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More Windfalls For Wall Street

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August 3, 2009

At a time when states and municipalities are going broke, foreclosures are on the rise and bankruptcies are skyrocketing, it’s nice to know that the Federal Reserve keeps coming up with new and inventive ways to enrich the investment banks on Wall Street.

I’ve often discussed the involvement of the Federal Government in “propping up” (manipulating) the stock markets since the onset of the financial crisis, nearly one year ago.  The so-called “Plunge Protection Team” or PPT was created during the Reagan administration to prevent stock market crashes after the October 19, 1987 event.  Although the PPT has been called an “urban myth” by many skeptics, there is plenty of documentation as to its existence.  Its formal name is the Working Group on Financial Markets.  It was created by Executive Order 12631 on March 18, 1988, which appears at 53 FR 9421, 3 CFR 559, 1988 Comp.  You can read the Executive Order here.  Much has been written about the PPT over the years since 1988.  Brett Fromson wrote an article about it for The Washington Post on February 23, 1997.  Here is a paragraph from that informative piece:

In the event of a financial crisis, each federal agency with a seat at the table of the Working Group has a confidential plan.  At the SEC, for example, the plan is called the “red book” because of the color of its cover.  It is officially known as the Executive Directory for Market Contingencies.  The major U.S.stock markets have copies of the commission’s plan as well as the CFTC’s.

In October of 2006, two years before the financial meltdown, Ambrose Evans-Pritchard wrote an interesting piece about the PPT for the Telegraph.  Here’s some of what he had to say:

The PPT was once the stuff of dark legends, its existence long denied.  But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9/11 terrorist attacks.

“They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem,” he said.

“In 1998, there was the Long Term Capital crisis, a global currency crisis.  At the guidance of the Fed, all of the banks got together and propped up the currency markets.  And they have plans in place to consider that if the stock markets start to fall,” he said.

Back on September 13, 2005, The Prudent Investor website featured a comprehensive report on the PPT.  It referenced a paper by John Embry and Andrew Hepburn.  Here is an interesting passage from that essay:

A thorough examination of published information strongly suggests that since the October 1987 crash, the U.S. government has periodically intervened to prevent another destabilizing stock market fall.  And as official rhetoric continues to toe the free market line, manipulation has become increasingly apparent.  Almost every floor trader on the NYSE, NYMEX, CBOT and CME will admit to having seen the PPT in action in one form or another over the years.

The conclusion reached in The Prudent Investor‘s article raises the issue of moral hazard, which continues to be a problem:

But a policy enacted in secret and knowingly withheld from the body politic has created a huge disconnect between those knowledgeable about such activities and the majority of the public who have no clue whatsoever.  There can be no doubt that the firms responsible for implementing government interventions enjoy an enviable position unavailable to other investors.  Whether they have been indemnified against potential losses or simply made privy to non-public government policy, the major Wall Street firms evidently responsible for preventing plunges no longer must compete on anywhere near a level playing field.

That point brings us to the situation revealed in a recent article by Henny Sender for the Financial Times on August 2.  Although, the PPT’s involvement in the equities markets has been quite low-profiled, the involvement one PPT component (the Federal Reserve) in the current market for mortgage-backed securities has been quite the opposite.  In fact, the Fed has invoked “transparency” (I thought the Fed was allergic to that) as its reason for tipping off banks on its decisions to buy such securities.  As Mr. Sender explained:

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets.  In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player.  In the interests of transparency, it often announces its intention to buy particular securities in advance.  A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage.  Barclay’s, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.

“You can make big money trading with the government,” said an executive at one leading investment management firm.  “The government is a huge buyer and seller and Wall Street has all the pricing power.”

A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them.  Their transparency hurts them.  Everyone picks their pocket.”

*   *   *

Larry Fink, chief executive of money manager BlackRock, has described Wall Street’s trading profits as “luxurious”, reflecting the banks’ ability to take advantage of diminished competition.

