The $700 Billion Bailout: A Boon or a Huge Bust?

In the midst of the economic dive, Congress threw billions at Wall Street without enacting any real oversight or regulations for the financial services industry. Public Citizen is pressing lawmakers to rein in Wall Street – and to stop giving corporate handouts.

By Joe Newman

If you're like most Americans, you're worried, angry and, maybe, just a little bit confused about what's happening with the economy.

You've watched your retirement account and mutual funds take a dive, along with the value of your house.

You're paying high prices at the gas pump (despite a recent drop), while oil companies rake in billions of dollars in profits and receive billions of dollars in government subsidies.

And then, to add insult to injury, executives at some of the Wall Street companies that created this country's financial mess collected millions in bonuses just days before the companies declared bankruptcy, while others jetted off to a $400,000 spa retreat after Congress voted to bail them out.

Who would blame you if you opened your window right now and screamed, "I'm mad as hell and I'm not going to take it anymore!"

But everything's going to get better now that Congress has passed the $700 billion Wall Street bailout, right? Maybe not.

Unfortunately, the plan that Congress passed in October lacked much of the increased regulation and strict accountability that Public Citizen and other public interest groups had sought.

The bailout plan that Senate leaders crafted was loaded with unnecessary corporate handouts, which added $150 billion in expenses and had little to do with fixing the U.S. financial system. And the limits for use of the handouts are vague.

"Why are taxpayers, who are struggling with their own bills, being asked to bail out the ultra-wealthy?" asked Joan Claybrook, president of Public Citizen. "Let the billionaires on Wall Street pay the cost of bailing themselves out."

Cost to consumers?

Under the plan Congress approved, the federal government will spend up to $700 billion to buy equity shares of banks and bail out businesses by buying assets that some refer to as "toxic" because they are essentially worthless on the open market.

Private investors are not interested in the assets the government is buying – that debt is considered too risky because of the high rate of mortgage defaults. At this point, however, it's almost impossible to determine how much this bailout will cost individual taxpayers.

If you divide the $700 billion by the number of Americans, the bill comes out to about $3,000 each. If you divide by the number of working Americans, it goes up to about $4,600 each.

However, this cost to taxpayers is more conceptual than anything else. First of all, the $700 billion won't be spent all at once. Second, some of it may be recouped.

Then again, there's the potential that the cost of the bailout will eventually reach $1.5 trillion or more as some government officials discuss increasing the amount of assets the government will buy.

One financial analyst estimated that, based on a $1 trillion bailout, the annual average cost per taxpayer will be $439, which he calculated based on paying off the debt at 4.13 percent interest (the rate on U.S. Treasury bonds) over 30 years.

When you're dealing with such enormous figures, government accountability is paramount, said David Arkush, director of Public Citizen's Congress Watch division.

"This crisis is rooted in a lack of regulation and oversight," Arkush said. "Bailing out troubled financial institutions without addressing the core cause of the problem – a lack of regulation and oversight – is like putting a Band-Aid on a gushing wound."

A sizable gift for corporations, lobbyists

The original $700 billion bailout plan that Treasury Secretary Henry Paulson submitted to the U.S. House of Representatives was only three pages long.

That was later expanded by lawmakers to a 110-page plan, which the House rejected.

The Senate then amended the plan. It grew to more than 400 pages, with another $150 billion in earmarks added at the behest of industry lobbyists.

The earmarks, which granted a variety of industries tax relief, included such goodies as $192 million in rebates on excise taxes for the rum industry, $148 million in tax relief for U.S. wool fabric producers and a $100 million tax break that benefits motor racetrack owners.

"These measures were added mostly to garner the support of reluctant House members," Claybrook said. "They do nothing to help this financial crisis."

The bill Congress passed did not contain many of the recommendations that Claybrook and Harvey Rosenfield, founder of Consumer Watchdog, a California-based consumer advocacy group, outlined in their organizations' "Principles for a Patriotic Bailout Plan." (Visit http://tinyurl.com/5g8c22 to read the recommendations.)

The consumer groups recommended capping interest rates on credit cards and mortgage rates at a level based about three percentage points above the Federal Reserve's Discount Window, which is the interest rate that the federal government uses to lend to banks; ensuring a government ownership stake in bailed-out firms in proportion to the amount of taxpayer risk; enacting meaningful salary and bonus caps for executives of any companies receiving a bailout; and restricting firms that benefit from the bailout from lobbying the government until after taxpayers have been repaid.

On Sept. 24, Claybrook and Rosenfield sent the recommendations to Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee, and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. That was the same day that Paulson appeared before Frank's committee.

The final bill included provisions for the government to receive an equity stake in bailed out corporations and restrictions on executive pay, though the pay restrictions are weak and would allow companies to take advantage of loopholes that would permit them to shift executive income into other benefits.

The bill did not include the interest rate caps or restrictions on lobbying.

A floating cap on mortgage and credit card interest rates would have been one of the most concrete actions Congress could have taken, Rosenfield said. While banks have been accessing taxpayer money through the Federal Reserve at low rates (2.25 percent in September), Americans have seen their interest rates remain high, with the likelihood they'll climb higher.

"Consumers should not have to pay interest rates of 7 percent to 25 percent to borrow their own money from the bailed-out banks," Rosenfield said.

Public Citizen also is calling for Congress to re-regulate the financial services industry.

To do this would require a partial repeal of the Gramm-Leach-Bliley Act of 1999, which sparked the types of risky investments that contributed to the financial crisis. The legislation allows banks, companies that trade securities and insurance companies to compete in the same markets, Claybrook said.

A lot of work is needed to ensure that the bailout serves the needs of taxpayers and not corporations, Claybrook said.

Public Citizen has been encouraging its online activists to contact Congress and urge lawmakers to watch out for the people's interests when the bailout money is doled out. Thousands of people have responded. This is crucial because bailed banks and other companies admit they might use the government money to pay dividends, honor past commitments for executive pay and purchase other entities – everything but make loans to small or large companies that need them to operate.

"The American people have expressed their anger and taken their frustration out at the ballot box," Claybrook said. "If Congress wants to solve this country's problems, it must start with a plan that addresses the needs of voters, particularly families about to lose their homes to foreclosure."

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