Crimes Against Liberty Page 25
But while many Republican critics argued that this $50 billion fund was the main problem with the bill, others, such as Senator Bob Corker, warned unlimited bailout powers would still exist apart from the fund. In an interview with National Review Online, Corker said the real danger is in the fine print, which confers on regulators the power to bail out firms that aren’t yet technically insolvent. Even without the fund provision, the government could still exercise its unlimited discretion to break up or bail out firms not yet insolvent via the Fed making loans and accepting “the shadiest of assets (such as subprime-mortgage-backed securities) as collateral,” or through FDIC guaranteed loans. National Review Online’s Stephen Spruiell commented, “The only difference is that, rather than being able to ‘pre-fund’ the resolution authority and cap it at $50 billion, the government would ‘post-fund’ the resolution of a failed firm by borrowing whatever it needs from the Treasury and then sending Wall Street the bill.”46
“A CURE FAR WORSE THAN THE DISEASE”
Like ObamaCare, the financial reform bill would likely yield results exactly opposite from those Obama promised. He said he wanted to end the “too big to fail” era, but experts believe his reform would enshrine that very concept into law. This new “all-powerful bureaucracy,” says Heritage expert David C. John, would “actually make future crises—and bailouts—more likely.”47 The bill makes it “more likely that those same institutions that made risky bad bets before will make the exact same mistakes again.” This is because the government’s advance promise to bail out companies “too big to fail” reduces the checks creditors naturally exercise over banks by, for example, demanding higher interest rates on loans to banks that are highly leveraged. With the government’s backing, creditors would be less cautious about making riskier loans.48
Carl Horowitz agrees, noting that the command-and-control model envisioned by the Dodd bill is “a cure far worse than the disease, triggering major misallocations of resources. Rewarding political allies and punishing enemies would become prime criteria for making business decisions.”49 Under this bill, the risk of collapse will intensify, because big financial firms will be spared the risk that encourages them to act responsibly. The Dodd bill, says David John, “does nothing to reduce the systemic risk of today’s ‘too big to fail’ financial institutions or to prevent this risk in the future.”50 What it does do, ironically, is enhance the government’s sweetheart protection for the very firms from whom Obama claims he’s protecting us—quite the sophisticated hustle.
Heritage’s James Gattuso prepared a non-exhaustive list of “14 Fatal Flaws” in Senator Dodd’s bill, a bill which, Gattuso argues, would make “another financial crisis or bailout more likely to occur.” According to Gattuso, the bill would:51 • Create a protected class of firms that would be subject to “enhanced regulation.” This would send a signal that these firms are too big to fail and encourage them to take “undue risk.” It “will be like creating Fannies and Freddies in every sector of the economy.”
• Provide for seizure of private property without meaningful judicial review.
• Create permanent bailout authority. As David John wrote about Obama’s earlier plan—and the same essential arguments would apply to Dodd’s bill—the Fed would have power to consider “unspecified factors” in its determination and “exercise discretion” in evaluating those factors, which translates into “openended power” that “would be difficult to constrain and should be resisted.” Under such a law, investing the government with broad authority to assume control of banks and inject them with cash, coupled with the power to assess penalties on bigger firms to pay for the intervention and cash injections after the fact, just imagine the temptation of a statist like Obama “exercising his discretion” to step in even in marginal cases, knowing that costs could be covered by penalties imposed in the future. What a seamless scheme for further wealth redistribution!52 The bottom line, in John’s view, is that Obama’s financial plan “would give government regulators almost unlimited powers to take over or micromanage financial institutions.”It’s hard to argue with John’s conclusion when you consider the words of Senator Dodd, himself: “Cracking down on the biggest players is critical to ending bailouts. And if a Wall Street firm does become too large or too complex and poses a grave threat to our financial stability, the Federal Reserve has the power to restrict its risky activities, restrict its growth, and, Mr. President, even to break up those institutions.”53 Obama-finance will mean expanding federal control over financial institutions in the name of economic stability and preventing future economic catastrophes caused by firms deemed “too big to fail.” Democratic congressman Brad Sherman, in an interview with Politico, confirmed, “The Dodd bill has unlimited executive bailout authority. That’s something Wall Street desperately wants but doesn’t ask for. The bill contains permanent, unlimited, bailout authority.”54
• Open a “line of credit” to the Treasury for additional government funding, which provides additional taxpayer financial support.