So let’s get this straight:  When Republican Congressman Ron Paul introduced the Federal Reserve Transparency Act (HR 1207) which would give the Government Accountability Office authority to audit the Federal Reserve and its member components for a report to Congress, there was widespread opposition to the idea of transparency for the Fed.  However, when Wall Street banks are tipped off about the Fed’s plans to buy particular securities and the public objects to the opportunistic inflation of the pricing of those securities by the tipped-off banks, the Fed emphasizes a need for transparency.

Perhaps Ron Paul might have a little more luck with his bill if he could demonstrate that its enactment would be lucrative for the Wall Street banks.  HR 1207 would find its way to Barack Obama’s desk before the next issue of the President’s Daily Brief.

The Scary Stuff

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July 6, 2009

During the past week, a good number of Americans had been soothing themselves in Michael Jackson nostalgia  . . .  others watched tennis, many were intrigued by the military coup in Honduras and everyone tried to figure out what was going on in Sarah Palin’s mind.  Meanwhile  . . .  there was some really scary stuff in the news.  With Fourth of July behind us, it’s time to start looking forward to Halloween.  We need not look very far to get a good scare.  Those of us who still have jobs are afraid they may lose them.  Those who have lost their jobs wonder how long they can stay afloat before chaos finally takes over.  Many wise people, despite their comfortable positions in life (for now) have been discussing these types of problems lately.  Their opinions and outlooks are getting more and more ink (or electrons) as the economic crisis continues to unfold.

As we look at the current situation,  let’s check in with the guy who has the biggest mouth.  During an interview on ABC’s This Week with George Stephanopoulos, Vice-President Joe Biden admitted that “we and everyone else misread the economy”:

Biden acknowledged administration officials were too optimistic earlier this year when they predicted the unemployment rate would peak at 8 percent as part of their effort to sell the stimulus package.  The national unemployment rate has ballooned to 9.5 percent in June  —  the worst in 26 years.

This was basically a concession, validating the long-standing criticism by economists such as Nouriel Roubini (a/k/a “Dr.Doom”) who refuted the administration’s view of this crisis.  Many economists (including Roubini) have emphasized the administration’s unrealistic perception of the unemployment problem as a primary flaw in the “bank stress tests” as established by Treasury Secretary “Turbo” Tim Geithner.  Now we’re finding out how ugly this picture really is.  Here are some points raised by Dr. Roubini on July 2:

The June employment report suggests that the alleged “green shoots” are mostly yellow weeds that may eventually turn into brown manure.  The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000.

*   *   *

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11 percent next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests.  You plug an unemployment rate of 11 percent in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans, and commercial loans — much bigger numbers than what the stress tests projected.

In the stress tests, the average unemployment rate next year was assumed to be 10.3 percent in the most adverse scenario. We’ll be already at 10.3 percent by the fall or the winter of this year, and certainly well above that and close to 11% at some point next year.

*   *   *

The job market report is essentially the tip of the iceberg.  It’s a significant signal of the weaknesses in the economy.  It affects consumer confidence.  It affects labor income.  It affects consumption.  It affects the willingness of firms to start increasing production.  It has significant consequences of the housing market.  And it has significant consequences, of course, on the banking system.

*   *   *

But eventually, large budget deficits and their monetization are going to lead — towards the end of next year and in 2011 — to an increase in expected inflation that may lead to a further increase in ten-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates.  Together with higher oil prices driven up in part by this wall of liquidity rather than fundamentals alone, this could be a double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011.   So the outlook for the US and global economy remains extremely weak ahead.  The recent rally in global equities, commodities and credit may soon fizzle out as an onslaught of worse-than-expected macro, earnings and financial news take a toll on this rally,which has gotten way ahead of improvement in actual macro data.

All right  .  .  .   So you may be thinking that this is exactly the type of pessimism we can expect from someone with the nickname “Dr. Doom”.  However, if you take a look at the July 2 article by Tom Lindmark on the Seeking Alpha website, you will find some important concurrence.  Mr. Lindmark discussed his own observation about the unemployment crisis:

All of these people do have to find jobs again sometime and I suspect, as do many others, that the numbers understate the extent of the problem.  There are a lot of people working for ten or twelve bucks an hour that used to make multiples of those numbers.  That’s what you do to survive.   So as we all probably know intuitively, the truth is worse than the picture the numbers paint.

