Coming Around On The Jobs Crisis

Bob Herbert wonders today if the Obama Administration understands the nature of the jobs crisis. He says that millions of Americans need to get back to work, and if the private sector is unwilling or unable to produce those jobs, then the government must step in. This was the most crucial passage:

The survey for the Economic Policy Institute was conducted in September by Hart Research Associates. Respondents said that they had more faith in President Obama’s ability to handle the economy than Congressional Republicans. The tally was 43 percent to 32 percent. But when asked who had been helped most by government stimulus efforts, substantial majorities said “large banks” and “Wall Street investment companies.”

When asked how “average working people” or “you and your family” had benefited, very small percentages, in a range of 10 percent to 13 percent, said they had fared well.

I think the White House got an advanced copy of Herbert's column, because their message today has a lot to do with jobs. Peter Orszag reiterated that the President is "exploring additional options to promote job creation." Bloomberg covers it as well:

President Barack Obama is considering a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label.

The discussion of the initiatives, including a boost in transportation spending and an extension of an expiring tax credit for first-time homebuyers, comes as the White House is balancing rising concern about unemployment and a budget deficit the Congressional Budget Office estimates will total $1.6 trillion for 2009, and $1.4 trillion in 2010.

Administration officials have told allies in Congress that a broader transportation bill, and extensions of a homebuyer tax credit and unemployment benefits are all on the table, a Senate aide said.

As well as Herbert's paper, The New York Times:

President Obama’s economic team discussed a wide range of ideas at a meeting on Monday, following his Saturday radio address in which he said it would “explore additional options to promote job creation.” But officials emphasized that a decision was still far off and that in any event the effort would not add up to a second economic stimulus package, only an extension of the first [...]

Among the options for additional steps is some variation on Mr. Obama’s proposal during the stimulus debate to give employers a $3,000 tax credit for each new hire, which Congress rejected last winter partly out of concern that businesses would manipulate their payrolls to claim the credit. Another option would allow more businesses to deduct their net operating losses going back five years instead of the usual two; Congress limited the break to small businesses as part of the economic stimulus law.

Not to mention the WSJ and a separate Times article.

Calculated Risk worked through some of the safety net options the other day. Extending unemployment benefits and COBRA reductions sounds fine, but I don't see exactly how they create jobs - though added consumer spending may save some. The homebuyer tax credit, while popular, is a complete waste of money, costing tens of thousands per new home sold, and it isn't boosting housing and construction to any great degree.

As for the rest, infrastructure spending through the transportation bill would be great, but is the Administration willing to waive paygo rules, or do they have some idea to pay for it? The business tax credit for new hires seems ripe for abuse, as does the "carry-back" provision allowing major tax breaks for corporations. That just sounds like trickle-down economics to me, and thus far it hasn't worked.

Robert Reich has some much better ideas, though he does side with the new jobs tax credit.

Use existing authority under both the stimulus package enacted earlier this year and the nefarious TARP bailout fund -- extending and combining them into a fund to make up for state and local cuts in public school budgets, childrens' health, public health (we need workers to administer swine flu vaccine) and public transportation. Instead of bailing out banks and giant automakers, we should switch to bailing out public services that average people need.

Propose a one-year payroll tax holiday on the first 20,000 of income. Republicans as well as Blue Dog Dems could go along with this, and it would be a highly progressive tax cut since 80 percent of Americans pay more in payroll taxes than they do in income taxes.

Give small businesses a "new jobs tax credit" for every net new job created over the next year. Granted, under normal circumstances this sort of jobs credit doesn't have much effect, and it's difficult to separate hires that would have happened anyway from net new ones. But we're not in normal circumstances; small businesses, which are responsible for most new jobs, still aren't hiring. They need a boost.

Dramatically expand the Small Business Administration's lending programs and have the Fed buy up the SBA's debt. Big banks are not lending to small businesses. TARP has been an utter failure in this regard. The SBA and the Fed should circumvent them and help small businesses get the capital they need, so they can start hiring again.

These might work in separate bills instead of one big stimulus bill that would have a target on its back. There's no question that state aid should be on the top of the list, and I think accelerating infrastructure spending is vital enough that deficit spending makes sense; government interest rates remain low, after all.

More than anything, the Obama Administration has to show through their actions a concern for those struggling right now. The jobs picture is intimately tied to their economic fortunes, so they have every incentive to do so.

A Missed Opportunity

Here's a report from the Inspector General for the TARP program saying that Treasury lied to get money into the hands of the banks.

