But the act placed very few restrictions on how the money could be used. So its not surprising that the use of the funds changed from purchasing troubled assets to direct injection of capital (taxpayer provided) into a handful of financial institutions who promised to make those funds available for loans. It now appears that some of those institutions have chosen to pay bonuses and dividends that they would not otherwise been able to afford without the injection of government funds.

Representative Henry Waxman (D. - California), Chairman of the House Committee on Government Oversight and Reform, sent this letter to Mr. Vikram Pandit, CEO of CitiBank. in which the Chairman observes:

Earlier this month, the Treasury Department announced plans to invest $125 billion of
taxpayer funds in nine major banks, including yours, as an emergency measure to rebuild
depleted capital. According to recent public filings, these nine banks have spent or reserved
$108 billion for employee compensation and bonuses in the first nine months of 2008, nearly the same amount as last year.

Some experts have suggested that a significant percentage of this compensation could
come in year-end bonuses and that the size of the bonuses will be significantly enhanced as a
result of the infusion of taxpayer funds. According to one analyst, “Had it not been for the
government’s help in refinancing their debt they may not have had the cash to pay bonuses.”

Chairman Waxman states that his committee will be investigating these claims and requested information from CitiBank.

For reference, the financial institutions which received TARP cash injections are listed below. The rest of the approximately $350M which has been spent so far under the program was used to shore up AIG (in the form of loans and purchase of troubled assets).

Each year, the Social Security Administration computes a Cost of Living Adjustment (COLA) for the payments it makes to beneficiaries which attempts to ensure that spending power of beneficiaries is preserved. The annual COLA has been mandated by federal law since 1975. Prior to 1975, social security payments were adjusted by legislation.

The first automatic COLA, for June 1975, was based on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the second quarter of 1974 to the first quarter of 1975. The 1976-83 COLAs were based on increases in the CPI-W from the first quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective. After 1983, COLAs have been based on increases in the CPI-W from the third quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective.

The COLA for 2008 is set at 5.8%, the largest increase since 1982, primarily due to significant inflation in fuel and food prices during 2008. You can see the computation of the COLA for 2008 at the Social Security Administraton.

Interestingly enough, the current legislation enacted in 1983 does provide for suspension of Cost of Living Adjustments, if the combined assets of the Social Security trust funds are below 20 percent of annual expenditures. (This limitation only applies to Social Security; SSI would be unaffected.) Such limitation has not occurred in the past, nor does it affect the current COLA determination. The combined trust fund assets at the beginning of 2008 are estimated to be 359.0 percent of 2008 expenditures.

If you agree with us that this plan is a bad idea after reading the details below, then TAKE ACTION NOW. You can send an email to your elected representatives in Washington, D.C., and the chairmen of the two House committees considering this proposal by clicking here.

Overhauling the 401(k) System

During the week of October 6th, Theresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York testified before the House Education and Labor Committee chaired by Rep. George Miller, D-California and the House Ways and Means Committee’s Subcommittee on Income Security and Family Support chaired by Rep. Jim McDermott, D-Washington. Components of the plan include the following:

• All workers would receive a $600 annual inflation-adjusted subsidy from the U.S, government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. This money would be invested in special government bonds that would accrue 3 percent per year. [PerotCharts question: Does this sound vaguely similar to the current Social Security Trust Fund?]
• The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.
• “I want to stop the federal subsidy of 401(k)s” Ghilarducci said in an interview. “401(k)s can continue to exist, but they won’t have the benefit of the subsidy of the tax break.” [PerotCharts note: We already have these types of accounts; they’re called brokerage accounts.]
• To make the plan more palatable, Ms. Ghilarducci offered an incentive, “Short term I propose…that Congress allow workers to swap out their 401(k) assets, perhaps at August level for a guaranteed retirement account.” [PerotCharts note: The idea here is to induce holders of 401(k) plans to turn over their plan assets to the government in exchange for restoring the balance in their 401(k) plans prior to the stock market collapse in September and October.]
• The plan would allow workers to pass on only half of their account balances to their heirs; presumably the government would keep the remaining half. [Currently, 401(k) balances are fully inheritable.]

Observations by PerotCharts.com:

• Many people contribute to their 401(k) plans because their employers match their contributions. Eliminating the tax break for 401(k)s would make the matching portion taxable to the recipient and subject to additional FICA taxes payable by both the employer and the employee.
• Eliminating tax breaks for 401(k) plans pushes individuals into higher tax brackets even though they have no additional disposable income.
• Apparently, there was no mention as to the rate at which the government would pay your money back to you when you reach retirement age.
• Although the chairman of the House Education and Labor Committee stopped short of endorsing the plan, it was reported that he was clearly against continuing tax breaks for 401(k)s as they currently exist.
• No mention was made of the fact that, under the proposed plan, the government would need to liquidate the stock portfolios of the former 401(k) holders. Neither was it explained how the market could absorb $3 trillion of securities currently held in 401(k) plans.
• There is no indication that the new administration favors this proposal. It is in discussion stages of the two committees mentioned above.

