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  • Morning Bell: The Fatal Flaws of the Wall Street Bailout Bill

    Speaking to an audience of big business and big labor executives (including Goldman Sachs’ Lloyd Blankfein, Bank of America’s Bruce Thompson and SEIU’s Andy Stern) at New York’s Cooper Union, President Barack Obama noted “the furious efforts of industry lobbyists to shape” the financial regulation bill “to their special interests.” Obama then admitted, “I am sure that many of those lobbyists work for some of you. But I am here today because I want to urge you to join us, instead of fighting us in this effort.” Obama should have saved his breath. Wall Street and big labor lobbyists have already joined forces to make sure the current Senate legislation has become a Wall Street Bailout Bill.

    Big labor’s ties to this White House are already well documented. Less known is just how close Obama administration interests align with the big firms that benefit most from the TARP bailout. The Washington Examiner reports that at Goldman Sachs, the nation’s largest investment bank, four of the five in-house lobbyists were Democratic Capitol Hill staffers — the remaining one gave $1,000 to Hillary Clinton last election. And USA Today notes that Goldman Sachs alone has given nearly $900,000 since January 2009 to congressional candidates, with 69% of that cash lining Democrat pockets. Finally, then-candidate Obama collected almost $1 million from Goldman executives and employees in 2008, more than the combined Goldman haul of every Republican running for president, Senate and the House.

    So what have Wall Street lobbyists bought with their campaign cash and high priced lobbyists? A bill that gives permanent TARP-like authority to Washington regulators, thus enshrining Washington as a permanent bailout machine. Specifically, the bill:

    Creates a protected class of too big to fail firms. Section 113 of the bill establishes a “Financial Stability Oversight Council,” charged with identifying firms that would “pose a threat to the financial security of the United States” if they encounter “material financial distress.” While these firms would be subject to enhanced regulation, such a designation would also signal to the marketplace that these firms are too important to be allowed to fail and, perversely, allow them to take on undue risk.

    Creates permanent bailout authority. Section 204 of the bill authorizes the Federal Deposit Insurance Corporation (FDIC) to “make available … funds for the orderly liquidation of [a] covered financial institution.” Although no funds could be provided to compensate a firm’s shareholders, the firm’s other creditors would be eligible for a cash bailout. The situation is much like the bailout AIG in 2008, in which the largest beneficiaries were not stockholders but rather other creditors, such as Deutsche Bank and Goldman Sachs.

    Provides for seizure of private property without meaningful judicial review. The bill, in Section 203(b), authorizes the Secretary of the Treasury to order the seizure of any financial firm that he finds is “in danger of default” and whose failure would have “serious adverse effects on financial stability.” This determination would be virtually irreversible in court.

    Establishes a $50 billion fund to pay for bailouts. Funding for bailouts is to come from a $50 billion “Orderly Resolution Fund” created within the U.S. Treasury in Section 210(n)(1), funded by taxes on financial firms. However, according to the Congressional Budget Office, the ultimate cost of bank taxes will fall on the customers, employees and investors of each firm.

    Opens a “line of credit” to the Treasury for additional government funding. Under Section 210(n)(9), the FDIC is effectively granted a line of credit to the Treasury Department that is secured by the value of failing firms in its control, providing another taxpayer financial support.

    Authorizes regulators to guarantee the debt of solvent banks. Bailout authority is not limited to debt of failing institutions. Under Section 1155, the FDIC is authorized to guarantee the debt of “solvent depository institutions” if regulators declare that a liquidity crisis (“event”) exists.

    Imposes one-size-fits-all reform in derivative markets. Derivatives are already increasingly being traded on clearinghouses thanks to private efforts coordinated by the New York Fed. But the Senate bill would require virtually all derivative contracts to be settled through a clearinghouse rather than directly between the parties. Applying such ill-designed blanket regulation would make financial derivatives more costly, more difficult to customize, and, consequently, less widely used—which would increase overall risk in the economy.

