The Bush Administration’s Banking Rescue Plan by Rodrigue Tremblay

Dandelion Salad

by Rodrigue Tremblay
Global Research, September 23, 2008

“Those who cannot remember the past are condemned to repeat it.” George Santayana

“The bill gives [Sec.] Paulson the ability to nationalize an unlimited amount of private debt and force you and your children to pay for it…. I predict that if this passes it will precipitate the mother and father of all financial panics.” Karl Denninger (Market Ticker)

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Section 8, Bush’s administration proposed legislation to bailout U.S. banks [Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets].

“The Fed is merely trying to inject money to keep prices not supported by fundamentals from falling. It is a prescription for hyperinflation. The only way to keep prices of worthless assets high is to lower the value of money. And that appears to be the Fed unspoken strategy.” Henry Liu, economist

If I may simplify somewhat the situation, (but only slightly) we can say that over the last quarter of century, Wall Street firms bought out Congress and the White House (and paid at wholesale prices). Now, they want the U.S. government to buy them back (and they want to sell at retail prices).

Over the years, indeed, Wall Street firms have lavished hundreds of millions of dollars in lobbying Washington D.C. so that their more and more complicated financial businesses would be less and less regulated. During the 1980s, the Savings & Loans industry (S&Ls) was the recipient of Washington largesse. The epitome was the lobbying by five prominent U.S. senators, one of them Sen. John McCain, to deregulate the borrowing and lending practices of savings and loans banks. During the Reagan-Bush era of the 1980’s, such deregulation encouraged unsound real estate lending by Savings & Loans financial institutions and this led to the 1986-1995 Savings and Loans crisis. Some 747 savings and loans banks failed and about $160 billion was lost, most of it through a $124.6 billion bailout by the U.S. Government.

During the Clinton and Bush-Cheney eras, large banks were allowed to buy relatively long term subprime home mortgages from regional banks and other mortgage lending firms and repackage them, “securitize” them and resell them as sliced mortgage-backed securities. The banks sold them as short term-like commercial paper, but without guaranteeing them. In 1999, for example, the banking industry spent more than $300 million in lobbying Congress and the White House to repeal the 1933 Glass-Steagall Act that closely regulated banking activities. In November 1999, the Glass-Steagall Act was eviscerated after many years of lobbying efforts. It was replaced by the Gramm-Leach-Bliley Act which established the new market-driven unregulated system for many financial institutions, the largest ones being the New York-based investment banks.

With scant regulation, banks could engage in highly leveraged new banking practices, in violation of sound banking practices. For example, regulated commercial banks normally keep a 1:10 ratio between reserves and loans.  But U.S. unregulated entities embarked upon highly leveraged finance, keeping a 1:30, 1:40 or even 1:50 ratio between reserves and risky loans. In so doing, the unregulated banks raked in huge fees at what (they thought) was very little risk for them, because they had hoped to transfer the inherent risk to the buyers of their repackaged securities.

However, when some of the original mortgages downstream became delinquent as the housing price bubble burst, in the spring of 2005, and home foreclosures began to rise, more than $1 trillion of the artificial mortgage-backed securities previously created thus became less secure and less liquid. As time went on, the market for such artificial securities de facto dried up. As a consequence, the issuing banks were left with a large inventory of now toxic securities that nobody wanted to buy. Huge permanent losses replaced huge but illusory short-term profits, although banking CEOs kept receiving large (some would say obscene) total corporate compensations.

The incestuous relationship between unregulated high finance and Washington politics is coming to a climax with the U.S. Treasury Secretary, a former Wall Street CEO of one of the Wall Street banks in relative distress, being declared by legislation a de facto economic tsar and a public Santa Claus. According to proposed legislation, indeed, Mr. Henry Paulson, the former Chairman and Chief Executive Officer (June 1998 – July 3, 2006) of Goldman Sachs, would be entrusted with the power to buy from troubled banks, at his discretion, the bad financial assets they now have on their books. To accomplish that task, as much as $700 billion would be placed in his hands. It is said that Congress, in this election period, does not have time to create an independently-run Bank Resolution Trust under the model of the 1989 Resolution Trust Corp, and all the power to intervene has to be concentrated in the person of the Treasury Secretary.

There you have it. —This is the overall feature of the Bush administration’s plan to place hundreds of billion dollars of public money at risk to shore up the U.S. banking industry and prevent the unstable financial house of cards from collapsing.

At the bottom of the problem is the fact that American banks are presently very short of capital, to the point of being insolvent, because of overleveraged investments in the past and because of the huge losses they have suffered in illiquid mortgage-backed securities. The purchase by government of the most illiquid financial assets they have on their books could have the effect of providing some badly need capital to banks through some form of public subsidies, provided it is done in a not too transparent way.

Indeed, the government rescue of U.S. banks comes down to this: How many of the toxic financial assets is Sec. Henry Paulson willing to buy from banks and at what prices?

The “Paulson put”

Henry Paulson is being placed in the role of a government financial plumber who promises to unplug the pipes of finance and cleanse them of the mortgage-backed sludge. He is asking taxpayers’ representatives for a blank check, to create a huge slush fund, $700 billion, that he would be free to use to buy toxic depreciated securities from troubled banks and relieve their balance sheets from this undesirable load.

If Sec. Paulson were to pay a high price for the most illiquid bank-owned mortgage-backed securities, this would amount to a “Paulson put” because it would have the effect of guaranteeing the profitability of many risky financial operations that otherwise would have failed. As a matter of fact, at what price would Sec. Paulson buy the illiquid bank toxic assets? At 70 percent of initial book value, or at a price closer to market value which may be 20 to 30 percent of face value. Who would know? When? Under what guidance?