• Authorize regulators to guarantee the debt of solvent banks, if regulators determine there is a liquidity crisis.
• Give the Bureau of Consumer Financial Protection broad powers to limit what financial products and services can be offered to consumers. The stated purpose is to protect consumers, but the effect would be to reduce consumer choice—reminiscent of ObamaCare.
• Give this bureau its own staff and autonomous rule-making authority, and the ability to examine financial institutions with more than $10 billion in assets. John warns with this autonomy it could pass regulations that could endanger the stability of the financial system with Congress having no ability to veto such regulations in advance—before the damage is done.
• Subject non-financial firms to financial regulations. This could lead to “a broad swath of private industry” being “ensnared in the financial regulatory net.”
• Do nothing to address problems at Fannie and Freddie. “There is still nothing in this bill that addresses the perverse incentives and moral hazard that is created when the federal government sticks its nose into the housing market.”55
Another major problem with the bill, highlighted by National Review’s editors, is that it would give unions “proxy access... under the guise of bolstering shareholder rights.” This would “greatly expand Big Labor’s influence over American corporations,” because it would facilitate consolidated voting by large and politically powerful shareholders, such as union pension funds. “Big labor’s agenda will often conflict with the goal of maximizing shareholder value” and “sound corporate management, which the unions would seek to undermine.”56
Despite the bill’s myriad dangerous provisions, the Senate passed it on May 20, 2010, by a 59 to 39 vote with just three Republicans voting for it, after which it headed to a House-Senate conference committee. Senate majority leader Harry Reid bragged, “When this bill becomes law, the joy ride on Wall Street will come to a screeching halt.” After all his savaging of banks, Obama, with a straight face, announced, “Our goal is not to punish the banks.”57 Republican senator Judd Gregg added, “This bill is a disaster because it doesn’t address the fundamental underlying causes of the economic issue, which were real estate and underwriting.” Of the bill’s newly formed Consumer Protection Agency, he said, “It’s going to become an agency which defines lending on social justice purposes . . . versus on safety and soundness of purposes.”58
Gregg couldn’t be more correct. Just as with the subprime mortgage fiasco, government bureaucrats will be forcing banks to make loans to people and institutions that are poor credit risks, which will likely have the same disastrous consequences as the Democrats’ similar policies toward Fannie Mae and Freddie Mac.
GOLDMAN NEEDS NO PROTECTION FROM ITSELF
For all of Obama’s demonizing of banks, it was his party that sided with Wall Street on this issue. Heritage’s Conn Carroll wrote, “It is ‘the big Wall Street banks’ that are supp
orting the Geithner permanent bailout plan.” It was Obama, not some Republican, who “raised about a million dollars from Goldman Sachs employees and executives in 2008, the most any politician has raised from a single company since McCain-Feingold.” Indeed, just as Obama’s push for his financial overhaul package was intensifying, Goldman Sachs promoted the bill in their annual report to shareholders. Goldman CEO Lloyd Blankfein and President Gary Cohn stated in their introductory letter accompanying the report, “Given that much of the financial contagion was fueled by uncertainty about counter-parties’ balance sheets, we support measures that would require higher capital and liquidity levels, as well as the use of clearing-houses for standardized derivative transactions.”59
Goldman’s support for the overhaul plan was suspicious, just as was the ultimate support of pharmaceutical companies for ObamaCare. As usual, an element of sleaze appears to have oozed into an Obama “reform” proposal. So what did Goldman have to gain in exchange for folding? According to the Washington Examiner’s Timothy Carney, Goldman “want[s] the government to reduce the risk that Goldman’s debtors or insurers will run into trouble.”
