Richard Shelby: United States Senator or Foreign Corporate Agent?

Alabama Senator Richard Shelby has emerged as the leader of Republican opposition to a federal rescue of the Big Three U.S. automakers. Shelby would have us believe that his position flows out of a deep belief in market forces. “The strength of the American system,” he said recently,” is it allows us to take risks—to create, to innovate, to grow, to succeed and sometimes to fail.”

While Shelby (seen in photo with Saddam Hussein) is credited by some for consistency in that he also opposed the big federal bailout of financial institutions, he’s been called a hypocrite because his home state lavished major economic development subsidies on Asian and European automakers—a total of more than $750 million to Mercedes, Honda, Toyota and Hyundai over the past 15 years. These transplants, all non-union, have given the Yellowhammer State one of the country’s largest auto sectors, albeit one that is foreign controlled.

Shelby insists that Alabama’s handouts to the foreign automakers are not relevant to the current debate, but what he and his critics are both ignoring is that the funds channeled to the likes of Mercedes and Honda have not been only state and local. The federal government has also provided assistance to the transplants, and Shelby, along with other members of the Alabama Congressional delegation, helped that happen.

A stroll through the archives of Alabama’s newspapers on Nexis makes this clear. In 1993, when Mercedes was lured to the state with a $250 million incentive package, Shelby praised the deal, stating: “Alabama put together a smart investment package that in both the short and long term will yield solid results for our state” (Birmingham News, 9/29/93). Federal money helped pay for some of the highway improvements that were promised to Mercedes to make the site more appealing (Birmingham News, 10/21/93).

In 1999, when Honda was induced to build a plant in Alabama with a $250 million package of its own, the Alabama delegation quickly mobilized. On May 7, 1999, Michael Brumas of the Birmingham News reported: “Alabama members of Congress said Thursday they will be looking for ways the federal government can help underwrite part of the costs associated with building the new Honda plant at Lincoln. And the lawmakers pledged to help the automaker maneuver through the federal bureaucracy as it prepares to build the plant.” The article said Shelby, as chair of a transportation appropriations subcommittee, was expected to funnel money for road projects near the site.

In 2001, when the Korean automaker Hyundai was deciding where to locate its first U.S. plant, Shelby and other members of the Alabama delegation met with the company (Birmingham News, 10/11/01). After the state won the plant with yet another package of around $250 million, Shelby arranged for $445,000 in federal funds to go to the Alabama Tombigbee Regional Commission, which planned to arrange free bus and van service to take construction workers to the Hyundai site (Montgomery Advertiser, 9/10/02). And these are only the cases that found their way into the press.

Shelby is far from the only senator to have used his office to arrange for federal funds to help a company in his state. But the fact that Shelby has worked so hard for the foreign automakers and now opposes measures deemed necessary to protect the jobs of three million American workers in the auto industry and related sectors makes one wonder whether he should be seen as a U.S. Senator or a foreign corporate agent.

Chicago Sit-In and the Future of Green Jobs

The sit-in at Chicago’s Republic Windows & Doors brings together a host of issues such as labor rights in a plant closing, the refusal of a major bank receiving billions in federal bailout funds to invest in a struggling company, and the fragility of blue-collar employment in the weakening economy. Let me add another to the mix: the fate of green jobs.

Coverage of the labor dispute tends to treat Republic as an old-line manufacturer desperately trying to survive in a new economy. On the contrary, Republic’s business – the production of replacement windows – is a key component of the clean energy revolution being so widely touted these days. Installing those windows lowers the amount of energy used by homes and commercial buildings, thereby reducing the need for new fossil-fuel-burning power plants. The Apollo Alliance is calling for a national energy efficiency commitment to reduce energy use in new and existing buildings at least 30 percent by 2025.

Before it fell on hard times, Republic was promoting green principles not just in terms of the uses of its windows but also in the way its products were made. In December 2003 the company issued a press release announcing that it was developing a “cradle to cradle” design system that would allow the materials in its windows to be fully recycled, thus avoiding the generation of waste. The project received funding from the Chicago Department of the Environment. In a follow-up interview with Industry Week, company executive Les Teichner said Republic was also looking into ways to expand the life span of window frames so they could remain in place longer while the company would replace and recycle window sashes more frequently.