Lindmark included the reactions of several economists to the latest unemployment data, as quoted from The Wall Street Journal Real Time Economics Blog.  It’s more of the same — not happy stuff.  Federal Reserve Chairman Ben Bernanke’s self-serving, self-congratulatory claim that “green shoots” could be found in the economy was made during a discussion on 60 Minutes back on March 15.  That’s what you call:   “premature shoots”.

Just in case you aren’t getting scared yet, take a look at what Ambrose Evans-Pritchard had to say in the Telegraph UK.  He draws our reluctant attention to the possibility that there might just be a violent reaction from the masses, once the ugliness of our situation finally sets in:

One dog has yet to bark in this long winding crisis.  Beyond riots in Athens and a Baltic bust-up, we have not seen evidence of bitter political protest as the slump eats away at the legitimacy of governing elites in North America, Europe, and Japan.  It may just be a matter of time.

One of my odd experiences covering the US in the early 1990s was visiting militia groups that sprang up in Texas, Idaho, and Ohio in the aftermath of recession.  These were mostly blue-collar workers, —  early victims of global “labour arbitrage” — angry enough with Washington to spend weekends in fatigues with M16 rifles.  Most backed protest candidate Ross Perot, who won 19pc of the presidential vote in 1992 with talk of shutting trade with Mexico.

The inchoate protest dissipated once recovery fed through to jobs, although one fringe group blew up the Oklahoma City Federal Building in 1995.  Unfortunately, there will be no such jobs this time.  Capacity use has fallen to record-low levels (68pc in the US,71 in the eurozone).  A deep purge of labour is yet to come.

*   *   *

The Centre for Labour Market Studies (CLMS) in Boston says US unemployment is now 18.2pc, counting the old-fashioned way.  The reason why this does not “feel” like the 1930s is that we tend to compress the chronology of the Depression.  It takes time for people to deplete their savings and sink into destitution.  Perhaps our greater cushion of wealth today will prevent another Grapes of Wrath, but 20m US homeowners are already in negative equity (zillow.com data).  Evictions are running at a terrifying pace.

Some 342,000 homes were foreclosed in April, pushing a small army of children into a network of charity shelters.  This compares to 273,000 homes lost in the entire year of 1932. Sheriffs in Michigan and Illinois are quietly refusing to toss families on to the streets, like the non-compliance of Catholic police in the Slump.

*   *   *

The message has not reached Wall Street or the City.  If bankers know what is good for them, they will take a teacher’s salary for a few years until the storm passes.  If they proceed with the bonuses now on the table, even as taxpayers pay for the errors of their caste, they must expect a ferocious backlash.

Do you think those bankers are saying “EEEEEK!” yet?  They probably aren’t.  Many other similarly-situated individuals are likely turning the page to have a look at the action in “emerging markets”.  Nevertheless, Mr. Evans-Pritchard, in another piece, exposed the hopelessness of those expectations:

Russia is sinking into a swamp of bad loans.

The scale of credit rot in the Russian banking system exposed by Fitch Ratings this week is truly staggering.  The report is yet another cold douche to those betting that the BRICs (Brazil, Russia, India, and China) can pull us out of our mess.

So there you have it.  You wanted to see Thriller again?  Now you have it in real life.  This time, neither Boris Karloff nor Michael Jackson will be around to keep it “lite”.  This is our reality in July of 2009.  Hang on.

A Consensus On Conspiracy

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May 21, 2009

I guess I can throw away my tinfoil hat.  I’m not so paranoid, after all.

