November 5, 2009
Ask NOT what your country can do for you —
But ask what your country can do for its largest banks.
— “Turbo” Tim
All right . . . “Turbo” Tim Geithner didn’t really say that (yet) but we’ve all seen how his actions affirm that doctrine. Former federal banking regulator, Professor William Black, recently criticized Geithner for not protecting the taxpayers when Turbo Tim bailed out CIT Group to the tune of 2.4 billion dollars this past summer. CIT has now filed for bankruptcy. Henry Blodget of The Business Insider described Professor Black’s outrage over this situation:
The government was in no way obligated to lend the struggling CIT money and, in fact, initially refused to provide it bailout funds. More importantly, being the lender of last resort, the government should have guaranteed we’d be the first to get paid if CIT eventually filed Chapter 11. By failing to do so, “it’s like he [Geithner] burned billions of dollars again in government money, our money, gratuitously,” says Black.
After Tuesday’s election defeats for the Democrats in two gubernatorial races, the subject of “bailout fatigue” has been getting more attention.
Acting under the pretext of “transparency” the Obama administration has developed a strategy of holding meetings for people and groups with whom the administration knows it is losing credibility. Jane Hamsher of FiredogLake.com has written about the Obama team’s efforts to keep the disaffected Left under control by corralling these groups into what Hamsher calls “the veal pen”. She described one meeting wherein Rahm Emanuel used the expression “f**king stupid” in reference to the critics of those Democrats opposing the public option in proposed healthcare reform legislation.
A different format was followed at what appeared to be a “message control” conference, held on Monday at the Treasury Department. This time, the guest list was comprised of a politically diverse group of financial bloggers. One attendee, Yves Smith of Naked Capitalism, described the meeting as “curious”:
None of us knew in advance how many attendees there would be; there were eight of us at a two-hour session, Interfluidity, Marginal Revolution, Kid Dynamite’s World, Across the Curve, Financial Armageddon, Accrued Interest, and Aleph (and of course, others may have been invited who had scheduling conflicts).
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It wasn’t obvious what the objective of the meeting was (aside the obvious idea that if they were nice to us we might reciprocate. Unfortunately, some of us are not housebroken). I will give them credit for having the session be almost entirely a Q&A, not much in the way of presentation. One official made some remarks about the state of financial institutions; later another said a few things about regulatory reform. The funniest moment was when, right after the spiel on regulatory reform, Steve Waldman said, “I’ve read your bill and I think it’s terrible.” They did offer to go over it with him. It will be interesting to see if that happens.
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My bottom line is that the people we met are very cognitively captured, assuming one can take their remarks at face value. Although they kept stressing all the things that had changed or they were planning to change, the polite pushback from pretty all the attendees was that what Treasury thought of as major progress was insufficient.
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Several of us raised questions about whether what their vision for the industry’s structure was and that the objective seemed to be to restore the financial system that got us in trouble in the first place.
Michael Panzner of Financial Armageddon and When Giants Fall adopted Ms. Smith’s description of the event, adding a few observations of his own:
- . . . it wasn’t clear that there was a “plan B” in place if things do not recover in 2010 as many mainstream analysts expect. In fact, the suggestion from one official was that the tenure of the current crisis would likely be nearer the shorter end of expectations.
- There was also a bit of a disconnect between the remarks various Treasury officials have made in public forums and what was said at the meeting. … Yesterday, however, a number of those present clearly acknowledged that things could (still) go wrong and said such fears kept them awake at night. While that is not unusual in and of itself, at the very least it adds to doubts I and others have expressed about the true state of the financial system and the economy.
- Finally, the meeting seemed to confirm the strong grip that Wall Street has on the levers of legislative power.
The most informative rendition of the events at the conclave came from Kid Dynamite, whose two-part narrative began with a look at how Michael Panzner interrupted a Treasury official who was describing the Treasury’s current focus “on reducing the footprint of economic intervention cautiously, quickly and prudently”:
Michael Panzner jumped right in, addressing a concept I’ve written about previously – that of “extend and pretend,” or “delay and pray” – the concept of attempting to avoid recognizing actual losses and or insolvencies, and growing out of them after enough time. Panzner called it “fake it ‘till you make it.” I mentioned that I felt like we were undergoing a “Ponzi scheme of confidence” – but that confidence mattered less than ever in the current environment where, contrary to perhaps the prior 10 years, confidence can no longer be “spent.”
Kid Dynamite’s report contained too many great passages for me to quote here without running on excessively. Just be sure to read his entire report, including Part II (which should be posted by the time you read this).
David Merkel of The Aleph Blog also submitted a two-part report (so far — with more to come) although Part 2 is more informative. Here are some highlights:
As all bloggers there will note, those from the Treasury were kind, intelligent, funny … they were real people, unlike the common tendency to demonize those in DC.