    According to Rasmussen Reports, 64% of Americans are not confident that policymakers in Washington know what they’re doing with regards to Wall Street. They have every reason to be concerned. Rep. Peter DeFazio (D-OR) tells National Review: “From the beginning, I’ve thought that the deal Goldman Sachs got via Treasury Secretary Tim Geithner on their bad bets through AIG kind of stunk. They got $13 billion from AIG last year.” DeFazio doesn’t seem to realize that the bill Obama is pushing would empower Secretary Geithner to repeat the AIG bailout ad infinitum. No need to ever go back to Congress for a new TARP. The Senate bill is a permanent TARP. Which is exactly what Goldman Sachs and the rest of their Wall Street lobbyists wanted all along.

    Quick Hits:

    Posted in Ongoing Priorities [slideshow_deploy]

    32 Responses to Morning Bell: The Fatal Flaws of the Wall Street Bailout Bill

    1. Turner, Massachusett says:

      Please see the imbalances of assets to derivatives. $5 trillion in assets versus $193 trillion in derivatives.

      http://www.occ.treas.gov...

      Check out graph 5A!

      Then look at Table 5 and compare the Total Assets to Total Derivatives

      of Goldman Sachs to all the other Top 5 banks!!!!! Talk about

      leverage! No wonder they need to get rid of them.

      Then look at the middle of graph 5A, where they compare the entire

      remaining industry. ALL other banks have a .85:1 ratio of assets to

      derivatives where as the Top 5 have a .028:1 (be sure you note that

      decimal point!) 85% versus 2.8% coverage. Goldman, number 3 of the Top

      5, has coverage of only .00223 or 1/4 of 1%!!!!!!!!!!

    2. Tim Kunes, Plano, TX says:

      and it does nothing to restrain Fannie & Freddie from pursuing social goals.

    3. Blair, Franconia, NH says:

      Why would President Obama want to just crack down on Wall Street and not Fannie

      and Freddie? Because Fannie and Freddie are the Democrats' piggy bank. Why kill

      the goose that lays the golden egg?

    4. Gray_Stroke in the R says:

      I wish Bill O'Reilly would read your articles and use more facts before letting his talking points to go forth in such shallow manner.

    5. Jake Martinez, NM says:

      Question: Could it be true that the U.S. debt will hit $20 Trillion in the next ten years, which means that the size of the federal debt would increase by nearly 250 percent over 10 years, from $7.5 trillion to a whopping $20 trillion?

      My recent blog post reveals the answer to this question-You Decide:

      http://weroinnm.wordpress.com/2010/04/23/u-s-debt

      “Food For Thought”

      “God Bless & Keep Our USA Safe”

      Semper Fi!

      Jake

    6. Jake Martinez, NM says:

      Question: What are the Russians saying about what’s going on in America today?

      My recent blog post contains:

      1.) Articles from the Russian newspaper Pravda that reveal the Russian view of what has been happening in America;

      2.) Articles where Igor Panarin, a Russian Scholar, predicts that there is a high probability that the U.S. will collapse in 2010; and

      3.) Eye-opening videos of interviews with Mr. Yuri Bezmenov, a former KGB Operative that were conducted by Mr. G. Edward Griffin in 1985, approximately seventeen (17) years after Bezmenov’s defection to the USA from the former Soviet Union.

      Note: Collectively they give us a disturbing insight into what seems to be happening in the U.S. today-You Decide:

      http://weroinnm.wordpress.com/2010/04/22/the-russ

      “Food For Thought”

      “God Bless & Keep Our USA Safe”

      Semper Fi!

      Jake

    7. Arnie Rosner, Founta says:

      The investigation rightfully should be directed at Congress. For it is the Congress really responsible for the problems.

      All of these witch hunts are simply to divert attention away from the folks behind the corruption. Don't be fooled. This is not new. It has been going on for many years.

      Federal Reserve Corporation Remarks in Congress, 1934
      http://home.hiwaay.net/~becraft/mcfadden.html

    8. Richard Cancemi, Arl says:

      Thuggery, hooliganism, hypocricy, deception, treachery, sedition are just some of the names that can be applied to Obama and his cronies.

      He is not a President; he is a huckstering salesman for the Socialist movement and his sychophantic "believers" drink in his snake oil without realizing it will bring death to them and the greatest system of government in the history of the world. Individuals to be the masters government. In Obama's "world", individuals will be the servants and property OF the government.

