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The Emergency Economic Stabilization Act – A $700 Billion Gift From All of Us to the Banks
Last month, the philosopher kings of Congress and the Executive branch met in Washington with the top financial chaplains of the Treasury and the Federal Reserve to decide how best to transfer the $700 billion from the American people to the financial corporations that have spent the last few years. decades of taking advantage of the American people. Even though nine out of ten people oppose a bailout from Wall Street, government bureaucrats meet throughout the week to ensure that a compromise will be reached and ratified. The bill concocted by these wise leaders, named the Emergency Economic Stabilization Act of 2008, promises to propagandize voters into believing that legislators have not simply given in to nearly every demand of Secretary Paulson and Chair Benanke.
Propaganda for the bill has already begun, with the Congressional Budget Office issuing a letter outlining the Act’s main provisions. After reading the letter, it is surprising how many times it is mentioned that the government will be able to reimburse taxpayers money on the sale of “valuable financial assets” that it will buy to bail out banks. After all, how could the government lose money on these assets when the Wall Street companies that held them are now out of business day after day over the perceived (lack) value of debt instruments?
Furthermore, it has been widely publicized that Fed Chairman Ben Bernanke has recommended the government to buy this worthless asset at 100% of its face value. It is nearly impossible to make any profit on such a high-risk bond when bought without a discount, even though it is currently priced by the market at close to $0. CBO stated that “The program will probably cover assets that have the worst credit risk and are therefore difficult to price.” Wall Street said, “Just trust us and buy the asset at whatever price we see fit.”
The possible loss on selling the asset ultimately increases with a higher purchase price to begin with. The CBO noted this in its letter: “overall net losses are more likely if the government initially overpays,” which is exactly what the Federal Reserve is proposing and which is now within the purview of the Treasury Department. Governments can buy intrinsically worthless assets at 100% of their face value and lie to the American people by telling them to expect future profits.
But even the CBO acknowledged that the present value of the assets the government is expected to buy for $700 billion is unclear, let alone the future value that it might sell. And with future failures and more foreclosures across the country, asset values will drop further. Wall Street dumps its trash on the American people and expects them to pay for it, in the dim hope of future uncertain gains. But those assets are illiquid because they have no value to them; if they have value, buyers will still be available.
The law would create a Troubled Asset Assistance Program (TARP) to cover (pun intended) private banks’ losses from consumer credit-backed securities. Although the main assets to be purchased are commercial and residential mortgage-backed securities, the Department of Finance is authorized to buy, insure, hold, and sell nearly all types of financial instruments. “Under the TARP, the Secretary will have the authority… to buy any financial asset at any price and sell that asset at any price in the future.” From credit cards to car loans to subprime mortgages, banks can turn over old, defaulted collateral in exchange for cash from the Treasury.
Another chilling aspect of the bill is that it is not a one-off $700 billion appropriation; instead, the banking system would have a $700 billion line of credit directly with the American people. The Treasury can only have $700 billion of assets to hold at any one time, but once it starts selling them, it can then buy more delinquent junk financial instruments up to a maximum. As stated in the CBO letter, “The purchase price of all outstanding assets at any one time cannot exceed $700 billion (although cumulative gross purchases may exceed $700 billion as previously purchased assets are sold).”
Wall Street even benefits from safeguards designed to prevent asset price abuse. Banks that sell securities to the government must also issue warrants or senior debt instruments. But a warrant that allows the Treasury to buy company stock at a fixed price in the future from a bankrupt company is as worthless as a subprime mortgage-backed CDO.
But the irresponsibility doesn’t stop there, as Wall Street is expected to demand a higher price for its junk securities if it also provides senior warrants or debt instruments: “Because the warrants or debt instruments will have value, the Treasury will generally face a higher price.” higher because the seller will seek compensation for either the value of the problem asset or the value of the warrant or debt instrument.” This has to go against the relative deal that the Treasury would accept if it only bought worthless assets without collateral. Leave it to the financial investment companies to ask people to pay money for the services that the people themselves provide to the company.
There have also been covert attempts by the government to provide job creation programs for Wall Street bankers who have lost their jobs. As CBO put it, “the government must compensate private asset managers hired by the Treasury. Those administrative costs are not included in the $700 billion limit for asset purchases.” Private asset manager? Now, someone has to be able to figure out how much to pay for troubled assets — why not hire a professional who has worked at Bear Stearns or Lehman Brothers to consult with the government, right?
But the most important question is what will be the bill for homeowners, who were hit hardest by the collapse of the lending industry and housing market? There are roughly one-sentence sections in the letter mentioning the homeowner, urging various keywords and voluntary participation. “Requires the Minister of Finance to take steps to maximize assistance to homeowners, including encouraging underlying mortgage stewards to take advantage of the Homeowner Hope Program.” If this can be called utterly worthless, at least it’s not expected to further hurt the foreclosure victim; but the Homeowner’s Hope Act, like all government programs designed to address the housing crisis, only exacerbated the situation.
It’s no surprise that most people across the country are against this bailout from the wolves of Wall Street. These companies have received nearly a trillion dollars in bailout money – giving them trillions more and allowing them to offload toxic debt from their balance sheets for nothing more than the government’s complicity in securities fraud. No one should support this bill, let alone the congressmen and women who will be asked to go back to their constituents and explain to them why Congress stole billions of dollars from the people to save the same corporations that impoverished the communities that elected them to Congress. .
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