergency that we all know was based on lies, in retrospect. But that was used, that state of emergency was used to justify no-bid contracts, to justify the fact that there was very little oversight of the contractors.

And we're seeing all of this repeat now, but just on such a massive scale, such a larger scale. First of all, when Henry Paulson and Neel Kashkari, his deputy, announced the $700 billion bailout, they also announced that they would be outsourcing all of the work. They have handed out the work to many of the banks and Wall Street law firms that really created the crisis in the first place. But in the same way, there's also been very little competition for these contracts. They were handed out very quickly. And at the same time, as we were discussing earlier, there is very little oversight over the process.

So, just to give you one example that I discuss in the Rolling Stone piece, there's the general contractor, the really big contracting -- it's kind of the Halliburton of Treasury contracts -- went to the bank, Bank of New York Mellon. Bank of New York Mellon, by the way, is one of the nine banks that got the equity deals, the cash injections in exchange for equity. And they are also very deep in this derivatives mess themselves, but they have been hired to handle a huge part of the bailout. So what I argue in the piece is that we actually have it backwards. It's not the banks that have been partially nationalized; it's Treasury that has been partially privatized by the very banks that created the crisis in the first place. 

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Amy Goodman is the host of the nationally syndicated radio news program, Democracy Now!

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