It’s not clear to what extent Republic was able to follow through on its ambitious environmental plans and what role they played in the company’s competitive and financial circumstances. It is also not yet known whether the announced closing of the company last week was more the result of a shutoff of credit by Bank of America or a decision by the company’s owners to move the operations out of state.

In any event, the situation serves as a cautionary tale for proponents of green jobs. We cannot assume that the clean-energy revolution will happen spontaneously nor that the kinds of jobs it creates will necessarily meet the highest standards. Aggressive government enforcement of labor laws and strong union advocacy of the sort being demonstrated by the UE at Republic will be necessary to fulfill the promises of the green-collar economy.

Rank-and-file activism like that being employed by the Republic workers will also be a key part of the equation. The Republic sit-in harkens back to the labor militancy of the 1930s but it also looks forward to the coming struggle to create a future of secure, well-paying and environmentally-friendly jobs.

Congress Busts the UAW

The United Automobile Workers has been effectively decertified as the collective bargaining representative of workers at General Motors, Ford and Chrysler. And the main union buster was not management, but rather the Congress of the United States.

That’s only a slight exaggeration of the facts. The UAW, fearing that its contracts at the Big Three would be voided if the automakers filed for bankruptcy, has made major new contract concessions to satisfy Congressional critics of a bailout that the auto companies insist is the only way they can avoid Chapter 11. In order to save its union contract, the UAW is being forced to destroy it.

It is infuriating that the UAW was put in this situation. First, there’s the obvious and widely noted double standard. The federal government has spent vastly more on the rescue of the financial sector while imposing no real conditions beyond token restrictions on executive compensation. By contrast, the auto industry, especially its workforce, is being put through the wringer.

Second, many of the members of Congress speaking out against the auto industry bailout are from Southern states where Japanese, Korean and European automakers have set up non-union plants with the aid of huge state subsidy packages. These lawmakers are functioning more like foreign agents than legitimate representatives of the United States.

And then there are the Congressional leaders who think they can remake the auto industry by insisting that the Big Three come up with new business plans to merit the federal intervention. Pressuring Detroit to move faster on the development of clean cars may be a good thing, but these would-be industrial policymakers are ignoring the fact that a bailout of the auto industry at this point is justified mainly as a way to prevent an accelerated collapse of the overall economy.

Yet, by pressuring the UAW to give up, for instance, what remains of the jobs bank program (a job security measure that provides nearly full pay for laid off workers), Congress is assuring that more people will end up on the unemployment rolls instead, thus taxing already strained state government budgets. Another of the main givebacks consented to by the UAW were delays in company payments to retiree health plans. This raises the odds that those plans, over which the UAW was previously pressured to assume administrative control, will collapse, forcing participants to turn to taxpayer-funded healthcare.

And these measures, which UAW leaders could implement without a vote of the membership, will apparently be followed by more wage concessions. Just when Congress is desperately trying to stimulate job creation and prop up family income in the larger economy, it is pressing the auto industry to take steps that will have the opposite effect.

The notion that the problems of the U.S. auto industry are the result of overpaid union workers (as opposed to managerial incompetence) is a long-standing myth that has been trotted out time and time again over the past quarter century. What’s amazing is that this fairy tale continues to be employed even after the UAW has made repeated concessions, and basic union wage rates (especially for new hires) are now not significantly different from pay levels at the U.S. operations of companies such as Toyota and Nissan. And what’s even more amazing is that the Democratic leadership of Congress has in effect compelled the UAW to make sacrifices that diminish the difference between union and non-union working conditions almost to the vanishing point.

The Democrats will be congratulating themselves if the auto bailout is approved, but they should be held accountable for making union workers pay so dearly for their survival.

Full disclosure: I am a member of UAW Local 1981, the National Writers Union.

