CQ Politics | David Corn - Why Some Democrats Said No to the Bailout

Why Some Democrats Said No to the Bailout

By David Corn | September 30, 2008 1:38 PM | Permalink | Comments (30)

The main reason the $700 billion bailout bill failed in the House is that the Republican leaders, who were working with the Democratic leaders to pass the bill, could not count. They did not round up enough of their comrades for the bill; one hundred and thirty-three House GOPers said nyet to what some of them considered to be socialism. But the bill also failed because 95 House Dems would not go along with Hank Paulson's Billions-for-Bad-Paper plan, when alternative approaches were worth considering. (I refer to some of those options here.) And a leader of a subset of these Democrats--dubbed the Skeptics Caucus--has been Representative Brad Sherman.

Sherman attracted several dozen members to a series of meetings and briefings this past weekend, as the bill was being negotiated by others. As he left Congress after the vote on Monday, he told me that the most effective argument he made was that the bailout bill was darn weak when it came to recouping the taxpayers' $700 billion. He cited a memo he circulated among colleagues that pointed out that taxpayers were not likely to see that money--either in profits from a future selloff of the bad assets the Treasury would buy from Big Finance Firms or in a revenue bill (meaning some sort of tax on the finance industry). In other words, he challenged Paulson and his own party leaders on a fundamental of the bill: this is not a handout, but a timely investment.

What's going to happen now? The safe bet is that the D and R leaders in the House will tweak the bill or offer enough inducements to individual members (a bridge, anyone?) to win over 13 members to insure passage of the legislation. That is, there won't be a wholesale revision of the basics. So the revenue issue may remain hot. And Sherman expects to come back to Washington later this week to keep the battle going. Here's the memo he disseminated:

TAXPAYERS HIGHLY UNLIKELY TO RECOUP ANY OF THE COSTS -- Brad Sherman 9/29/08

We know that the Bailout Bill allows million-dollar-a-month salaries to executives of bailed-out firms, and it allows hundreds of billions to be used to buy toxic assets currently held by foreign investors. But we are told: "don't worry, this $700 billion bill won't cost us anything. We will get it all back next decade through a revenue bill."

I. Section 134 of the Bailout Bill merely says that the President must submit a revenue bill to Congress in 2013 that recoups from the financial industry the taxpayers' net losses.

a. If the President has any revenue ideas he actually likes, he would submit them to us anyway.
b. If the President submits revenue ideas only because he is forced to by Section 134, he will send it to us with a note saying that he believes they are bad for the country, and reserves the right to veto.
c. The Bailout Bill does not automatically enact any revenue increases, nor protect a revenue bill from filibuster or veto.

II. Congress is unlikely to pass a tax increase bill of hundreds of billions of dollars in 2013.

a. Tax increase bills are anathema to many.
b. 41 Senators can block the plan. We're giving Wall Street enough money to hire 4100 lobbyists.
c. In recent years, Wall Street has easily defeated every attempt to close every loophole that they exploit, no matter how pernicious-even the abusive use of Cayman Island tax havens by hedge fund managers, who thereby pay zero tax.

III. Any tax on the financial industry would make the good banks pay a huge tax so we can recoup what we gave to the bad banks.

a. Section 134 says the tax will be on "the financial industry." It does not provide for a tax on just those firms that received bailout payments.
b. A bank that doesn't get a bailout payment still pays the tax.
c. Community banks and perhaps credit unions will also be subject to the tax, so we can recoup what we gave to Wall Street.

IV. It is impossible to draft a tax that hits only those firms that received bailout payments, and even more impossible to draft one that taxes each bank in proportion to how much money we lost on its toxic assets.

a. There are no provisions to even keep track of losses on each asset purchased as it is managed over the years. Assets purchased from several
banks will be pooled, managed, and sold together, and we can never know how much we lost on assets purchased from any one bank.
b. If three banks in the year 2013 have the same income and size and operations, they will all pay the same tax-even if one got no bailout payments, a second got a million dollars, and a third got a billion dollars.
c. Many bailed-out firms won't exist in 2013.

1. Some will go under.
2. Some bailed-out firms are only shell companies. Example: Assume the Bank of Shanghai has $30 billion in toxic assets. It will sell these to the tiny subsidiary it has incorporated in California. The subsidiary will then sell these to the Treasury in 2009, and will be dissolved long before 2013.
3. Many bailed-out firms will still be unprofitable in 2013.
4. Some bailed-out firms will move offshore before 2013.

d. The whole purpose of the bill is to improve the balance sheets of the bailed-out firms. If particular bailed-out firms owe us the money they receive, they would have to list this as a liability, and the bill would fail to improve their balance sheets.