      He does not have America's interests at heart. He is a BAD man! serving a BAD cause! under BAD masters!

      Do not be fooled by his charismatic ways and rhetoric. He is a master of lies and bad intentions.

      Republicans have been only slightly less guilty. because too many have caved in to "Progressivism" or sold themselves to the "Party store" and self serving.

      We need a return to true conservatism among Republicans (and Democrats). A return to the Constitutional principles of our wise and inspired Founding Fathers. We need to tell the rest of the socialist world to go to hell!

    9. Lloyd Scallan - New says:

      I happened to see part of Obama teleprompter read at Cooper Union. Is it just me,

      or does anyone else see that Obama does nothing but lie and distort the true facts about whatever he is pushing. Am I living in America or some altered state.

      If it is America, how can we allow this lying socialist to continue to hold any office in our government?

    10. Jimiguana, florida says:

      It just seems that all the smart people sit back, observe and comment on what is happening, filling us with real truths that are simply treated as anecdotes rather than basic tenets, while the corrupt go about business as usual. Where is the outrage that is going to fuel the "I've had enough" mentality? Are we to go quietly into this good night? This country is stage 4 (apathy) of the Fall of Rome, It is a flaw in human nature that compels us to mindlessly repeat the mistakes that history has proven, and makes us treat common sense with disdain..

    11. Terry Marti says:

      What are the unions getting out of this bill ?? Anyone know ??

    12. Steve Bukosky, West says:

      I skipped through the bill and admit to not making much sense of it. Your comments are very helpful. I wrote both my Senators, Democrats unfortunately, that aspects of the bill are very troubling and requested that they vote against it.

    13. Gary Nevada/Alaska says:

      Does anyone else see a blatant overthrow of our Constitutional Republic, or is it just me?

    14. Ken Jarvis says:

      Predictions —–

      4-23-10 — Charlie Crist – will LOSE in FL.

      ===

      4-18-10 —– McCain will win in AZ

      ===

      3-1-10 – Former Hewlett-Packard CEO Carly Fiorina —–

      Will defeat Barbara Boxer

      LVKen7@Gmail.com

    15. toledofan says:

      How long is it going to take for this house of cards to crumble? It sounds, to me, like no matter what Wall St. does, they will be covered. (There is something really wrong with the foxes watching over the hen house). The guys that are trying to fix it are the guys that broke it in the first place; Dodd, Frank and the Banking Committee. So, why isn't Fannie and Freddie a part of this, is it because they are already and have been a part of the government. It sounds to me like there is so much collusion and and maybe even some good old criminal activity between the White House and Wall St. Where is the SEC, Trade Commission, the Banking Committee, who's investigating Geithner? Holy Toledo Batman, who are the good guys?

    16. Dennis Social Circle says:

      Government is know for mismanagement, what makes us think they will do any different with this mess. This whole thing stinks of more "guvrment" contro;; and the futherance of socialism. This may very well be actual marxism, or worse.

    17. Dan Shamrock, Knoxvi says:

      Well, Change we got, I just "hope" that now we can survive long enough to get rid of these lying idiots. I doubt we will ever get the kool-aid drinkers to open their eyes and see what is really going on, so it is up to the rest of us to take back the asylum.

    18. WM, La says:

      Do we still have anti-monopolistic laws? It seems that some politicians are playing favorites with companies.

    19. Wildcat from Dallast says:

      Once again we find ourselves bracing prior to organizing to refute a horrendous piece of legislation with an innocuous name attached to it. Based upon the combination of my experience in the financial world and that of America collectively I have to surmise that we have a situation in which needs more than simple reform. Of course the financial reform bill (FRB) in development is that “in name only.” Similar to the alleged HCR bill this too has very little to do with bonafide necessary financial reform but virtually everything with special interests, Wall Street and creating more power over all by this administration.