Taking Our Money and Running Overseas

It was only about week ago that the Treasury Department, the Federal Reserve and the FDIC rushed to put together an emergency rescue package for Citigroup consisting of a $20 billion capital infusion and protection against up to $306 billion in losses on the financial giant’s portfolio of mortgage-backed securities. This was in addition to an earlier $25 billion investment in Citi as part of the effort to prop up the country’s largest banks.

Now comes the news that an arm of Citigroup agreed to pay $10 billion to buy a Spanish toll road operator called Itinere Infraestructuras SA. Funny, I don’t recall Treasury Secretary Henry Paulson mentioning that the taxpayers were bailing out Citi so that it could speculate in the foreign infrastructure privatization market.

This caused me to wonder what else major financial institutions have been doing with their federal infusions other than expanding credit for U.S. consumers and businesses. We already know about the way in which some banks have used their money from Uncle Sam to buy competitors and the tendency of AIG executives to treat themselves to lavish retreats at public expense, but is Citi the only recipient that is sending some of its money overseas?

To answer this question I started with the tally of bailout recipients maintained by ProPublica and searched for recent announcements by those companies. I found, for example:

* Bank of America ($25 billion received) gave notice of its plan to exercise the remainder of its option to purchase shares in China Construction Bank Corporation (CCB) from China SAFE Investments Limited (Huijin). The purchase will increase B of A’s holdings in CCB from 10.8 percent to 19.1 percent. The cost was not reported.

* JP Morgan Chase ($25 billion) announced an enhancement of its cash management and trade services in India, which represented part of a $1 billion plan to expand the bank’s worldwide cash management and treasury business.

* Bank of New York Mellon ($3 billion) announced that it had received a license to initiate banking operations in Mexico.

Under normal circumstances, such announcements would merit no comment. But at a time when these institutions are receiving massive amounts of taxpayer funds, they take on a new significance. While the infusions of federal money were designed to expand the flow of credit in the United States, banks are using some of the funds to expand their foreign operations and investments. They are taking our money and running overseas.

And all this is happening while an anonymous U.S. Senator has placed a hold on the nomination of Neil Barofsky to serve as the special inspector general for the bailout. Apparently, some parties don’t want any close scrutiny of how hundreds of billions of dollars of public money are being bestowed on the financial sector by a federal government acting like an overindulgent parent at Christmastime.

Adding New Floors to the Bailout House of Cards

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke have added a few more floors to their ever-expanding bailout house of cards. Their two agencies kicked in another $800 billion in the latest frantic effort to ward off financial collapse. The Fed is putting up $600 billion to buy mortgage-backed securities and mortgages held by Fannie Mae and Freddie Mac. This seems, at least initially, to have brought down mortgage rates—assuming anyone is in a position these days to buy a house.

The plan for the other $200 billion is more dubious. Treasury and the Fed are going to use those funds to make loans to consumer finance companies, which in turn would be in a position to provide more auto loans, student loans and credit cards. Yet, as with the bailout of the banks, there seems to be no actual requirement that the finance companies use their new liquidity to open the spigots to consumers. We are apparently supposed to take it on faith that these lenders will in fact lend, even though it’s now clear that many of the banks used their federal assistance for other purposes.

Another questionable assumption in the plan is that consumers are aching to borrow more money. With unemployment soaring and the value of retirement savings dwindling, most people are opting for austerity, not seeking to add to their already heavy debt load. Creating more jobs and boosting household income are more urgent than allowing people to go further into hock.

And finally, it is worth recalling that many of the consumer finance companies have been as predatory in their lending as the unscrupulous subprime mortgage lenders. Nowhere is this truer than in the credit card business. These are the companies that, thanks to deregulation in their industry, have been gouging consumers with usurious interest rates and punishing fees.

The idea that bailing out these firms is the way to help consumers is yet another indication of the warped thinking of Paulson and Bernanke. It does not occur to them that the solution might be to lessen the hold that the card companies have on consumers—through measures such as interest rate reductions—rather than intensifying it. But what can you expect from what has become a government of the financial institutions, by the financial institutions and for the financial institutions.

