© 2008 – 2018 John T. Burke, Jr.

Black And Reich

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April 16, 2009

I guess it’s because I was using TurboTax to work on my income tax return for the past few days, that I was constantly reminded of Treasury Secretary “Turbo” Tim Geithner.  Criticism continues to abound concerning the plan by Turbo Tim and Larry Summers for getting the infamous “toxic assets” off the balance sheets of our nation’s banks.  It’s known as the Public-Private Investment Program (a/k/a:  PPIP or “pee-pip”).  I recently read an article by a couple of Economics professors named Laurence J. Kotlikoff (Boston University) and Jeffrey Sachs (Columbia University) wherein they referred to this plan as the GASP (Geithner And Summers Plan).  Their bottom line:

The Geithner-and-Summers Plan should be scrapped.  President Obama should ask his advisors to canvas the economics and legal community to hear the much better ideas that are in wide circulation.

One of the harshest critics of the PPIP is William Black, an Economics professor at the University of Missouri.  Professor Black gained recognition during the 1980s while he was deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC).  During that time, the FSLIC helped block an attempted sale of Charles Keating’s Lincoln Savings and Loan, which was subsequently seized by the Federal Home Loan Bank Board, despite opposition from five United States Senators, who became known as the Keating Five.  A recent interview with Professor Black by Jack Willoughby of Barrons revealed that Black’s aversion to the PPIP starts with the fact that it is being implemented by Geithner and Summers:

We have failed bankers giving advice to failed regulators on how to deal with failed assets.  How can it result in anything but failure?  If they are going to get any truthful investigation, the Democrats picked the wrong financial team.  Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems.  Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.

I particularly enjoyed Black’s characterization of the PPIP’s use of government (i.e. taxpayer) money to back private purchases of the toxic assets:

It is worse than a lie.  Geithner has appropriated the language of his critics and of the forthright to support dishonesty.  That is what’s so appalling — numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies.  He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent.  He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything.  He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

For the past month or so, I’ve been hearing many stock market commentators bemoan the fact that there is so much money “on the sidelines”.  In other words, people with trading accounts are letting their money sit in brokerage money market accounts, rather than risking it in the stock markets.  I believe that many of these people are so discouraged by the sleazy environment on Wall Street, they are waiting for things to get cleaned up before they take any more chances in a casino where so many games are rigged.  In the Barrons interview, Black made a point that reinforced my opinion:

His (Geithner’s) use of language like “legacy assets” — and channeling the worst aspects of Milton Friedman — is positively Orwellian.  Extreme conservatives wrongly assume that the government can’t do anything right.  And they wrongly assume that the market will ultimately lead to correct actions.  If cheaters prosper, cheaters will dominate.  It is like Gresham’s law:  Bad money drives out the good.  Well, bad behavior drives out good behavior, without good enforcement.

By asking Professor Black a few simple, straightforward questions (in layperson’s language) Jack Willoughby got some fantastic and refreshing information in return (also in layperson’s language) making this article a “must read”.  As Black and many others have pointed out, these huge financial institutions must be broken down into smaller businesses.  Why isn’t this being undertaken?  Professor Black looks to where the buck stops:

Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America’s pre-eminence in global financial capitalism at any cost.  They remain wedded to the bad idea of bigness, the so-called financial supermarket — one-stop shopping for all customers — that has allowed the American financial system to paper the world with subprime debt.  Even the managers of these worldwide financial conglomerates testify that they have become so sprawling as to be unmanageable.

Another critic of the Geithner-Summers PPIP is former Secretary of Labor, Robert Reich.  Reich is now a professor at the University of California at Berkeley.  His April 6 blog entry discussed the fact that the top 25 hedge fund managers earned a total of $11.6 billion last year:

But what causes me severe heartburn is that these are exactly the sort of investors Tim Geithner is trying to lure in to buy troubled assets from banks, with an extraordinary offer financed by you and me and other taxpayers:  If it turns out the troubled assets are worth more than these guys pay for them, they could make a fortune.  If it turns out the assets are worth less, these guys won’t lose a thing because we taxpayers will bail them out.  Plus, they get to pick only the highest-rated of the big banks’ bad assets and can review them carefully before buying.

What a deal.  Why can’t you and I get in on this bonanza? Because we’re too small.  The government will designate only about five big investor funds — run or owned by the richest of the rich — as potential buyers.  Hedge funds fit the bill perfectly.

It’s nice to know that more and more prominent individuals in the world of economics and public policy are taking the ethical stand against a program based on the principle of “socialized loss and privatized gain”.  I just hope President Obama doesn’t take too long to realize that these people are right and that the Geithner – Summers team is wrong.

