Letter to Congress re: the new bailout proposal

More from Sue:

Dear Congressmember

Please vote “no” on the revised bailout package, because it contains toothless safeguards for preventing abuses in the billions of dollars.

First: What good is a law that prohibits the Treasury from buying assets at a cost above what companies actually paid for them? The problem is that those assets are near worthless, and the financial institutions know it — which is why the credit markets have seized up. The CDO’s were “only paper” and therefore fraudulent from the beginning and massively overpriced. If you can’t reach through an agreement and seize the collateral in satisfaction upon a default, then the agreement is not “collateralized” in any meaningful sense. Credit default swaps, which are insurance contracts issued by companies without the necessary capital to back them up, are also by definition fraudulent.

There is no difference, philosophically, between CDOs and credit default swaps and the securities issued in 1919-21 by Charles Ponzi vis-a-vis purported international postal reply coupon arbitrage. There is no difference between these sham paper transactions and tulip bulb mania of 1636-37.

If the Treasury buys these securities for any more than pennies on the dollar, the American people will be cheated.

Second: Supposed restrictions on executive compensation are no more strict than current tax laws. There is no law capping executive compensation. Under Internal Revenue Code section 162(m) no tax deduction is allowed for corporations related to a CEO’s compensation above $1,000,000. But of course there’s a loophole, which is: It doesn’t apply to compensation the employee *actually earned* — by which they mean the payment of commissions, and payment for meeting performance goals preapproved by the BoD and shareholders. Performance goals can be as meager as you want them to be.

Under IRC 280G, no tax deduction is allowed for an “excess parachute payments” in connection with a “change in control” in the ownership of a corporation’s stock. The excess parachute amount is defined as the “excess amount” over a “base amount.” The base amount is the average of compensation for the last five years (however high the amount). There is no “excess golden parachute” unless the payment is equal to or more than 3 times the 5-year average. The law applies to all employees in highest paid 1% of employees of the corporation or, if less, the highest paid 250 employees of the corporation.

I can’t see that there is any difference between the law proposed and those already on the books. Also please consider that a tax penalty on a company that is already doing poorly (and therefore does not really need the deduction) isn’t a meaningful penalty.

Third and most alarming: The SEC will now be able to suspend “mark-to-market” rules? Isn’t this the same as telling companies they can now lie on their financial statements with impunity? Isn’t lack of transparency a main reason that financial companies got us into this mess in the first place? Isn’t this a primary cause of Japan’s “lost decade” – allowing banks to keep worthless securities on their books for years, without marking them down to their actual value? This is a horrible provision that should be opposed with all of your might.


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