Rescuing the Villain in the Citigroup Bailout

Treasury Secretary Henry Paulson has once again shown his willingness to take speedy action to rescue his friends in the financial world while allowing industrials such as the Big Three automakers to twist in the wind. The safety net for Citigroup that Treasury, the Federal Reserve and the FDIC announced last night represents the latest reversal in the ever-changing bailout “plan.”

Less than two weeks after announcing he had given up on the idea of purchasing toxic assets from banks in favor of capital infusions, Paulson is now saying that Treasury and the FDIC will “provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion” of mortgage-backed loans and securities. Given the way those securities have been falling in value, that possibility is far from remote. Citi graciously agreed to absorb the first $29 billion in losses, but taxpayers will probably be on the hook for much more.

In addition, Treasury is giving Citi another fix of $20 billion in capital. Paulson is driving a slightly harder bargain than in the past round of infusions, getting Citi to pay a dividend of 8 percent, up from 5 percent in the previous deals. Citi will also comply with “enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.” The latter is perhaps the most hopeful aspect of this new bailout, in that some homeowners may benefit.

Yet it is still amazing to see the federal government give essentially a blank check to Citi while the automakers are in limbo. The Big Three have a lot of mistakes to answer for, but they don’t compare to Citi’s checkered history. Throughout its history, the company has made reckless decisions that weakened the financial system and necessitated its own rescue. As early as the financial panic of 1837, what was then called City Bank had to be bailed out by tycoon John Jacob Astor. In the early 20th Century, the firm, then the main bank of the Rockefellers and Standard Oil, was one of the first commercial banks to make a big move into securities. This paved the way for the excesses of the 1920s and the ensuing stock market crash.

During the 1970s, First National City Bank was a major instigator of lending to third-world countries, which later backfired on the big banks. That and other forms of forms of questionable lending weakened Citi’s financial condition, prompting it to solicit a big capital infusion from Saudi prince Al-Waleed bin Talal in 1991. Pursuing a replay of the 1920s, Citi merged in 1998 with insurance and securities giant Travelers Corp. and began acting more like an investment bank than a commercial one.

Over the past decade, Citi led the way in another boomerang situation: promoting subprime lending to low-income borrowers. In 2000 Citi spent $31 billion to purchase Associates First Capital, one of the more aggressive predatory lenders responsible for the wave of untenable mortgages that are now poisoning the financial system.

All this doesn’t include other scandals involving money laundering and collusion with the likes of Enron and WorldCom. In the latter two cases alone, Citi had to pay some $5 billion to settle investor lawsuits. Citi’s finances weakened to the point late last year that it had to get another Middle Eastern shot in the arm—a $7.5 billion investment by the government of Abu Dhabi.

And here we go again with another rescue—this time by a benefactor with the deepest pockets of all. Paulson would have us believe that Citi is a financial damsel in distress that must be saved for the good of the country. In fact, the company is more like a Snidely Whiplash villain who periodically lies down on the railroad track pretending to be a victim in order to get rescued by gullible Dudley Do-Rights. Who knows what mischief Citi will get into with its latest haul.

Clinging to a Defunct Ideology

Keynes famously wrote that “Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authori­ty, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” The Bush Administration today is in the awkward position of continuing to espouse the laissez-faire rhetoric of Milton Friedman and Friedrich Hayek while spending hundreds of billions of dollars of public money to bail out the financial sector.

Last week, President Bush gave a speech to the rightwing Manhattan Institute in which he asserted with a straight face that “free market principles offer the surest path to lasting prosperity.” He went on to insist “I’m a market-oriented guy, but not when I’m faced with the prospect of a global meltdown.” The idea that the market itself brought on this state of affairs was conveniently not emphasized.

Today, Treasury Secretary Henry Paulson delivered a speech of his own at the Ronald Reagan Presidential Library, a monument to the man who, in his first inaugural address, declared: “In this present crisis, government is not the solution to our problem; government is the problem.” While the current economic mess prevented Paulson from saying anything quite so categorical, he did try to salvage a bit of Reaganism by warning against “implement[ing] more rather than better regulations.”