The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.

A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky [...]

Mr. Barofsky’s office also says that regulators were wrong to tell the public last year that the earliest bailout recipients were all healthy.

Former Treasury Secretary Henry M. Paulson Jr., for instance, said on Oct. 14 that the banks were “healthy,” and that they accepted the money for “the good of the U.S. economy.” The banks, he said, would be better able to increase their lending to consumers and businesses.

That was George Bush's Treasury Department. And this practice of private equity companies and Wall Street investment firms looting the Simmons Bedding Company through borrowing the company into debt and taking out profits, is a fairly common practice. Neither should be intimately associated with the Obama Administration. Neither should the TARP program, initiated by Henry Paulson and the Bush White House. And yet, these revelations are happening on a Democrat's watch. And Chris Bowers is absolutely right to note that the bailout has constrained Obama's moves on the economy and threatened the Democratic majority for years to come.

The $810 billion Wall Street Bailout is a loadstone hanging around the neck of the Democratic Party. It thwarting what should have been a realigning moment in American electoral politics. Upon regaining control over the federal government following the 2008 elections, Democrats should have been able to cement their image as, in the words of Al Gore, "the people versus the powerful." Instead, we have become complicit in perpetuating a federal government that is more responsive to the wishes of powerful moneyed interests at the expense of the vast majority of Americans. And so, our chances at realignment are slipping away [...]

Maybe it wasn't possible to pass a $1.2 trillion stimulus in early 2009. However, this was due as much to Congress passing a $700 billion Wall Street bailout in October 2008 as it was to anything else. From October 2008 through February 2009, Congress did actually pass more than $1.2 trillion in economic stimulus. The problem was that, in the form of the Wall Street bailout, most of that money went to the same people financial institutions who caused the economic meltdown.

Perhaps the distinction between the stimulus and the bailout is clear in the minds of most economists and policy wonks, but it is not clear to many Americans. As such, passing the Wall Street bailout imposed a huge opportunity cost on the amount of money the Obama administration could realistically ask for in the February stimulus / jobs package. If they had not asked for $700 billion to hand over to Wall Street, they might very well have been able to ask for, and pass, the $1.2 trillion needed in the stimulus package.

Again, the bailout began prior to Obama's election, but Democrats in Congress held the majority when it passed, Obama endorsed it, and he even started pressuring members of his own party about it. He clearly had no problem with it, and yet it has narrowed his options on a sagging economy that has not seen much of a comeback on the jobs front. As Paul Krugman notes today, Christina Romer knew that the stimulus package would need to be twice as large as it ultimately became, but Larry Summers didn't even offer that as an option for political reasons. They didn't think they could move a $1.2 trillion dollar stimulus. So Summers talked himself into calling the stimulus “an insurance package against catastrophic failure,” admitting its lack of sufficiency. And the bailout contributed to that. Bowers is right that people don't make the distinction between the bailout and the stimulus in their minds; to them it's all government spending. And the right has used this skillfully, taking advantage of the anxiety people feel with job loss and financial insecurity to advance a kind of right-wing populism that ultimately serves corporate interests as much as the bailout did. As a result the teabaggers are gaining the upper hand in this debate:

Having said all that, there is great, HUGE value in this movie as an emotional, populist polemic for the left, something I've been screaming about since the beginning of the financial crisis. It's extremely disheartening to see the administration and so many Democrats in congress completely ignore the political and policy ramifications of failing to engage in fundamental financial reform and fiery populist rhetoric at a time like this. This teabagger movement is happening in a vacuum created by a lack of interest in this topic by liberals who are so enamored of being members of the new "creative class" and the like that they aren't paying attention to the cynicism and anger that's reaching critical mass among average working stiffs out there. It's easy to dismiss it, but very, very foolish. The issues Moore raises in this film will be answered on the right with authoritarianism, militarism, immigrant bashing and violence. It's a recipe for disaster unless the left takes this on in direct, political terms.

It's all there in Ryan Lizza's beat sweetener on Larry Summers and the Obama economic team. Fairly or unfairly, they are being tarred as corporate sellouts and tagged as the ones who ushered in the bailout. What that really suggests is that the parties in this country are interchangeable in the face of corporate hegemony, where powerful interests can write the laws no matter which party nominally controls the government. Right now, that's being proven by an economy working only for the banks and not regular people. And the Democrats are in power at this moment.

