The best way to rob us is to own a bank

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.

1. “The Geithner-Summers plan is worse than you think“, Laurence J Kotlikoff and Jeffrey Sachs, blog of the Financial Times, 6 April 2009
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.
3. 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:

1. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
2. The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
3. A reminder – the TARP program is just theft, 24 November 2008
4. “What Barack Obama Needs to Know About Tim Geithner, the AIG Fiasco and Citigroup”, 3 December 2008
5. A solution to our financial problems: steal wealth from other nations, 2 February 2009
6. Stand by for action – more theft of our money being planned in Washington, 4 February 2009
7. Update: yes, the Paulson Plan was just theft, 14 February 2009
8. Now is the time for America to get angry, 24 March 2009
9. America on its way from superpower to banana republic, 28 March 2009
10. Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009

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