Back on December 18, after discussing the bank bailout boondoggle, I made this observation about what had been taking place in the equities markets during that time:

Do you care to hazard a guess as to what the next Wall Street scandal might be?  I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets.  I’ve discussed it with some knowledgeable investors.  I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets.  I have a hunch that their plan is to run up stock prices at the end of the day, before those numbers have a chance to settle back down to the level where the market would normally have them.  The inflated “closing price” for the day is then perceived as the market value of the stock.  This plan would be an effort to con investors into believing that the market has pulled out of its slump.  Eventually the victims would find themselves hosed once again at the next “market correction”.  I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.

Some people agreed with me, although others considered such a “conspiracy” too far-flung to be workable.

Thanks to Tyler Durden at Zero Hedge, my earlier suspicions of market manipulation were confirmed.  On Tuesday, May 19, Mr. Durden posted a video clip from an interview with (among others) Dan Schaeffer, president of Schaeffer Asset Management, previously broadcast on the Fox Business Channel on May 14.  While discussing the latest “bear market rally”, Dan Schaeffer made this observation:

“Something strange happened during the last 7 or 8 weeks. Doreen, you probably can concur on this — there was a power underneath the market that kept holding it up and trading the futures.  I watch the futures every day and every tick, and a tremendous amount of volume came in at several points during the last few weeks, when the market was just about ready to break and shot right up again.  Usually toward the end of the day — it happened a week ago Friday, at 7 minutes to 4 o’clock, almost 100,000 S&P futures contracts were traded, and then in the last 5 minutes, up to 4 o’clock, another 100,000 contracts were traded, and lifted the Dow from being down 18 to up over 44 or 50 points in 7 minutes.  That is 10 to 20 billion dollars to be able to move the market in such a way. Who has that kind of money to move this market?

“On top of that, the market has rallied up during the stress test uncertainty and moved the bank stocks up, and the bank stocks issues secondary — they issue stock — they raised capital into this rally.  It was a perfect text book setup of controlling the markets — now that the stock has been issued …”

Mr. Schaeffer was then interrupted by panel member, Richard Suttmeier of ValuEngine.com.

My fellow foilhats likely had no trouble recognizing this market manipulation as the handiwork of the Plunge Protection Team (also known as the PPT).  Many commentators have considered the PPT as nothing more than a myth, with some believing that this “myth” stems from the actual existence of something called The President’s Working Group on Financial Markets.  For a good read on the history of the PPT, I recommend the article by Ambrose Evans-Pritchard of the Telegraph.  Bear in mind that Evans-Pritchard’s article was written in October of 2006, two years before the global economic meltdown:

Hank Paulson, the market-wise Treasury Secretary who built a $700m fortune at Goldman Sachs, is re-activating the ‘plunge protection team’ (PPT), a shadowy body with powers to support stock index, currency, and credit futures in a crash.

Otherwise known as the working group on financial markets, it was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987.

Mr Paulson says the group had been allowed to languish over the boom years.  Henceforth, it will have a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis.

*    *    *

The PPT was once the stuff of dark legends, its existence long denied.  But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9/11 terrorist attacks.

“They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem,” he said.

“In 1998, there was the Long Term Capital crisis, a global currency crisis.  At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall,” he said.

The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929.  The level of moral hazard is subtly different.

John Crudele of the New York Post frequently discusses the PPT, although he is presently of the opinion that it either no longer exists or has gone underground.  He has recently considered the possibility that the PPT may have “outsourced” its mission to Goldman Sachs:

Let’s remember something.

First, Goldman Sachs accepted $10 billion in government money under the Troubled Asset Relief Program (TARP), so it is gambling with taxpayer money.

But the bigger thing to remember is this:  The firm may be living up to its nickname – Government Sachs – and might be doing the government’s bidding.

The stock market rally these past seven weeks has certainly made it easier for the Obama administration to do its job.  That, plus a little fancy accounting during the first quarter, has calmed peoples’ nerves quite a bit.

Rallies on Wall Street, of course, are good things – unless it turns out that some people know the government is rigging the stock market and you don’t.

That brings me to something called The President’s Working Group on Financial Markets, which is commonly referred to as the Plunge Protection Team.

