Criticism continues to grow about the Geithner Plan (the , which is just a refurbished version of the original Paulson Plan. The consequences of this plan’s failure — operational or political — could be severe. Squandering the momentum of Obama’s first 100 days in office could make later and bolder economic plans difficult to sell. Political capital is easier lost than rebuilt.
The Hoover Administration suffered political collapse in its last year or so, during which time the Great Depression gathered strength — embedding itself in the the global economy. One nightmare scenario is such a political collapse in the first year of the Obama Administration.
The following give strong criticism of Obama’s proposals, all from those inherently neutral or even friendly politically.
- “The Geithner-Summers plan is worse than you think“, Laurence J Kotlikoff and Jeffrey Sachs, blog of the Financial Times, 6 April 2009
- “Larry Summers, Tim Geithner and Wall Street’s ownership of government“, Glenn Greenwald, 4 April 2009 — The individuals Obama chose to be his top economic officials embody exactly the corruption he repeatedly vowed to end.
- Bill Moyers Interview with William K. Black, 3 April 2009 — “The best way to rob a bank is to own one.”
And if you have not read these, I recommend doing so.
- “Administration Seeks an Out On Bailout Rules for Firms“, Washington Post, 4 April 2009 — It’s OK to get angry when reading this.
- “ The Pricing of Investment Grade Credit Risk“, Jubal Coval, Erik Stafford and Jakub Jurek (the first two are Harvard, the last is Princeton), Presented at the USC FBE Finance Seminar, 2 April 2009 — This undercuts the entire basis of the Geithner Plan; the paper appears at the end.
For a technical analysis of Geithner’s Public-Private Investment Plan (PPIP), see “Apples and Truffles: PPIP is Financially Flawed, Intellectually Dishonest“, The Institutional Risk Analyst, 6 April 2009.
Excerpts
(1) “The Geithner-Summers plan is worse than you think“, Laurence J Kotlikoff and Jeffrey Sachs, blog of the Financial Times, 6 April 2009
The Geithner-And-Summers Plan (GASP) to buy toxic assets from the banks is rightly scorned as an unnecessary give-away by virtually every independent economist who has looked at it. Its only friends are the Wall Street firms it is designed to bail out.
In an article last month, one of us (Sachs, FT, March 23) described the systematic overbidding entailed by the proposal. Others have since made similar calculations, including Joseph Stiglitz (NYT, April 1) and Peyton Young (FT, April 1). The situation is even worse that it looks, however, since the GASP can be gamed by the banks that own the toxic assets to boost the purchase prices for their bad assets even higher than has been suggested to date.
… 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.
Laurence J. Kotlikoff is professor of economics at Boston University. Jeffrey Sachs is professor of economics at Columbia University and director of the Earth Institute.
(2) “Larry Summers, Tim Geithner and Wall Street’s ownership of government“, Glenn Greenwald, 4 April 2009 — The individuals Obama chose to be his top economic officials embody exactly the corruption he repeatedly vowed to end. Excerpt:
White House officials yesterday released their personal financial disclosure forms, and included in the millions of dollars which top Obama economics adviser Larry Summers made from Wall Street in 2008 is this detail:
Lawrence H. Summers, one of President Obama’s top economic advisers, collected roughly $5.2 million in compensation from hedge fund D.E. Shaw over the past year and was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations. . . .
Financial institutions including JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form.
That’s $135,000 paid by Goldman Sachs to Summers — for a one-day visit. And the payment was made at a time — in April, 2008 — when everyone assumed that the next President would either be Barack Obama or Hillary Clinton and that Larry Summers would therefore become exactly what he now is: the most influential financial official in the U.S. Government (and the $45,000 Merrill Lynch payment came 8 days after Obama’s election). Goldman would not be able to make a one-day $135,000 payment to Summers now that he is Obama’s top economics adviser, but doing so a few months beforehand was obviously something about which neither parties felt any compunction. It’s basically an advanced bribe. And it’s paying off in spades. And none of it seemed to bother Obama in the slightest when he first strongly considered naming Summers as Treasury Secretary and then named him his top economics adviser instead (thereby avoiding the need for Senate confirmation), knowing that Summers would exert great influence in determining who benefited from the government’s response to the financial crisis.
… Just think about how this works. People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting. When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal. Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government. Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced. This corruption is so tawdry and transparent — and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity — that it is mystifying that it is not provoking more mass public rage.
(3) Bill Moyers Interview with William K. Black, 3 April 2009 — “The best way to rob a bank is to own one.”
BILL MOYERS: For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that “The Best Way to Rob a Bank Is to Own One.” In fact, the man you’re about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.
