Outrageous Credit Bailout Expands – Foreign Banks?

| September 21, 2008

Congress and the treasury have been working all weekend to rob the US taxpayer of $1.2 Trillion by putting every one of us taxpayers on the hook to repay all of the bad investments their oligarch pals made over the last 10 years, while letting them keep all of the profit.

Now word surfaces this morning that this play may include foreign banks. This comes from the Politico, so take it with a grain of salt:

In a change from the original proposal sent to Capitol Hill, foreign-based banks with big U.S. operations could qualify for the Treasury Department’s mortgage bailout, according to the fine print of an administration statement Saturday night.

The theory, according to a participant in the negotiations, is that if the goal is to solve a liquidity crisis, it makes no sense to exclude banks that do a lot of lending in the United States.

The legislative outline that went to Capitol Hill at 1:30 a.m. Saturday had said that an eligible financial institution had to have has “its headquarters in the United States.” That would exclude foreign-based institutions with big U.S. operations, such as Barclays, Credit Suisse, Deutsche Bank, HSBC, Royal Bank of Scotland and UBS. The theory, according to a participant in the negotiations, is that if the goal is to solve a liquidity crisis, it makes no sense to exclude banks that do a lot of lending in the United States.

But a Treasury “Fact Sheet” released at 7:15 last night sought to give the administration more flexibility, with an expanded definition that could include all of those banks: “Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.”

I submit that this was always part of the plan, but like any shrewd negotiators, they got agreement on what seemed reasonable first, and then started walking the deal towards what they wanted / needed in the first place.

This nicely reveals the underlying weakness in the heist that Treasury is undertaking – if you pump all of this taxpayer money into the big investment houses, you still won’t avoid the crash. Thanks to efforts to globalize everything, the whole world is now tightly coupled. We can no more isolate our financial disaster from the disaster looming in China, the EU or the UK than they can from us. The global credit disaster reached nearly every corner of the world, and unless every government plunders their citizen’s money (as Uncle Sam is working up) this is going to fail.

Bernanke is a student of the great depression, and he has said many times it could have been avoided by broader direct government intervention at the time. He is putting is old college theory to the test in real time it seems, but like most college theories, they lack the solid underpinning that only an engineer can give it. Mathematically this one is a long shot, but will in the processes bankrupt millions of US citizens who had no part in, and did not process from the largest credit bubble / Ponzi scheme every constructed.

[Update – Henderson] The awesome Calculated Risk has more on this story, information is now in the latest Treasury Fact Sheet released last night, Of particular note is this piece:

Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury’s general fund for the benefit of American taxpayers.

As usual, they want to take our money in the form of taxes, use it to pay $100.00 for something that is worth effectively $0 in today’s market, and if they accidentally make any money, well they are just going to keep it. Nice…

[Update 2 – Henderson] The end must nigh, I find myself in massive agreement with a staunch liberal, one Paul Krugman who in the past I have mentally likened to a bowl of limp lettuce. In (of all places) the New York Times:

I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.

And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I’m wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work — not try to panic Congress into giving it a blank check. Otherwise, no deal.

This “Big Game” is more than just economics on a global scale, we may be about to see a series of events that will re-cast social and political alignments. The fact that Paul Krugman and I align is just one sign of that.

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Category: Credit Backlash, Economics, Main, Recession Watch

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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