As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Thursday, April 16, 2009

Banksters Losing Their Grip?

With all the talk of torture and wiretapping and tea parties, I have neglected that little story about how the banks have the economy by the cojones and won't let go. While more banksters release earnings reports completely tarnished by the creative accounting and cheap bailout money (as well as conveniently forgetting major write-downs that would show a loss), they are continuing to tell everyone they're just about to repay the government, a fact somewhat sullied by the fact that they have no money:

Former Treasury Secretary Paul O'Neill noted that at the start of the TARP program, the heads of the major U.S. banks were summoned to Washington and told they were required to take the money so that those who needed it would not be stigmatized.

"So they all took the money. Stop and think about that. What was the purpose of this policy? To deceive the people so that the public would not know which banks were in danger of failing? Why didn't any of the CEO's, claiming not to need the money, have the courage to refuse?" O'Neill said in an e-mail to ABC News. "If banks now claim they want to return the money because they don't need it, why do they have to raise new capital to replace the money from we the people in order to repay the government?"

O'Neill said that unfortunately the government is permitted to practice a policy of deception for the greater good of the society.

"Is the public ever going to have clear facts regarding any of the individual institutions?" he said. "For months I have been calling for a public disclosure of all bank assets by rating class, along with facts showing the face value of so-called toxic assets along with the associated current book keeping value and associated reserve account. The public and members of Congress seem to be accepting of the idea that a handful of people in the administration and the Fed should do all of this in secret."

The banksters clearly want to return the money to get out from under executive pay restrictions. They care more about their own salaries than they do the greater economy. But of course, if a bank like Goldman Sachs does manage to return TARP money, they are still a ward of the state given all the special treatment it has gotten from special-purpose vehicles and cheap money from the Fed, without which they would be in the toilet right now. Oh, and the creative accounting and counter-party payments from AIG, too.

Now, the Treasury Department has actually pushed back on this a bit. They oppose the banks repaying the TARP funds. They replaced Neel Kashkari as head of the TARP. And they will now release the stress test results, and they claimed that Goldman's desire to repay the TARP money was a factor.

The administration’s hand may have been forced in part by the investment firm Goldman Sachs, which successfully sold $5 billion in new stock on Tuesday and declared that it would use the proceeds and other private capital to repay the $10 billion it accepted from the government in October.

That money came from the Troubled Asset Relief Program, or TARP, and Goldman’s action was seen as a way of predisclosing to the markets the company’s confidence that it would pass its stress test with flying colors.

Goldman’s action has put pressure on other financial institutions to do the same or risk being judged in far worse shape by investors. The administration feared that details on healthier banks would inevitably leak out, leaving weaker banks exposed to speculation and damaging market rumors, possibly making any further bailouts more costly.

The Goldman move also puts pressure on the administration to decide what conditions will apply to institutions that return their bailout funds. It is unclear if Goldman, for example, will continue to be allowed to benefit from an indirect subsidy effectively worth billions of dollars from a federal government guarantee on its debt, a program the Federal Deposit Insurance Corporation adopted last fall when the credit markets froze and it was virtually impossible for companies to raise cash.

“The purpose of this program is to prevent panics, not cause them,” said one senior official involved in the stress tests who declined to speak on the record because the extent of the disclosures were still being debated. “And it’s becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum.”

Yves Smith thinks that this information was leaked specifically to blame Goldman for releases that would possibly result in receivership or worse for the most struggling banks. And Emptywheel hones in on those FDIC subsidies:

Shorter Anonymous Senior Official: "Goddamn it Goldman, you risk starting a panic here! And as punishment, we're going to reconsider the terms of that FDIC backing." [...]

Goldman Sachs, you see (and Bank of America, and JP Morgan Chase, and Citi, and Morgan Stanley, and Wells Fargo) have been benefiting from higher credit ratings than they themselves merit because the FDIC has been backing their loans to the tune of billions of dollars [...]

Now, frankly I'm most interested in this from the same perspective that Yves is. These two stories, taken together, appear to be a welcome new tactic from the Administration, to start laying out all the value the government has given the banksters. It's time to make these banks squirm with the recognition that they're deadbeats for a change.

There are plenty of tactics available to the regulators here, and if they get sufficiently pissed off, I'll bet they have no problem using them. Significantly raising capital requirements, for example, or calling in the antitrust division of the Justice Department to investigate the market share of leading banks, or even letting Nancy Pelosi loose with her (very noble) idea for a 21st-century Pecora Commission:

Democratic House Speaker Nancy Pelosi, saying that the American people are demanding "discipline and accountability" after the multibillion-dollar federal bailouts, promised Wednesday to create a legislative commission with broad oversight to investigate the causes of Wall Street irregularities and their full costs to taxpayers.

Pelosi, speaking to the Commonwealth Club of California, said she wants the panel to be modeled after the Pecora Commission, a bipartisan investigative body established by the U.S. Senate in 1932 to examine the causes and abuses of the Wall Street crash of 1929 and to prevent a repeat.

"They investigated what happened in the markets," including conflicts of interests and irregularities that set off such devastating effects on the U.S. economy, she said. When the commission issued its findings during the administration of President Franklin Delano Roosevelt, "they had tangible recommendations," she said, which helped generate widespread public support for major banking system reforms and new securities laws.

Liberals are cheering this move by Pelosi and the Congress because it could result in the same kind of systemic reform we saw after the Depression. And with even the teabaggers angry about the bailouts, Republican leaders would be in little position to mount a defense.

Anyway, I don't know where this will lead, but it seems to me that the banksters have a slightly weaker hand than they did a couple weeks ago. They still have the power to overrun the country, but the anger is rising and Treasury has a few tools in the toolkit; and what's more, they might actually use them.

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