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The Bailout Bill's Foreign Aid Program
10/02/2008 3:00 pm EST
The $700-billion bailout plan that passed the US Senate Wednesday night has many, many bad ideas.
But one of the very worst is allowing foreign banks that operate in the US to participate in the government's program to buy up toxic debt.
That provision, which was not in the original plan but was reportedly inserted in response to "lobbying and intense questions by bankers around the world," gives French, British, Japanese, Chinese, or Swiss banks with subsidiaries in the US the same access to taxpayer dollars to buy their bad loans as, say, Citigroup or Commerce Bancshares or community banks in Topeka, Kansas, and Norman, Oklahoma.
Some of you who may not know this must be shaking your heads in disbelief. I hope others took their blood-pressure medication this morning.
But it's true.
"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," treasury secretary Henry M. Paulson told George Stephanopoulos on ABC News's This Week.
"This is about protecting the American people and protecting the taxpayers, and the American people don't care who owns the financial institution."
I'm not so sure about that, Mr. Secretary.
In fact, allowing overseas-based banks to participate in the US taxpayer-funded bailout was a real sticking point for opponents to the bill, which was defeated in the House of Representatives Monday and will probably go for another vote by week's end.
That stunning rebuke to the Bush Administration and the Congressional leadership, which capped a firestorm of populist rebellion against the rescue plan, was thoroughly bipartisan. And the foreign-bank provision united a lot of congressmen who don't agree on much else.
"The secretary of the treasury will be given unprecedented power to buy any financial instrument of any kind at any price, bailing out any financial institution anywhere in the world," rep. John Culberson (R-Texas) told MSNBC. "He could bail out a foreign investment bank with my tax dollars."
His Blue State colleague, rep. Brad Sherman (D-California), couldn't agree more.
"Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it, and the bill has been carefully written to make sure that can happen," he said on Larry Kudlow's CNBC show Tuesday.
"Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday," he continued. "Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20th that it can't be sold to the Treasury."
A Treasury Department spokesperson didn't return telephone calls seeking comment. But here's what the bill says:
"To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending financing to financial institutions that have failed or defaulted on such financing, such troubled assets qualify for purchase."
That part of the bill is obviously aimed at foreign banks like Deutsche Bank, Lloyds, Barclays, and HSBC, which gobbled up tons of mortgage-backed securities churned out by the likes of Bear Stearns, Lehman Bros., and Merrill Lynch. Some of those banks had their own wannabe securitization departments that tried to get in on the lucrative game.
Asian banks were much less involved in buying subprime mortgages and other exotic derivatives that are now under siege.
But European institutions have thus far written down an estimated $120 billion in toxic mortgage and other debt, and JP Morgan estimates these banks will take an additional $40 billion of write downs in the second half alone.
The biggest culprit: UBS, the Swiss banking giant that has accounted for $40 billion worth of those write downs and which could take $2.7 billion in additional charges this year, according to JP Morgan.
UBS, you might remember, was involved in practically every dubious business Wall Street engaged in during its lowest, most dishonest decade-subprime mortgages, auction-rate securities, what have you.
But unlike their colleagues, the bank is reportedly cooperating with the Justice Department in a criminal investigation of its alleged efforts to help almost 20,000 wealthy US clients evade billions of dollars in federal income taxes by using secret overseas bank accounts.
So, please help me out here: are we really planning to use taxpayer dollars to help bail out an institution that may have helped many Americans evade federal taxes?
Now, I actually support the bailout, which is a pretty lousy bill, but the only one we've got. When unemployment is rising and even blue-chip companies like AT&T are having trouble raising money, we're in a real crisis, and we have to pass what we can now and fix the unintended consequences later.
And some European governments are stepping up to the plate. Tiny Ireland plans to set aside $565 billion to guarantee all the loans and deposits of its largest banks. France is pushing the European Union to consider a similar measure, and there's some speculation the UK may follow.
Surely the Swiss have enough spare francs and gold bars sitting around their vaults in the Alps to do their share, too?
I hope the Treasury Secretary will twist some arms and get more of these countries to pay up. He has said he would. "We are talking very aggressively with other countries around the world and encouraging them to do similar things," he told ABC News.
But for now, at least, the US taxpayer will pick up the tab-just as we bore most of the burden of defending western Europe against the Soviet Union during the Cold War.
Remember Emma Lazarus's famous words, inscribed in the Statue of Liberty:
"Give me your tired, your poor, your huddled masses yearning to be free"?
Let's hope we won't have to add: "And your rich and well-connected, too."
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and are not necessarily the views of InterShow or MoneyShow.com.
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