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To the Treasury I would say, “Markets are inherently unstable, and that is a good thing.” They often have to adjust to severe changes in the human condition, and governmental attempts to tame markets may result in calm for a time, and a tsunami thereafter.
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As for the bank stress-testing, one can look at it two ways: 1) the way I looked at it at the time — short on details, many generalities, not trusting the results. (Remember, I have done many such analyses myself for insurers.) or, 2) something that gave confidence to the markets when they were in an oversold state. Duh, but I was dumb — the oversold market rallied when it learned that the Treasury had its back.
John Jansen from Across The Curve included his report on the meeting within his usual morning posting concerning the bond market on November 4. In a subsequent posting that afternoon, he referred his readers to the Kid Dynamite report. Here’s what Mr. Jansen did say about the event:
. . . those officials expressed real concern about the downside risks to the economy (as did blogger Michael Panzner of Financial Armageddon) and since I think that the relationship between the Treasury and the Federal Reserve has morphed into something somewhat incestuous I suspect that the Federal Reserve will not jump off the reservation and take the first baby steps to exiting its easy money policy.
The report at the Accrued Interest blog drew some hostile comments from readers who seemed convinced that Accrued was the only blogger there who actually drank the Kool-Aid being served by the Treasury. Their reaction was easily understandable after reading this remark (which followed a breach of protocol with the admission that Turbo Tim was there in the flesh):
It was a fascinating experience and I have to admit, it was just plain cool to be within the bowels of power like that.
Huh? All I can say is: If you like being in powerful bowels, just take a cruise over to duPont Circle. Actually — it was at his next statement where he lost me:
I am also on record as saying that Geithner was a good choice for Treasury secretary.
— and then it was all downhill from there.
The administration’s “charm offensive” has moved to the dicey issue of financial reform, where it is drawing criticism from across the political spectrum. Given the fact that they have all but admitted to a strategy of simply reading The Secret and willing everything to get better by their positive thoughts — Michael Panzner might as well start writing Financial Armageddon — The Sequel.
Preparing For The Worst
November 19, 2009
In the November 18 edition of The Telegraph, Ambrose Evans-Pritchard revealed that the French investment bank, Societe Generale “has advised its clients to be ready for a possible ‘global economic collapse’ over the next two years, mapping a strategy of defensive investments to avoid wealth destruction”. That gloomy outlook was the theme of a report entitled: “Worst-case Debt Scenario” in which the bank warned that a new set of problems had been created by government rescue programs, which simply transferred private debt liabilities onto already “sagging sovereign shoulders”:
To make matters worse, America still has an unemployment problem that just won’t abate. A recent essay by Charles Hugh Smith for The Business Insider took a view beyond the “happy talk” propaganda to the actual unpleasant statistics. Mr. Smith also called our attention to what can be seen by anyone willing to face reality, while walking around in any urban area or airport:
By this point, most Americans are painfully aware of the massive bailouts afforded to those financial institutions considered “too big to fail”. The thought of transferring private debt liabilities onto already “sagging sovereign shoulders” immediately reminds people of TARP and the as-yet-undisclosed assistance provided by the Federal Reserve to some of those same, TARP-enabled institutions.
As Kevin Drawbaugh reported for Reuters, the European Union has already taken action to break up those institutions whose failure could create a risk to the entire financial system:
Meanwhile in the United States, the House Financial Services Committee approved a measure that would grant federal regulators the authority to break up financial institutions that would threaten the entire system if they were to fail. Needless to say, this proposal does have its opponents, as the Reuters article pointed out:
When I first read this, I immediately realized that Treasury Secretary “Turbo” Tim Geithner would consider any use of such power as imprudent and he would likely veto any attempt to break up a large bank. Nevertheless, my concerns about the “Geithner factor” began to fade after I read some other encouraging news stories. In The Huffington Post, Sam Stein disclosed that Oregon Congressman Peter DeFazio (a Democrat) had called for the firing of White House economic advisor Larry Summers and Treasury Secretary “Timmy Geithner” during an interview with MSNBC’s Ed Schultz. Mr. Stein provided the following recap of that discussion:
Another glimmer of hope for the possible removal of Turbo Tim came from Jeff Madrick at The Daily Beast. Madrick’s piece provided us with a brief history of Geithner’s unusually fast rise to power (he was 42 when he was appointed president of the New York Federal Reserve) along with a reference to the fantastic discourse about Geithner by Jo Becker and Gretchen Morgenson, which appeared in The New York Times last April. Mr. Madrick demonstrated that what we have learned about Geithner since April, has affirmed those early doubts:
As the rest of the world prepares for worsening economic conditions, the United States should do the same. Keeping Tim Geithner in charge of the Treasury makes less sense than it did last April.