Why Obama Allowed Bailouts Without Indictments

Financial Crisis Evidence

In November 2008, President Obama was elected, and he was sworn in January 2009. The country was promised change and reform. Recently two democrats close to the top of President Obama’s administration made excuses to me for the lack of financial reform in the United States. Their separately related versions were remarkably similar, so similar they seemed scripted: The administration made a bargain, and I’m not sure it was the right decision. The world was teetering on the edge of collapse. There was a crisis of confidence. There would have been unimaginable consequences. So bad even your imagination can’t handle the truth?

It was the lesser of two evils to let a lot of people get away scot free than to risk a collapse in confidence.  There were only two choices according to this narrative.

It was better to let a lot of people get away scot free than to have the first African American president take on the establishment while the country was deeply divided and he needed agreement on big things like ending wars, health care, Supreme Court nominees (and LGBT rights). There were lots of battles without taking on the financial establishment.  It seems to me that reforming our financial system is a big thing. As for at least two of the narrative’s big issues: health care costs are zooming up, and it looks as if we’re rattling our swords for another military conflict.

The president was elected in part on his promise to effect change on the really tough issues, and there was no better time than when the crisis was fresh, and he had a groundswell of popular support.

All About Money

Another of President Obama’s broken campaign promises was that he would enact campaign finance reform. I believe that went right out the window, when he realized during his first campaign that corporations would throw money at him.

If the White House really didn’t like the Citizen’s United v. Federal Election Commission decision in 2010, it could have used moral suasion to work with Congress to amend our Constitution.

It now appears to many citizens as if the chief goal of most of Congress is to be reelected, and that means they’re more interested in campaign contributions than in representing the interests of their constituents and the country. As for upholding the Constitution, it is only a priority when it coincides with the special interests they seem to represent.

A Myth of the Crisis: There Wasn’t Time to Prepare

One of the myths of the financial crisis is that no one saw it coming. HSBC wrote off $6 billion related to subprime loans for the fourth quarter of 2006, and U.S. banks pretended they had no losses. The ABX-HE 06-2 BBB- subprime index dropped like a stone in the first quarter of 2007. I questioned why banks weren’t taking write-downs. The cover-ups of 2006 weren’t working anymore.

Mortgage lenders went bankrupt. Ownit’s bankruptcy at the end of 2006 was large and public. New Century, another huge lender, hit the skids. Although Countrywide didn’t go critical until August 2007, it was already in trouble. Dozens of other mortgage lenders went bankrupt in the first quarter of 2007.

U.S. banks continued fudging. In the first half of 2007, they issued more fraudulent CDOs than for the full year 2006, as they desperately tried to shove losses on unwary investors.

Financial regulators publicly denied there was a problem, when they should have raised a ruckus. Congress did nothing. The sheepdogs that are supposed to protect the flock from the wolf pack are really wolves in sheepdogs’ clothing. They exit the regulatory revolving door in expensive bought and paid for wolf-skins.

Alternative to Treasury Bailouts: One That Does Not Violate the Spirit of Democracy

The Treasury’s plan was a variation of the Paulson Plan. It used billions of taxpayer dollars and forced risk and potential losses on taxpayers—instead of having those who enjoyed the gains take the consequences. I advocated a viable alternative.

In September 2008, there was no longer time to break up the banks all at once and no time for unwinding AIG. But a temporary backstop was possible, along with a restructuring in which either 1) creditors agree to discount debt in exchange for warrants (for potentially viable enterprises) or 2) creditors agree to transform (possibly discounted) debt into new equity—a new capital structure in which former shareholders are wiped out.

Instead of TARP, handing out money to cover banks’ losses, we could have forced creditors to accept a restructuring plan. This is what was done during the Great Depression. Creditors, i.e., debt holders including credit default swap counterparties, would have been compelled to accept a restructuring plan. That required partial forgiveness of debt in many cases and/or a debt for equity swap.

The government’s bailout plan destroyed capitalism. In a capitalist system, those who stood to gain–and already made off with large gains—would have to bear the risk. The bailouts represented a corruption of capitalism. Crony capitalism violates the spirit of democracy established by the Founding Fathers of the republic known as the United States. I expressed these sentiments in a letter to the Financial Times on September 29, 2008.

READ ENTIRE ARTICLE HERE: http://www.tavakolistructuredfinance.com/2013/09/potus-bailouts-without-indictments/

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