TheCenterLane.com

© 2008 – 2020 John T. Burke, Jr.

Understanding The Creepy Bailouts

Comments Off on Understanding The Creepy Bailouts

March 26, 2009

The voting, taxpaying public had no trouble understanding the outrageousness of AIG’s use of government-supplied, bailout money to pay $165 million in bonuses to its employees.  As we all saw, there was a non-stop chorus of outrage, running from letters to the editors of small-town newspapers to death threats against AIG employees and their next-of-kin.  However, what most people don’t really understand is how this crisis came about and what the failed solutions have been.  Some of us have tried to familiarize ourselves with the alphabet soup of acronyms for those government-created entities, entrusted with the task of solving the most complex financial problems of all time.  Nevertheless, we are behind the curve with our own understanding and we will remain behind the curve regardless of how hard we try.  It’s no accident.  Opacity is the order of the day from the Federal Reserve, the Treasury, the Securities and Exchange Commission and the Commodity Futures Trading Commission.  In other words:  You (the “little people”) are not supposed to know what is going on.  So just go back to work, pay your taxes and watch the television shows that are intended to tie-up your brain cells and dumb you down.

This week, Wall Street was excited to learn the details of Treasury Secretary “Turbo” Tim Geithner’s latest version of what, last week, was called the Financial Stability Plan.  In order to make the unpopular plan sound different, it was given a new name: the PPIP (Public-Private Investment Partnership or “pee-pip”).  Those economists who had voiced skepticism about the plan’s earlier incarnations were not impressed with the emperor’s new clothes.  As Nobel laureate and Princeton University Professor Paul Krugman explained in The New York Times:

But the real problem with this plan is that it won’t work.  Yes, troubled assets may be somewhat undervalued.  But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem.  They lost that bet.  And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

The plan’s supporters now claim that Professor Nouriel Roubini, an advocate for “nationalization” (or more accurately:  temporary receivership) of insolvent banks now supports the “new” plan.  As one can discern from the New York Daily News op-ed piece by Dr. Roubini and fellow New York University Professor Matthew Richardson, they simply described this plan a “a step in the right direction”.  More important were the caveats they included in their article:

But let’s not have any illusions.  The government bears the risk if and when the investors take a bath on the taxpayer-provided loans.  If the economy gets worse, it could get very ugly, very quickly.  The administration should be transparent in making clear that there is still a wealth transfer taking place here – from taxpayers to investors and banks.

*    *    *

Moreover, there’s the issue of transparency – or lack thereof.  No one knows what the loans or securities are worth.  Competing investors will help solve this by promoting price discovery.  But be careful what you wish for.  We might not like the answers.

James K. Galbraith (the son of famed economist John Kenneth Galbraith) has a PhD in Economics from Yale and is a professor at the University of Texas at Austin.  His reaction to the PPIP appears on The Daily Beast website in an article entitled:  “The Geithner Plan Won’t Work”:

The ultimate objective, and in President Obama’s own words, the test of this plan, is whether it will “get credit flowing again.”  (I have dealt with that elsewhere.)  Short answer:  It won’t.  Once rescued, banks will sit quietly on the sidelines, biding their time, until borrowers start to reappear.  From 1989 to 1994, that took five years.  From 1929 to 1935 — you get the picture.

*    *    *

And the reality is, if the subprime securities are truly trash, most of the big banks are troubled and some are insolvent.  The FDIC should put them through receivership, get clean audits, install new management, and begin the necessary shrinkage of the banking system with the big guys, not the small ones.  It should not encumber the banking system we need with failed institutions.  And it should not be giving CPR to a market for toxic mortgages that never should have been issued, and certainly never securitized, in the first place.

Back in May of 2006, Dr. Galbraith wrote an article for Mother Jones that is particularly relevant to the current economic crisis.  Many commentators are now quoting Galbraith’s observations about how “the predator class” is in the process of crushing the rest of us:

Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia.  Instead, predation has become the dominant feature — a system wherein the rich have come to feast on decaying systems built for the middle class.  The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth.  But it is the defining feature, the leading force.  And its agents are in full control of the government under which we live.

The validity of Galbraith’s argument becomes apparent after reading Matt Taibbi’s recent article for Rolling Stone, called “The Big Takeover”.  Taibbi’s article is a “must read” for anyone attempting to get an understanding of how this mess came about as well as the sinister maneuvers that were made after la mierda hit the fan.  It’s not a pretty picture and Matt deserves more than congratulations for his hard work on this project, putting the arcane financial concepts and terminology into plain, easy-to-understand English.  Beyond that, he provides the Big Picture, which, for those who read Galbraith’s discourse on predation, is all too familiar:

People are pissed off about this financial crisis, and about this bailout, but they’re not pissed off enough.  The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’etat.  They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grace:  Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess.  And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — “our partners in the government,” as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class.  But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

Let’s hope I haven’t scared you out of reading Matt’s article.  Besides:  If you don’t — you are going to feel really stupid when you have to admit that you don’t know what the ABCPMMMFLF is.