This Should Have Happened Last Year

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September 18, 2008

I’m sorry.  What is happening in the financial markets right now, should have happened at this time, last year.  I put my money where my mouth was, in the belief that a laissez-faire Republican government would have let market conditions run their course.  That strategy caused me to lose money for the past year.  When precious metals should have been going up, they were going down.  Something “stinky” was happening.  At this time, last year, Jon Markman of was discussing the “duct tape and pixie dust” being used to hold the economy together.  In hindsight, I suspect that there may have been an effort to keep the ca-ca from hitting the fan until after Election Day (November 4).  Time will tell whether there was some skullduggery involved in such an effort.  Do you think that the “oil speculators” realized, at some point, that they could manipulate the prices of the small handful of stocks (30) that comprise the Dow Jones Industrials, by manipulating the price of oil?  Are these same “oil speculators” on “good behavior” right now, out of fear that the “Enron Loophole” could be doomed?

I apologize because I have been making (back) lots of money this week, while many people have seen their retirement plans crash and burn.  I stuck to my belief that the emperor was not really wearing any clothes.  It cost me money to adhere to that opinion, although it is now “payback time”.  To no surprise, the Carly Fiorinas of this nosedive will walk away with their golden parachutes intact.  However, will AIG still be free to make crucial decisions about which lawsuits to litigate?  Do they have a right to make those (and other) decisions as they used to, now that you and I own eighty percent of that company?

Meanwhile, John “Keating Five” McCain claims that he will champion the interests of those suckers who vote for him, by bringing “The Good Old Boys of Wall Street” to Alaskan frontier justice.  Why would anyone believe this?  Based on his record, McCain could not expect the voters to consider him as the advocate of the downtrodden.  For some reason, the Obama campaign has expressed an unwillingness to use the “Keating Five” episode of McCain’s life, as fodder for negative ads.  (They may find themselves thinking more clearly in late October.)

Let’s take a look back at the “glory days” of The Keating Five, from what is available on

The Keating Five scandal was prompted by the activities of one particular savings and loan: Lincoln Savings and Loan Association of Irvine, California. Lincoln’s chairman was Charles Keating, who ultimately served five years in prison for his corrupt mismanagement of Lincoln.  In the four years since Keating’s American Continental Corporation (ACC) had purchased Lincoln in 1984, Lincoln’s assets had increased from $1.1 billion to $5.5 billion.  Such savings and loan associations had been deregulated in the early 1980s, allowing them to make highly risky investments with their depositors’ money, a change of which Keating took advantage.  Lincoln’s investments took the form of buying land, taking equity positions in real estate development projects, and buying high-yield junk bonds.

*   *   *

The core allegation of the Keating Five affair is that Keating had made contributions of about $1.3 million to various U.S. Senators, and he called on those Senators to help him resist regulators. The regulators backed off, to later disastrous consequences.

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(f)ive senators, Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), John McCain (R-AZ), and Donald W. Riegle (D-MI), were accused of improperly aiding Charles H. Keating, Jr., chairman of the failed Lincoln Savings and Loan Association, which was the target of an investigation by the Federal Home Loan Bank Board (FHLBB).

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After a lengthy investigation, the Senate Ethics Committee determined in 1991 that Alan Cranston, Dennis DeConcini, and Donald Riegle had substantially and improperly interfered with the FHLBB in its investigation of Lincoln Savings. Senators John Glenn and John McCain were cleared of having acted improperly but were criticized for having exercised “poor judgment”.  All five of the senators involved served out their terms. Only Glenn and McCain ran for re-election, and they were both re-elected.

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McCain and Keating had become personal friends following their initial contacts in 1981, and McCain was the closest socially to Keating of the five senators. Like DeConcini, McCain considered Keating a constituent as he lived in Arizona. Between 1982 and 1987, McCain had received $112,000 in political contributions from Keating and his associates. In addition, McCain’s wife Cindy McCain and her father Jim Hensley had invested $359,100 in a Keating shopping center in April 1986, a year before McCain met with the regulators. McCain, his family, and their baby-sitter had made nine trips at Keating’s expense, sometimes aboard Keating’s jet. Three of the trips were made during vacations to Keating’s opulent Bahamas retreat at Cat Cay. McCain did not pay Keating (in the amount of $13,433) for some of the trips until years after they were taken, when he learned that Keating was in trouble over Lincoln. On his Keating Five experience, McCain has said: “The appearance of it was wrong. It’s a wrong appearance when a group of senators appear in a meeting with a group of regulators, because it conveys the impression of undue and improper influence. And it was the wrong thing to do.”

So where is the Obama ad using “Poor Judgment” as its theme?  Wouldn’t it be nice to see that phrase repeated under a picture of Sarah Palin?