WILLIAM K. BLACK: These numbers as large as they are, vastly understate the problem of fraud.
BILL MOYERS: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, “How do they get away with it?” Well, no one has asked that question more often than Bill Black.
The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L’s in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating – after whom the senate’s so-called “Keating Five” were named – he sent a memo that read, in part, “get Black – kill him dead.” Metaphorically, of course. Of course.
Now Black is focused on an even greater scandal, and he spares no one – not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname “banksters.” …
BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton’s Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?
WILLIAM K. BLACK: There were two really big things, under the Clinton administration.
One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what’s called commercial banking from investment banking. That’s the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan.
And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn’t. She tried to do the right thing to regulate one of these exotic derivatives that you’re talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can’t regulate. And it’s this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.
BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: There are two reasons. One, they’re much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they’re outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.’ But the other element of your question is we don’t want to change the bankers, because if we do, if we put honest people in, who didn’t cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That’s a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who’s covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion – a trillion is a thousand billion – $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have masses losses, and that they’re fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because…
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation’s top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he’s a failed legacy regulator. …
BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you’re seeming disillusioned now.
WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they’re refusing to obey the law.
BILL MOYERS: In other words, they could have closed these banks without nationalizing them?
WILLIAM K. BLACK: Well, you do a receivership. No one — Ronald Reagan did receiverships. Nobody called it nationalization. …
BILL MOYERS: Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: You are.
WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They’re scared to death of a collapse. They’re afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we’ll run screaming to the exits. And we won’t rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it’s foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, “We just can’t let the big banks fail.” That’s wrong. …
Afterword
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To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- About Obama, his administration and Ameican policies today
- About the Financial crisis – what’s happening? how will this end?
Posts about theft pretending to be solutions:
- Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
- The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
- A reminder – the TARP program is just theft, 24 November 2008
- “What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup”, 3 December 2008
- A solution to our financial problems: steal wealth from other nations, 2 February 2009
- Stand by for action – more theft of our money being planned in Washington, 4 February 2009
- Update: yes, the Paulson Plan was just theft, 14 February 2009
- Now is the time for America to get angry, 24 March 2009
- America on its way from superpower to banana republic, 28 March 2009
- Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009
About Change:
- American history changes direction as the baton passes between our political parties, 18 May 2008 – Importance of the November 2008 political landslide.
- “Don’t Let Barack Obama Break Your Heart” by Tom Engelhardt, 21 November 2008
- Obama’s national security team: I hope you didn’t really believe in change?, 26 November 2008
- Obama supporters mugged by reality (and learn not to believe in change!), 9 December 2008
- Change you should not have believed in, 10 February 2009
Ian Welsh observes today that oil is currently at $51 a barrel, an unnaturally high price for an economy in recession. He concludes that banks, awash with TARP money, but loathe or unable to invest in the real economy, are buying up commodities. The shaft continues!
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Fabius Maximus replies: I very much doubt that. The current price — in the age of oil scarcity — has no relation to past prices in the age of oil supply gluts.
There is a good chance that FASB’s loosening of the “Mark-to-Market” rules will kill or at least severely damage the Geithner plan.
The original idea was that the investment banks would dump all of these “toxic assets” on a private-public partnership (with the public absorbing most of the risk) at a market-determined fair price, probably at around 50 cents on the market. But if the banks can tell themselves that they can get 95-100% of the original price if they just hold onto the assets long enough they aren’t going to play the game.
There is a good chance that the only “toxic assets” will that the banks will want to unload will be so toxic that nobody will want to buy them at any price.
I seem to recall hearing a Marketplace report that said there were only five companies eligible to work in the Geithner plan and last week I read that one of them has already chosen not to take part. What happens when you hold a party and nobody shows up?
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Fabius Maximus replies: It’s worse than that. None of this makes sense.
* If the prices of these assets are depressed due to a temporary shortage of liquidity, investors will want to buy them (hold to maturity and get rich) — but the banks will not want to sell them (the loses will wipe away much capital, and they have no shortage of funds). Government pressure could force very weak banks to destroy their capital base in order to make some hedge funds risk — but why? Officially ending “market to the market” (it was probably de facto ended by last summer) strengthens the bank’s ability to hold assets.
* If the low prices of these assets reflect real-world factors (as suggested by the Coval et al paper), why would investors buy them? That is, their risk-reward calculations should not differ substantially from the banks.
As for the limited number of eligable buyers, this was the original news story: “Treasury’s Very Private Asset Fund“, Wall Street Journal, 1 April 2009 — “Why write the rules to favor only a handful of bidders?” (mentioned on the FM site 5 April). On April 6 the Treasury Dept issued a notice that delayed the deadline for those who want to participate in the Public-Private Investment Program and loosening some of the guidelines for participation.
