Workers Vanguard No. 1011
26 October 2012
Bush/Obama and the Bank Bailout
During the 2008 election campaign, we called Barack Obama a “Wall Street Democrat” when the bulk of the left was openly or backhandedly pushing his candidacy. During the intervening four years, Obama has amply confirmed our characterization. Nevertheless, right-wing demagogues like Rush Limbaugh and Glenn Beck castigate Obama as a “socialist,” and Mitt Romney and other Republican politicians denounce him as “anti-business.” On the other side, some leading Democrats are using pseudo-populist rhetoric in attacking the Republicans for favoring the rich. At the Democratic National Convention, Vice President Joseph Biden lambasted the GOP for opposing “even one dollar—one cent—in new taxes for millionaires.” Elizabeth Warren, the Democratic Senatorial candidate in Massachusetts and a hero in liberal circles, declaimed: “Republicans say they don’t believe in government. Sure they do. They believe in government to help themselves and their powerful friends.”
In reality, the Obama administration has been just as subservient to Wall Street bankers as its Republican predecessor. That reality is described in a factually detailed, firsthand account: Neil Barofsky’s Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street (Free Press, 2012). Barofsky is the former Special Inspector General for the bank bailout program, initially called TARP (Troubled Asset Relief Program). His efforts to impose somewhat more stringent conditions on the banks receiving hundreds of billions in government money—greater transparency, limits on executive pay—were continually opposed and obstructed by Obama’s treasury secretary, Timothy Geithner, and his cohorts. With the fervor of the newly enlightened, Barofsky exclaims:
“I had no idea that the U.S. government had been captured by the banks and that those running the bailout program I’d be charged with overseeing would come from the very same institutions that both helped cause the crisis and became the beneficiaries of the generous terms of the bailout.”
As a liberal, Barofsky believes that the U.S. government can and should serve the interests of the American people even at the expense of Wall Street. His assertion that the government “had been captured by the banks” implies that this was a relatively recent development, a notion currently widespread among liberals and reinforced by many reformist “socialists” who have cheered on the populist Occupy movement. However, as Karl Marx and Friedrich Engels stated in the Communist Manifesto over 150 years ago: “The executive of the modern State is but a committee for managing the common affairs of the whole bourgeoisie.” In capitalism’s imperialist epoch, which emerged in the late 19th century, the bourgeoisie as a whole is dominated by the lords of finance.
The financial abuses that concern Barofsky are but a small aspect of the system of exploitation, immiseration and oppression that is capitalism. Even if all of the policies advocated by him had been implemented and strictly enforced, they would have had little effect on the worsening conditions of the working class and poor amid the deepest and most prolonged global economic downturn since the Great Depression of the 1930s. Here one can clearly see the destructive irrationality of the capitalist system. To overthrow that system and with it the political rule of the bourgeoisie, under both the Democrats and Republicans, requires a social revolution carried out by the working class allied with the impoverished black and Latino masses, establishing a workers government. Such a government would expropriate the productive wealth now in the hands of the capitalist class and establish a planned socialist economy, one based on meeting social needs, not maximizing private profit.
The Bipartisan Financial Elite
When the financial crisis hit Wall Street in the fall of 2008, Barofsky was a senior federal prosecutor, specializing in mortgage fraud, at the office of the U.S. Attorney in New York City. He was then offered the job of “SIGTARP,” special inspector general of the newly established TARP, by the outgoing Bush administration. Barofsky was surprised that as a known Obama supporter he was selected by this right-wing Republican administration for a supposedly important financial post.
In its own way, Barofsky’s appointment illustrates how the two capitalist parties, despite their sometimes heated rhetorical exchanges, collaborate when the vital interests of the capitalist ruling class are at stake. Bush’s treasury secretary, Hank Paulson, a former CEO of Goldman Sachs (the country’s premier investment bank), needed support for the bailout from the then Democratic majority of the House of Representatives and Senate. He was willing to pay a small political price by making one of their own the program’s “watchdog.” As it happened, this particular “watchdog” was rendered toothless by the subsequent Obama administration.
The top government financial officials, under both Republican and Democratic presidents, are mainly drawn from the same small pool of the Wall Street elite. A good example was Barofsky’s immediate boss, Herb Allison, head of TARP under Obama. A former CEO of Merrill Lynch, he was brought to Washington by Paulson during the financial crisis in late 2008 and made head of Fannie Mae. A giant government-sponsored corporation involved in mortgage finance, Fannie Mae was effectively nationalized to prevent it from going bankrupt. When the Obama team took over, they retained Allison, shifting him to another component of the government’s bailout of finance capital.
In his own naive way, Barofsky reveals the cynical manipulation of public opinion by the Democrats as well as Republicans. After Obama was elected but before he took office in January 2009, his main economic point man, Lawrence Summers, urged Congress to release the second $350 billion cache of the TARP funds. In doing so he said that the new administration would impose tougher conditions on the recipient banks. Barofsky recounts a conversation at the time with Neel Kashkari (also a Goldman alumnus), who was head of TARP in the lame-duck Bush administration:
“Kashkari dismissed the point, saying ‘Those new conditions are purely political. And I strongly suspect, even if they’re adopted, the new administration may not want you looking too closely at them.’ I was somewhat surprised that Kashkari was essentially accusing his incoming bosses of making false promises to Congress just to get their hands on the second cache of TARP funds. But he was ultimately correct; those ‘commitments’ never saw the light of day.”
Barofsky implicitly assumes that unlike the cynical Republican financial operative Kashkari many members of Congress, presumably mainly Democrats, were taken in by Summers’ “false promises.” They really weren’t that gullible. The main thing driving Obama’s men was to dampen popular opposition to and even outrage over the bailout of the bankers amid increasing immiseration for working people.