As I wrote in last Thursday’s column, the Team has disappeared.

Try finding The President’s Working Group at the US Treasury and you won’t.

The guys and girls that Treasury Secretary Hank Paulson relied on so heavily last year when he was forcing Bank of America to buy Merrill Lynch and when he was waterboarding other firms into coming to Wall Street’s rescue has gone underground.

Anybody who has read this column for long enough knows what I think, that the President’s Working Group Plunge Protectors have, in the past, tinkered with the financial markets.

We’ll let interrogators in some future Congressional investigation decide whether or not they did so legally.

But right now, I smell a whiff of Goldman in this market. Breath in deeply, it’s intoxicating – and troubling.

Could Goldman Sachs be involved in a conspiracy to manipulate the stock markets?  Paul Farrell of MarketWatch has been writing about the “Goldman Conspiracy” for over a month.  You can read about it here and here.  In his May 4 article, he set out the plot line for a suggested, thirteen-episode television series called:  The Goldman Conspiracy.  I am particularly looking forward to the fourth episode in the proposed series:

Episode 4. ‘Goldman Conspiracy’ is manipulating stock market

“Something smells fishy in the market. And the aroma seems to be coming from Goldman Sachs,” says John Crudele in the New York Post.  Stocks prices soaring.  “So, who’s moving the market?”  Not the little guy.  “Professional traders, with Goldman Sachs leading the way.”   NYSE numbers show “Goldman did twice the number of so-called big program trades during the week of April 13,” over a billion shares, creating “a historic rally despite the fact that the economy continues to be in serious trouble.”   Then he tells us why: Because the “Goldman Conspiracy” is using TARP and Fed money, churning the markets.  They are “gambling with taxpayer money.”

It’s nice to know that other commentators share my suspicions … and better yet:   Some day I could be watching a television series, based on what I once considered my own, sensational conjecture.

Just Keep Walking

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April 23, 2009

Peggy Noonan had an esteemed career as speechwriter to former Presidents Ronald Reagan and George H.W. Bush.  She now writes a weekly column for The Wall Street Journal and she frequently appears as a panelist on many television news programs.  She has been on the blogroll of this website since its inception.

On Sunday, April 19, she appeared as a panelist on ABC’s This Week with George Stephanopoulos.  During that program’s Roundtable discussion, the subject eventually turned to President Obama’s decision not to prosecute the CIA operatives involved in the torture of detainees in the “War on Terror” as well as the decision to release the so-called “torture memos”.  Those memos were prepared by the Office of Legal Counsel during the Bush administration.  They described the permissible use of such techniques as waterboarding, sleep deprivation, confinement in a box with insects and other sadistic acts, intended to get detainees to provide valuable information.  Roundtable panelist Sam Donaldson expressed his opinion that the operatives who administered these interrogation techniques were not “just following orders”; they believed they were following the law because they were relying on the legal opinions expressed in those memos.  However, as Donaldson explained, if the people who devised those methods and wrote the legal memos condoning their use were “just trying to find cover” and just trying to find a way to get around American law and the Constitution, they should be held accountable in a court of law.  Donaldson added that if the President wanted to pardon those people, he should do so, although it would be important for those individuals to be held accountable before a court.

Peggy Noonan then remarked:

Oh, I have reservations about all of this.  It’s hard for me to look at a great nation issuing these documents and sending them out to the world and thinking:  “Oh, much good will come of that?”  Sometimes in life you wanna’ just keep walkin’.

Sam Donaldson then interrupted with the question as to whether it was right “to let people walk who may have committed a crime”.  Noonan then replied:  “Some of life has to be mysterious”.

Noonan’s remarks drew immediate outrage from Senator Russ Feingold of Wisconsin.  As Sam Stein reported for The Huffington Post, Feingold was harshly critical of the rationalizations for avoiding prosecution of these people, as expressed by government officials as well as those in the news media.  Stein quoted the Senator’s expressed indignation:

“If you want to see just how outrageous this is, I refer you to the remarks made by Peggy Noonan this Sunday” …  “I frankly have never heard anything quite as disturbing as her remark that was something to the affect of:   ‘well sometimes you just have to move on’.”

