No more bailouts, Br’er Durbin?!?

Last week brought a rare victory for the free markets and the sanctity of private contracts: By a 51-45 vote, the Senate defeated a measure championed by Democratic Senator Dick Durbin (Illinois) which would have allowed judges to reduce the principle amount of a mortgage on a primary residence during a bankruptcy proceeding. Twelve Democrats, including Arlen Specter, voted against the plan.

The idea was typical Democrat fare, representing a complete lack of understanding of the importance of contracts. Can you imagine the chilling effect on the mortgage industry if lenders had to figure into their interest rate determinations the probability that they would be forced by judges to lose money on loans? If you were a bank and you knew that some percentage of your loan portfolio would be forced into greater-than-necessary losses by judges, you would have to increase the interest rate you charge on every loan – or at least every loan to people who don’t have absolutely stellar credit – in order to make sure you’re maintaining the return on capital you need to justify being in business.

In other words, Durbin’s program would have made home ownership more difficult for millions of moderate income earners who would be trying to buy a home, often a first home, in order to let judges interfere in the voluntarily-made contracts between a much smaller number of prior home buyers and lenders. Durbin’s plan was thus not actually an attempt to help the housing market (as if that were a proper role of government anyway) as much as it was another step toward government involvement in and control of as much of our economic lives as possible. This is the true goal of today’s Democratic Party and the common thread among all their economic policies.

There was an important lesson during the discussions between Durbin and the industry: The only bank to support the plan was Citigroup, i.e. the recipient of the most TARP money, a company which gave 61% of its 2008 political contributions to Democrats, and a company which, because of its soon-to-be-completed conversion of preferred equity to common stock, will be 36% owned by the Federal Government. They do us the occasional courtesy of saying the stake will be “taxpayer owned”, but we all know just how much respect we-the-people will garner during closed-door discussions of how the bank should operate, which is to say none at all.

This unholy alliance between the federal government and the corporate Board Room is the essence of economic fascism. Citigroup’s behavior certainly pleased Durbin; it would have pleased Mussolini as well. The company’s support of a plan which would likely be a negative for its shareholders but pleasing to its left-wing political champions is a stark reminder that government “bailouts”, particularly when ongoing participation is clearly, despite all administration rhetoric, not intended to be temporary, is an unvarnished disaster for the principles of economic liberty and the realities of day to day life in a free-market system.

So, as if the defeat of Durbin’s ill-conceived plan weren’t a tasty enough meal for a starved minority of congressional fiscal conservatives, Durbin himself offered a delicious dessert: According to a Roll Call story, Durbin said the following on the Senate floor following defeat of his measure: “This Senator wants to put the banking interests on notice. I am not going to be a party to shoveling billions more in taxpayers’ dollars your way if you won’t lift a finger to help these people who are facing foreclosure across America today.”

What? No more bailouts?!? Please, Br’er Durbin, don’t throw us into that briar patch!

In a sense, I understand Durbin’s frustration: Anyone who gives enormous amounts of money to a corporation expects some level of influence over that corporation, roughly proportionate to the size of the financial contribution. The problem is that the investor/lender in this case is the government, and that changes everything. Since the money government hands out in bailouts isn’t actually the politicians’ money, the politicians’ goals could frequently be antithetical to building shareholder value. As Milton Friedman warned, there’s no less responsible spender of money than someone who is spending someone else’s money on things to benefit yet another party. A spends B’s money on C….do you think A or C really care about B? And YOU are B.

Durbin is frustrated that his support of bank bailouts didn’t make him the Senate’s effective bank czar, with recipients of his largesse (in the form of our money) groveling at his feet, willing to accede to demands – demands which non-government investors would never make – that would diminish the companies’ profitability.

Many banks took TARP money, but only Citigroup – the sole bank likely to have massive government ownership of voting stock – caved in to Durbin’s pressure. Other banks realized that their primary duty is to their shareholders. Citi decided that sucking on the teat of the TARP is more important than their bottom line or their fiduciary responsibility. Alternatively, maybe their decision to fawn at Durbin’s feet was made considering their financial situation, leaving one to wonder about Citigroup’s financial stability.

I don’t believe that Senator Durbin won’t support giving taxpayer money to banks or other corporations in the future. Instead, he’ll just work to ensure that his ability to control those corporations is cemented before he’ll sign off on any deal. The good news is that corporations have seen the true nature of these bailouts: When you make a deal with the devil, you’re always the junior partner.