[Iowa-dx] Republican Welfare Bailout Of Bear Stearns

Tue, 1 Apr 2008 22:22:00 -0500

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From: Ronald Kinum   GreenPartyRon@activist.com
To: GreenPartyIssues@yahoogroups.com
CC:
Subject: [GreenPartyIssues] Republican Welfare Bailout Of Bear Stearns
Date: Wed, 02 Apr 2008 03:18:53 -0000
Show Full Headers Back To [INBOX]

The Welfare King of the 21st Century
    By Dean Baker
    t r u t h o u t | Perspective

    Monday 31 March 2008

To help advance his 1980 presidential campaign, Ronald Reagan invented
the "welfare queen;" a woman who drove to pick up her check every month
in a Cadillac. This mythical figure helped galvanize support among
working class whites who felt that their tax dollars were being frittered
away on people too lazy to work, most of whom they believed to be black.

There was little truth to the mythology of the welfare queen, the vast
majority of welfare stints were always short and were usually the result
of family breakups or job loss. Furthermore, welfare never amounted to
more than a trivial item in the federal budget, coming in near one
percent of total spending. And, most welfare beneficiaries were white.
But the welfare queen mythology proved to be an effective political tool,
propelling Reagan to an election victory and boosting Republican
prospects over the next two decades.

But the old welfare queen mythology has run out of steam. The Republicans
are victims of their own success. Welfare rolls have plummeted in the
decade following the 1996 welfare reform. Work requirements and harsher
qualification rules make it hard to sell the image of a whole class of
lazy freeloaders.

If the welfare queen is dead, then it's time to say, "Long live the
welfare king." This person really exists, his name is James E. Cayne, and
taxpayers just handed him almost $50 million. Mr. Cayne got this gift
when J.P. Morgan renegotiated the terms of its takeover of Bear Stearns.
The buying price went up fivefold, fetching Bear Stearn's stockholders
$1.2 billion instead of the $236 million in the agreement brokered by the
Fed last week.

While Bear Stearns shareholders may still have been unhappy about their
losses even at the higher price (the stock had been worth more than ten
times as much a year earlier), in reality this was a very generous gift
from US taxpayers. As an inducement to carry through the takeover, the
Fed gave J.P. Morgan up to $30 billion in guarantees, in case the bank
has to make good on Bear Stearns' liabilities. In other words, J.P.
Morgan is being given the opportunity to do some gambling, with the
taxpayers committed to making good any losses. The money that J.P. Morgan
paid for this privilege went to Bear Stearns shareholders, not the
taxpayers.

James E. Cayne did especially well as a result of the taxpayer's
generosity because as the former CEO of Bear Stearns, and current
chairman, he owned a great deal of the company's stock. To put the
taxpayer's gift to Mr. Cayne in some context, this is approximately equal
to the amount paid in TANF to 10,000 working mothers over the course of a
year.

Of course Mr. Cayne and the rest of the Bear Stearns stockholders are not
the only incredibly rich people benefiting from the taxpayers generosity
these days. The Fed's actions are reining down taxpayer money all over
Wall Street. When Fed Chairman Ben Bernanke rushed in to save Bear
Stearns last week, he made two other important policy changes. He
indicated a commitment to protecting other major investment banks and he
opened the Fed's discount window to the investment banks. These are both
huge taxpayer subsidies to these titans of free market capitalism.

The story of the discount window is straightforward. The Fed is allowing
investment banks, which are subject to none of the restrictions or
disclosure requirements of commercial banks, to borrow at a government
subsidized interest rate. Currently the discount rate is two-and-a-half
percent. Those seeking to refinance mortgages, most of whom are probably
better credit risks these days than the investment banks, may want to
call Mr. Bernanke and ask for the same deal.

While the subsidy involved in the below market lending is easy to see,
the commitment to support the investment banks is probably the bigger
subsidy to the Wall Street crew. The basic story here is that the
investment banks made commitments, mostly in the form of credit default
swaps, that they lack the resources to honor. These credit default swaps
are essentially a form of insurance. The investment banks promise to make
payments to bondholders in the event that there is a default on the bonds
they hold.

The banks were prepared to deal with an occasion default, but they don't
have the resources to deal with the sort of large-scale collapse that we
are now witnessing as a result of the bursting of the housing bubble. Mr.
Bernanke has effectively told the banks' creditors not to worry, because
the Fed will make good on these credit default swaps, even if Bear
Stearns, Lehman Brothers, or Goldman Sachs can't.