Noonan’s opinion is emblematic of the mainstream media’s all-too-frequent response to scandalous events and it demonstrates why so many people have turned to the Internet to get the news.  If you overhear someone in a restaurant arranging a bribe with a politician:  Just keep walking.  If you discover information about illegal toxic dumping by one of your publication’s sponsors:  Just keep walking.  If Harry Markopolos approaches you and tries to explain how Bernie Madoff is running a Ponzi scheme:  Just keep walking.

Peggy Noonan’s statement wasn’t just a situation where she “misspoke”.  It was the expression of an arrogant attitude held by too many in the media who decide it is up to them to determine when the public deserves to know something and when it doesn’t.  After all:  “Some of life has to be mysterious”.

Shame on you, Peggy Noonan!  Shame on you!

It’s Time For Obama And Geithner To Blink

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February 16, 2009

On Tuesday, February 10, our newly-appointed Treasury Secretary, “Turbo” Tim Geithner, rolled out a vague description of his new “Financial Stability Plan”.  Most commentators were shocked at the lack of information Geithner provided about this proposal.

This was in stark contrast with President Obama’s description of what we would hear from Geithner, as the President explained during his February 9 press conference.  In response to a question by Jennifer Loven of the Associated Press, concerning his earlier statements about the worsening recession, Obama stated:

And so tomorrow my Treasury Secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again.

Later in the conference, Julianna Goldman of Bloomberg News asked the President how he could expect the remaining $350 billion in available in TARP funds to solve the problems with the financial system when individuals, such as economist Nouriel Roubini, have explained that the price tag for such a fix could exceed a trillion dollars.  Again, the President explained:

We also have to deal with the housing issue in a clear and consistent way.  I don’t want to preempt my Secretary of the Treasury; he’s going to be laying out these principles in great detail tomorrow.

Yet again, in response to a question from Helene Cooper of The New York Times as to whether financial institutions receiving federal bailout money would be required to resume lending again, the President responded:

Again, Helene — and I’m trying to avoid preempting my Secretary of the Treasury, I want all of you to show up at his press conference as well; he’s going to be terrific.

Despite this hype, the following day’s presentation by Tim Geithner offered neither “clear and specific plans” nor “great detail” about the principles involved.  Nearly all of the editorials dealing with this strange event voiced a negative appraisal of Geithner’s discourse, particularly due to the complete absence of any discussion of specific measures to be employed by the Department of the Treasury.  Did something change between Monday night and Tuesday’s event?  Recent developments suggest that disagreements over the details of this plan, particularly those related to the possible “nationalization” of insolvent banks, forced the entire project into a state of flux.

Prior to last Tuesday’s fiasco, Geithner admitted to David Brooks of The New York Times that he was averse to the idea of nationalizing insolvent banks, even on a temporary basis:

Therefore, Geithner argues, the government doesn’t need to go in and nationalize the banks.  “It’s very important that we don’t look like there’s any intent of taking over or managing banks.  Governments are terrible managers of bad assets.  There’s no good history of governments doing that well.”

Geithner’s throwaway argument was disputed by Joe Nocera in the February 13 New York Times:

But that’s a canard.  The government did a terrific job managing banks during the savings and loan crisis of the 1980s.  It took over banks — “we called them bridge banks,” recalled William Seidman, the former chairman of the Federal Deposit Insurance Corporation, with a chuckle — replaced their top managers and directors, stripped out bad assets that the government then managed brilliantly, and sold the newly healthy banks to private buyers.  It turned out not to be all that hard to find actual bankers who could run these S.& L.’s for the federal government.