In 2013 we will not pass a tax bill that imposes hundreds of billions of dollars of taxes on the financial services industry, including those banks that got no bailouts, community banks, and credit unions. A tax bill imposed only on those entities that got bailout payments is impossible to draft, and contrary to the purposes of the Bill.

If it were easy to pass a bill to recoup hundreds of billions of dollars through taxes to be imposed in 2013 and thereafter, then provisions imposing such taxes would be in today's bill.

Wall Street gets their money now, and we get it back never.

Comments

Good Money after Bad...after WORSE!

Why should I trust "Wall Street"...?

Quick suggestion...next politician who says "Wall Street" and "Main Street" in the same sentence has to do the "funky chicken" on live TV?

-T

Posted by: Hajji | September 30, 2008 3:05 PM

If it's the Democrats that have to pass the plan, it should be a progressive Democratic plan that fully addresses both the impeding credit crisis and the fundamental problems in the economy.

If the Republicans want to back off, then back them off to a point of getting a plan in place that solves issues of foreclosures, bankruptcy, jobs, health care and our energy future. That's something all of us Democrats can get behind. Let the right wing vote no.

Posted by: Hunter Gatherer | September 30, 2008 3:11 PM

In all fairness anything done should be very short term - as in one to three months.

This maladministration has failed - there is no reason to make any sweeping changes that do not expire with the end of the era of abject failure.

Nobody trusts Bush, Paulson or any of the WH staff or cabinet.

Posted by: capt | September 30, 2008 3:31 PM

RNC ad, was cut, sent out before package failed

The Republican National Committee's new advertisement critical of the the Wall Street "bailout" was produced and sent to television stations in key states before the package failed, officials at two stations said.

"Wall Street Squanders our money. And Washington is forced to bail them out with -- you guessed it -- our money. Can it get any worse?" asks the ad's narrator, as the words "BAILOUT WITH OUR MONEY" cross the screen. (The answer: Obama's plans would make it worse.)

The ad, however, seems to assume that it can safely attack a successful plan. And the reason may be the timing: Though it started airing this morning, the spot was released to stations yesterday morning, ad executives at stations in Michigan and Pennsylvania said.

Kae Buck of WLNS in Lansing said her station received the at at 7:55 a.m. Monday. Luanne Russell of Pittsburgh's WTAE said her station received it at 10:49 Monday morning.

http://tinyurl.com/3qx48g

*****

The Democrats should walk away.

The RNC is playing games. They are trying for a financial 9/11. They don't think the democrats have the spine to walk away. (they probably don't have the spine)

Posted by: capt | September 30, 2008 3:36 PM

Corinne Weber, a GOP county chairwoman in upstate New York, has resigned over a chain e-mail that she forwarded “to more than two dozen Republicans on Friday night that makes a veiled reference to Democratic presidential candidate Barack Obama and suggests he is the Antichrist.” One county official pressing for Weber’s resignation said that the e-mail “didn’t reflect the views of the Republican Party.”

(ThinkProgress)

Posted by: capt | September 30, 2008 4:12 PM

I agree with the assertion that the promise of some sort of future tax on the financial services industry isn't what we should rely on as some sort of guarantee that the taxpayer will recoup the costs of the bail-out. But the Sherman memo contains a series of confused remarks that undermine the credibility of his overall claim. Take, for example, this item:

"d. The whole purpose of the bill is to improve the balance sheets of the bailed-out firms. If particular bailed-out firms owe us the money they receive, they would have to list this as a liability, and the bill would fail to improve their balance sheets."

No. The form in which the bailed-out firms will "owe" something to the government will take the form of equity (common or preferred) which won't increase liabilties but rather capital. It dilutes current shareholders or, if things go badly for a firm, wipes out other more junior equityholders. It doesn't increase the firm's leverage.

If Sherman isn't referring to what firms "owe" the government from the bail-out itself, but rather is referring to future tax liabilities to be determined years from now, those liabilities will only hit firms who survived the current financial crisis (which is going to continue for months to come at the least) and the coming economic downturn (which is going to continue for a year or two at least). Their balance sheets will have recovered by the time anyone would be imposing a new financial sector tax.