Pardon me while I wander a little bit off-topic for a moment. I’m seeing a trend on Wall Street and in the Obama administration’s pronouncements that is driving me just a bit insane.
There is a strong tendency on the part of both groups to sugar-coat news or to view news through rose-colored glasses to the point insanity. FM has commented on it before but it is reaching such ridiculous heights that it deserves additional comment.
1. The government noted that foreclosures are beginning to slack off in the last couple of months and that means things are getting better. Good news, right? Not really.
Fannie, Freddie (both owned by the government), and Citi (under pressure from the government) all announced at the beginning of January that they’d slow down their foreclosure processes. That’s 60+% of the lending market. Is this an indication that things are getting better? No.
2. Citi announced in February that if you didn’t count its losses it made money. The stock market boomed the next couple of days as other banks made similar, completely useless statements.
3. Wells Fargo announced record profits for the first quarter yesterday. Crisis over? Consider the following points that independent analysts discovered:
a) Wells Fargo took advantage of the looser “Mark to Market” rules to understate its mortgage losses
b) Yesterday’s profits include money from the take-over of Wachovia. The prior year numbers don’t include Wachovia’s profits, which had been considerable
c) The government eased interest rates so much of that profit came from a one-time (or at least irregular) surge in refinancing fees
d) The CFO of Wells Fargo stated that the results from his bank for this quarter should not be considered to be anything more than a blip on the radar screen.
Result: Frantic purchasing of Financial stocks as the market cheers the end of the recession. Meanwhile unemployment grows and retailers report increasing losses…
Taking all of the above into consideration, it appears that the OODA loop is being intentionally broken by Wall Street and the Obama administration. Because of this, the US government is not treating the actual disease of debt, it is just treating some of the symptoms with inadequate tools.
In fact one could argue that many of the government’s announcements and Wall Street recovery plans are intended to keep us from recognizing and dealing with the problem. Individuals and companies are dealing with it in the background but not on a systemic basis and that means that the recovery (yes, there will be a recovery someday) will be highly uneven at best.
I recognize that the government and Wall Street need to prevent panic responses from a public that is emotionally immature, financially illiterate, and has the attention span of a gnat on speed but this blizzard of rigged “sunny day” announcements and double-or-nothing investment strategies is allowing the problem to fester out of sight. This will make it much harder to deal with when (not if) it bursts into view again.
I find this choice of actions to be very similar to meticulously planning how to win the annual Darwin Award.
Stumbling on the Criminal State site yesterday somehow simply confirmed my conviction, held for some time now, that the view that best clarifies much of what has been transpiring the past few decades, but especially of late, is simply that we have essentially criminal oligarchies running the show. From that perspective, pretty much everything makes perfect sense. Absent the criminal aspect, one still holds to antiquated notions that the government is trying to do right by the people but is either stupid, bloated or misled by lobbyists/advisors etc., that change has come upon us so quickly that we are behind the curve, and so on.
The OODA loop is broken only in the sense that most people simply have been unable to ‘grock’ that they live under Criminal Leadership Oligarchical system and keep trying to apply the wrong perspectives in order to either understand or improve the situation.
In other words, it’s not only too late to manage and correct the situation, as FM warned last fall, it’s also too late to fix the system. It is totally broken and has been for a long time. It needs to be acknowledged as such so that we understand that throwing it out is not throwing out the Constitution etc. (i.e. the system we thought we lived in for so long) rather destroying the false system that currently holds sway. This power must be dismantled totally.
(Somehow?!?!)
I’ve been trying to get past the stage of blaming and outrage. I’ve begun to ask: What purpose is being served by protecting the big, big banks? What is it that policymakers are trying to avert? While “national security risk” is over broad and so much an artifact of George W. Bush’s discredited outlook, it seems safe to say that as a nation we are unprepared for the foreign policy consequences of a big bank receivership or nationalization, much less a sudden collapse.
Changing tacks, I want to underscore the former regulator Bill Black’s comment, in the final moments of the interview with Bill Moyers, where he says in effect that FDIC deposit insurance is not a sure thing. As a matter of fact, there was a time during the S&L crisis of the 1980s when the FDIC’s insurance reserves were depleted and they found it necessary to go to Congress for an appropriation. That was a political football for a time, which brought lawmakers into the dealmaking for the benefit favored constituents.
It’s worth asking: What would people do if they couldn’t rely on deposit insurance? For consumers, what would then be the safe–or if you will, politically correct–place to buy your banking services, checking, savings, home loans, credit cards, etc.?
Meanwhile, it seems that sharply rising prices of credit default swaps on big banks are indicative of a silent run already in progress.