The Betrayal

Comments Off on The Betrayal

March 23, 2009

We the people, who voted for Barack Obama, are about to get ripped off by our favorite Hope dealer.  Throughout the recent controversy arising from the huge bonuses paid to AIG executives, President Obama has done quite a bit of hand wringing over the fact that the government is rewarding “the very same people who got us into this mess”.  Treasury Secretary, “Turbo” Tim Geithner is now rolling out the administration’s so-called Financial Stability Plan, wherein once again, “the very same people who got us into this mess” will be rewarded with our tax dollars.  Over a trillion dollars of taxpayer money will be used to either buy back or insure an arbitrarily-assigned value for the infamous mortgage-backed securities.  The purpose of this exercise will be to prevent the bankers themselves from losing money.  The country’s top economists, including two Nobel Prize winners (Paul Krugman and Joseph Stiglitz) have advocated a different solution:  placing those banks that are about to fail into “temporary receivership”.  However, this process would result in a significant reduction of the stock prices for those banks, in addition to replacement of the management of those institutions.  The big-shot bankers won’t put up with this.

In Sunday’s New York Times, Frank Rich referenced a reader’s observation that this is President Obama’s “Katrina Moment”.  How the new President responds to this crisis will likely shape “the trajectory of his term”.  I prefer to call it Obama’s “Yellow Cake Moment”, since he and his administration are bent on selling a lie (the likelihood that the Financial Stability Plan can succeed) to the public in order to further assist the bad bankers.  It is similar to when George W. Bush convinced many in Congress and the public, that Saddam Hussein was attempting to purchase yellow cake uranium to make atomic bombs (with Bush’s ultimate goal being widespread support for the invasion of Iraq).

It should be no coincidence that the Financial Stability Plan is rewarding the bad bankers, since it was prepared by some of “the very same people who got us into this mess”.  I am specifically referring to Larry Summers and Turbo Tim himself.  Frank Rich covered this point quite well in Sunday’s article.  As a result, Obama’s attempt to chastise “the very same people who got us into this mess” is quite specious, in light of the fact that some of those people have shaped his latest bank bailout.

Back during the campaign, Candidate Obama caught quite a bit of flack for talking about “putting lipstick on a pig”.  Nevertheless, his continued promotion of the various incarnations of what is essentially the same ill-conceived plan floated by former Treasury Secretary Henry Paulson, demonstrates that Obama himself is now putting lipstick on a pig.  As Paul Krugman pointed out:

Why was I so quick to condemn the Geithner plan?  Because it’s not new; it’s just another version of an idea that keeps coming up and keeps being refuted.  It’s basically a thinly disguised version of the same plan Henry Paulson announced way back in September.

*    *    *

But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets.  Actually, that’s not quite it:  the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls “a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don’t think I can finish this on a Times blog]”

Nevertheless, “public outcry” is exactly what is warranted in response to this soon-to-be fiasco.  Most economists favor the “temporary receivership” approach, rather than the continued bailouts of insolvent banks.  The Administration’s Financial Stability Plan is just another way to reward “the very same people who got us into this mess”.  This plan is expected to cost at least one trillion dollars.  As a result, the government is about to bilk the taxpayers out of an amount in excess of 20 Bernie Madoff Ponzi schemes.

MSNBC’s Rachel Maddow has recently vilified Senator Evan Bayh’s caucus of moderate Democrats, whom she calls “Conservadems” because they have been offering some resistance to a few of Obama’s proposals.   These Senators are actually smart people who can detect the distinctive odor of snake oil.  They know better than to tie their political futures to a bank bailout plan that can destroy their own credibility with the voting public.  They know that public support of Obama’s broader agenda is hinged on how he deals with the banking problem.  As Ben Smith and Manu Raju reported for Politico:

But many lawmakers made clear Tuesday their view that voters’ willingness to trust Obama on some subjects will be determined by their view of how well he handles the economic crisis.

*    *    *

“Unless we can instill some trust back with the American people that these people who brought on this problem, who risked our 401K funds and hard-working people’s money, aren’t going to be able to profit from their folly, I think we are at risk of losing their trust,” said Sen. Amy Klobuchar (D-Minn.).

Meanwhile, there’s an ill wind a-blowin’ and it’s coming from 1600 Pennsylvania Avenue.  The efforts by many pundits to blame the flawed financial policy on Geithner are misplaced.  If President Obama weren’t on board with this plan, it would have never made it outside of the Oval Office.  The problem is with Obama himself, rather than Geithner.  Unfortunately, the decision our President has made will likely turn a two-year recession into a ten-year recession.  To him, the corresponding benefit of helping out the bankers must apparently be worth it.

