Not Stupid, Just Secure In Their System

A few days ago, AmericaBlog asked if Goldman Sachs was tone deaf, politically stupid or foolish to boast about high bonuses during a recession. I think the right answer was "they know they can get away with it." Indeed, those record profits from the banks were a feature, not a bug. The government decided to indirectly bail Goldman and other banks out by allowing them to make bushels of money, much of it handed over by the Feds, and essentially recapitalize themselves. It hasn't fully worked, and much of it is illusory, but it's worked enough to give profits for now to a lot of banks, and as a result, compensation shoots up. That's just a byproduct of the decision on how to help the banks out of their mess. That decision itself gets clearer when you look at the revolving door between D.C. and Wall Street, which apparently doesn't stop even if the individual in question helped to fund the Sudan genocide.

As for the political pitfalls of announcing record profits right at the beginning of talks over financial regulatory reform, that doesn't appear to be a great obstacle, either.

Intense lobbying pressure from Wall Street has slowed the progress of a major piece of financial regulatory reform legislation. Financial Services Committee chairman Barney Frank (D-Mass.) informed committee members Monday night that a vote on the creation of the Consumer Financial Product Safety Commission will be pushed back until September.

"We wanted to give consumer groups and their allies time to work with their members, organize and get their message out," said committee spokeswoman Elizabeth Esfahani. "So far in this debate, we've only heard from one side, the banking lobbyists, so we want to give both sides time to be heard."

The setback is a wake-up call for Democrats, said Rep. Brad Miller (D-N.C.), an original sponsor of the measure.

"Now some of those who thought with a conciliatory approach we might get agreement, I think they now know that it's going to be a battle," said Miller.

Further undermining the efforts to create a Consumer Financial Protection Agency, beyond the bank lobbyists, is the chairman of the Federal Reserve Ben Bernanke, who thinks that the Fed can manage that on their own. Of course, the Fed is a quasi-governmental partnership with... those same big banks whose lobbyists want to tear the heart out of the CFPA. I'm not hopeful that the Federal Reserve would somehow become this uber-regulator over those who partially own them.

Brad Miller is sure to not give up on this, nor will Elizabeth Warren, who can be credited with the idea. Her article on the myths of a CFPA is must-reading. But clearly, they have a big set of hurdles, not the least of which is the perspective that the bankers still "own the place" when it comes to cracking down on them in any meaningful way.

Sure, Goldman won't be able to get everything it wants. After haggling over the purchase of government warrants, they paid them off at a solid price for taxpayers. But that's a small price to pay for keeping the regulatory efforts in their direction.

COP on the Beat

As we see today the life insurance industry set to get in on the bailout act and receive TARP money, the Congressional Oversight Panel, charged with actually overseeing the Treasury Department's TARP strategy, has released their latest report, which is unsparing. Elizabeth Warren, the chair of the COP, delivers a video introduction.



The report looks back at how these types of financial crises have been traditionally handled over time. Warren offers three choices to policymakers: liquidation (essentially what we did in S&L crisis), receivership (the Swedish option), and subsidization (what we're doing to keep zombie banks alive, like in Japan). As you can see above, Warren handles each of these options expertly, and finds four crucial actions needed to successfully resolve banking crises:

• Transparency. Swift action to ensure the integrity of bank accounting, particularly with respect to the ability of regulators and investors to ascertain the value of bank assets and hence assess bank solvency

• Assertiveness. Willingness to take aggressive action to address failing financial institutions by (1) taking early aggressive action to improve capital ratios of banks that can be rescued, and (2) shutting down those banks that are irreparably insolvent.

• Accountability. Willingness to hold management accountable by replacing – and, in cases of criminal conduct, prosecuting – failed managers.

• Clarity. Transparency in the government response with forthright measurement and reporting of all forms of assistance being provided and clearly explained criteria for the use of public sector funds.

Warren concludes that the TARP bailouts failed to provide transparency, accountability or clarity. The Geithner Treasury Department plans, including PPIP and increased transparency, still fall short. "Bottom line: Treasury's efforts to date could be enough, but we will continue to press Treasury about these four tests." Essentially, Warren gives a mixed review, and she thinks that the Treasury efforts are based on the idea that the problems are temporary and not systemic.

One key assumption that underlies Treasury’s approach is its belief that the system-wide deleveraging resulting from the decline in asset values, leading to an accompanying drop in net wealth across the country, is in large part the product of temporary liquidity constraints resulting from nonfunctioning markets for troubled assets. The debate turns on whether current prices, particularly for mortgage-related assets, reflect fundamental values or whether prices are artificially depressed by a liquidity discount due to frozen markets – or some combination of the two.