Geithner’s resistance to nationalization of insolvent banks represents a stark departure from the recommendations of many economists.  While attending the World Economic Forum in Davos, Switzerland last month, Dr. Nouriel Roubini explained (during an interview on CNBC) that the cost of purchasing the toxic assets from banks will never be recouped by selling them in the open market:

At which price do you buy the assets?  If you buy them at a high price, you are having a huge fiscal cost.  If you buy them at the right market price, the banks are insolvent and you have to take them over.   So I think it’s a bad idea.   It’s another form of moral hazard and putting on the taxpayers, the cost of the bailout of the financial system.

Dr. Roubini’s solution is to face up to the reality that the banks are insolvent and “do what Sweden did”:  take over the banks, clean them up by selling off the bad assets and sell them back to the private sector.  On February 15, Dr. Roubini repeated this theme in a Washington Post article he co-wrote with fellow New York University economics professor, Matthew Richardson.

Even after Geithner’s disastrous press conference, President Obama voiced a negative reaction to the Swedish approach during an interview with Terry Moran of ABC News:

Sweden, on the other hand, had a problem like this.  They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again.  So you’d think looking at it, Sweden looks like a good model.  Here’s the problem; Sweden had like five banks.  [LAUGHS] We’ve got thousands of banks.  You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale,  I think, would — our assessment was that it wouldn’t make sense.  And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different.  And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

Obama’s strident resistance to the Swedish approach could force him into an embarrassing situation, in the event that he changes his view of that strategy.  This may happen once Geithner begins applying his “stress tests” this week, to measure the solvency of individual banks.  On the ABC News program “This Week”, Republican Senator Lindsey Graham of South Carolina expressed his opinion that the option of nationalizing these unhealthy banks should remain open:

GRAHAM:  Yes, this idea of nationalizing banks is not comfortable, but I think we have gotten so many toxic assets spread throughout the banking and financial community throughout the world that we’re going to have to do something that no one ever envisioned a year ago, no one likes, but, to me, banking and housing are the root cause of this problem.  And I’m very much afraid that any program to salvage the bank is going to require the government…

STEPHANOPOULOS:  So what would you do now?

GRAHAM:  I — I would not take off the idea of nationalizing the banks.

President Obama and Turbo Tim need to keep similarly open minds about the nationalization option.  They wouldn’t want to be on the wrong side of the “moral hazard” argument, forcing taxpayers to eat the losses risked by investors — especially with a prominent Republican wagging his finger at them.  This situation calls for only one response by the new administration:  Blink.

Obama The Centrist

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January 12, 2009

It was almost one year ago when the conservative National Journal rated Barack Obama as “the most liberal senator in 2007”.  Of course, that was back during the primary season of the 2008 Presidential campaign, when many people believed that the “liberal” moniker should have been enough to sink Obama’s Presidential aspirations.  Now, with the Inaugural just a week away, we are hearing the term “centrist” being used to describe Obama, often with a tone of disappointment.

On Sunday, January 11, David Ignatius wrote an op-ed piece for The Washington Post, entitled:  “Mr. Cool’s Centrist Gamble”.  Mr. Ignatius spelled out how Obama moved toward the political center after his election, beginning with the appointment of Rahm Emanuel as chief of staff, to appointing a Cabinet “which is so centrist it almost resembles a government of national unity”:

Since Election Day, he has taken a series of steps to co-opt his opponents and fashion a new governing majority.  It’s an admirable strategy but also a high-risk one, since the “center,” however attractive it may be in principle, is often a nebulous political never-never land.

Obama’s bet is that at a time of national economic crisis, the country truly wants unity.

The President-elect’s appearance on ABC’s January 11 broadcast of This Week with George Stephanopoulos motivated Glenn Greenwald to write on Salon.com that the interview:

. . .  provides the most compelling — and most alarming — evidence yet that all of the “centrist” and “post-partisan” chatter from Obama’s supporters will mean what it typically means:  devotion, first and foremost, to perpetuating rather than challenging how the Washington establishment functions.

