Public backlash against Wall Street bailouts

Here is an article from Reuters on the public backlash against taxpayer funded dividends and bonuses.

(emphasis mine)

October 30th, 2008
TARP, bonuses, dividends and Waxman’s letter
By John Kemp

LONDON (Reuters) - The bitter political divisions between middle America and Wall Street on display when the House of Representatives first rejected the Emergency Economic Stabilization Act last month look set to be re-opened in even more dramatic form in the remaining months of the year.

Rep Henry Waxman, chairman of the powerful House Committee on Oversight and Government Reform, on Tuesday sent identical letters to the chief executives of nine major banks receiving $125 billion of capital injections under the Troubled Assets Relief Program (TARP) demanding details of total bonus payments for 2006, 2007 and 2008 (see 81028142314.pdf).

The issue of bonuses and dividend payouts from banks that accepted the TARP injection looks set to become highly charged.

It is going to be hard for the banks and Treasury to explain why so much taxpayer funding needs to go in through the front door, only for it to flow out again as staff bonuses and dividend payments to ordinary shareholders. Bonus and dividend payments could quickly absorb all the TARP capital funding.

The issue of responsibility for the credit crisis will intensify during the quarterly dividend and annual bonus payout period in Dec-Feb, just when a new administration will be taking office and Democrats are likely to extend their control over both houses of Congress.

The equation between bonus and dividend payments on the one hand and capitalization and TARP funding is a false one. But it will stoke fury in middle America about the cost of bailing out banks while homeowners continue to be foreclosed.

By heightening the political temperature at a key time, it will make a more radical solution to the crisis more likely. For example, buying off political hostility to the continued bonus and dividend payments will almost certainly force Congress and the incoming administration to consider widespread restructuring, loan guarantees and other financial support to homeowners and troubled companies (eg GM) which in turn will intensify the upward pressure on the budget deficit.

The toxic cocktail of TARP, compensation and dividends will complicate budget planning and makes it almost certain there will be significant slippage on the federal government’s budget deficit. Even before the crisis struck, the Congressional Budget Office (CBO) and White House Office of Management and Budget (OMB) were projecting deficits of around $450 billion in 2009.

TARP will add at least another $250 billion to the deficit — because CBO has already reportedly decided capital injections into banks will be counted as 100 pct spending (and 100% revenue when they are finally cashed in) rather than just counting the subsidy element of the credits and estimates of likely losses (which is what would have happened if the TARP had been utilized only to buy troubled assets, as the Treasury originally proposed).

OMB is likely to take a similar view. There is already speculation the Treasury could use TARP funds to help smooth a merger between General Motors and Chrysler. The more of TARP is used for equity injections rather than troubled asset purchases, the higher the deficit will be.

In addition, the worsening downturn may well cut income tax and corporation tax revenues, while boosting expenditure on unemployment insurance and aid to families with dependent children in the form of food stamps.

This is before Congress considers tax cuts, homeowner bailouts or extra spending to stem the tide of foreclosures and stimulate the economy. Using conservative estimates, the budget deficit for fiscal 2009 could easily hit a record $900 billion — $450 billion originally projected plus $250 billion of TARP equity capitalization plus $100 billion in underlying deterioration from the automatic stabilizers of lower tax receipts and higher welfare spending plus $100 billion of stimulus from extra tax cuts and spending.

The US government will therefore need to borrow about $900 billion to finance new deficits as well as around $2.3 trillion to roll over existing debt maturing within the next twelve months.

The cocktail of TARP, compensation, dividends and record debt issuance promises to be very bitter indeed.


My reaction:  Public backlash against Wall Street bailouts is just beginning.  The worse it gets for the average American the greater the anger will grow, and with all the job losses in the pipeline, it is going to get much worse for Main Street America.  Eventually, this anger will greatly complicate life for policy makers when they need to expand the size of the current TARP bailout (banks will need to pay dividends and bonuses next year too).

Another implications of the anger against Wall Street is that it is very bearish for the dollar.  Unless politicians stop throwing money at Wall Street, they will need to start throwing money at Main Street too to calm public outrage.  With the war in Iraq, falling tax revenue, bailouts for Wall Street, and bribes for Main Street, America's AAA rating is already gone (rating agencies will never have the nerve to officially downgrade the US until way after the fact).   Very soon, as governments around the world destroy their balance sheets with bailouts and handouts, there will be a run on all fiat currencies as investors pile into gold and silver.

(One comment in the article above gets under my skin:  "The equation between bonus and dividend payments on the one hand and capitalization and TARP funding is a false one".  Really?  Without TARP, most of these financial institutions would already be bankrupt.  Are Lehman employees getting bonuses this year?  Are Lehman shareholders getting dividends?  No, they aren't.  The equation between bonus/dividend payments and TARP Is perfectly fair.)

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One Response to Public backlash against Wall Street bailouts

  1. Anonymous says:

    It is very difficult to see the benefit of $10 Billion of TARP funds given to Goldman Sachs out of taxes paid by working citizens.

    Goldman is the poster child for very rich speculators who neither sow or reap, whose income from marketing toxic subprime assets was enormous.

    It is doubtful that the bankruptcy of Goldman would have any negative impact on the ordinary citizen, yet its hand is deep in the till of the TARP handouts.

    No wonder there's a backlash.

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