If its assumptions are correct, Treasury’s current approach may prove a reasonable response to the current crisis. Current prices may, in fact, prove not to be explainable without the liquidity factor. Even in areas of the country where home prices have declined precipitously, the collateral behind mortgage-related assets still retains substantial value. In a liquid market, even under-collateralized assets should not be trading at pennies on the dollar. Prices are being partially subjected to a downward self-reinforcing cycle. It is this notion of a liquidity discount that supports the potential of future gain for taxpayers and makes transactions under the CAP and the PPIP viable mechanisms for recovery of asset values while recouping a gain for taxpayers. On the other hand, it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.

I think Warren is being overly polite, but she's saying all the right things. And I think she's informing some of Congress' moves in this area. The House Oversight Committee is examining the "special purpose vehicles" allegedly used to skirt executive pay restrictions, which contain elements of accountability and clarity. Geithner and the Treasury Department are clearly acting assertively, but to what end? I think Warren's report is spot-on, and needs a wide audience.

When Will The Bailouts End?

Elizabeth Warren only holds a watchdog job, and one without much power, but she's the first government official, such that it is, to call for the firing of top bank CEOs.

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.

Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.

Strangely, Treasury Secretary Tim Geithner agreed that firing CEOs that received TARP money was a possibility, though I agree with Robert Reich that there was a fairly transparent motive to his words.

I suppose it's comforting to know our government stands ready to fire corporate executives and directors whenever taxpayer money is on the line. But I suspect Geithner's new tough line is mostly designed to reassure a public that's lost all faith in the wisdom of bailing out Wall Street.

For the sake of the argument, assume he's sincere. What criterion will an axe-wielding Geithner be using? If precipitous loss of shareholder value is enough to "require a change in management and the board," presumably every CEO and director of every big bank now being bailed out should be fired, starting with Ken Lewis of Bank of America.

If the criterion is diversion of taxpayer money to uses other than Congress intended when it first authorized the $700 billion bailout, the list of soon-to-be-fired CEOs is a bit shorter but still large. Surely it includes all the bailed-out banks that continue to fly their executives around the world in company jets, award them extraordinary pay packages, and run junkets at fancy resorts. Citigroup's Vikram Pandit (who collected $38.2 million for his taxpayer-subsidized services in 2008) comes immediately to mind.

You can make the argument right now about firing these guys. Somehow I'm not feeling Geithner's vow to get around to it. But that's actually a smaller point; Warren was criticizing the approach of giving away trillions of dollars to financial firms without consequences or even so much as a haircut for sharehodlers and bondholders. That's the subject on which I would like to see Geithner comment. We already learned today that the bailout will cost $167 billion more than expected. How much is enough?

Set Up A Meeting With France, Mr. President

By now, Barack Obama has probably landed in London on the eve of the G20 summit, his first international conference as President. He has vowed to participate as a listener rather than just dictating terms. He should sit down with Nicolas Sarkozy:

Responding to a popular outcry, the French government issued a decree Monday banning stock options and limiting bonuses for bankers or auto executives who lay off workers after accepting government aid to weather the economic crisis.

Prime Minister François Fillon, announcing the measures, said France was the first European country to lay down such legal restrictions on executive pay. Although not retroactive, they will run through 2010, he said in a statement, and they could be extended.

"There is no question of some people escaping from the consequences of the crisis while others suffer unemployment or pay cuts," he added, pledging to monitor compliance with the decree carefully because "it is a question of justice."

Banks and auto companies were singled out because they have received extensive aid since the financial crisis broke out in September, leading to economic turmoil across the globe. President Nicolas Sarkozy allocated $14 billion in October to prevent France's six main banks from sinking and loaned $8 billion under favorable terms to the country's three main car companies.

I mean, this is almost a parallel situation. Societe Generale, one of the largest French banks, was a major AIG counter-party, and two weeks ago they admitted the granting of huge stock options to their executives. After public outrage, the French government, under duress, made the changes. And the Left in France remains dissatisfied.

The Socialist Party, France's main opposition group, criticized the decree as "perfectly insufficient," saying the ban should be retroactive and extend beyond banks and auto companies. In a statement, the party charged that Fillon chose to issue a decree instead of passing a law because he was afraid of a parliamentary debate on the government's efforts to address the crisis.