Between September and October 2008, the Total U.S. National Debt increased by nearly one trillion dollars, or about 10% of the outstanding debt. Most of this increase is due to public borrowing to finance the Wall Street Bailout plan. The additional borrowing on top of the mandatory increases in programs such as Social Security (which will increase payout by 5.8% in January of 2009) represents a significant loss in financial flexibility which makes the problem of persistent deficit spending even more difficult to solve.

At the current rate, the national debt is increasing by nearly 4 billion dollars every day! See our National Debt Clock.

We have posted a revised and simplified (shorter) presentation on the financial challenges facing the United States at http://perotcharts.com/issues/. Let us know what you think. Many of the changes were driven by comments from our readers.

Please tell your friends and family about this presentation by emailing them a link to it. The more people we can educate on these issues the better.

Finally, you can express your concern by sending an email to your elected officials at our legislative action center.

Mandate that the SEC:

• Suspend its “mark-to-market” accounting regulations that are causing the write-down of bank assets to fire-sale prices, and thereby contracting the supply of available investment capital.
• Tightly restrict short sales of financial stocks.

Mandate that the FDIC:

• Declare a national emergency during which time the FDIC will back depositors and general creditors of banks that fail and resolve those collapses in a way that does not cost depositors, such as selling deposits and loans of the failed institution to another institution.
• Reconstitute the FDIC’s “net worth certificate” (NWC) program that Congress created in the 1980s for the savings and loan crisis of that era. The NWC required no federal subsidy or cash outlay. Under the NWC, the FDIC bought subordinated debentures in the bank and issued FDIC notes to the bank, with the interest being the exact same on both instruments. Under this program, the FDIC assesses the financial condition of banks and shores up weak ones that can survive if given time to resolve their problems and merges/liquidates those too weak for the NWC program. Under the NWC program, the FDIC will provide strict supervision of participating banks, including the employment of key personnel and their compensation, until the crisis has passed. Again, no federal subsidies or outlays are required.
• Declare a 120-day moratorium on payment of dividends by banks. Executives of banks that need capital often worry that failing to pay dividends is a sign of financial instability. A temporary ban across-the-board will end fears and give FDIC time to strengthen banks’ capital base.
• Expand FDIC insurance coverage to other financial institutions, including hedge funds, placed under federal regulation.

• Declare a 120-day moratorium on mortgage foreclosures. This will (a) keep families in their homes while components of the broader plan are put in place and the real economy is revived; (b) better ensure that the property does not fall into disrepair; and (c) reduce the decline in housing values created by unoccupied, foreclosed homes.
• Devise a post-moratorium program to do work out plans for owner-occupied homes, including federal cash subsidies for owners that can pay for their homes if given time to financially survive this crisis.
• Amend federal law so that federal bankruptcy judges are able to modify the terms of mortgages of homeowners in bankruptcy and thus give them more time to work through their financial problems and keep their homes.

• Whenever the government makes a loan or an equity investment in a distressed financial institution, such as the AIG deal, the public gets a share of any future recovery profits.
• Create a true “Social Security Lockbox” for the warrants and equity the federal government acquires as part of this financial rescue. The goal is not long-term federal ownership, but to assist these organizations in returning to a sound operation and then make a prudent sale of the public equity.
• Restrict the investment of those funds to AAA-rated state and local infrastructure bonds, which provide safe, long-term investments that will stimulate the real economy, create new jobs, and fiscally strengthen the Social Security System.

• Create an independent agency/board to oversee and manage the non-FDIC/SEC portions of the Rescue Plan and report to Congress on a regular basis. The Board would consist of:
• Secretary of Treasury (Chair).
• Chairman of the Federal Reserve Board,
• Chairman of the FDIC,
• Chairman of the SEC,
• Comptroller General of the United States,
• One appointee by each of the Majority and Minority Leaders of the House of Representatives and the U.S. Senate.
• Create a new Joint Committee of Congress to oversee the plan and provide recommendations to Congress. The new Joint Committee would consist of representatives from all standing committees with partial jurisdiction for resolving this financial crisis. The goal is to involve all relevant committees in this rescue plan.

• The mission of this unit is to investigate any criminal acts that led to this crisis, hold the guilty accountable, and disgorge assets from individuals and institutions found guilty.
• The head of the Office will be an experienced, non-political career prosecutor appointed by the President and confirmed by the U.S. Senate.
• The Congress will provide sufficient funds to staff the Office with qualified attorneys and the necessary support staff of accountants and investigators.

• The goal is to restore prudence and accountability to the U.S. financial system through appropriate regulation.
• Oversight of the financial rescue.

On July 31, 2008, the total federal debt stood at $9.586 trillion. Of that amount, $4.182 trillion was owed to the various “trust funds” (e.g., Social Security, Medicare, federal employees retirement funds, etc.) because the government “borrowed” that money from them. That leaves $5.404 trillion of debt “held by the public.” Of that amount, $2.728 trillion is held domestically by banks, mutual funds, and other U.S. investors. This leaves $2.676 held by foreign countries, institutions and individuals.

Notes:

¹ Oil Exporters includes: Ecuador, Venezuela, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the UAE, Algeria, Gabon, Libya and Nigeria.

² Caribbean Banking Centers includes: Bahamas, Bermuda, the Cayman Islands, Netherland Antilles, Panama, and British Virgin Islands.