Should Wall Street Pay for Their Own Bailout

A Much Larger than Expected Taxpayer Burden may be Required

Oct 27, 2008

Now that AIG, GM, and Bank of America are clamoring for their slice of the bailout pie, Congress and President Bush are in search of answers.

Those who are looking for what is going to come next after the massive U.S. bailout of AIG, the 18th largest company in the world (according to the 2008 Forbes Global 2000 list), in addition to the U.S. Treasury Department committing $700 billion dollars of taxpayer money?

The concern of a complete meltdown of the U.S. economy is very real despite a whole host of other financial initiatives being implemented in a bid to stave off utter catastrophe for several formerly iconic U.S. corporations and potentially, the American economy itself.

There is also the quasi-nationalization of nine of the largest U.S. banking institutions, and the pending $25 billion dollar (or more) bailout of the U.S. automobile industry and huge drops in the employment ranks in this country.

Good Questions Are Plentiful, Good Answers Seem Scarce

Unfortunately things like the world-wide economic downturn, along with losses in many 401(k) investments, even bigger potential losses in the stock market, and people wondering if things will continue to get better than they have been over the past year. And, because of the globalized nature of today's markets we are more interconnected than ever before.

Due to the leadership position and the dominate nature of the American financial system within the larger global financial structure what has effected the U.S., has like a virus, infected financial markets all over the globe. In essence throwing the American, Asian and European markets into a massive downturn. The question now, is what is next?

The Asia-Europe Meeting (ASEM) Summit

Towards the end of last year, the Asia-Europe Meeting (ASEM), ended with the current global financial crisis dominating the agenda. For the past twelve years the ASEM meeting has been the primary multilateral channel for communication between major economic powers in this region of the world.

And this year by admitting countries like India, Pakistan, and Mongolia the organization has solidified its growing influence and place in the world primarily through the securing of forty-five (45) partner nations representing nearly 60% of the world's population.

India' s Prime Minister Manmohan Singh, one of ASEM's newest members, and head of one the most populist nations on earth, has been pushing for more involvement from the IMF and World Bank when he recently commented in a video made available by the conference that, "IMF and World Bank should put in place facilities to provide additional assistance more quickly and large amounts with less service conditions and greater flexibility to developing countries."

Failure of Regulatory and Supervisory Mechanisms Lead to Crisis

In an Interview with Fox Business a leading expert in economics, Dr. Sadananda Halageri says that the root cause of the financial crisis is basically due to, "the accelerated momentum of the horizontal capital mobility that has been enabled due to the increasingly sophisticated financial instruments for investment."

"These new instruments were obviously complicated and far away removed from the real economic activity upon which any financial instrument has to be designed and circulated in the global financial markets, Halageri said.

Dr. Halageri went on to say, "The role played by the rating agencies in enhancing the marketability and horizontal mobility of such instruments, in hindsight, has come to be regarded as dubious and the the developments which have violently shook the very core of the international financial structure were obviously beyond the scope of any present-day domestic or international regulatory body."

The U.S. Congress, Justice Department and FBI are Investigating

According to a recent CNN news report, The FBI is investigating Fannie Mae, Freddie Mac, Lehman Brothers and AIG-as well as their executives- as a broad look into possible massive mortgage fraud.

Appearing on CNN Money, a spokesman for the FBI said that at this point officials are not pursuing any specific individuals at these firms. Again, this is going to be a long road , don't expect indictments tomorrow or next week or even next month, cautioned FBI spokesman Special Agent Richard Kolko.

Senate Banking Committee Chairman Christopher Dodd (D-Conn), has been having hearings related to these matters and has called the bailout plan a "fundamental shift in the way we do business," his colleague Republican Sen. Jim Bunning of Kentucky commented, "the free market for all intents and purposes is dead in America."

Plan has Made Profits Private and Losses Public

In Macroeconomics 101 in any college or university in the country, they would teach that a fundamental principle of the free market system is that investors take big risks to reap even bigger rewards, but that they also must assume any losses if they should occur.

The Treasury Departments plan has changed all of that, and there are lingering questions concerning the valuation of the toxic assets, the governments decision to take on equity shares of the countries nine largest banks and enacting limits on executive pay.

And Ralph Nader, a life-long consumer advocate and former third party candidate for president, in a recent interview on CNN called for "an expanded role for the criminal prosecution of crooks and those swindlers who made off with trillions of dollars from worker's pensions and pension funds and enriched themselves by jumping ship into a golden parachute or lifeboat."

Nader went on to say, "Make the speculators pay for their own bailout, by taxing securities transactions one-tenth-of -one-percent, which could produce $US500 billion dollars in this year alone."

So Far Bailout Money has not Been Used To Help U.S. Homeowners

While still in the tentative planning stages a proposal by the Bush Administration to help up to 3 million homeowners who are behind on their mortgages potentially staying in their homes is problematic and could end up costing many more billions than originally predicted.

An October 2008 article on the U.S. bailout proposals appearing in the on-line publication Seeking Alpha, William Patalon III commented that, "As proposed, the federal government would incur half the loss on a home loan if the mortgage company that controls the loan agrees to lower the borrower's monthly payment for at least five years. On any given loan, the mortgage company would reduce the payment borne by the homeowner by writing off part of the loan balance, reducing the loan's interest rate or changing other loan terms."

In addition, Money Morning contributing editor R. Shah Gilani, a retired hedge-fund manager, noted that the plan was apparently still that-a plan. In addition, "any bailout plan that directly addresses foreclosures is political posturing that will ultimately be overwhelmed by inevitable economic realities, Gilani said.

Still to be determined are extremely important items of the program like, who would be eligible and for how much of $50-$60 billion in bailout programs. Also what happens if U.S. home prices continue to fall? It may all be just too much to ask.

Forbes.com: The World's Biggest Companies, Edited by Scott DeCario, April 02, 2008.

AndhraNews.net: Development has to be inclusive: Prime Minister at ASEM Oct 25, 2008.

CNN Money: FBI Probing Bailout Firms, by Kelli Arena CNN Justice Correspondent Sept 24, 2008

Seeking Alpha.com: Foreign Bondholders Drove the Fannie/Freddie Bailout. William Patalon III Spet 12th 2008.

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