Telling us the truth: Bailing out Wall Street or bailing out the country?

By Ardain IsmaCSMS Magazine Staff WriterFour years ago, while in the campaign trail, George Bush begged the nation to trust his leadership so that he could get the time needed to accomplish his mission of social conservatism. He also predicted that the best days of America have yet to come as he urged the people to be more patient. Many who voted him did not do so out of a genuine confidence in his ability to govern effectively. They simply voted their pocket book. The Bush Administration, which makes deregulation the centerpiece of its domestic policy, remained until recently a champion of Wall Street financiers, who were given carte blanche to drive the economy to where they saw fit.Driving the economy, they did; and in some trivial ways, George Bush’s prediction was right. Indeed, the best days are certainly far from being materialized as the country now plunges into its deepest level of uncertainty since the dive of 1988. And the latest swings on Wall Street are not only causes for concern but are also tangible reasons to ring the alarm bell. All signs since last week pointed toward a disaster waiting to happen. Not a single day went by without the news of a major bank either being seized by the government or being forced into a fire sale, which was the case of Wachovia on Monday—one of the country’s largest commercial banks that was taken over by City Group, the country largest financial conglomerate, for just a little over 2 billion dollars.Ironically, news of the fire sale sent shockwaves to all City Group shareholders, who feared the company may not be able to absorb the 312 billion dollar questionable loans currently sitting in Wachovia’s balance sheet. Market watchers believe that it was a forced sale implicitly ordered by the government to avoid yet another embarrassment when it became clear that Wachovia was on the verge of a financial collapse.Since the roller coaster rides started more than 2 years ago, yesterday was the most dramatic of all. What started as an upbeat day on both Wall Street and on Main Street following the news of a bipartisan compromise on the 700 billion dollar loan package to bail out Wall Street, ended up in a financial storm. Meanwhile campaigning in Ohio, Republican candidate John McCain, with his running mate Sarah Palin by his side, spent the entire morning in a self congratulating mood, praising himself before television cameras for being “a leader with impeccable vision and uncompromising patriotism who put country first before [traditional] politic.” Taking credit for the deal, he blasted his rival Barack Obama who refused to put his campaign on hold, like he did, to go to Washington to “get things done.”  But the party was only short-lived. Few hours later, the stunning news of the compromise’s rejection by the House of Representatives forced the Dow Jone Industrial Average into a financial nose dive, losing 7% of its value after dropping down more than 700 points. Within hours, more than a trillion dollars went up in smoke. Wall Street gurus, who until now have been wallowing into a financial windfall, were unable to stop the financial freefall in which they currently find themselves. McCain, who was priding himself few hours earlier for being a true Republican, was forced to sallow his words as he stumbled erratically before an army of journalists. “It’s no time for playing partisan politic. It’s time to put country first,” he said, twisting his tongue to fight the right words. This is a clear reminder that the Arizona senator, while claiming to be “ready” on day one to take charge of the nation, has no clue on the breath and the depth of this economic meltdown.The package defeat was expected  However shocking it may seem, the package’s defeat in Congress should have been expected. Engineered by Treasury Secretary Henry Paulson (above in the picture), a Wall Street insider who formerly ran Goldman Sachs and whose personal fortune was estimated to be at 500 million dollars at the time he went to head the office of the Treasury Department. Paulson being the architect of the bailout has triggered an uneasiness among politicians in Washington, which made the future of the 700 billion dollar loan package to Wall Street uncertain at best. Many who voted NO to the package did so out of fear that their vote might go back to hunt them some day, for the agreement that gave birth to the rescue package also gave Paulson an unprecedented power over its expenditures with no clear reference on how to deal with the problem of millions of disenfranchised homeowners who are on the verge of losing their homes—the heart of this economic labyrinth.             Moreover, the agreement offers no guarantee that the money will remain in the US; nor does it offer a timeframe for the return of the 700 billion dollar taxpayers’ money. The biggest concern to many lawmakers was the barrage of rumors being circulated around the corridors of Wall Street about so many financiers that are already lined up to make shameful profits off the taxpayers’ money.  On top of that, the agreement imposes no salary cap on the CEOs.An article published yesterday on Bloomberg under the pen of Mark Pittman seemed to have confirmed these rumors. According to Pittman, several federal bailout loans have already gone to other investment banks like “the $37 billion from federal bailout loans to American International Group [that] has [already] gone to several investment banks, including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.”Still according to the article, Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York, made some interesting remarks on the government bailout of AIG. “It was the biggest crisis ever—if you’re an investment bank…..We didn’t just save AIG. We saved the counterparties, the banks. It’s true that it would have been a disaster, but it would have been a disaster for them,” Rosner said. And in a meeting on Sept. 15 at the New York Federal Reserve Bank at which the troubles at AIG were discussed, Paulson’s successor at Goldman, Lloyd Blankfein, was the only chief executive present. A Fed spokesman confirmed that, although Pittman does not reveal the name of that spokesman. The very next day, AIG started its borrowing spree, spending 4 days borrowing money totaling at $37 billion dollars. This was disclosed in AIG financial filing on Sept. 26.Here is how that works according to Pittman. The government empowers AIG, the insurer, with a Federal Reserve credit line endorsed by Paulson. The money is then used for “AIG to meet its collateral calls to its Wall Street trading partners,” confirmed Rodney Clark, an S&P analyst.Under normal circumstances, it would have been perfect for the Federal Reserve to move swiftly to avert the collapse of AIG. But after such debacle of financial disaster, caution or fiscal responsibilities should have been the order of day. Before the crisis,    AIG was and still is the ultimate guarantor of the money exchange, providing “$441 billion in backing for Wall Street trades involving credit—default swaps, or transactions in which one party agrees to pay another to accept the risk of default. Those bets are packaged into larger securities called synthetic collateralized debt obligations.” But AIG’s job is not to hand out money to whoever is in trouble; especially companies involved in subprime mortgage trading. Its job is “to insure the top-rated, safest part of those CDOs, also known as super-senior.”   These kinds of transactions, sometimes very difficult to understand, got many lawmakers in Washington freaked out. And when this is something spearheaded by Federal Reserve Chairman Ben Bernake and Treasury Secretary Henry Paulson whose former firm, Goldman Sachs, sets to juice out an humble portion of that 700-billion bailout, politicians in Washington became very hesitant to buy into it.It wasn’t because Republican politicians in Congress espouse an ideological opposition to the bailout. It was because it offers no incentive to troubled homeowners and it gears entirely toward starving off Wall Street and its CEOs who are directly responsible for the crisis in the first place; and the agreement offers them nothing to be able to go home and explain to their constituencies.In the end, they all will have to be forced into line and vote for the package, for their conviction does not run deep and their “negative” move was nothing but a political calculation. Don’t be surprised if the package is reintroduced before Congress on Friday. After all, this is an election year. No one wants to be blamed for what might take place just 32 days from now, on November third.      Note: Dr. Ardain Isma is the chief editor for CSMS Magazine and the executive director of the Center For Strategic And Multicultural Studies. He also teaches Cross-Cultural Studies at Nova Southeastern University. He is a novelist and the author of several essays on multiculturalism and Caribbean politics. He may be reached at [email protected] .Also see The financial crisis in the US and the mirage of an enlightened global capitalismGlobal stock markets stumbled in the aftermath of the Wall Street downslide on Monday