Why You Want the Bailout

Yes, taxpayers were blindsided by Hank Paulson’s bailout proposal last week. Yes, taxpayers remain angry. But, if you watched any of the proceedings in the Senate over the past few days (without talking heads at C-Span), then you might have realized that just as many senators and congressmen – Republican and Democrat – were as blindsided and angry as you. But, they spent the past few days asking questions, getting answers, forging compromises and putting together a package that would diminish the rewards to corporate CEOs who were responsible for this mess and that would protect the American taxpayer as much as possible.

Still not convinced that this new package might protect you? Think about this: Last night, Washington Mutual (WaMu), the country’s largest savings and loan institution, was seized by regulators after the markets closed.  JP Morgan picked up on the WaMu deal, and customers should see little change in how their accounts operate. At least, until JP Morgan tells those customers how different those accounts might be within their policy realm.

It’s a good thing for WaMu checking, savings, IR and 401k customers that JP Morgan stepped in at the 11th hour, as – and this is the part that should frighten you – the FDIC’s fund for paying out-of-pocket depositors, $53 billion before the crisis, is fast becoming depleted. The FDIC guarantees $100,000 on checking and savings accounts and $250,000 on most retirement accounts should a bank go belly up (those guarantees may fluctuate, depending upon whether the bank in question says your checking or savings accounts are one or two accounts, btw). But, that guarantee is nebulous – which should frighten you even more.

In reality, according to William M. Isaac, former FDIC chairman, the FDIC fund is pure fiction [PDF] :

The reality is that there is no FDIC fund. Anything the FDIC lays out to handle a bank failure must be borrowed by the Treasury, which adds to the federal deficit. The total amount of the current outlay is charged against the federal budget even if recoveries are expected in the future, as problem assets are collected by the FDIC. That’s the case whether the FDIC’s nominal balance at the Treasury is positive or negative.

According to Treasury Secretary Don Regan in 1981, “The banks have been paying money to the FDIC, the FDIC has been turning the money over to the Treasury, and the Treasury has been
spending it on missiles, school lunches, water projects, and the like. The money’s gone.” Nothing has changed since 1981 – the money the banks thought they were storing up for the past half century – sort of saving it for a rainy day – is gone. “If a storm begins brewing and we need the money,” Isaac said, “Treasury will have to borrow it.”

This is the crisis that Paulson is talking about – although it hasn’t been said in so many words. Why? Because a run on banks would deplete the treasury ’system,’ and bank failures would bankrupt the country. Really bankrupt the country, as the Bush administration has dented this country’s finances with its Iraqi war expenditures of over $500 billion. Any money we print now will be worth only the value of the paper that it’s printed on, but it’s a bargaining tool nonetheless.

This is why you want the bailout. But, you want a bailout with caveats to protect the American Taxpayer and that eliminates financial nods to CEOs and that totally eliminates Section 8 in that proposal, which reads: “Decisions by the [U.S. Treasury] 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.” This is one of the sentences which made Nancy Pelosi state that the original bailout plan was “almost laughable.”

Your thoughts?