Answers to these questions are crucial because they will help to calculate what could be the final cost to the public purse of the bank bailout. But there is a fundamental dilemma here for the government. If Sec. Paulson were to overpay for the banks’ garbage securities, the bailout would amount to a recapitalization of the banks, with taxpayers’ money. This would not be a popular move, considering how much money the banks’ CEOs made in driving their institutions into the ground. On the other hand, if Sec. Paulson were to pay strictly fair market value for those bad debts, priced at a substantial discount to reflect their poor liquidity and marketability, then the troubled banks would have to write down their losses and would still remain weak and unstable.

There is something surreal and profoundly immoral that the individuals who were front and center in creating the subprime financial meltdown are also those who have been entrusted by the government to solve the mess they have created. Are there not independent economic and financial experts in the United States who could have been assigned this task?


Even though it is the primary responsibility of a government to make sure that financial markets and institutions function properly, the Bush administration’s banking rescue plan leaves a lot to be desired before being called economically efficient, and socially and politically acceptable.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and can be reached at

He is the author of the book ‘The New American Empire‘.

Visit his blog site at

Check Dr. Tremblay’s coming book “The Code for Global Ethics” at:

© Copyright Rodrigue Tremblay, Global Research, 2008

The url address of this article is:


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Democracy Now!: Largest Government Bailout of Private Industry in US History

3 thoughts on “The Bush Administration’s Banking Rescue Plan by Rodrigue Tremblay

  1. Pingback: Tragedy in the Making in Washington and on Wall Street: The Canadian Solution | Dandelion Salad

  2. Pingback: Marc Faber: Let the crisis burn itself out « Dandelion Salad

  3. The USA Government is a corporation acting as such.

    Why so much confusion? After all who is this government that is bailing out the big speculative banking and financials corporations with tax payer’s money?

    This government is a corporative institution that does not have any thing to do with what a sociopolitical government is about; a civil apparatus engineered by fair laws and the election of representatives by the vote of the adult population in general; an apparatus which represents all sectors of society as a regulator, law enforcer and protector of the rights and individuality of every citizen.

    The current republican neoconservative government is nothing but the opposite; it has being converted in a, almost, private business whose main asset is the taxing system that is imposed on the labor of the population as a guaranteed source for fresh cash, which is used by the administrators of the corporative government in whatever form they need it to be used for their own private business interests, just to name two of the most popular lets say: Wagging wars for profit all around the world and bailing out failing private enterprises — as the speculative ones from the banks, wall street and the insurance industry all of them parts of the same financial business system that “controls the whole social life” of our American society an the world’s – “to save the core” of the banking-financial-speculative capitalistic system which is their own source of power and control upon the world’s population…

    What this government is doing with its financial strategy, is assuring the total control of the Nation’s finances for their own profit and against people’s wealth and freedom. They had been setting the stage and the structure, in the last eight years, to impose poverty and “slavery”, into the American population and the world’s population, to a calculated and prepared scale that will left not option to people more than to work the rest of their lives for less than peanuts or to go into a civil war to get rid of the “sickness”…

    The patriot act, the laws against bankruptcy and the lending fiasco “to give people a chance for having a house” through bogus loans and now the massive bail out for the speculators doing predatory lending, are part of this strategy, with the first one, the patriot act, having the objective to monitor peoples lives and to build profiles of those, “radicals”, that will oppose any actions that the “government” and other private “patriotic” institutions decide to take for the protection of their system, but not of the people that sustains it. The other “laws” and schemes were designed to impose rules that disempowered individuals and families to protect them selves against predatory businesses as the ones that ere ripping of Americans right now: wars for profit, credit card debt, foreclosures, bailouts for the rich, etc.

    Every thing had been designed to work the way it is, with the goal to make us subjects of persecution and, almost, force labor with none or little benefit but only for the gain of their system. What the American dream was all about at the end and under the law of the financial “free” markets and from the administrators’ perspective and plan, is that eventually the dream was going to be turn to be into a Nazi-financial nightmare.
    Welcome to the post 9/11 XXI century New North American Financial World Order.

    As one commentator had putted it in a column of a Mexican news paper:
    “Like never before it applies the biblical metaphor of Sodom and Gomorra, which symbolizes the biggest degree of concupiscence and lasciviousness that humans are capable…
    “Even the republican presidential candidate, John Mc Cain, who is the most affected; more than Obama, by the this serious financial global crisis, has had no other option that to denounce, against his own free-exchange ideology, the corruption and greed with out control of the Wall Street speculators. The imprecations of the bellicose Mc Cain remind “the curses of the prophet Isaiah” with Wall Street and the City becoming the new global financial Sodom and Gomorra in complete degradation…”
    “Dominique Strauss-Kahn, French director of the IMF, considers that the worst is yet to come, meanwhile the silly Jacques Attali, former director of the European Bank of Reconstruction and Development, assures that the present crisis looks like the 1929 crisis, with the difference that the current one, due to its major interconnectivity, is superior in its extension. To his judgment, the problem lays in the hiding of the accountings of the bad quality actives in many financial businesses…”
    “Incredibly: The financial neo-liberalism is being pulverized by its own entropy. The bad news is that it’s dragging everybody else in its cataclysmic disgrace…”
    “The best as with Sodom and Gomorra, is not to turn back trying to rescue what is gone with the wind already…” ( La Jornada, Bajo la Lupa 9/21/08)
    “The world as we knew it is gone…is the end of an era”; when “the fundaments of the US capitalism had been destroyed” In this way concludes the era of the capitalism with out brakes of the “free market” economy in the USA” (Der Spiegel on line, 09/18/08).

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