"Capitalism is Devouring Humanity"

A close friend of mine who wishes to remain anonymous wrote to me today:

I would like to know exactly how this $700 billion dollars will help our citizen (meaning people living below the middle income bracket). A source has argued that this $700 billion bailout is nothing but to protect big business that got caught in this financial mess. He also made a great point that, all these International Banks that have branches here in US will be able to funnel their toxic assets (such as mortgage securities that are wrecking havoc in the US financial system) here in to the US and that they can wipe out these toxic asset by doing so. Any comments on this?

Truth is I don't know a lot about these toxic assets

I also don't really know what $700,000,000,000 is. The Honduran President José Manuel Zelaya Rosales has some idea in this comment he made to the United Nations:

Today when they rush in to save the big banks from failure in a crisis created by speculative and fraudulent capital, to the value of some $700 billion, we must remind them that with just a third of that amount poverty could be eliminated in Africa, America and Asia.

Zelaya Rosales went on to say:

Capitalism is devouring humanity, especially the poor and the very capital that created it.

I did find this by the Roubini Global Economics Monitor:

A recent IMF study of 42 systemic banking crises across the world provides evidence on how different crises were resolved. First of all only in 32 of the 42 cases there was government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system only seven included a program of purchase of bad assets/loans (like the one proposed by the US Treasury). In 25 other cases there was no government purchase of such toxic assets. In 6 cases the government purchased preferred shares; in 4 cases the government purchased common shares; in 11 cases the government purchased subordinated debt; in 12 cases the government injected cash in the banks; in 2 cases credit was extended to the banks; and in 3 cases the government assumed bank liabilities. Even in cases where bad assets were purchased – as in Chile – dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. Of course in most cases multiple forms of government recapitalization of banks were used.

But government purchase of bad assets was the exception rather than the rule. It was used only in Mexico, Japan, Bolivia, Czech Republic, Jamaica, Malaysia, and Paraguay. Even in six of these seven cases where the recapitalization of banks occurred via the government purchase of bad assets such recapitalization was a combination of purchase of bad assets together with other forms of recapitalization (such as government purchase of preferred shares or subordinated debt).

In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead – in most cases in which it was used – made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

Thus the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer - the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.