That is how an oppositional movement works. In America we have a few lonely cries in the wilderness, and Elizabeth Warren has been courageous in trying to get some accountability from the Treasury Department (alas, they have been stiffing her at every opportunity). But by and large most political leaders that would be seen as "on the Left" are supporting the Geithner plan, and the fury over the AIG bonuses has petered out. And people who should be giving out all their money on the street under threat of prison like Hank Paulson can whine about not getting more "credit" for saving the economy, and nobody bats an eyelash.

I know the political dynamic is easier in France, with the party on the left in opposition to the ruling party. Democrats are wary of criticizing Obama over the bank bailouts. But they must speak. We are at risk of >slipping into a Japanification (h/t Krugman), where we never do what's necessary to rescue the banks, and we slide along with zero growth and tied-up financial markets for a decade. Delay simply makes this problem worse, and makes the inevitable takeover and restructuring more expensive.

There is at least a possibility we can get out of this all right, if the PPIP becomes a prelude to determining solvency and nationalization. Perhaps the Congress needs to grant Treasury additional resolution authority to wind down units like AIG and nonbank financial institutions. But at the very least, the Administration can respond to public anger, as the political environment has shifted. People are not blaming the President for the economy right now, but at some point that will end. I appreciate their movement on many other fronts. But we have to rip off the band-aid and take the necessary steps to recapitalize the banks and ultimately tamp down the financial sector as a share of the overall economy.

Trickle To Nowhere

So how's that financial bailout going? Depends on who you ask. Richy McRicherton, CEO of Globo-Capital, thinks it's the straight awsom!!1! Regular folks across the country, not so much.

Reporting from Las Vegas -- In this hard-hit corner of the nation's mortgage meltdown and credit crisis, it's hard to find anybody who sees evidence that the Treasury Department's $700-billion rescue plan is working after two months.

In the first public hearing of the Congressional Oversight Panel -- a three-member board mandated to keep close watch on the bailout program enacted in October -- economists, local bankers, beleaguered homeowners and government officials said here Tuesday that the billions of dollars paid out by Washington to the banking industry were not filtering down and that Nevada's desperate condition was growing worse.

Clark County has the nation's highest foreclosure rate. Unemployment has jumped above 7% and lines for free food at charity centers are growing.

"It is a sad day when a child writes to Santa that all she wants for Christmas is food," said Julie A. Murray, who operates the Three Square food bank [...]

The government's solution to the crisis was to bolster the nation's banking system by handing out about $250 billion to scores of banks.

But "there is little evidence of what effect these billions of dollars are having on us," said Elizabeth Warren, the Harvard University law professor who chairs the panel.

Warren has repeatedly asked Treasury Department officials for an explanation of their strategy and how the bailout is supposed to help solve the credit crisis, but so far her panel has not received any answers.

The Las Vegas Sun has more.

Meanwhile, that homeowner relief program the White House put into place? Designed to help 400,000 homeowners, so far it's received 312 applications, because it's way too expensive and requires too many forms that lenders and borrowers want nothing to do with it. Predictably, everybody's blaming everybody.

Democrats want to hold back the next installment of $350 billion for the TARP program until the White House comes up with a legitimate plan to help out homeowners. That should be fun to watch.

This is theft.

Can't Anyone Here Play This Game?

Conservative policies don't work in a crisis. They work for robbery. Therefore, it shouldn't surprise anyone that the Treasury Department has been flailing from side to side in response to the financial meltdown.

The head of a new Congressional panel set up to monitor the gigantic federal bailout says the government still does not seem to have a coherent strategy for easing the financial crisis, despite the billions it has already spent in that effort.

Elizabeth Warren, the chairwoman of the oversight panel, said in an interview Monday that the government instead seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.

“You can’t just say, ‘Credit isn’t moving through the system,’ ” she said in her first public comments since being named to the panel. “You have to ask why.”

If the answer is that banks do not have money to lend, it would make sense to push capital into their hands, as the Treasury has been doing over the last two months, she continued. But if the answer is that their potential borrowers are getting less creditworthy with each passing day, “pouring money into banks isn’t going to fix that problem,” she said.

The GAO is similarly puzzled by the grand design here, releasing a report yesterday with a number of disturbing conclusions that TPM Muckraker recounted, including:

• Banks don't have to tell Treasury how they're spending the bailout money
• There's no monitoring of conflicts of interest between Treasury and the recipients of bailout money
• Treasury wants to let banks enforce executive pay limits themselves

And on top of all this, Emperor Paulson might ask for the second $350 billion from the Congress before the new Administration comes in, in an effort to steal manage the problem even more.

There's no way Paulson should be allowed another dime, given past performance.