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Seal of the State of Michigan

Wall Street Bailout

In mid-September, Treasury Secretary Henry Paulson insisted the government would not bail out American International Group (AIG), which was heavily invested in the subprime mortgage market. Thirty six hours later, the Secretary changed his mind and the Federal Reserve provided an $85 billion line of credit to save AIG in the largest government bailout of a private corporation in U.S. history.

It is alleged that Secretary Paulson changed his mind because his former employer, Goldman Sachs, was AIG’s largest trading partner and its collapse threatened to leave Goldman Sachs with a $20 billion loss.

Just days earlier, the failure of global financial services firm Lehman Brothers became the largest bankruptcy in U.S. history, sending global markets into turmoil. The Secretary refused to assist Lehman Brothers, Bear Stearns and other distressed financial firms.

By the end of that same week, the Treasury Secretary came to Congress with a two-and-a-half page, $700 billion bailout proposal for Wall Street, insisting that the White House proposal must be implemented immediately to avoid a severe financial crisis.

It was against this backdrop, that Secretary Paulson and Federal Reserve Chairman Ben Bernanke insisted Congress grant the administration unprecedented authority and power, essentially asking elected officials to handover the keys to the U.S. Treasury allowing political appointees, like Secretary Paulson, to determine which Wall Street financial institutions would receive hand outs. As greed ran amuck, there was now panic on Wall Street.

It came as quite a shock that Paulson, Bernanke and President Bush – the same men who have for the past year continued to insist our economy is sound and that it would survive the subprime mortgage crisis – were now asking Congress for government intervention unprecedented since the Great Depression. Like many of my colleagues, I did not trust their gloom and doom forecast and wanted time to review the proposal before adding $700 billion to our national debt.

Democrats and Republicans worked with the Bush Administration to craft the Emergency Economic Stabilization Act of 2008. I compliment members of both parties involved in these negotiations for their hard work and willingness to compromise to produce a much improved proposal.

I have heard from thousands of my constituents across northern Michigan and have reviewed their messages, emails and letters. My staff and I have reached out to banks, credit unions, small businesses, economists and many constituents across northern Michigan. Most people sensed the urgency of addressing the financial crisis but had many more questions than answers.

While the debates raged over what Congress should do, a consensus on four main principles emerged: there must be transparency on the purchase of troubled assets by the secretary; no windfalls or golden parachutes should be provided for executives; Congress must provide strong oversight; and the taxpayers must be protected. H.R. 3997 falls short in all of these areas.

The bottom line is Wall Street executives enjoyed lavish lifestyles and exorbitant salaries while making risky real estate and mortgage investments. Many of these financial transactions were unregulated and no one exercised oversight of these markets or these individuals. Now the American taxpayer is being asked to bail out Wall Street for such things as NINJA mortgages. NINJA mortgages are those granted to individuals with no income, no job and no assets.

You don’t have to look very hard to find the excesses Wall Street executives continue to enjoy. On September 25, Washington Mutual became the largest bank to fail in U.S. history. Its CEO has been on the job less than three weeks and stands to walk away with $18 million, including a $7 million “signing bonus” just for taking the job. Last year, the CEO of Merrill Lynch walked away with $161 million. The CEO of AIG was offered a $22 million severance package on the heels of the government bailout, but declined to accept it after considerable public pressure. Treasury Secretary Paulson, himself a former chairman and CEO of Goldman Sachs, received a $38 million compensation package in his final year with the company and had a personal net worth of more than $500 million when he became Treasury Secretary!

Although $700 billion is the number being attached to this bailout, even the Treasury Secretary acknowledges the number is arbitrary and was chosen to show the financial markets the U.S. government was serious. No one can tell us the total cost of the bailout, what the taxpayers are being asked to purchase or even if the infusion of $700 billion will solve this financial crisis.

My review of the Emergency Economic Stabilization Act shows that the limitations on Wall Street executive pay and golden parachutes only apply if a financial entity receives $300 million in government help; this $700 billion bailout raises the national debt to $11.3 trillion; taxpayers will have no way to recoup the interest on the $700 billion bailout; taxpayers will have to pay for the administration of this bailout; and finally, no one can tell us where or how the United States will come up with $700 billion.

I am concerned $700 billion is just the beginning and additional billions of dollars will almost certainly be necessary. The bailout is likely to go on for more than five years and over that time I fully expect corruption and criminal activity will be found on Wall Street and, sadly, no one will probably be held accountable to the American taxpayer.

On September 29, 2008, the Emergency Economic Stabilization Act of 2008 (H.R. 3997), which would authorize the $700 billion bailout, failed in the U.S. House of Representatives by a vote of 205-228. I voted “no” on the bill because I could not ask American families – who work hard, play by the rules and struggle to meet their own financial obligations – to bail out Wall Street executives for their reckless, lavish lifestyles.

On October 1, 2008, The U.S. Senate passed its version of the Emergency Economic Stabilization Act (H.R. 1424) by a vote of 74 to 25. This legislation made no changes to the $700 billion bailout provisions that the House voted on. Instead, the bill added additional provisions, including tax incentives for businesses and alternative energy producers, a one-year fix to correct the Alternative Minimum Tax (AMT), and a provision to increase from $100,000 to $250,000 Federal Deposit Insurance Corporation (FDIC) insurance for bank accounts. Unfortunately, the Senate also added special interest tax breaks for rum producers in the Virgin Islands and producers of wooden arrows used for children’s toys, among others. These provisions added an additional $100-150 billion in new spending to the bailout bill, without paying for the majority of this new spending.

On October 3, 2008, the House passed the Senate bill by a vote of 263 to 171. I again voted against the bailout package.

None of the concerns I had raised when the House first considered the legislation were addressed. The bill still did not effectively limit the pay of Wall Street executives, it will significantly increase the national debt, there are still not sufficient protections of taxpayer dollars, and there is still no evidence that this bailout will actually address the problems with our economy. Efforts to attract more votes for the bailout package only made it worse.

This bailout does not represent our northern Michigan values. It rewards bad behavior without any accountability for these irresponsible actions. I remain concerned we are being rushed into this bailout with no opportunity to hear opposing views or alternative proposals. A number of respected economists have said there are better ways to address this financial crisis than merely throwing money at the problem. We should start by holding those who led us down this road accountable for their actions.

The President is expected to quickly sign the Emergency Economic Stabilization Act into law and begin implementing it immediately. As the Treasury Secretary begins to use these funds, I will continue to monitor the Administration to ensure that taxpayer dollars are used wisely.