This is a very nice deal for the investment banks, because they got the
fees for selling the credit default swaps, not the Fed. And they were
very big fees, making the banks and the bank's executives extremely
wealthy. In effect, the investment banks sold insurance that they
actually were not in a position to provide. Instead the Fed is providing
the insurance, but the investment banks get to keep the money they got
from selling the insurance: nice work, if you can get it.

This is yet another episode of the Conservative Nanny State, the story of
the how the government intervenes in the market to redistribute income
from those at the middle and bottom to those at the top. In this case,
the media would have us applaud Mr. Bernanke and the Fed for keeping the
financial system from freezing up and preventing the economic chaos that
would follow.

While the Fed deserves some credit for preventing worse financial
distress in the face of the collapsing housing bubble, government
handouts for the very richest people in the country are difficult to
justify. In other areas, we usually expect to see some quid pro quo, for
example, serious regulations on lending and perhaps restrictions to
accomplish social goals, like a cap on executive compensation ($1 million
a year should attract a much more competent crew). This is welfare as we
know it now.

------------------------------------------------------------------------

Dean Baker is the co-director of the Center for Economic and Policy
Research (CEPR). He is the author of The Conservative Nanny State: How
the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativ=
enannystate.org).
He also has a blog, "Beat the Press," where he discusses the media's
coverage of economic issues. You can find it at the American Prospect's
web site.

