The U.S. economy has enteredan accelerating downward spiral.As confidence wanes, spending has dried up. This situation hasaffected many consumers’ ability to service their debts. Mortgage default rates have risen. Savingsrates have plunged. As a result of excess Treasury borrowing (nearly 1.2 trillion in the last 90days) easy credit has dried up.This has reduced demand for stock financing, and as a result the stock markets have lost more than 35% of their value. These dramatic investment portfolio losses have potential retirees reconsidering their options and a nation wringing its hands. Manufacturing is suffering. Since our last quarter publication 1.2 million Americans have lost their jobs.

The Detroit auto makers have told Congress that they are facing immediate bankruptcy and seek $20 billion or so in loans. Merrill Lynch, Bear Stearns, Stalwarts and Lehman Brothers have vaporized huge sums of money in their demise,while Goldman Sachs and Morgan Stanley have taken a more modest $25 billion in TARP funds. The FDIC has expanded their list of problem institutions to include 171 banks. In October Congress authorized Treasury Secretary Henry Paulson to infuse $350 billion in taxpayer money to “restore liquidity and stability to the financial system...in a manner that protects home values, college funds, retirement accounts, and life savings…preserves homeownership and promotes jobs and economic growth. ”The Secretary has so far failed miserably in this mandate.

When Congress was originally confronted with a solution, Secretary Paulson indicated that he would spend the funds to purchase mortgage-related assets from financial institutions. After all, these so called mortgage defaults or toxic debt as Paulson termed them, were the cause of the crisis weren’t they? However, he did not do that. Instead, Secretary Paulson doled outnearly $300 billion dollars to his colleagues in the banking community. The Secretary has provided 88 financial institutions with $205 billion with a dubious result, as intended by the legislation. Taken as a whole, the money given to banks and other favored institutions amounts to roughly $2,686 per taxpaying household. In the shadow of the drama, the stealth bailout has progressed.

The Federal Reserve organization, which is owned by the Banks receiving the TARP money, has injected nearly $2 trillion dollars into the coffers of its members, without Congressional appropriation or approval and most certainly without oversight. On November 25, Paulson announced that the Treasury would help the FRB fund a $200 billion program that would participate in the finance of auto loans, credit card debt, and small business loans. According to Secretary Paulson this “will enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower cost consumer finance and small business loans.” In the area of most concern, housing, the Treasury has a plan to allow the FNMA to facilitate the issuance of 30 year purchase money mortgages at a 4.5% rate to the nations homebuyers. Furthermore, FDIC Chair Sheila Bair has put forth a proposal for loan modification programs for defaulted homeowners that would allow them to reduce their debt and to keep their homes. The Treasury has failed to monitor the use of the funds provided to these favored financial institutions. The revelation of lavish partie sat AIG and huge bonuses beingre-designated as “employee retention payments”, epitomizes the attitude of business as usual.

Unmonitored and unfettered spending of taxpayer funds is what the Treasury has allowed the banks to accomplish. To date, not one of these FRB owned banks has been quizzed on how it spent the $250 billion in “direct equity investments”. Contrast this with the hapless automakers who are faced with the prospect of a ‘car czar’ before they can even get a loan for a meager $15 billion. This is clearly a double standard. Financial firms, with their well connected white collar employees, were given your money as an “equity investment” not a loan, with virtually no oversight or accountability while automakers with their largely blue collar employee base, are being burdened with regulatory nightmares before being considered for a relatively minor loan. Many arguments provided for the banks equity injections suggest that we the people are getting a “good deal” on the assets that they have acquired. Warren Buffett announced on September 23, 2008 that he would invest $5 billion for a 5% stake in Goldman Sachs for a 10% annual dividend. Exactly one month later our purchaseof 5% cost taxpayers $10 billion or double the price Buffett paid. The Abu Dhabi Investment Authority invested $7.5 billion to acquire 5% of Citigroup. Its preferred shares pay an 11% annual dividend. Our purchase of Citigroup senior preferred shares pays annual dividends of 5% for five years and 9% thereafter. The Treasury also provided $306 billion in loan guarantees to Citigroup’s investment portfolio.

So much for getting a good deal. Not only has the money been given out without a guarantee of repayment or a requirement of oversight, but we receive an inferior return on investments in all cases. In general, the Treasury has not attempted to assess the business plans or accounting practices of firms receiving aid. They are allowing banks to extend loans to favored clients who then buy assets on the cheap. When John Pierpont Morgan himself was called before the Pujo committee in 1908 to explain his bank’s practice of loaning money to clients regardless of their creditor collateral, Morgan replied that the most important thing to him was the character of the person. Character indeed. JP Morgan’s characters used 1908 money to corner entire industries, thereby profiting from the collapse. Today, Paulson tells us that the Treasury has only one criteriain deciding who gets moneyand who does not: is the business viable. That is not quite as nebulous as character but equally indefinable. The Treasury has stated that the process is consistent for all banks and no bank has everbeen denied. The Secretary’s actions thus far have directed funds to financial institutions that he has had professiona land personal profit from for over 40 years. Oversight or not, a clearer conflict of interest could not be found.