This story first appeared on the Tom Dispatch website.
The Greatest Swindle Ever Sold
How the Financial Bailout Scams Taxpayers, Subsidizes Wall Street, and Props Up Our Broken Financial System
By Andy Kroll
On October 3rd, as the spreading economic meltdown threatened to topple financial behemoths like American International Group (AIG) and Bank of America and plunged global markets into freefall, the U.S. government responded with the largest bailout in American history. The Emergency Economic Stabilization Act of 2008, better known as the Troubled Asset Relief Program (TARP), authorized the use of $700 billion to stabilize the nation's failing financial systems and restore the flow of credit in the economy.
The legislation's guidelines for crafting the rescue plan were clear: the TARP should protect home values and consumer savings, help citizens keep their homes, and create jobs. Above all, with the government poised to invest hundreds of billions of taxpayer dollars in various financial institutions, the legislation urged the bailout's architects to maximize returns to the American people.
That $700 billion bailout has since grown into a more than $12 trillion commitment by the U.S. government and the Federal Reserve. About $1.1 trillion of that is taxpayer money—the TARP money and an additional $400 billion rescue of mortgage companies Fannie Mae and Freddie Mac. The TARP now includes 12 separate programs, and recipients range from megabanks like Citigroup and JPMorgan Chase to automakers Chrysler and General Motors.
Seven months in, the bailout's impact is unclear. The Treasury Department has used the recent "stress test" results it applied to 19 of the nation's largest banks to suggest that the worst might be over; yet the International Monetary Fund as well as economists like New York University professor and economist Nouriel Roubini and New York Times columnist Paul Krugman predict greater losses in U.S. markets, rising unemployment, and generally tougher economic times ahead.
What cannot be disputed, however, is the financial bailout's biggest loser: the American taxpayer. The U.S. government, led by the Treasury Department, has done little, if anything, to maximize returns on its trillion-dollar, taxpayer-funded investment. So far, the bailout has favored rescued financial institutions by subsidizing their losses to the tune of $356 billion, shying away from much-needed management changes and—with the exception of the automakers—letting companies take taxpayer money without a coherent plan for how they might return to viability.
The bailout's perks have been no less favorable for private investors who are now picking over the economy's still-smoking rubble at the taxpayers' expense. The newer bailout programs rolled out by Treasury Secretary Timothy Geithner give private equity firms, hedge funds, and other private investors significant leverage to buy "toxic" or distressed assets, while leaving taxpayers stuck with the lion's share of the risk and potential losses.
Given the lack of transparency and accountability, don't expect taxpayers to be able to object too much. After all, remarkably little is known about how TARP recipients have used the government aid received. Nonetheless, recent government reports, Congressional testimony, and commentaries offer those patient enough to pore over hundreds of pages of material glimpses of just how Wall Street friendly the bailout actually is. Here, then, based on the most definitive data and analyses available, are six of the most blatant and alarming ways taxpayers have been scammed by the government's $1.1-trillion, publicly-funded bailout.
1. By overpaying for its TARP investments, the Treasury Department provided bailout recipients with generous subsidies at the taxpayer's expense.
When the Treasury Department ditched its initial plan to buy up "toxic" assets and instead invest directly in financial institutions, then-Treasury Secretary Henry Paulson, Jr. assured Americans that they'd get a fair deal. "This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything," he said in October 2008.
Yet the Congressional Oversight Panel (COP), a five-person group tasked with ensuring that the Treasury Department acts in the public's best interest, concluded in its monthly report for February that the department had significantly overpaid by tens of billions of dollars for its investments. For the 10 largest TARP investments made in 2008, totaling $184.2 billion, Treasury received on average only $66 worth of assets for every $100 invested. Based on that shortfall, the panel calculated that Treasury had received only $176 billion in assets for its $254 billion investment, leaving a $78 billion hole in taxpayer pockets.
Not all investors subsidized the struggling banks so heavily while investing in them. The COP report notes that private investors received much closer to fair market value in investments made at the time of the early TARP transactions. When, for instance, Berkshire Hathaway invested $5 billion in Goldman Sachs in September, the Omaha-based company received securities worth $110 for each $100 invested. And when Mitsubishi invested in Morgan Stanley that same month, it received securities worth $91 for every $100 invested.
As of May 15th, according to the Ethisphere TARP Index, which tracks the government's bailout investments, its various investments had depreciated in value by almost $147.7 billion. In other words, TARP's losses come out to almost $1,300 per American taxpaying household.
2. As the government has no real oversight over bailout funds, taxpayers remain in the dark about how their money has been used and if it has made any difference.
While the Treasury Department can make TARP recipients report on just how they spend their government bailout funds, it has chosen not to do so. As a result, it's unclear whether institutions receiving such funds are using that money to increase lending—which would, in turn, boost the economy—or merely to fill in holes in their balance sheets.
Neil M. Barofsky, the special inspector general for TARP, summed the situation up this way in his office's April quarterly report to Congress: "The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution's core business and may be little more than a way to gain access to the low-cost capital provided under TARP."
This lack of transparency makes the bailout process highly susceptible to fraud and corruption. Barofsky's report stated that 20 separate criminal investigations were already underway involving corporate fraud, insider trading, and public corruption. He also told the Financial Times that his office was investigating whether banks manipulated their books to secure bailout funds. "I hope we don't find a single bank that's cooked its books to try to get money, but I don't think that's going to be the case."
Economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, suggested to TomDispatch in an interview that the opaque and complicated nature of the bailout may not be entirely unintentional, given the difficulties it raises for anyone wanting to follow the trail of taxpayer dollars from the government to the banks. "[Government officials] see this all as a Three Card Monte, moving everything around really quickly so the public won't understand that this really is an elaborate way to subsidize the banks," Baker says, adding that the public "won't realize we gave money away to some of the richest people."