Blankfein’s statements lend support to that view. He wrote, “The biggest beneficiary of reform is Wall Street itself. The biggest risk is risk financial institutions have with each other.”60 In other words, Blankfein appears to have no objection to the government propping up his fellow “fat cats.” This was, said Carney, an “odd function of government: making Goldman Sachs feel safer in its business dealings.” Also enticing to Goldman, noted Carney, was that these stricter government requirements were designed to renew American investors’ confidence in the stock market, which would hopefully lead to financial firms lending more and Goldman type firms thriving on the “free-flowing capital.”61 The Obama administration employs many Goldman alumni-lobbyists, including Chief of Staff Rahm Emanuel, White House economic advisor Larry Summers, and Treasury chief of staff Mark Patterson. “So who,” asks Carroll, “is really on the side of the American people and who really is doing the work of Wall Street lobbyists?”62
Another wrinkle arose when the government filed civil fraud charges against Goldman. The timing of the suit, just as Senate debate on the bill was ready to begin, was highly suspicious, though the SEC claimed it was acting entirely independently from the administration. The White House professed not to have known in advance about the SEC’s plans to file the suit, but Press Secretary Robert Gibbs nevertheless admitted the complaint helped the cause of financial reform, because it “is a prescient reminder of what’s at stake.”
The White House’s denial of a link between the SEC charges and its efforts to pass the financial reform bill became more suspect when the Democratic National Committee bought online ads capitalizing on the Goldman case.63 Internet surfers entering “Goldman Sachs SEC” in Google were directed to the president’s website by way of a sponsored link titled “Help Change Wall Street.” The web page had a photo of Obama with the quote, “We’ve seen and lived the consequences of what happens when there’s too little accountability on Wall Street and too little protection for Main Street. It’s time for real change.”64 Even if there was no collusion between the White House and the SEC, the political exploitation of a civil suit by the administration was unconscionable.
Obama’s furious attacks on Wall Street were a natural outgrowth of his anti-corporate ideology, but they were also a cynical ploy to whip up public support for his policies by stoking outrage at “fat-cat bankers” and other evil capitalists who seemed to come straight out of a comic book. Amidst all the heated rhetoric, the fact was largely ignored that his signature financial reform bill would benefit the very bankers and other Wall Street veterans who have deep connections to his administration. Denying that government policies and regulations helped spark the financial meltdown in the first place, Obama sought to solve the problems of big government with the only approach he knows: creating more big government. That these policies will depress competition and institutionalize the damaging practices of the past is apparently of little concern to this administration. They don’t necessarily want a successful America; they want a transformed America—and with the financial reform bill, that is what they’re trying to deliver.
Chapter Ten
THE COMMISSAR
CRIMES AGAINST AMERICAN INDUSTRY
Obama has exerted power beyond that of any previous U.S. president. On March 29, 2009, his Treasury secretary Tim Geithner made the Sunday talk show circuit to explain that some banks would have to take new TARP monies against their wishes—which was consistent with Obama preventing J. P. Morgan executives from repaying their TARP funds. Later that same Sunday, Obama made another extraordinary move, firing General Motors CEO Rick Wagoner. As an indication of widespread opposition to federal control over the auto industry, GM’s stock fell 25 percent the next day upon news of Wagoner’s firing. But Obama and Geithner were unchastened. Geithner told CBS News’ Katie Couric that “of course” he was open to the option of pressuring CEOs of “troubled banks” to resign as well. The government, he said, “has had to do exceptional things.”1
Republican senator Bob Corker called the Wagoner firing “a major power-grab by the White House on the heels of another power-grab from Secretary Geithner, who asked last week for the freedom to decide on his own which companies are ‘systemically’ important to our country and worthy of taxpayer investment, and which are not.” He said it was “a marked departure from the past,” “truly breathtaking,” and “should send a chill through all Americans who believe in free enterprise.”2 CNBC economist Larry Kudlow noted that this was the proper domain of bankruptcy courts, not the executive branch. Corker agreed, telling Kudlow that “today, a bright line was crossed.... Now, in essence, they have taken over these companies.” He accurately predicted that soon the executive branch would be deciding which GM plants would stay open and which would close.3
