by Naomi Klein
October 29, 2008
A version of this column was first published
In the final days of the election, many Republicans seem to have given up
the fight for power.
But don’t be fooled: that doesn’t mean they are
relaxing. If you want to see real Republican elbow grease, check out the
energy going into chucking great chunks of the $700 billion bailout out the
At a recent Senate Banking Committee
hearing, Republican Senator Bob Corker was fixated on this task, and
with a clear deadline in mind: inauguration.
“How much of it do you think may be actually
spent by January 20 or so?” Corker asked Neel Kashkari, the
35-year-old former banker in charge of the bailout.
When European colonialists realized that they
had no choice but to hand over power to the indigenous citizens, they would
often turn their attention to stripping the local treasury of its gold and
grabbing valuable livestock. If they were really nasty, like the Portuguese
in Mozambique in the mid-1970s, they poured concrete down the elevator
Nothing so barbaric for the Bush gang. Rather than open plunder, it prefers
bureaucratic instruments, such as “distressed asset” auctions and the
“equity purchase program.” But make no mistake: the goal is the same as it
was for the defeated Portuguese—a final frantic looting of the public
wealth before they hand over the keys to the safe.
How else to make sense of the bizarre decisions that have governed the
allocation of the bailout money?
When the Bush administration announced it
would be injecting $250 billion into America’s banks in exchange for equity,
the plan was widely referred to as “partial nationalization”—a radical
measure required to get the banks lending again. Treasury Secretary Henry
Paulson had seen the light, we were told, and was now following the lead
of British Prime Minister Gordon Brown.
In fact, there has been no nationalization, partial or otherwise. American
taxpayers have gained no meaningful control over the banks, which is why the
banks are free to spend the new money as they wish. At Morgan Stanley, it
looks like much of the windfall will cover this year’s bonus pool. Citigroup
has been hinting it will use its newfound $25 billion buying other banks,
while John Thain, the chief executive of Merrill Lynch, told analysts
that “At least for the next quarter, it’s just going to be a cushion.”
The U.S. government, meanwhile, is reduced to
pleading with the banks that they at least spend a portion of the taxpayer
windfall for loans – officially, the reason for the entire program.
What, then, is the real purpose of the bailout?
My fear is this rush of deal making is something
much more ambitious than a one-off gift to big business; that the Bush
version of “partial nationalization” is rigged to turn the U.S. Treasury
into a bottomless cash machine for the banks for years to come. Remember,
the main concern among big market players, particularly banks, is not the
lack of credit but their battered share prices.
Investors have lost confidence in the honesty of
the big financial players, and with good reason.
This is where Treasury’s equity pays off big time. By purchasing stakes in
these financial institutions, Treasury is sending a signal to the market
that they are a safe bet. Why safe?
Not because their level of risk has been
accurately assessed at last. Not because they have renounced the kind of
exotic financial instruments and outrageous leverage rates that created the
crisis. Rather, because the market will now be banking on the fact that the
U.S. government won’t let these particular companies fail. If they get
themselves into trouble, investors will now assume that the government will
keep finding more cash to bail them out, since allowing them to go down
would mean losing the initial equity investments, many of them in the
billions. (Just look at the insurance giant AIG, which had already gone back
to taxpayers for a top-up and seems set to ask for a third.)
This tethering of the public interest to private companies is the real
purpose of the bailout plan: Paulson is handing all the companies that are
admitted to the program—a number potentially in the thousands—an implicit
Treasury Department guarantee. To skittish investors looking for safe
places to park their money, these equity deals will be even more comforting
than a Triple-A rating from Moody’s.
Insurance like that is priceless. But for the banks, the best part is that
the government is paying them to accept its seal of approval.
For taxpayers, on the other hand, this entire
plan is extremely risky, and may well cost significantly more than Paulson’s
original idea of buying up $700 billion in toxic debts. Now taxpayers aren’t
just on the hook for the debts but, arguably, for the fate of every
corporation that sells them equity.
Interestingly, Fannie Mae and Freddie Mac both enjoyed this
kind of unspoken guarantee before the mortgage giants were nationalized at
the start of this crisis. For decades the market understood that, since
these private players were enmeshed with the government, Uncle Sam could be
counted on to always save the day. It was, as many have pointed out, the
worst of all worlds. Not only were profits privatized while risks were
socialized but the implicit government backing created powerful incentives
for reckless business practices.
Now, with the new equity purchase program, Paulson has taken the discredited
Fannie and Freddie model and applied it to a huge swath of the private
banking industry. And once again, there is no reason to shy away from risky
bets—especially since Treasury has made no such demands of the banks.
(Treasury, apparently, does not want to “micromanage.”)
To further boost market confidence, the federal government has also unveiled
unlimited public guarantees for many bank deposit accounts. Oh, and as if
this wasn’t enough, Treasury has been encouraging the banks to manically
merge with one another, ensuring that the only institutions left standing
will be “too big to fail,” thereby guaranteed of a bailout. In three
different ways, the market is being told loud and clear that Washington will
not allow the country’s financial institutions to bear the consequences of
their behavior, no matter how reckless.
This may well be Bush’s most creative
innovation: no-risk capitalism.
There is a glimmer of hope. In answer to Senator Corker’s question, Treasury
is indeed having trouble dispersing the bailout funds. So far it has
requested about $350 billion of the $700 billion, but most of this hasn’t
yet made it out the door. Meanwhile, every day it becomes clearer that the
bailout was sold to the public on false pretenses. Clearly, it was never
really about getting loans flowing. It was always about doing what it is
doing: turning the state into a giant insurance agency for Wall Street—a
safety net for the people who need it least, subsidized by the people who
will most need state protections in the economic storms ahead.
This duplicity is a political opportunity.
Whoever wins the election on November 4 will
have enormous moral authority. It should be used to call for a freeze on the
dispersal of bailout funds—not after the inauguration, but right away. All
deals should be renegotiated immediately, this time with the public getting
It is risky, of course, to interrupt the bailout process. The market won’t
Nothing could be riskier, however, than allowing
the Bush gang their parting gift to big business—the gift that will
keep on taking.