This is a dangerous time, where a party at near-historic lows in the public consciousness could actually rise to power, because they can credibly claim the mantle of being the party of the people. If the Democrats don't show Americans they are on their side, that's exactly what will happen.

Bailout Bonanza!

Looks like the United States has actually made money on the bailout thus far. But this reflects a very small sample. As you may know, the Bush Administration forced dozens of banks to take TARP money which may not have needed it, to disguise the true weak sheep in the system. Those banks which where in relatively good health are the ones returning the money to the Treasury. And this doesn't take into account all of the other special lending deals they've received from places like the Federal Reserve, which has enhanced their balance sheets and enabled them to repay the TARP money. Then there's the other two-ton elephant in the room.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

Some of those measures, like AIG and Fannie and Freddie, had nothing to do with TARP. But the CBO actually made projections on all of this back in April, and they foresaw major losses. The answer lies probably somewhere between small profit and catastrophic loss, so you shouldn't read a whole lot into either.

That's Only If You Think $23.7 Trillion Is A Lot Of Money

Neil Barofsky puts a number on the worst-case scenario:

The federal government has devoted $4.7 trillion to help the financial sector through its crisis, a level of assistance equal to about one-third of the overall U.S. economy, a watchdog report said Monday.

Under the worst of circumstances, the report said, the government's maximum exposure could total nearly $24 trillion, or $80,000 for every American.

That's an unlikely circumstance and represents the gross exposure, but what it does show is how the TARP funds are really a drop in the bucket. All of these special programs that banks can access make a mockery of them "paying back" their obligations. All of them are still open to the banksters. And what burns me more than the exposure is how the banks have used this money:

Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government's financial rescue program.

The report, which will be published Monday, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks.

Roughly 80 percent of respondents, or 300 banks, also said at least some of the money had supported new lending.

They've taken our money and shaken it lovingly down their gullets. And as a result, the economy hasn't budged. Larry Summers is finally urging banks to lend, but he could have put this in writing months ago. It is simply not good enough to expect voluntary compliance. Hope is not a plan.

...I'm still trying to figure out how you can say that the stimulus plan is working except for the jobs. Wasn't that the point?

Goldman's Record Taxpayer-Subsidized Profits

Matt Taibbi's excellent reported piece on Goldman Sachs is now online, and he's created a kind of sequel with this piece about Goldman's big profits, mostly the result of handout after handout from the Feds:

Last year, when Hank Paulson told us all that the planet would explode if we didn’t fork over a gazillion dollars to Wall Street immediately, the entire rationale not only for TARP but for the whole galaxy of lesser-known state crutches and safety nets quietly ushered in later on was that Wall Street, once rescued, would pump money back into the economy, create jobs, and initiate a widespread recovery. This, we were told, was the reason we needed to pilfer massive amounts of middle-class tax revenue and hand it over to the same guys who had just blown up the financial world. We’d save their asses, they’d save ours. That was the deal.

It turned out not to happen that way. We constructed this massive bailout infrastructure, and instead of pumping that free money back into the economy, the banks instead simply hoarded it and ate it on the spot, converting it into bonuses. So what does this Goldman profit number mean? This is the final evidence that the bailouts were a political decision to use the power of the state to redirect society’s resources upward, on a grand scale. It was a selective rescue of a small group of chortling jerks who must be laughing all the way to the Hamptons every weekend about how they fleeced all of us at the very moment the game should have been up for all of them.

Goldman's profits only count as "profit" if you consider a pass-through federal subsidy to AIG, quick and easy loans and multiple bailout programs made available to them by the FDIC and the Fed after converting themselves into a bank holding company, the forced collapse of much of its competition and fees from stock issuance from other banks having to repay TARP to be something based on hard work and ingenuity and not political connections and corporate welfare.

But what's most amazing about all of this is how Goldman Sachs is taking all this federal largesse and plowing it back into the market at HIGHER rates of leverage than even during the crisis which amount burnt down the entire financial system:

As Felix Salmon notes, Goldman last year, after it converted to bank holding company status, announced that it was “taking steps to reduce leverage.” But what’s happened since then is that Goldman has actually been emboldened by all its state backing to borrow more and gamble more than ever. This is the equivalent of a regular casino gambler who hears that the house has doubled down on his credit line and decides to stay up at the tables all night, instead of going home and sobering up. Just look at Goldman’s VaR, or Value at Risk, which measures the amount of money the bank puts at risk on any given day: it’s soared since last year.