A few days after the firing, Obama and Treasury secretary Giethner were reportedly weighing a plan to divide the “good” and “bad” assets of GM and Chrysler before putting them into bankruptcy. This would effectively nationalize a major portion of the auto industry—an action unprecedented in American history and, in the words of the Wall Street Journal, one which would “represent one of the biggest-ever government incursions into private enterprise.” Obama and his henchmen were deeply immersed in micromanaging a wholesale restructuring of the companies, planning on allowing Chevrolet and Cadillac to remain independent while selling the equity in Chrysler to Fiat SpA. Obama played both ends against the middle, warning the automakers they had only brief windows to formulate plans to justify government support, then saying he would do all he could to salvage the industry. “We cannot, we must not, and we will not let our auto industry simply vanish,” he vowed.4
Just as Obama would later duplicitously claim his healthcare plan would not interfere with patients’ choice of their doctors as he signed into law a bill contradicting his assertion, he insisted he had no intentions of taking over GM at the very same time he was cementing plans to do just that. Obama had another motive to subsume the auto industry beyond his claim that automakers were “too big to fail” and jobs had to be preserved. As with his redirection of the space program, he aimed to push his environmental agenda from the inside—to force automakers into producing more energy efficient vehicles.5 As Peter Kaufman, president and head of restructuring at investment bank Gordian Group LLC, said, “The big question is whether the government, as a shareholder, will be focused on GM making money, or it making clean and green cars, or whatever other political agenda they have for the auto space.”6
That question was answered when Brent Dewar, Chevrolet vice president, told dealers they should learn to sell small cars, based on projections that smaller cars will overtake trucks and SUVs as GM’s best sellers.7 On the other hand, we saw an interesting glimpse of liberal hypocrisy at work as the “New GM” conspicuously withdrew from an environmental partnership
called the End of Life Vehicle Solutions (ELVS). ELVS was created to collect toxic parts from scrapped cars to prevent the release of mercury emissions into the environment when vehicles are crushed and shredded. But the new government managers weren’t so concerned about the environment when their own credibility was at stake in making the new company a financially viable entity. New GM basically said the mercury in the old vehicles wasn’t its problem, as those vehicles remained with Old GM.
New GM’s environmental callousness was rather untimely, as Obama’s “cash-for-clunkers” program was expected to lead to the trade-in and recycling of an estimated 750,000 vehicles, some of which contain mercury switches whose destruction could cause mercury pollution. Clearly, it’s always easier to preach environmentalism to the other guy than to abide by the rules yourself. ELVS executive director Mary Bills commented, “We’re surprised that GM, who wants to have this great green image, would do this.” New GM’s spokesperson dismissed the company’s culpability, claiming the responsibility for participating in the partnership remained with Old GM. But that was small comfort to other partners, as Old GM was but a composite of GM’s liabilities and under-performing assets.8
Without any semblance of constitutional authority, Obama announced he would unilaterally guarantee federal warranties for all new GM and Chrysler vehicles. Why should taxpayer dollars guarantee—retroactively, no less—the quality of a car? Why should the federal government offer to make such a guarantee without any inquiry into whether it was a prudent decision? But being a politician with no business experience, Obama unilaterally declared carte blanche responsibility on behalf of the federal government, as if he had an endless supply of money. Obama also expressed support for a congressional bid to offer large tax incentives for new-car purchases from stimulus monies, without bothering to justify that expenditure either. At least he was being consistent: since he didn’t have to justify his use of bank bailout money to keep Chrysler afloat with emergency loans, why should he have to justify using “stimulus” funds for a purpose not contemplated by the law?