Mr. Greenwald (an attorney with a background in constitutional law and civil rights litigation) began his article by taking issue with the characterization by David Ignatius that Obama’s centrist approach is something “new”.  Greenwald pointed out that for a Democratic President to make a post-election move to the center is nothing new and that Bill Clinton had done the same thing:

The notion that Democrats must spurn their left-wing base and move to the “non-ideological” center is the most conventional of conventional Beltway wisdom (which is why Ignatius, the most conventional of Beltway pundits, is preaching it).  That’s how Democrats earn their Seriousness credentials, and it’s been that way for decades.

Greenwald then focused on a point made by Mr. Obama in response to a question posed by George Stephanopoulos concerning whether the detention facility at Guantanamo will be closed within the first 100 days of the new Presidency.  The President-elect responded that:

It is more difficult than I think a lot of people realize and we are going to get it done but part of the challenge that you have is that you have a bunch of folks that have been detained, many of whom who may be very dangerous who have not been put on trial or have not gone through some adjudication.  And some of the evidence against them may be tainted even though it’s true.  And so how to balance creating a process that adheres to rule of law, habeas corpus, basic principles of Anglo American legal system, by doing it in a way that doesn’t result in releasing people who are intent on blowing us up.

The magic words in Obama’s response that caught Glenn Greenwald’s attention were:  “creating a process”.  Why should due process require creation of a new process outside of our court system?  Mr. Greenwald suspects that this “new process” will be one that allows for the admission of evidence (confessions, etc.) obtained by torture.  If what Mr. Obama has in mind is a process that will protect the secrecy of legitimately-classified information, that is one thing.  Nevertheless, I share Mr. Greenwald’s skepticism about the need for an innovative adjudication system for those detained at Guantanamo.

George Stephanopoulos made a point of directing Mr. Obama’s attention to “the most popular question” on the Change.gov website.  It came from Bob Fertik of New York City, who asked:

Will you appoint a special prosecutor ideally Patrick Fitzgerald to independently investigate the greatest crimes of the Bush administration, including torture and warrantless wiretapping?

The response given by the President-elect involved a little footwork:

We have not made final decisions, but my instinct is for us to focus on how do we make sure that moving forward we are doing the right thing.

Glenn Greenwald’s analysis of Mr. Obama’s performance on This Week, did not overlook that part of the interview:

Obama didn’t categorically rule out prosecutions — he paid passing lip service to the pretty idea that “nobody is above the law,” implied Eric Holder would have some role in making these decisions, and said “we’re going to be looking at past practices” — but he clearly intended to convey his emphatic view that he opposes “past-looking” investigations.  In the U.S., high political officials aren’t investigated, let alone held accountable, for lawbreaking, and that is rather clearly something Obama has no intention of changing.

Obama’s expressed position on whether to prosecute the crimes of the Bush administration is fairly consistent with what he has been saying all along.  Frank Rich covered this subject in his January 10 New York Times editorial:

The biggest question hovering over all this history, however, concerns the future more than the past.  If we get bogged down in adjudicating every Bush White House wrong, how will we have the energy, time or focus to deal with the all-hands-on-deck crises that this administration’s malfeasance and ineptitude have bequeathed us?  The president-elect himself struck this note last spring.  “If crimes have been committed, they should be investigated,” Barack Obama said.  “I would not want my first term consumed by what was perceived on the part of Republicans as a partisan witch hunt, because I think we’ve got too many problems we’ve got to solve.”

Henry Waxman, the California congressman who has been our most tireless inquisitor into Bush scandals, essentially agreed when I spoke to him last week.  Though he remains outraged about both the chicanery used to sell the Iraq war and the administration’s overall abuse of power, he adds:  “I don’t see Congress pursuing it. We’ve got to move on to other issues.”  He would rather see any prosecutions augmented by an independent investigation that fills in the historical record.  “We need to depoliticize it,” he says.  “If a Democratic Congress or administration pursues it, it will be seen as partisan.”

Welcome to Barack Obama’s post-partisan world.  The people at the National Journal are probably not the only ones disappointed by Obama’s apparent move to the political center.  It appears as though we will be hearing criticism about the new administration from all directions.  When he disappoints centrists, you can read about it here.