Taken altogether, what all of this means is that Goldman’s profit announcement is a giant “fuck you” to the rest of the country. It is a statement of supreme privilege, an announcement that it feels no shame in taking subsidies and funneling them directly into their pockets, and moreover feels no fear of any public response. It knows that it’s untouchable and it’s not going to change its behavior for anyone. And it doesn’t matter who knows it.

And meanwhile, out in the country, unemployment will top 10 percent soon, and lots of people will be wondering why those Wall Street profits haven't trickled down.

Ian Welsh has a lot more.

The Real Numbers On TARP

We hear all about these $700 billion dollar bailouts for the banks. And to be sure, they're awful. But they are somewhat less awful than advertised.

The Congressional Budget Office has put out its latest calculation of the loss taxpayers will take on the TARP bailout.

CBO estimates that the subsidy cost of the transactions (broadly speaking, the difference between what the Treasury paid for the investments or lent to the businesses and the market value of those transactions, including repurchases of preferred stock) amounts to $159 billion.

The automobile bailouts look particularly grim. Of the $55 billion that went out the door, CBO expects $40 billion will never be returned.

Also, $50 billion of this goes to the foreclosure mitigation plan (although this needs some scrutiny, because the money does not appear to be getting to people who need it), and $35 billion for AIG (although a lot of that was a pass-through to the banks). That's $125 of the $159 billion. Just the straight payments to the banks are being recouped at a fairly high rate, although there's no way they could be considered "investments" - all of them will come in at a loss.

Considering the big banks largely broke the system - a system which is still broken, by all accounts - giving them ten cents doesn't please me. And the Treasury Department looks like they're offering a bad deal for taxpayers for the shares entitled under TARP. But this really is significantly less money than feared, and certainly not the budget-buster assumed. Relative to the stimulus, which provides a lot of money to real people and creates jobs, the TARP bailout is looking smaller.

You're Allowed To Do That?

Banks received TARP money in exchange for agreements with the federal government to offer back dividends, among other things. And now, some banks are flat-out not paying them anymore.

At least three small, cash-strapped banks have stopped paying the U.S. government dividends that they owe because they got $315.4 million in capital infusions under the Troubled Asset Relief Program [...]

Treasury spokeswoman Meg Reilly said Monday that "a number of banks" that got taxpayer-funded capital under TARP are no longer paying dividends to the government. "Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base."

The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week.

Remember that whole "sanctity of contracts" that the United States cannot abrogate, during the AIG bonus debate? I guess that's no longer operative.

Yves Smith writes:

Plenty of folks, including yours truly, were skeptical of Treasury's claim, made often with a straight face. that the government was exercising care on who got TARP funding (as in it was not just handing out dough willy-nilly, but did have an eye to getting taxpayer dough back). That of course presupposes that the banks getting the money were just a little bit bad off, as opposed to in Serious Trouble (belied by the aggregate size of the effort) [...]

Given that there are no formal penalties for suspending TARP dividends, save a negative reaction in the markets, which would affect stock prices and borrowing rates, there consequences of missing payments may be de minimus. While three small banks missing payments is in theory no biggie, the action does point up the disconnect between the PR of TARP (protect the taxpayer) and practice (protect the banks). Even if the result of pressure to bolster capital levels, this precedent may encourage others to follow.

OK, if you still think the banks are solvent, let's just for one day pull the plug on all the special vehicles that the Federal Reserve and the Treasury Department and the FDIC have been offering these firms, and watch the entire financial system absolutely melt. What this means for the future is that we're propping up a sick system, just as Japan did in the 1990s, and their experience shows a lost decade with little or no economic growth, because the money dumped into the black hole of the banking system does nothing for the larger economy. That's why we're going to see 10 percent unemployment soon, that's why the so-called "real" economy is cause for such concern, and that's why those of us hearing about these "green shoots" are not impressed.

And I have to agree with Atrios- what exactly is recovering in this recovery if everyone is broke and out of work and the numbers for everything except Government Goldman Sachs bonuses are down? I understand that unemployment is a lagging indicator, so please don’t spam the comments with that (it is an insight so trite it ranks up there with “correlation does not equal causation.” Thanks. I had intro to stats as an undergrad, too.).

And I’m being serious. What exactly are we basing these claims of green shoots and recovery on other than pixie dust?

The root cause of this is the dysfunctional financial system, and that system is not being fixed. So the public suffers the consequences.

