Capitalism needs a ‘Crony’ State
by Sandhya Jain on 27 Mar 2009 2 Comments

With the shine coming off his presidency with each passing day, Barack Obama must have been slightly relieved when the bosses of the now 80% Government-owned insurance giant AIG agreed Monday to return $ 50 million in bonuses, following a public uproar against the wanton use of taxpayer money for executive perks.

AIG posted a loss of $ 61.7 billion in the last quarter of 2008, the largest quarterly loss ever recorded in the United States. Yet, after the American government pumped approx. $ 170 billion to keep this scandalously malfunctioning company afloat, its profligate management had no qualms in awarding $ 165 million of bailout funds for staff bonuses. With $ 50 million now pledged to be returned, that still leaves a startling $ 115 million of unjustified freebies to morally and professionally decrepit financiers.

As bonuses are normally associated with production/output, performance, and above all, profit, it remains inexplicable what these bonuses were for, unless it was an unthinking continuation of an old habit of putting funds available in company ledgers into private pockets. 

AIG offered the feeble excuse that the bonuses were an incentive to retain staff, so that the derivatives scam could be unravelled – something which could best be done by a professional audit firm, though given the true calibre that PriceWaterhouseCoopers revealed in India, it is possible that here too, many reputation are based on pure PR. Anyway, in an era of pink slips and a persisting home loan crisis, most Americans just do not believe that staff needs to be bribed to keep their jobs. The outcry prompted Congress to moot a 90 percent tax on these illicit premiums – what is inexplicable here is the Government helplessness in taming a company it owns to the tune of 80%. Obviously this says something about the true structures of power in America – supposedly the leader of the Free World.

Already, it is said, there are over 12 million people unemployed in America, and nobody knows where the economy is going. The banks created the $ 8 trillion housing bubble, and now want to use taxpayer money to pay themselves multi-million dollar bonuses. As Dean Baker, Co-Director, Center for Economic and Policy Research, said, the banks were always playing with taxpayers’ money, only the people did not know it then.

It transpires that there are many things the people don’t know even now. In a recent article in The Charlotte Observer, Stella M Hopkins revealed that even as the credit markets froze, American banks loaned a whopping $ 41 billion to insiders, mainly directors, top executives and others.

Experts feel, quite legitimately, that this issue should be stripped of the cloak of secrecy that lets bankers play with taxpayer money. Worse, this insider lending could colour the judgments of the officials expected to be vigilant about shareholder interests, and oversee bank management [see]

Top 10 Insider Lenders


JPMorgan Chase, New York

$1.48 billion


Wachovia, Charlotte, N.C

$747 million


M&I Marshall & Ilsley, Milwaukee

$644.4 million


Bank of America, Charlotte

$624.2 million


Northern Trust, Chicago

$523.5 million


Union Bank, San Francisco

$499.3 million


BB&T, Winston-Salem, N.C.

$493.8 million


Commerce Bank, Kansas City, Mo.

$467.9 million


Regions Bank, Birmingham, Ala.

$444.3 million


Comerica Bank, Dallas

$391.5 million

(Note: Wells Fargo, based in San Francisco, bought Wachovia on Dec. 31.)

The largest loans went to directors or their companies. This happened when government was infusing banks with billions in tax dollars. The Bank of America board purchased the troubled Merrill Lynch, and Wachovia was bought by Wells Fargo on 31 December 2008.

At a time when off-shore tax havens are coming under governmental scrutiny in many parts of the world, and never had any justification anyway, there is no case for banks shielding their multi-million dollar lines of credit to their executives, or to big companies owned by their directors.


Democracy as practiced in many western countries is increasingly being revealed to be nothing more than a Mask for non-transparent governance in key sectors of the polity and economy. If Democracy is not to be exposed as a complete sham, and Capitalism is not to be equated with old-style Robber Barons, new legislations must make it imperative that the annual statements of banks declare the full extent of insider lending – the amounts and terms upon which money has been given to directors or executives, and their businesses.

It would be interesting to know if the bulk of bank borrowings are cornered by such entities. As directors have to approve all insider loans above $500,000, they happily back-scratch – voting mutually on loans for each other or the executives they are supposed to oversee. Cronies make Cool Capitalism.

This means that unknown to the American people, a secret economic oligarchy has been thriving for decades! Such favouritism is utterly dubious, and must be brought under public scrutiny. Unless the loans of directors who are supposed to protect the public interest are known, how can shareholders assess their independence and calibre, particularly when the American people are paying for decades of profligacy? 

Hopkins says that as many as seven of the 10 banks with the largest insider loans received over $50 billion in the banking bailout of late 2008. And America has more than 8000 banks. At the end of 2008, insider loans amounted to $41 billion – an increase of 5.7% over 2007.

Wells Fargo dished out a modest $20 million in insider loans last year, but Wachovia which it took over last December, disbursed $747 million in insider lending. Experts hold insider lending responsible for bank failures across the world. In December 2008, the chairman of a large Irish bank resigned after it was learnt that he had $109 million of secret insider loans; in January 2009, the government took over the bank. Too little, too late.

With intrepid American journalists washing the dirty linen of the nation’s Corporate Culture, it is little wonder that the Corporate-friendly new President is beginning to feel the strain of disclosure and scrutiny. Most Americans now admit to having little faith in his economic revival plan, especially the mysterious trillion-dollar bailouts to banks and other institutions with a penchant for putting the money in their own pockets. 

The Congressional Budget Office, the principal US budgetary watchdog, said Obama’s proposals would generate budget deficits to the tune of $ 9.3 trillion over the next decade, a projection that has alarmed the nation, particularly after the inglorious AIG bonus saga. As a result, Barack Obama’s popularity has begun to fall rather dramatically, and his policies are being subjected to closer scrutiny.

So far, Main Street, a term coined by the Obama propaganda machinery in the run up to the most costly election ever, has not received a penny in loans; nor has the fear of foreclosures ended for homeowners. Yet with every passing day, the bank bailouts are rising algebraically and Wall Street retains the first claim on American tax-payer resources.

If this is the fate of citizens in the so-called Free World, it is time to ask if Democracy without Disclosure is just another shell company.

The author is Editor

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