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Banking Bailout Plan-Taxpayers Get Scalped

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Wall Street bankers and investment houses made some lousy business decisions and want taxpayers to cough up for their mistakes.

"Over the years, indeed, Wall Street firms have lavished hundreds of millions of dollars in lobbying Washington D.C. so that their more and more complicated financial businesses would be less and less regulated. During the 1980s, the Savings & Loans industry (S&Ls) was the recipient of Washington largesse. The epitome was the lobbying by five prominent U.S. senators, one of them Sen. John McCain, to deregulate the borrowing and lending practices of savings and loans banks.

During the Reagan-Bush era of the 1980's, such deregulation encouraged unsound real estate lending by Savings & Loans financial institution s and this led to the 1986-1995 Savings and Loans crisis. Some 747 savings and loans banks failed and about $160 billion was lost, most of it through a $124.6 billion bailout by the U.S. Government.  

During the Clinton and Bush-Cheney eras, large banks were allowed to buy relatively long term subprime home mortgages from regional banks and other mortgage lending firms and repackage them, “securitize” them and resell them as sliced mortgage-backed securities. The banks sold them as short term-like commercial paper, but without guaranteeing them. In 1999, for example, the banking industry spent more than $300 million in lobbying Congress and the White House to repeal the 1933 Glass-Steagall Act that closely regulated banking activities. In November 1999, the Glass-Steagall Act was eviscerated after many years of lobbying efforts. It was replaced by the Gramm-Leach-Bliley Act which established the new market-driven unregulated system for many financial institutions, the largest ones being the New York-based investment banks.  

With scant regulation, banks could engage in highly leveraged new banking practices, in violation of sound banking practices. For example, regulated commercial banks normally keep a 1:10 ratio between reserves and loans.  But U.S. unregulated entities embarked upon highly leveraged finance, keeping a 1:30, 1:40 or even 1:50 ratio between reserves and risky loans. In so doing, the unregulated banks raked in huge fees at what (they thought) was very little risk for them, because they had hoped to transfer the inherent risk to the buyers of their repackaged securities. However, when some of the original mortgages downstream became delinquent as the housing price bubble burst, in the spring of 2005, and home foreclosures began to rise, more than $1 trillion of the artificial mortgage-backed securities previously created thus became less secure and less liquid. As time went on, the market for such artificial securities de facto dried up.

As a consequence, the issuing banks were left with a large inventory of now toxic securities that nobody wanted to buy. Huge permanent losses replaced huge but illusory short-term profits, although banking CEOs kept receiving large (some would say obscene) total corporate compensations.

The incestuous relationship between unregulated high finance and Washington politics is coming to a climax with Henry Paulson, the U.S. Treasury Secretary, a former Wall Street CEO of one of the Wall Street banks in relative distress, being declared by legislation a de facto economic tsar and a public Santa Claus. According to proposed legislation, indeed, Mr. Henry Paulson, the former Chairman and Chief Executive Officer (June 1998 – July 3, 2006) of Goldman Sachs, would be entrusted with the power to buy from troubled banks, at his discretion, the bad financial assets they now have on their books. To accomplish that task, as much as $700 billion would be placed in his hands. It is said that Congress, in this election period, does not have time to create an independently-run Bank Resolution Trust under the model of the 1989 Resolution Trust Corp, and all the power to intervene has to be concentrated in the person of the Treasury Secretary.

"The Bush Administration's Banking Rescue Plan" by Professor Emeritus Rodrigue Tremblay, Link, CLICK HERE http://www.thenewamericanempire.com/tremblay=1097   

 

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Lance Ciepiela is a retired senior who had an interesting career in government service - a United States Marine Corps (USMC) Vietnam-Era veteran, who became interested in restoring the Constitution after I realized that W Bush had attacked Iraq (more...)
 

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We need to take action before the Bush Neo-cons an... by Mark Adams on Friday, Sep 26, 2008 at 4:19:03 PM