      None of the FRB in development attacks the roots of the series of events that caused the cataclysmic tumble of our once vibrant economy. The primary root of our economic woes came from a change in FHA rules desired by then President Clinton to make homes affordable to those who couldn’t afford or would never be able to take part in the American Dream. That included no collateral zero money down for mortgages that could not be afforded due to the lack of adequate income and was further exacerbated by forcing banks (and mortgage companies) with the help of ACORN to make these exceptionally risky loans and Fannie Mae and Freddie Mac behind it pushing (as well as giving themselves huge bonuses) for exceeding subprime mortgage goals. *If I remember correctly a guy at one of those government aligned entities by the name of Franklin Raines was paid $90M+ in bonuses either in one year or over a three or four year period! Either way it is not chump change for wreaking havoc on the world economy.

      Additional economic havoc was worsened by the development of another financial instrument called a derivative based on combining these risky subprime loans and selling them up in pieces to other financial houses and eventually investors. Goldman Sachs bought a significant number of these from a financial firm they had a formal financial concern with then realized these derivatives are in fact exceptionally risky so they insured (bet against their highly probable loss) with another company called AIG. **Had AIG looked deeper into the matter they probably should not have accepted this insurance contract due to the aforementioned financial connection between Goldman Sachs and one of their “subsidiaries” (for lack of a better word) but they did. When these subprime loans went south and Goldman Sachs was about to lose billions on their investment of these derivatives they made a claim that AIG could not financially cover. No problem for Goldman Sachs as one of their former executives, Hank Paulson, then the Secretary of the Treasury, creates the Troubled Asset Relief Program (TARP) and gives AIG billions of dollars that rushed right thru them to Goldman Sachs (and Deutche Bank). And then came the term, “Too big to fail” and subsequently came GM and Chrysler bailouts due to financial woes caused primarily by over bloated union contracts containing excessive pay, retirement pay and health benefits and pay for not working when laid off workers were offered full pay to work elsewhere in the company where their efforts were needed. GM lost money on every vehicle they sold due to these unbalanced union contracts.

      None of those aforementioned root causes are even found in the FRB in development. Instead of attacking to defeat the causes of our national economy’s woes this bill is filled with everything else including a permanent slush fund (about $50B) to bail out financially distressed companies, simply taking over companies (with about no possibility of reversal in court), creating a formal “too big to fail” list of companies for special treatment, creating an open line of credit with the Treasury of the United States for financially distressed companies etc. All of this promotes financial firms (and other businesses) to take on bad risks rather than shy away from them because they will be bailed out with taxpayers’ money rather than be dealt with in an unadulterated form of capitalism.

      We need to block this bill period. Your attention is invited to: http://www.youtube.com/watch?v=s0bh77k2Wdk to read, view and hear a message true American patriots need to do come election time to prevent such future atrocities.!

    20. Iris of Islip, NY says:

      Can we as citizens get together and file a Class Action Suit against the people amassing this fraud before it goes into law? I am sick of these Unlawful, Unconvicted Felons trying to run our country. With only 9% of the "Leaders" in this Administration ever having worked outside of the confines of the government, it is time to enact CHANGE…. let's change the whole group of them in November. They are supposed to be Representatives of the People. The only ones they are representing are themselves and their pocketbooks.

    21. Bob Veigel, Arlingto says:

      Why would or should anyone have confidence in Washington policy maker's? Just ask some questions about past passed programs.

      01. Has the Fed kept us out of trouble? No ups and downs, just daily peace about our finacial affairs. No huge debts, a sound balance sheet.

      02. How has Social Security worked out? All kinds of extra income to pay for benefits. No need to worry about the future.

      03. How has Medicare worked out? More income than expenses. No need to worry about the future.

      04. How has the Department of Education performed? The learning system has been improving and we are the smartest people on earth.

      05. How has the Department of Energy done? All kinds of extra energy supplies and no need to worry about the future.

      06. How about the minimum wage? More jobs, people happy, no jobs going overseas and almost no unemployment..

      07. How about our nations annual budget? Balanced of course, no inflation and the dollar is sound. National debt is almost zero.

      08. How about immigration, decency, honesty, truth, virtue, competence and on and on and on? All getting much better because of the nations leaders.

      And if you think that all of a sudden some new financial regulation bill will solve all those problems, you must be living in lala land.