Most Transparent Government In History

The Obama Administration has really taken to this executive power and official secrecy thing. Duck, meet water. This has all happened in the past week:

MSNBC:

The Obama administration is fighting to block access to names of visitors to the White House, taking up the Bush administration argument that a president doesn't have to reveal who comes calling to influence policy decisions.

Despite President Barack Obama's pledge to introduce a new era of transparency to Washington, and despite two rulings by a federal judge that the records are public, the Secret Service has denied msnbc.com's request for the names of all White House visitors from Jan. 20 to the present. It also denied a narrower request by the nonpartisan watchdog group Citizens for Responsibility and Ethics in Washington, which sought logs of visits by executives of coal companies.

The Guardian UK:

A rift has opened between the Obama administration and some of its closest allies - Democratic leaders and environmental organisations - over its refusal to publicly disclose the location of 44 coal ash dumps that have been officially designated as a "high hazard" to local populations.

The administration turned down a request from a powerful Democratic senator to make public the list of 44 dumps, which contain a toxic soup of arsenic and heavy metals from coal-fired electricity plants, citing terrorism fears.

The LA Times:

He was appointed with fanfare in December as public watchdog over the government's multibillion-dollar bailout of the nation's financial system. But now Neil Barofsky, inspector general of the Troubled Asset Relief Program, is embroiled in a dispute with the Obama administration that delayed one recent inquiry and sparked questions about his ability to investigate without interference.

The Treasury Department contends that Barofsky does not have a completely independent role. That claim prompted a stern letter from a Republican senator, who warns that Obama administration officials are encroaching on the integrity of an office created to protect taxpayers.

The Washington Post:

A federal judge yesterday sharply questioned an assertion by the Obama administration that former Vice President Richard B. Cheney's statements to a special prosecutor about the Valerie Plame case must be kept secret, partly so they do not become fodder for Cheney's political enemies or late-night commentary on "The Daily Show."

U.S. District Judge Emmet G. Sullivan expressed surprise during a hearing here that the Justice Department, in asserting that Cheney's voluntary statements to U.S. Attorney Patrick J. Fitzgerald were exempt from disclosure, relied on legal claims put forward last October by a Bush administration political appointee, Stephen Bradbury. The department asserted then that the disclosure would make presidents and vice presidents reluctant to cooperate voluntarily with future criminal investigations.

The Plum Line:

On Friday, there may be a major development in the torture wars: The CIA is set to release portions of a 2004 report that reportedly found no proof that torture foiled any terror plots, which would dramatically undercut Dick Cheney’s claims that torture worked.

But a news story this morning raises the question: Is the CIA trying to keep chunks that would undermine Cheney under wraps?

That last one may concern the CIA, but I'm pretty sure they work for somebody in the White House. And that's just from this week, there are countless other examples of using the state secrets privilege to shut down lawsuits, breaking a campaign promise to post every bill passed by Congress on the White House website for public comment before signing, and on and on and on.

Progressives battled George W. Bush and Dick Cheney on their unprecedented offical secrecy on the merits, but also out of a recognition that there is such a thing as Presidential precedent. If one President can get away with aggrandizing their power, the successor would certainly watch and learn. Which is exactly what has happened.

Green Weeds

The Treasury Department will allow ten banks to repay their TARP money, for a total of $68 billion dollars. I don't have an enormous problem with it, especially considering that the right is whining about socialism and this is more money that the government has given Chrysler or GM combined. But I also agree with Simon Johnson:

The money allows the strongest banks to return federal aid provided at the peak of the fall financial crisis, but few banks have expressed eagerness for the government to end the other forms of support, creating concern that these programs will be habit-forming and more difficult to terminate.

As a result, independent experts warn that the government's relationship with the industry is entering a precarious new phase. As with mortgage giants Fannie Mae and Freddie Mac, the government will no longer share in the banks' profits, but it still stands ready to absorb losses.

"It's good from an individual investor point of view, it's great for the banks, but from a system point of view it's very dangerous," said Simon Johnson, a Massachusetts Institute of Technology professor and former chief economist at the International Monetary Fund.

Banks have been able to raise plenty of capital on the open market, but they still obviously need government support in the form of quick and easy lending and Federal Reserve programs. They want out of TARP to avoid executive compensation rules, period.

So now we have this situation where everyone makes the happy talk about the banks, but unemployment has far outstripped expectations, to the extent that the President and his team came out and repackaged the stimulus yesterday, promising to get money out this summer at a faster pace, saying that they will create or save 600,000 jobs in the next 100 days. Of course, conservatives want to forget the stimulus entirely because they think things are going so well (but NOT because of Obama, you understand... it's a tough needle to thread).