While Bush and Paulson are trying to preserve some semblance of their failed ideology, corporate executives are doing what they do best: lining their pockets. Back in 2002, in the wake of the scandals involving companies such as Enron, Tom Toles published a cartoon headlined: “The preceding 22 years. A Synopsis.” It showed Regan in the foreground making his statement about government being the problem, while in the background CEOs are seen looting a safe filled with cash.

That image is even more appropriate today. The latest indication of corporate cupidity comes in today’s Wall Street Journal, which reports that in the run-up to the current crisis, top executives in the housing and financial sectors cashed out more than $21 billion in stock and thus avoided the subsequent collapse in the value of those holdings.

At the same time, automakers, who for years resisted significant fuel-economy regulation, are clamoring for a place at the public trough alongside the bankers who managed to abolish many of the rules that governed their industry. For all of them, government is now seen as the solution—to their financial woes.

It remains to be seen how long the likes of Paulson will go on clinging to some vestige of market fundamentalism. For the rest of us, the question is whether a decent economy can somehow be built amid the ruins of deregulated capitalism.

Paulson Thinks He’s the Decider—and Doing a Heckuva Job

Treasury Secretary Henry Paulson’s handling of the financial crisis represents the last major manifestation of the Bush School of federal management: He asserts that he is The Decider, and he thinks he’s doing a heckuva job.

Paulson’s inflated view of his own effectiveness was evident in the op-ed he just published in the New York Times, in which he declares: “I am very proud of the decisive actions by the Treasury Department, the Federal Reserve and the F.D.I.C. to stabilize our financial system.” The Decider also bragged of “decisive action” in his testimony today before the House Financial Services Committee.

All this self-congratulation is no more effective than the efforts of former FEMA Director Michael Brown to rewrite the history of his performance in the aftermath of Hurricane Katrina. Paulson’s track record in the Big Bailout has been roundly criticized for inconsistency, ineffectiveness and lack of transparency. (A generally positive profile of Paulson in today’s Washington Post is an anomaly that is unlikely to change many minds.)

The problem is that Paulson, who has two months left in office, seems to think he is not only the Decider but the Dictator. Although Congress inserted oversight provisions in the bailout legislation, Treasury has dragged its feet in implementing them, and Paulson acts as if he had gotten approval for his original three-page proposal that would have given him total carte blanche.

Paulson’s hauteur was on display in today’s hearing. Despite a lot of hostile questioning, he continued to assert, in effect, that his judgment—including the decision to switch from asset purchases to capital infusions as well as his resistance to using any of the bailout money to help homeowners avoid foreclosure or to aid businesses outside the financial sector—is all that counts.  Paulson seems to regard the need to testify as an annoyance, and he apparently sees his job as shooting down the ideas of members of Congress rather than taking their guidance.

The handling of the financial crisis and the bailout will go down in history as the last of a long string of Bush Administration fiascoes. Fortunately, Paulson will soon return to the private sector, where he can do as much deciding as he wants without putting the country at risk.

Note: I want to put in a plug for a newly published report I wrote in my other capacity as the research director of Good Jobs First. Called Skimming the Sales Tax, it documents the ways in which giant retailers such as Wal-Mart are allowed to divert more than $1 billion of revenue each year into their own coffers.

Consumers Beware: Henry Paulson is Coming to Your Rescue

Treasury Secretary Henry Paulson is once again trying to pull off a sleight of hand in his execution of the financial crisis, but he’s a lousy magician. His first trick—trying to depict the existing rescue plan as a success—fell flat. While Paulson tried to take credit yesterday for a “major accomplishment,” there is growing consensus that Treasury’s use of some $300 billion in federal funds to invest in a variety of banks has done little to achieve its intended purpose of stimulating home mortgage and business lending.

The ineffectiveness of the plan may be traced in part to a lack of oversight. As the Washington Post points out today, Treasury has so far taken no formal action to implement the safeguards that Congress included in the legislation authorizing the original bailout plan. Absent those provisions, Paulson found it easy to completely transform the plan that had been steamrolled through Congress—the federal purchase of toxic securities from banks. Yesterday, Paulson formally acknowledged what had become apparent in recent weeks: that he had abandoned the asset-purchase scheme in favor of a complete focus on capital infusions.