His objection "IV" doesn't make much sense either. He writes:
"a. There are no provisions to even keep track of losses on each asset purchased as it is managed over the years. Assets purchased from several
banks will be pooled, managed, and sold together, and we can never know how much we lost on assets purchased from any one bank.
b. If three banks in the year 2013 have the same income and size and operations, they will all pay the same tax-even if one got no bailout payments, a second got a million dollars, and a third got a billion dollars."

As to "a", sorry. That's nonsense. Even if assets, once purchased, are pooled for management and sale, we know how much each asset cost and how much they are sold for. For the most part, they're distinct assets, not fungible securities, so we don't have a big inventory accounting problem (LIFO, FIFO, etc). It's only if the assets are transformed while they're in the pool -- unbundled or bundled into something else -- that we've got a problem matching purchase price and sale price of each individual asset. And it's not an insuperable accounting problem.

As to "b", true enough. But it misses the object of the tax. The objective of the tax isn't to recoup from either the malefactors or from the direct beneficaries of the bail-out funds. It's from the financial industry as a whole, since as a whole they will have all benefited from the attempts to stop the meltdown of the whole sector.

I've got further problems with other specifics in Sherman's memo. But the general point is that it's a hodge-podge of not very well-thought-out shreiks of outrage. So it doesn't make its case very effectively.

Posted by: nadezhda | September 30, 2008 4:14 PM

My congresscritter voted NO.

Doesn't mean I'll vote for her, tho'.

Posted by: David B. Benson | September 30, 2008 4:51 PM

What would LIFO, FIFO have to do with mortgage based securities?

Posted by: capt | September 30, 2008 4:52 PM

Obama 330.6 McCain 207.4

http://www.fivethirtyeight.com/

Looking worse for gramps day by day.

Posted by: capt | September 30, 2008 4:59 PM

Obama 286 McCain 225 Ties 27

Dem pickups (vs. 2004): CO IA NM VA
GOP pickups (vs. 2004): (None)

Today in 2004:

Kerry 254 Bush 280

http://electoral-vote.com/

Posted by: capt | September 30, 2008 5:01 PM

capt --- LIFO and FIFO are opposed inventory evaluation methods to estimate, for accounting purposes, the value of the inventory.

Posted by: David B. Benson | September 30, 2008 7:21 PM

I know "Last in first out - First in first out"

I doesn't make any sense with regard to mortgage securities?

I used to write inventory programs for manufacturing - we were discussing lifo-fifo one day and a guy from HQ asked "Why are you talking about the life of fido?"

We laughed until our sides hurt!

Still makes me giggle.

Posted by: capt | September 30, 2008 7:36 PM

No bailout period! The federal government is not capable of running anything.

Posted by: tytandanmar | September 30, 2008 8:26 PM

capt --- Mortgage securities are a form of inventory. But don't ask me to attempt to explain the arcane rules of GAAP.

Posted by: David B. Benson | September 30, 2008 8:30 PM

The real problem is not that we don't know if we are bailing out Wall Street Banks based on bad mortgages, or on the bundled securities called Mortgage Based Derivatives (Poker Chips).

The real problem is that our elected officials don't know the difference, and they are embarrassed to ask someone to explain it to them.

And this problem is compounded by the news media that do not know how to report on the problem.

This leaves us with the question that Rachel Maddow asked last night. Is this like global warming where some scientists don't agree, or is it like WMDs in Iraq where we should be cautious this time around?

Seems like a trillion in jobs creation would have a better long term impact. If we got back the 5,000,000 manufacturing jobs that we've Bushed away to the far east, we could generate the 700 billion in income the first two years. (250 B in direct jobs and and the rest in small business jobs supported by the primary workers).

Does anyone know where we can actually read the bill being discussed?

Posted by: geof01 | September 30, 2008 8:48 PM

If you have HDNET on your TV, Dan Rather has an in depth report on what these lenders did in Georgia to derail the anti-predatory lending bill there.

Yes, Dan Rather lives!

Posted by: geof01 | September 30, 2008 8:52 PM

The Rather report details how hard the mortgage industry fought for predatory lending in Georgia and eventually overturned it. These are the same companies asking us to bail them out.

4.6 billion spent on politicians and lobbyists over the last 10 years to create the problem they want us to save them from.

Posted by: geof01 | September 30, 2008 9:08 PM

oh for god's sake, does even this issue have to boil down to left v right?
this $700 BILLION "bailout" is nothing more than another BUSHCO criminal act (money grab).
what the fuck corn? what happened to your endorsement of "calling a spade a spade"?
son of a bitch!