Barofsky looked forward to the new administration only to be bitterly disappointed by the replacement of the Republican Paulson by Democrat Timothy Geithner: “Whereas Paulson appeared to view SIGTARP as a potential ally that could help protect TARP and enhance its credibility, Geithner was utterly dismissive.” Geithner is another example of the bipartisan character of the financial elite. A career government functionary, Geithner started out at a think tank established by Henry Kissinger, a major Republican power broker. He then became a protégé of Summers, who served as an economic consigliere in the Clinton administration in the 1990s. Under Bush II, Geithner was president of the New York branch of the Federal Reserve (U.S. central bank). Along with Paulson and Fed chairman Ben Bernanke, he initiated and organized the massive bank bailout.
An early instance of Barofsky’s disillusionment with Geithner’s Treasury Department concerned executive pay for the bailed-out firms. An especially egregious case was that of AIG (American International Group). A global insurance giant, AIG was a major provider of so-called credit default swaps (CDSs), a kind of insurance against the default of various types of bonds. When the financial crisis hit, AIG could not pay off the hundreds of billions it contractually owed to Goldman, JPMorgan, Deutsche Bank and other banks that had purchased its CDSs. The Treasury Department and Federal Reserve duly “rescued” the fallen insurance giant to the tune of $170 billion, money that went to pay off the holders of its CDSs.
In March 2009, Treasury officials approved $168 million in annual “retention bonuses” for executives in AIG’s Financial Products division, in Barofsky’s words, “the very unit whose reckless bets had brought down the company.” Pointing to the AIG bonus scandal, Barofsky comments:
“The Wall Street fiction that certain financial executives were preternaturally gifted supermen who deserved every penny of their staggering paychecks and bonuses was firmly ingrained in Treasury’s psyche. No matter that the financial crisis had demonstrated just how unremarkable the work of those executives had turned out to be, that belief system endured at Treasury across administrations.”
The Treasury officials’ dogged defense of the “staggering paychecks and bonuses” of Wall Street executives is not, however, motivated by the ideological biases that Barofsky ascribes to them. Rather, the false ideology—“these executives are worth every cent they make”—acts as a rationale for their material self-interest. The top officials of the Treasury Department, Federal Reserve and other government financial agencies typically come from and return to the boardrooms and executive suites of the big Wall Street firms. For example, when Neel Kashkari resigned as head of TARP, he moved on to a senior position in PIMCO, the world’s largest investment fund specializing in corporate and government bonds.
The Bank Bailout and Other Financial Scams
The official justification for the bailout was that it would enable and encourage banks to start lending again, especially to businesses, and thereby pull the economy out of the sharply deepening downturn. At the time, we predicted that was not going to happen. Right after Obama was inaugurated we wrote:
“Bank executives are fearful that additional loans will become additional losses. Through the massive sell-off of financial stocks...capitalist investors are forcing bank executives to rebuild their capital base however they can, including by reducing their outstanding loan volume. So any government bailout money is going to be hoarded, used to pay down the bank’s own debt or to take over weaker, failing competitors.”
—“Obama: CEO of Bankrupt American Capitalism,” WV No. 930 (13 February 2009)
Barofsky, who closely monitored how banks were using the bailout money, substantiates this prediction:
“Banks were beginning to talk to the press, and they were saying that they were using their taxpayer-supplied funds for just about everything other than increased lending that had been Treasury’s justification for CPP [Capital Purchase Program]. Buying securities, great; buying other banks, no problem; saving it for a rainy day, sure; but lending? It wasn’t happening.”
One of the few financial programs instituted by the Obama administration that was supposed to directly help working people hurt by the economic downturn was HAMP (Home Affordable Modification Program). Announcing the program immediately after taking office, Obama claimed that it would enable up to four million homeowners to modify their mortgages to avoid foreclosure. To begin with, excluded from this program were people who were faced with losing their homes because they had lost their jobs and couldn’t find another one. To qualify for HAMP required a certain level of income from current employment.
Barofsky explains how this program mainly benefited the banks and their underlings, an especially sleazy type of financial operator called mortgage servicers. The latter collected the mortgage payments and, after taking their cut, transferred the money to the banks. Under HAMP there were two levels of mortgage modification (reduction): trial and permanent. A trial modification was much more lucrative for the banks and servicers than a permanent one. Under a trial modification all mortgage payments, even if made on time, were legally considered “late” because the amount was less than the originally scheduled amount. Participants were therefore charged a late fee that was waived only if the trial status was made permanent.
Servicers naturally used every means available to them, including outright fraud, to prevent trial modifications from becoming permanent. Many families were subjected to a lengthy trial period only to be denied permanent status. The banks then demanded they pay a huge “deficiency” bill—the accumulated difference between the reduced and original mortgage amount—plus late charges. Many families lost their homes because they participated in HAMP! Barofsky writes: “Borrowers who might otherwise never have missed a payment found themselves hit with whopping bills that they couldn’t pay and now faced foreclosure. It was a disaster.”
The HAMP scam demonstrated on a small scale the different ways by which the Democrats and Republicans serve the interests of Wall Street. The Republicans openly express hostility to and contempt for the working class, poor and oppressed minorities. Witness Romney’s recent rant against almost half the U.S. population because they “believe that they are entitled to health care, to food, to housing.” The Democrats claim to stand for the interests of working people, sometimes even at the expense of financial capitalists. But that claim is fraudulent.
In opposition to both parties of capital, we stand for a revolutionary workers party, part of a Leninist-Trotskyist international dedicated to fighting for socialist revolution to overthrow the capitalist order worldwide. This will lay the basis for a rationally planned international economy. Only then will productive forces be developed and utilized such that poverty, scarcity and want are eliminated, creating the conditions for an egalitarian and harmonious society.