For his next trick, the Great Paulson is applying that same technique to the consumer finance sector. Using language similar to his scare talk in September about the housing and business finance sectors, Paulson yesterday warned that consumer finance “is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt. Today, the illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards.”

No doubt that is all true, but Paulson’s apparent plan to address the crisis is more of the same. Rather than helping consumers directly, he intends to provide capital infusions to the corporations that are supposed to provide those loans. In other words, he is applying the same dubious logic as with the bank investments: Prop up the balance sheets of the lenders and the loans will start flowing again.

Keep in mind that the consumer finance industry followed the same path as home lending in recent years. Shaky and often predatory loans were pushed on struggling borrowers and then repackaged as asset-backed securities that are now in precarious condition. Paulson’s infusions will go to the same companies that perpetuated that abusive system.

And even if we are willing to forgive the consumer finance companies for their transgressions, why should we expect that they will respond any differently to the Treasury investments than the commercial banks did? Given Paulson’s aversion to putting any significant strings on the federal investments, it’s likely that the consumer finance firms will follow banks in using the money to fund acquisitions and dividends rather than opening up the spigot for consumers.

What Paulson can’t seem to understand is that lenders of all kinds are spooked by the weakness of the economy. Credit is based on the faith that the borrower can repay the loan, and for now almost no one looks trustworthy. Until significant steps are taken to boost employment and household income, all the federal investments in the financial sector serve as nothing more than corporate handouts. Maybe that’s Paulson’s real sleight of hand.

Bush Administration, in Bed with Banks, Shuns Union with Automakers

George Bush has strong views on marriage. He is an ardent proponent of the marriage between the financial sector and the federal government, but he apparently finds intolerable a similar union involving the auto industry.

It’s difficult to pin down exactly why the very lame duck Bush is resisting calls for a bailout of Detroit. There were reports, subsequently denied, that he was using his opposition as a bargaining chip to get Congress to go along with his desire for a free trade agreement with Colombia, whose right-wing government is Bush’s only significant ally in Latin America.

Then there’s the theory that he does not want to assist an industry that is heavily unionized and that supposedly brought on its own troubles by giving in to the wage and benefit demands of those unions over the years. And there’s the notion that Bush is trying to reestablish his credentials as a free marketeer, but that’s hard to believe at a time when his administration is pouring seemingly endless taxpayer funds into the likes of AIG.

The explicit statements made by Administration representatives about the reasons for the resistance are perhaps the most preposterous. White House spokesperson Dana Perino suggested that the problem was that Congress had not provided explicit authority to assist industries other than banks. Since when does the Bush Administration worry about explicit Congressional authority in deciding what it can and cannot do? Take the bailout itself. Congress was steamrolled into approving a $700 billion plan under which the federal government would buy up “troubled” assets from banks. That plan was put on the back burner by Treasury Secretary Henry Paulson as he instead embarked on a program—never debated by Congress—to purchase holdings in the banks themselves. And isn’t it ridiculous to cite a lack of Congressional approval as a reason for not doing something being heavily advocated by leaders of Congress?

Until this mystery is solved, perhaps the best course of action for the automakers is to simply change their identity. Neel Kashkari, the interim assistant secretary at Treasury who is running the bailout, said in a speech on Monday: “We have allocated sufficient capital, $250 billion, so that all qualifying banks, potentially thousands, can participate. Therefore, it is important to note that Treasury will not implement this program on a first-come-first-served basis; there is enough capital allocated for all qualifying institutions.”

With the bailout window wide open for bank, why can’t the automakers follow the lead of investment houses Morgan Stanley and Goldman Sachs—as well as, more recently, American Express—and redefine themselves as bank holding companies (with cars as a sideline)? GMAC, the financing arm of General Motors that is co-owned by Cerberus Capital, is already moving in that direction. The rest of Detroit should follow suit. After all, the Big Three are not making any money trying to sell cars in the current economic situation; perhaps they will have more luck making loans. And, given the reluctance of real banks to lend, they should have an open field.