“Bank Rage” Stresses The Obama Agenda

Comments Off on “Bank Rage” Stresses The Obama Agenda

March 19, 2009

Public anger over the AIG bonus controversy has risen to the point where no politician wants to be complicit in any government action to further reward those characters, widely regarded to have helped cause the economic crisis.  Worse yet, bailout fatigue is finally taking its toll on the consensual psyche.  On March 18, Chairman Ben Bernanke announced the decision of the Federal Reserve’s Open Market Committee (FOMC) to print up another trillion dollars to buy back long-term Treasury bonds and to purchase some of those toxic, mortgage-backed securities.  The most immediate beneficiaries of this news were the usual suspects:  the banks.  Citigroup saw its stock value jump over 22% on Wednesday.  Bank of America made a similar gain and Wells Fargo’s stock rose over 17%.  As John Dickerson reported for Slate, President Obama is walking a tightrope by resonating with the public outrage over the behavior of Wall Street’s investment banks, since too much taxpayer anger could cause him trouble down the road:

Administration aides know this outrage can go too far.  If the president stokes too much outrage, he’ll have a tougher time asking for more tax money for future bailouts of banks and other industries.  But, as it was explained to me by an administration adviser, it is impossible for the president not to show that he’s outraged.  If he didn’t, he’d lose credibility, which would eventually hurt his ability to sell future bailouts and his budget.

Meanwhile, Treasury Secretary “Turbo” Tim Geithner continued to take heat from members of Congress, as he is increasingly perceived as the individual who failed to prevent the villains at AIG from being rewarded $165 million for their role in causing the financial meltdown.  As Rick Klein reported for ABC News, two Republican Congressmen (Connie Mack of Florida and Darrell Issa of California) have called for Geithner’s resignation.  Klein’s article went on to point out:

Several congressional aides said members of Congress remain unlikely to press for Geithner’s ouster in large numbers.  At the very least, according to one Democratic leadership aide, members are likely to wait for Geithner to present his comprehensive bank bailout plan before passing judgment.

Once Turbo Tim does finally present “his comprehensive bank bailout plan” (a/k/a the Financial Stability Plan), he will validate his new-found reputation as a lackey for the Wall Street establishment.  If you think he’s unpopular now  …  wait until that happens.  Harold Meyerson’s March 18 op-ed piece in The Washington Post is emblematic of the criticism the new administration faces as it attempts to assimilate Geithner-ism into its economic recovery strategy:

But Geithner’s indulgence of bankers’ indulgences is fast becoming the Obama administration’s Achilles’ heel.  The AIG debacle is the latest in a series of bewildering Geithner decisions that threaten to undermine the administration’s efforts to restart the economy.  So long as it’s Be Kind to Bankers Week at Treasury — and we’ve had eight straight such weeks since the president was inaugurated — American banking, and the economy it is supposed to serve, will remain paralyzed.  The Geithner plan to restart the banks provides huge taxpayer subsidies to hedge funds, investment banks and private equity companies to buy the banks’ toxic assets without really having to assume the risk.  That’s right — the same Wall Street wizards who got us into this mess, using the same securitization techniques that built mountains of debt within a shadow financial system that remains unregulated, are the saviors whom Geithner has anointed to extricate us — with our capital, not theirs — from the mess that they created.

A more plausible solution would be for the government to assume control of those banks that are insolvent, as it routinely does when banks go under.  It could then install new management, wipe out the shareholders, take the devalued assets off the banks’ books, restart lending and restore the banks to private control at a modest profit for the taxpayers.  There may be reasons that Geithner’s plan makes more sense than this one, but if they exist, Geithner has failed to explain them.

Nothing could more seriously undermine President Obama’s “big bang” strategy (of simultaneously tackling the problems of energy, health care, climate change and education) than Geithner’s inept approach to solving the nation’s economic problems.  In fact, it appears as though the growing “bailout fatigue” is already taking its toll.  As Ben Smith and Manu Raju reported for Politico, Indiana Senator Evan Bayh’s 15-member caucus of conservative and centrist Democrats seems convinced that it will be impossible to adequately address the nation’s financial ills while pursuing such an ambitious, multi-front agenda.  Worse yet, as the Politico article pointed out, if the administration is seen as mishandling the economic crisis by catering to the interests of Wall Street, the public could become unwilling to trust the new administration with such a far-reaching scheme, involving so many costly programs:

But many lawmakers made clear Tuesday their view that voters’ willingness to trust Obama on some subjects will be determined by their view of how well he handles the economic crisis.  That judgment, in turn, will be shaped by whether the White House effectively responds to public outrage over large bonuses to executives at bailed-out American International Group.

“Unless we can instill some trust back with the American people that these people who brought on this problem, who risked our 401K funds and hard-working people’s money, aren’t going to be able to profit from their folly, I think we are at risk of losing their trust,” said Sen. Amy Klobuchar (D-Minn.).

If Rush Limbaugh still wants to see President Obama fail in advancing the “big bang” agenda  .  .  .

He must have a lot of love for Tim Geithner.