Here on Planet Earth, what we're starting to see is the groundwork for a jobless recovery.

Although the pace of layoffs appears to be subsiding and the overall economy is showing hints of stabilization, most forecasters expect unemployment to continue to increase in coming months and to recede only gradually as recovery takes hold. In this Economic Letter, we evaluate this projection using data on three labor market indicators: worker flows into and out of unemployment; involuntary part-time employment; and temporary layoffs. We pay particular attention to how these indicators compare with data from previous episodes of recession and recovery. Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market. Specifically, we suggest that the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario.

And even that recovery is threatened by the next wave of foreclosures caused by mortgage rate recasts and unemployment, and while the banks have successfully blocked any reform of the system, they may live to regret that choice. Because in truth, the economy remains at the brink:

We have both spent large chunks of our lives working on Wall Street, absorbing its ethic and mores. We’re concerned that nothing has really been fixed. We’re doubly concerned that people appear to feel the worst of the storm is over — and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. [...]

Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed.

Instead of hauling out the new drywall to cover up the existing studs, let’s seriously consider ripping down the entire structure, dynamiting the foundation and building a new system that rewards taking prudent risks, allocates capital where it is needed, allows all investors to get accurate and timely financial information and increases value to shareholders and creditors.

At the very least, we should rerun the stress tests with the new adverse scenario. And if banks want out from federal government restrictions on pay they need to stop using federal funds in lending programs. We cannot roll back the clock to the go-go 90s and expect everyone to pick up their roles again. That would be a disaster.

New Leader Of The Fiscal Scold Gang

Well, if you hadn't heard, the crisis in the financial markets ended, and everything's fine now. The banks were able to raise more capital than needed to comply with the stress tests, as investors swallowed all their stock offerings. And why not? The federal government put a virtual guarantee that the top banks would not be allowed to fail, and the stocks are already low, low, low, so there's almost no risk to the purchase. CEOs aren't buying the stock, so maybe they know this to be a bear-market rally, but they also know they have what amounts to a federal backstop. Sure, the next wave of foreclosures will degrade the quality of loans and mortgage-backed securities even further, but then the government will just buy the bad ones out. In fact, the banksters don't like the price right now, so they've put a plug in the legacy loan program:

The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets. . . .

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.

Just last week at least some banks wanted to participate in the program – to buy assets from themselves. Once Sheila Bair rejected that idea, I guess they lost interest. Essentially the stress tests placed a big government stamp of approval on their balance sheets, so their current strategy is to wait out the recession and hope the prices of their legacy loans recover. There’s no downside risk, because if the economy gets worse and they ever need to unload those loans, they can count on the plan being resurrected.

The Federal Reserve asked the banks to raise additional capital to comply with repaying their TARP money, but if they found it this easy to sell stock already, they should have no problem reaching that hurdle. Basically the industry made it through the worst, and now they exist on this fantasy plane where they remain too big to fail, socializing the risk while privatizing the profit.

So it should come as no surprise that, now that the crisis has lifted, I guess, the successor to the Maestro is immediately calling for fiscal discipline.

The Federal Reserve chairman, Ben S. Bernanke, said on Wednesday that the United States needed to develop a plan to restore fiscal balance, even as the government builds huge budget deficits as it tries to spend its way out of the worst economic crisis since the Great Depression.

In remarks to the House Budget Committee, Mr. Bernanke said that the government must address the immediate problems of a crippling recession that has erased trillions of dollars in household wealth, hobbled investment portfolios and raised unemployment to its highest levels in a generation. Still, he said, the government needs to think about putting its fiscal house back in order.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said [...]

“Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance,” Mr. Bernanke said.

I thought the Fed dealt with monetary policy and the Treasury Department fiscal policy, but what do I know.

Let me pinpoint the years where the words "deficit" or "fiscal sustainability" never crossed the lips of someone of Bernanke's stature: Jan. 1981-Jan. 1993 and Jan. 2001-Jan. 2009. At that time deficits didn't matter. Now all of a sudden, in the midst of cleaning up the wreckage of the Bush regime, no discussion of economic policy can go by without the important mention of getting our fiscal house in order.