__._,_.___

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<TD class=3Dfst><B><FONT size=3D2>From:</FONT></B> Ronald Kinum&nbsp;&nbsp;=
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<TD class=3Dft><!-- --><B>To:</B> GreenPartyIssues@yahoogroups.com<BR><B>CC=
:</B> <BR><B>Subject:</B> [GreenPartyIssues] Republican Welfare Bailout Of =
Bear Stearns<BR><B>Date:</B> Wed, 02 Apr 2008 03:18:53 -0000<BR><!-- --></T=
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<DIV>&nbsp;&nbsp;&nbsp;<B>The Welfare King of the 21st Century</B><BR>&nbsp=
;&nbsp;&nbsp;&nbsp;By Dean Baker<BR>&nbsp;&nbsp;&nbsp;&nbsp;t r u t h o u t=
 | Perspective<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp;Monday 31 March 2008<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; To help advance his 1980 presidential campaign,=
 Ronald Reagan invented the "welfare queen;" a woman who drove to pick up h=
er check every month in a Cadillac. This mythical figure helped galvanize s=
upport among working class whites who felt that their tax dollars were bein=
g frittered away on people too lazy to work, most of whom they believed to =
be black.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; There was little truth to the mythology of the =
welfare queen, the vast majority of welfare stints were always short and we=
re usually the result of family breakups or job loss. Furthermore, welfare =
never amounted to more than a trivial item in the federal budget, coming in=
 near one percent of total spending. And, most welfare beneficiaries were w=
hite. But the welfare queen mythology proved to be an effective political t=
ool, propelling Reagan to an election victory and boosting Republican prosp=
ects over the next two decades.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; But the old welfare queen mythology has run out=
 of steam. The Republicans are victims of their own success. Welfare rolls =
have plummeted in the decade following the 1996 welfare reform. Work requir=
ements and harsher qualification rules make it hard to sell the image of a =
whole class of lazy freeloaders.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; If the welfare queen is dead, then it's time to=
 say, "Long live the welfare king." This person really exists, his name is =
James E. Cayne, and taxpayers just handed him almost $50 million. Mr. Cayne=
 got this gift when J.P. Morgan renegotiated the terms of its takeover of B=
ear Stearns. The buying price went up fivefold, fetching Bear Stearn's stoc=
kholders $1.2 billion instead of the $236 million in the agreement brokered=
 by the Fed last week.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; While Bear Stearns shareholders may still have =
been unhappy about their losses even at the higher price (the stock had bee=
n worth more than ten times as much a year earlier), in reality this was a =
very generous gift from US taxpayers. As an inducement to carry through the=
 takeover, the Fed gave J.P. Morgan up to $30 billion in guarantees, in cas=
e the bank has to make good on Bear Stearns' liabilities. In other words, J=
.P. Morgan is being given the opportunity to do some gambling, with the tax=
payers committed to making good any losses. The money that J.P. Morgan paid=
 for this privilege went to Bear Stearns shareholders, not the taxpayers.<B=
R>
<P>&nbsp;&nbsp;&nbsp;&nbsp; James E. Cayne did especially well as a result =
of the taxpayer's generosity because as the former CEO of Bear Stearns, and=
 current chairman, he owned a great deal of the company's stock. To put the=
 taxpayer's gift to Mr. Cayne in some context, this is approximately equal =
to the amount paid in TANF to 10,000 working mothers over the course of a y=
ear.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; Of course Mr. Cayne and the rest of the Bear St=
earns stockholders are not the only incredibly rich people benefiting from =
the taxpayers generosity these days. The Fed's actions are reining down tax=
payer money all over Wall Street. When Fed Chairman Ben Bernanke rushed in =
to save Bear Stearns last week, he made two other important policy changes.=
 He indicated a commitment to protecting other major investment banks and h=
e opened the Fed's discount window to the investment banks. These are both =
huge taxpayer subsidies to these titans of free market capitalism.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; The story of the discount window is straightfor=
ward. The Fed is allowing investment banks, which are subject to none of th=
e restrictions or disclosure requirements of commercial banks, to borrow at=
 a government subsidized interest rate. Currently the discount rate is two-=
and-a-half percent. Those seeking to refinance mortgages, most of whom are =
probably better credit risks these days than the investment banks, may want=
 to call Mr. Bernanke and ask for the same deal.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; While the subsidy involved in the below market =
lending is easy to see, the commitment to support the investment banks is p=
robably the bigger subsidy to the Wall Street crew. The basic story here is=
 that the investment banks made commitments, mostly in the form of credit d=
efault swaps, that they lack the resources to honor. These credit default s=
waps are essentially a form of insurance. The investment banks promise to m=
ake payments to bondholders in the event that there is a default on the bon=
ds they hold.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; The banks were prepared to deal with an occasio=
n default, but they don't have the resources to deal with the sort of large=
-scale collapse that we are now witnessing as a result of the bursting of t=
he housing bubble. Mr. Bernanke has effectively told the banks' creditors n=
ot to worry, because the Fed will make good on these credit default swaps, =
even if Bear Stearns, Lehman Brothers, or Goldman Sachs can't.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; This is a very nice deal for the investment ban=
ks, because they got the fees for selling the credit default swaps, not the=
 Fed. And they were very big fees, making the banks and the bank's executiv=
es extremely wealthy. In effect, the investment banks sold insurance that t=
hey actually were not in a position to provide. Instead the Fed is providin=
g the insurance, but the investment banks get to keep the money they got fr=
om selling the insurance: nice work, if you can get it.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; This is yet another episode of the <A href=3D"h=
ttp://www.conservativenannystate.org/" target=3D_blank>Conservative Nanny S=
tate</A>, the story of the how the government intervenes in the market to r=
edistribute income from those at the middle and bottom to those at the top.=
 In this case, the media would have us applaud Mr. Bernanke and the Fed for=
 keeping the financial system from freezing up and preventing the economic =
chaos that would follow.<BR>
<P>&nbsp;&nbsp;&nbsp;&nbsp; While the Fed deserves some credit for preventi=
ng worse financial distress in the face of the collapsing housing bubble, g=
overnment handouts for the very richest people in the country are difficult=
 to justify. In other areas, we usually expect to see some quid pro quo, fo=
r example, serious regulations on lending and perhaps restrictions to accom=
plish social goals, like a cap on executive compensation ($1 million a year=
 should attract a much more competent crew). This is welfare as we know it =
now. <BR>
<P>
<HR align=3Dleft width=3D"15%">
&nbsp;&nbsp;&nbsp;&nbsp;<I><A href=3D"http://mail01.mail.com/scripts/mail/c=
ompose.mail?compose=3D1&amp;.ob=3Da3ccdba5dcd1d04a4f970dddbbf662ce26878885&=
amp;composeto=3Dcepr@cepr.net&amp;composecc=3D&amp;subject=3D&amp;body=3D">=
Dean Baker</A> is the co-director of the <A href=3D"http://www.cepr.net/" t=
arget=3D_blank>Center for Economic and Policy Research</A> (CEPR). He is th=
e author of </I>The Conservative Nanny State: How the Wealthy Use the Gover=
nment to Stay Rich and Get Richer<I> (<A href=3D"http://www.conservativenan=
nystate.org/" target=3D_blank>www.conservativenan<WBR>nystate.org</A>). He =
also has a blog, "Beat the Press," where he discusses the media's coverage =
of economic issues. You can find it at the <A href=3D"http://www.prospect.o=
rg/cs/blogs/beat_the_press" target=3D_blank>American Prospect's web site.</=
A></I> </DIV>
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IV></DIV></SPAN></TD></TR></TBODY></TABLE></TD></TR></TBODY></TABLE></DIV><=
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