As I write this the U.S. House of Representatives has just defeated the Wall Street bailout plan.
On Sunday, the final details of the bill emerged from the fetid backrooms of the nations capital. After intense negotiations congress and the administration managed to put together the costliest and least effective piece of legislation ever to emerge from Washington D.C. The Emergency Economic Stabilization Act of 2008 was supposed to free up the credit markets and get banks lending again. Yet there were no provisions, no mechanism, and no requirements in the bill that would have made this happen. In exchange for their $700 billion dollars, American taxpayers were guaranteed nothing - and they were likely to have received it in abundance.
Even if the bill had had some means in it to revitalize the U.S. banking system, this still would not have happened. The simple reason for this is that the bailout was much too small to have had any significant impact. At no point in the verbose discussions and pontifications in the congressional hearings did anyone specify approximately how large the problem was that this bill was trying to address. I personally had no problem of finding an estimate of $13 trillion of bad loans (which I think is much too low). The Treasury, the Fed and the congressional research staff either couldn't determine this number or didn't want to discuss it publicly. If they had, the absurdity of this latest government endeavor to deal with the credit crisis and its real intent as just a give away to big Wall Street banks would have become immediately obvious.
To make the bailout more palatable, the cost tag was divided into three parts: $250 billion immediately, $100 billion additional at the discretion of the president, and another $350 billion unless congress decided to rescind it (fat chance of that ever happening). The Treasury secretary, not exactly someone known for his good judgment and lack of corruption, still would have had wide leeway in deciding who got the money. Inexplicably, loans up to March 14, 2008 were eligible for government purchase, even though the credit crisis was front page news starting in late July 2007. Why wasn't that the cut off date set for eligible funding?
According to government press releases, the plan was supposed to prevent the big money from profiting big time from the bailout. In reality, the bill insured that this would happen. The bill specifically made banks that acquired assets in a merger or takeover (this includes JP Morgan, Bank America, and Citibank so far) eligible to dump the bad assets they acquired on the taxpayer. This provision was also a de facto bailout for the FDIC, which would itself be bankrupt as of today because of the failure of Wachovia, if it didn't exist.
The taxpayers were supposedly protected in the bill because the government would get some ownership rights in companies that had their bad debts purchased. Rights in a company that fails - and most if not all of these companies will fail - are of course worthless. If after five years the government is facing a loss in the program, the president was required to 'submit a plan'. How submitting a plan would magically restore lost money from out of business companies was not detailed in the bill description.
What about caps on the $50 million dollar paydays for Wall Street executives? The bill created some 'tax restriction' on earnings above $500,000 and imposed some 'limits' on golden parachutes. What those 'tax restrictions' or 'limits' were, seemed somewhat vague. Executives that received huge bonuses in the past were not required to return any of the money before a company received bailout funds from the taxpayer, even if those bonuses had been obtained under false premises.
What direct benefits and new protections would the people paying for the bailout get? The average investor, pension holders, homeowners, people on Main Street in general, those who suffered because of the bad decisions of Wall Street companies weren't to benefit from the government's largess at all - they were only supposed to pay for it.
NEXT: The First Stock Market Crash of 2008