I believe deficits do matter, eventually. But it only makes sense to work on "fiscal responsibility" if you believe the crisis is over. And if that's what Bernanke thinks, we have serious problems. Because the housing market remains in free-fall. And unemployment is still going over the edge. What's happening here is that Bernanke is fronting for the fiscal scolds (so is Peterson Institute fellow Simon Johnson, who dresses up this talk in prettier language sometimes) who seek to eliminate the social safety net through "entitlement reform." Going back to the same old arguments as if the Great Recession has transformed into some boom time seems really premature.

Yes, Banksters, Insurance Costs Money

What's happening now with the banksters is that they're desperately trying to repay their TARP money, presumably so that the federal government can't hold anything over their heads and mess with their executive pay packages, but also, predictably, to make a killing:

Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner’s first sale sets the pace, data compiled by Bloomberg show.

While 17 financial institutions have repaid TARP funds, two have come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. The first was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million last week for warrants that may have been worth $5.81 million, according to the data.

If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of the profits taxpayers might have claimed.

“For once we’d like to get a fair value when we come into contact with the banking system,” said Representative Brad Miller, a North Carolina Democrat and chairman of the Investigations and Oversight Subcommittee of House Science and Technology Committee. “We don’t want a ruthless bargain.”

Rep. Miller is such an angry hippie for even daring to ask for full value for the government's investment. The nerve.

While the banks will almost certainly get away with some manner of windfall by trading in these warrants, at the very least, they can replenish the FDIC with a progressive fee system:

The Federal Deposit Insurance Corp., which guarantees bank deposits against loss, yesterday approved a controversial change requiring big banks to pay a larger share of the bill for that insurance.

Bank failures are draining the FDIC's insurance fund, forcing it to collect larger assessments from banks, which foot the bill, at a time when many institutions can barely find the money to stay in business.

The five-member FDIC board voted yesterday to collect an additional $5.6 billion from the industry, raising the total annual bill to $17.6 billion. That amounts to a 5 percent tax on industry profits, the FDIC estimated.

The assessment could decrease the money available for lending to consumers and businesses.

That last line is so predictable, the proverbial gun to the head of Main Street that we've seen throughout this crisis. The truth is that the FDIC spends billions to rescue banks, and the banks rely on this insurance for the peace of mind of their customers and their own personal security. They can afford the fees - and without paying them, it kind of isn't insurance. The big banks caused this crisis and ought to pay at least a little bit to bail it out. This "but they won't have money to lend" argument has grown so tiresome.

Why Don't You Just Make The Check Blank

It really has been comical to see the leaks of the stress tests trickle out, first with full confidence in the strength of the banks, then less, then less, and now a situation where Bank of America needs $34 billion dollars. Their total market capitalization right now is only $70 billion. The word "insolvent" comes to mind.

The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank.

If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.

It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.

But that would make the government one of the bank’s largest shareholders.

The company has certain assets they could sell, if anyone's in the market for a bank right now. But the most likely scenario makes the US government a near-controlling interest in Bank of America. Citigroup, which already has converted government preferred shares to common stock, needs an additional $10 billion or so, according to this report. It's not all that reassuring to hear BofA spokesmen claim that they'll be able to make $30 billion a year in income once the recession clears, which I think is more than Exxon.

Unfortunately, this is a fight that's already lost, Obama dinners with Paul Krugman aside. The banks will not be nationalized, and most likely they will be propped up until the crisis lifts. Geithner and Summers have their reasons for this, and the Administration doesn't see Congress playing along with anything that might damage the banksters too heavily (see cramdown) or allocating the money that would be needed for a restructuring. Mike Lux offers a couple post-TARP solutions that I think make sense:

The first is to really invest in long-term organizing and institutional building on the finance issue. While it is disappointing that Obama hasn't used this economic crisis and the populist anger it invoked to more fundamentally change the system that brought us to this pass, it's not like finance issues are going away or recede in importance in years to come. Now is the time to build institutions with the grassroots, political, and intellectual firepower to battle the banks in the years to come. We clearly have a stable of economists and business people who get what is going on, including George Soros, Joseph Stiglitz, Paul Krugman, Dean Baker, Rob Johnson, Simon Johnson, Leo Hindery, and others. What we need is long term institutional political power to build the constituency that will fight this fight effectively.

