The fallout from the bailout

The bailout of Wall Street, which totaled $700 billion and has apparently been paid back to the government with a profit, went from being a headline-grabbing story to a forgotten memory in record time.

Here’s how it all began:

at 11 a.m. on September 18th, 2008 – [Treasury Secretary Hank] Paulson actually told members of Congress that $5.5 trillion in wealth would disappear by 2 p.m. that day unless the government took immediate action, and that the world economy would collapse ‘within 24 hours.’

How is that even possible?

The Treasury Dept. haggled back and forth with Congress until Congress eventually got a notable concession:

Treasury would buy $700 billion of troubled mortgages from the banks and then modify them to help struggling homeowners. Section 109 of the act, in fact, specifically empowered the Treasury secretary to “facilitate loan modifications to prevent avoidable foreclosures.”

What is never spoken of is quite how that number was arrived at, or why these troubled mortgages were purchased by the banks in the first place.

Oh wait, yes, we know: the Federal Government pressured banks during the 1990s to give out subprime loans to homeowners who were more likely to not pay them back then actually pay them back, then the mortgages were bundled and sold between banks, and when homeowners began to default (as was expected), the banks were up shit creek.

The Treasury Department eventually abandoned the provision of the act, Section 109, which was modified to help homeowners, and just gave the cash directly to Goldman Sachs and Citigroup.

The Bush Administration became the Obama Administration, and of course, change was promised:

Obama, [Obama administration economic advisor Larry] Summers vowed, would use the money to stimulate bank lending to put people back to work. He even went so far as to say that banks would be denied funding unless they agreed to “increase lending above baseline levels.” He promised that “tough and transparent conditions” would be imposed on bailout recipients, who would not be allowed to use bailout funds toward “enriching shareholders or executives.” As in the original TARP bill, he pledged that bailout money would be used to aid homeowners in foreclosure. And lastly, he promised that the bailouts would be temporary – with a “plan for exit of government intervention” implemented “as quickly as possible.”

That’s a severe problem. Increasing lending above baseline levels? That’s how banks got into this problem in the first place.

For the banks, however, the $700 billion bailout was not enough.

Only weeks after Paulson and Co. gave the firm $25 billion in TARP funds, Citi – which was in the midst of posting a quarterly loss of more than $17 billion – came back begging for more. In November 2008, Citi received another $20 billion in cash and more than $300 billion in guarantees.

It shows that the government is the last entity to be trusted to handle debt, when they make the first mistake of enabling those in debt: giving more and more.

The bailout was not temporary, it was not kept from shareholders or executives, it was not one-time-only, it was not a set amount, no conditions were set for banks, and few understand its true scope. As Taibbi explains:

So what exactly did the bailout accomplish? It built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failier, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors. The bailout has also made lying on behalf of our biggest and most corrupt banks the official policy of the United States government. And if any one of those banks fails, it will cause another financial crisis, meaning we’re essentially wedded to that policy for the rest of eternity – or at least until the markets call our bluff, which could happen any minute now.

Well, that’s reassuring.

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