    22. Robert Edwards, Phoe says:

      Will you, Heritage, PLEASE explore and advise us the methods, legal of course, that we can remove him…befire the country goes bankrupt..? Bob Edwards, Phoenix

    23. DKID says:

      close your eyes put your fingers in your ears and dream with hussian!

    24. Jim Roumeliotis - Hu says:

      It just seems that with this administration you can't concentrate on one issue and another pops up…..STOP the process and address the recent past……Obama is manufacturing more trash than can be kept up with…STOP the progress and address the past movements…….Where are the Republicans who can throw a wrench in the mess……..STEP forward and be known…

    25. Jack Kinch(1uncle) says:

      Break them up. Make them small enough to allow failure. Create competition. Do that to cell phone companies also.

    26. Darrell, Denver says:

      Sometimes I wonder just "what the feds" have done legal, productive and for the people in my lifetime??? Let's see…WWII (just before I was born)…Man on the Moon in 69…??? Now this "Chicago Ganster (THUG) is trying to take over the financial system?? How low can we go….before we hit dead bottom? I understand a wildcard shoe in….. But the most remarkable fact is the %35-40 of American citizens that STILL FOLLOW THIS FOOL!!!!!! THAT is the amazing point to remember. Come on NOVEMBER… db

    27. Dave, Provo, UT says:

      The governments of the world are part of the problem by not taking action when the signs of the financial melt down became clear but even more is the lack of ethical behavior by the banking industry its self. Read "Fools Gold" by Gillain Tett (2009-Free Press) to get insights into how credit derivatives could have been used to improve banking methods and were instead used by the greedy leaders of Citigroup, UBS, Merrill Lynch, etc. to shove us down the financial rat hole. Unfortunately many of the same group are now advising our current president.

    28. Bean, Pittsburgh PA says:

      I'm with the other writer – what can we do to get rid of Obama now before he does more damage to our country?

    29. bigdave, ocala fl says:

      Tick…Tick…Tick…tick.

    30. robert sargent westv says:

      obama dont give a crap about wall street.all this is about is power.every thing this man says is a lie.whats mind blowing is some people believe his lies.

    31. Tom, Pennsylvania says:

      While Wall Street has its own demons to get rid of, the real culprits of the meltdown are Freedie and Fannie and the Community Reinvestment Act. Congress practically coerced mortgage companies and banks into lending money to people they knew could not pay it back. Wall St. was only too happy to jump on the greed wagon and make money over other people's misfortune. The Congress was warned twice by Bush treasury officials to rein in Fannie and Freddie, but they were laughed off the stage. Senator Dodd, Rep. Frank, and then Senator Obama all stopped any reform. Read the book by Thomas Sewell, The Housing Boom and Bust if you want some interesting reading that is easy to understand. He is a PHD ecomonics professor who has more of my trust than Congress. They are part of the problem and have done everything possible to throw blame everywhere else. Just look at the millions the Democrates and Republicans have taken from Wall Street. It is enough to make you ill.

    32. MajorStu, Peru, IN says:

      This should be called the "Shakedown Act of 2010". Al Capone and Mayor Daley will be proud.

      The Federal bureaucracy will be able to put the squeeze on any bank in order to keep them or leave them out of the "too big to fail" category. Or be classified as "distressed" to be parted out to Obama's crony fatcats on Wall St.

      Anybody who has seen "The Godfather" or read "Atlas Shrugged" will understand the power grab inherent in this proposal. Government gets to pick winners and losers. Cronies win, opponents lose. Cronies get bailed out, so they're essentially playing with house money – they win and keep their profits, they lose, and get bailed out with taxpayer money. How does this inhibit risky behaviour? It incentivizes it.

      Oppose the regime and be considered "distressed". Feds will force bankruptcy, and the vulture capitalists will divvy up the carcass. The "too big to fail" will be able to devour their competition with the assistance of the new bureaucracy.

      Upstarts will be subjugated at a bureaucratic whim. OBTW, Fannie Mae and Freddie Mac are excluded. Barney Frank and Chris Dodd have vouched for their creditworthiness, we must believe them.

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