Posted by: as_if! | October 1, 2008 2:00 AM

WAKE UP CALL!

""I believe that banking institutions are more dangerous than standing armies....if the american people ever allow private banks to control the issue of currency....the banks and corporations that grow up around them will deprive the people of their property until their children wake up homeless on the continent their fathers conquered.""

http://tinyurl.com/46jdjs

Posted by: as_if! | October 1, 2008 4:22 AM

McCain Urges Bush To Spend $1 Trillion On Bailout -- Without Congressional Approval

http://www.youtube.com/watch?v=SesiK5CpcII

This is the same John McCain who just a couple of days ago was railing on the $1 trillion price tag of the bailout (when it was actually $700 billion).

But just a few days after railing against the unbridled power of government, McCain now seems to envision the presidency as a dictatorship. He now thinks that Bush should just spend $1 trillion without allowing anyone to ask any questions -- and he supports doing it just one day after the House of Representatives voted down a $700 billion bailout.

This won't suprise anyone on the left. The question I have is this: when are conservatives going to wake up and realize that despite all his bluster about being a conservative, the Republican nominee for president has proposed the single largest expenditure in the history of this nation -- and that he's proposed that it be made without the approval of Congress?

(huffpo)

Posted by: capt | October 1, 2008 8:50 AM

McSame as Bush?

http://www.youtube.com/watch?v=60dcD1s6mhE

lololo

Posted by: capt | October 1, 2008 1:13 PM

Stanley O'Neal, Merrill Lynch

Following an $8.4 billion write-down at Merrill Lynch, the news that the head of the firm, Stanley O’Neal, would be leaving in late 2007 with more than $160 million in stock options and retirement perks in his pocket outraged many, from shareholders to legislators.

The previous year, O’Neal had been paid $46.4 million, making him the nation's second-highest paid executive in the country behind Lloyd C. Blankfein, the CEO of Goldman Sachs who made $54.3 million.

O’Neal was part of a group of corporate top dogs called to testify before Congress about excessive CEO pay. Merrill Lynch has since been taken over by Bank of America.

(MSNBC)

Posted by: capt | October 1, 2008 1:25 PM

Angelo R. Mozilo, Countrywide Financial

Angelo Mozilo built Countrywide Financial into the nation’s largest mortgage company and was paid handsomely during the real estate boom.

He fought against his own board’s attempts to cut back his pay by hiring a special consultant when things started going south in 2006.

His efforts paid off. In 2007, he took home $121.5 million from exercising stock options and compensation of over $22 million. This huge pay came in a year when the bottom dropped out of the housing market and Countrywide took a beating with a loss of $704 million and a nearly 80 percent skid in the company’s stock price.

The company was bought by Bank of America in July.

(MSNBC)

Posted by: capt | October 1, 2008 1:26 PM

Richard Fuld, Lehman Bros.

In a New York Times opinion piece last month, Nicholas Kristof estimated that Lehman CEO Richard Fuld last year earned “roughly $17,000 an hour to obliterate a firm.”

That estimate was based on Fuld’s earnings in 2007 of more than $40 million.

Lehman Bros., the oldest of the Wall Street titans founded in 1850, filed for bankruptcy last month.

Fuld, who has been CEO of Lehman since 1993, was faulted by analysts for not taking acting quickly enough to deal with the firm's problems.

(MSNBC)

Posted by: capt | October 1, 2008 1:28 PM

James Cayne, Bear Stearns

Bear Stearns CEO James Cayne made more than $160 million before the company hit the skids and was sold off at a discount price to JPMorgan Chase as part of a government bailout earlier this year.

At one point Cayne was worth about $1 billion on paper, but when the Wall Street firm crumbled he sold his stake for a mere $61 million.

Cayne, known for being an obsessive bridge player, was supposedly at a bridge tournament and unable to be reached when two major hedge funds at the firm collapsed in 2007, the beginning of the end for the firm.

(MSNBC)

Posted by: capt | October 1, 2008 1:29 PM

The above are the poor bankers and their compensation for their companies going belly up.

There are many more.

Posted by: capt | October 1, 2008 1:36 PM

Obama 336 McCain 202

85.4% - 14.6% (basically 5:1)

http://www.fivethirtyeight.com/

Posted by: capt | October 1, 2008 3:42 PM

Obama 286 McCain 190 Ties 62

Dem pickups (vs. 2004): CO IA NM VA
GOP pickups (vs. 2004): (None)

10/01/04:

Kerry 221 Bush 276