Tuesday 30 September 2008

Errata in Michael Moore’s polemic against the Emergency Economic Stabilisation Act

Michael Moore provides five criticism of the $ 700 billion Emergency Economic Stabilisation Act of 2008. It is strange, to say the least, that these reasons are chosen, given that there is so much evidence in the Act to the contrary.

I also wonder at his contention that “Of course, sane people know that nobody "lost" anything yesterday..” Is Mr. Moore not aware of that there are at least 60 million US holders of Individual Retirement Accounts and 401(k) plans which are heavily invested in stock market equities? Is he not aware that a significant share of pension assets held by CALPERS, various state and university endowment and other funds is in the stock market? Is it such a light thing to wipe off $ 1.2 trillion in value?

But let’s leave philosophy aside and get to the facts of his argument. Moore claims that:

1. The bailout bill had NO enforcement provisions for the so-called oversight group that was going to monitor Wall Street's spending of the $700 billion;

2. It had NO penalties, fines or imprisonment for any executive who might steal any of the people's money;

3. It did NOTHING to force banks and lenders to rewrite people's mortgages to avoid foreclosures -- this bill would not have stopped ONE foreclosure!;

4. It had NO teeth anywhere in the entire piece of legislation, using words like "suggested" when referring to the government being paid back for the bailout;

5. Over 200 economists wrote to Congress and said this bill might actually WORSEN the "financial crisis" and cause even MORE of a meltdown.

On the first four points, he is wrong:

1. Enforcement
The Act has sufficient enforcement oversight mechanisms, including the following:

a. The Financial Stability Oversight Board is established, comprising the Chairman of the Federal Reserve, the Secretary of the Treasury, the Director of the Federal Home Finance Agency, the Chairman of the Securities and Exchange Commission and the Secretary of the Department of Housing and Urban Development.

b. The Secretary of Treasury is required to report every 60 days, and for every tranche of $ 50 billion spent.

c. All transactions are to be reported within 48 hours.

d. The Secretary is authorised to draw down only $ 350 billion in the first tranche.

e. The Comptroller General is required to report every 60 days, implement an annual audit and develop monitoring mechanisms.

f. An Office of the Special Inspector General for the Troubled Asset Relief Programme is established to further inspect and monitor TARP’s actions.

g. A Congressional Oversight Panel is also established to monitor TARP every 30 days.

h. The Act enables the FDIC to take enforcement action “against any person or institution where the banking agency has not acted, and requires cooperation with the FBI and other law enforcement agencies.

i. The Government Accounting Office (GAO) is given space and oversight capacity within the facilities of the Department of Treasury to monitor the Act. This is in line with SEC regulatory practise.

Section 104 gives the Oversight Board the specific responsibility to “report[e] any suspected fraud, misrepresentation, or malfeasance to the Special Inspector General for the Troubled Assets Relief Program or the Attorney General of the United States, consistent with section 535(b) of title 28, United States Code.” The Board is also responsible for appointing a credit review committee for the specific purpose of evaluating the purchase authority and the assets acquired through the exercise of such authority.

This is fully in line with US government law, and operates in the same way that Congress provides an oversight function of Federal Government spending. It is simply not true that there are no enforcement provisions.

2. Penalties
The Oversight Board is able to take criminal action against executives who improperly profit from TARP. Note that Moore uses the term “steals”: if this is the case, the issue will be handled by the Attorney General or the FBI, as per US law.

Section 101 (e) requires the Secretary to take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset.

Section 111 restricts executive pay, in particular the use of Golden Parachutes, as a further means of enrichment.

3. Foreclosures
The argument that there are no specific provisions to minimise foreclosures is absolutely untrue:

Section 110: “For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.”

Section 110 “Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.”

Section 124. “Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.”

4. No Teeth
This is absurd. The language of the Act is filled with specific provisions, using languages like “requires,” “audits,” “must implement,” etc.

Furthermore, Mr. Moore ignores the provision of Section 134, which “Requires that in 5 years, the President submit to the Congress a proposal that recoups from the financial industry any projected losses to the taxpayer.”

This means that any losses incurred from lower asset prices will be refunded by the financial industry, most probably through a special tax.

I’m not going to respond to his fifth comment, except to say that (a) there will be inevitable policy disagreements with policy initiatives of this sort, and (b) recommendations on alternatives – such as direct injections of capitalisation into the banking system or nationalisation following the Swedish model are impossible in the current business climate and culture of this country.

To conclude: I’m rather surprised Michael Moore is this far off base. I can only presume that he didn’t read the plan, or is not aware of how the division of powers between the executive, judicial and legislative branches of the US government work. The alternative is that there is some bizarre political motivation to his writing, which given the current state of financial markets, is absolutely inappropriate.

1 comment:

  1. The HOPE for Homeowners Act needs to pay less than 36.5 % of the face value of the subprime mortgage back securities. If more is paid the government loses money in the long run and owners of the securities profit now. nomedals.blogspot.com