Smash And Grab Job

by dday

You can’t teach an old dog ethical tricks. The Republican ethos in the Age of Bush has been to use government as a vehicle for profit-taking, and that continues:

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration’s request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion […]

“Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no,” said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. “They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks.”

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

This is a long and well-reported story by Amit Paley, which is really the only thing that can kill this provision. I think the White House was banking on nobody finding out; the implementation appears illegal, and lots of tax lawyers don’t even know Section 382 exists. The simple way of explaining it is a giant tax shelter for banks – they could conceivably set up a dummy company with manufactured debt, buy the company, and write off the debt to avoid corporate taxes. It’s been a conservative white whale for years, and so they tried to kill it by writ in the hope that everyone was distracted. The problem, however, is that closing the loophole would decelerate bank mergers and cause more failures, which is probably necessary but nobody was to pull the trigger and get stuck with the blame:

Lawmakers are considering legislation to undo the change. According to tax attorneys, no one would have legal standing to file a lawsuit challenging the Treasury notice, so only Congress or Treasury could reverse it. Such action could undo the notice going forward or make it clear that it was never legal, a move that experts say would be unlikely.

But several aides said they were still torn between their belief that the change is illegal and fear of further destabilizing the economy.

“None of us wants to be blamed for ruining these mergers and creating a new Great Depression,” one said.

Some legal experts said these under-the-radar objections mirror the objections to the congressional resolution authorizing the war in Iraq.

“It’s just like after September 11. Back then no one wanted to be seen as not patriotic, and now no one wants to be seen as not doing all they can to save the financial system,” said Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts. “We’re left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?”

Yes, this is exactly the problem. Conservatives overreach and create giant giveaways under the cover of a crisis, and then dare anyone to reverse them, lest the crisis be blamed on them. Naomi Klein wrote a whole book about it. It’s what makes these reversals so politically treacherous. You can’t pull the rug from AIG because they’re too big to fail. You can’t find out who the Fed is lending to because the system will collapse. And under this cover, the shouts of “you’re not being economically patriotic,” the profit-taking grows.

Which is why the initial language from the Obama transition team about reversing decisions by executive order was so heartening, just to get back to what we were discussing yesterday. Obama is the only one with the political capital to make these moves – Congress doesn’t have it. And throughout the campaign, while Obama tied McCain to George Bush’s failed policies he didn’t go all the way into delineating what they were. As Thomas Powers said, “The change Obama seeks remains oddly bloodless, as if the mess were a found object, not something that someone had done.”

Now, that change has a face. They are being pretty clear that what is reversible will be reversed, and quickly. The Bush legacy project over the next couple months is to embed their radical theories of government deep inside the institutional structure, to set landmines and keep the cash flowing to corporate entities. Obama is signaling that he’s willing to fight that. And that is a very welcome development. It doesn’t mean that there aren’t pitfalls, or that conservative media types won’t roil at the horrible partisanship Obama is engendering by going after these abuses. It means that such concerns may not drive decisions anymore.

Which does make our job on the outside more important. I attended a lot of get-togethers with people who worked on the Obama campaign here in California over the weekend, and the question from all of them was “What do we do now?” Not in the post-Kerry sense of “Oh crap, what the fuck are we going to do?” but “How can we get the best from our government in the next four years?” These people are bright, they’re trained and they’re progressive. And most of all, they’re engaged. They are the secret weapon of the progressive movement, and they need to be channeled to fight the entrenched interests that are going to try and influence Obama’s early-term agenda.

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