Just as importantly, we need to work constructively with the Obama administration to be prepared with a plan B if what they are doing begins to show significant weaknesses. If, as we restructuring advocates fear, the Geithner/Summers plan does not work to rebuild the economy, and/or the plan is gamed by the big banks to create other AIG bonus style scandals, Obama will be forced to turn to a plan B. If that happens, as I wrote a few weeks ago, progressives should avoid going into I-told-you-so mode, and instead be ready with a strong progressive plan that they can push with the administration. The economic thinkers listed above ought to be working together right now to come up with a strong plan B option. If we can keep a constructive dialogue going with the White House, and mobilize our friends in Congress and in the media, such a plan has a chance of being adopted.

I'll begin this new constructive arrangement by saying that I really like one aspect of the government's new plan - the idea that banks who want to return TARP money must cut themselves off from all the rest of the government largesse they receive to keep them afloat.

Banks that want to return Troubled Asset Relief Program funds will have to demonstrate their ability to wean themselves off another major federal program, according to senior government officials, making it less attractive for some banks to return the money.

The other program, a guarantee of debt issuance offered by the Federal Deposit Insurance Corp., allows firms to borrow money relatively inexpensively. Banks have $332.5 billion of debt outstanding under this program, which began last fall.

If you don't need assistance, prove it. Either you stay on the government dole or leap off. And either way, the government will regulate you in the future so you can't borrow using 30-1 leverage and take up half the national economy. If this is the result, I can basically live with it. But of course, this only applies to those few banks healthy enough to weather the storm. The Bank of Americas of the world? We're going to need a Plan B for them.

Banks Aren't Lending, Don't Have Enough Capital, Other Than That They're Fine

Tim Geithner showed up on Capitol Hill today, facing the Congressional Oversight Panel (whose leader got a brushback from the Beltway establishment and the right leading up to this hearing) to defend his plans for the financial industry.

Treasury Secretary Timothy Geithner defended the bank rescue program devised by the Obama administration Tuesday as the International Monetary Fund predicted U.S. financial institutions could lose $2.7 trillion from the global credit crisis [...]

Geithner said the new plan "strikes the right balance" by letting taxpayers share the risk with the private sector while at the same time letting private industry use competition to set market prices for the assets.

"If the government alone purchased these legacy assets from banks, it would assume the entire share of the losses and risk overpaying," Geithner said in his remarks. "Alternatively, if we simply hoped that banks would work off these assets over time, we would be prolonging the economic crisis, which in turn would cost more to the taxpayer over time."

Geithner said "the vast majority of banks" have more capital than they need to be considered well-capitalized. But he said the economic crisis and the bad assets have created uncertainty about the health of individual banks and reduced lending across the system.

I think the vast majority of banks are well-capitalized only if you mean "not the big ones." I mean, we have pretty hard evidence on this. The Treasury wouldn't play accounting games by converting preferred shares to common stock, which has the express purpose of reducing the liabilities on the banks' balance sheet and giving the impression that THEY ARE MORE WELL-CAPITALIZED, if the opposite was true. James Kwak pretty well takes apart the whole idea, so I won't comment further.

In addition, if the banks were so well-capitalized, they would actually lend instead of hoarding capital, which after all is the function of a bank.

Lending at the biggest U.S. banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector.

According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.

The total dollar amount of new loans declined in three of the four months the government has reported this data. All but three of the 19 largest TARP recipients with comparable data originated fewer loans in February than they did at the time they received federal infusions.

Interestingly, the same banks that cut back the most on lending are the ones who have received the most money from the federal government, which suggests that the TARP funds might as well have been thrown down a well. But the banks want to return that TARP money (and I'm sure they'll get around to that any day now) while talking up their own earnings, which have been seen by the street as soft as tissue paper. To their credit, Treasury wants to put some limits on that return of TARP money, based on some amorphous idea of whether repayment is in the "national economic interest". But clearly, the banksters have never acted in that interest. This sad tale is sadly indicative:

Top officials at Chrysler Financial turned away a government loan because executives didn't want to abide by new federal limits on pay, according to new findings by a federal watchdog agency.

The government had offered a $750 million loan earlier this month as part of its efforts to prop up the ailing auto industry, including Chrysler, which is racing to avoid bankruptcy. Chrysler Financial is a major lender to Chrysler dealerships and customers.

In forgoing the loan, Chrysler Financial opted to use more expensive financing from private banks, adding to the burden on the already fragile automaker and its financing company.

They have always been more concerned with their personal fortunes than the health of the overall economy or even their own businesses. The greed here is astonishing.

Let's be honest here. Many banks are insolvent, and even the Administration admits that some will need more help. They don't want to sell the toxic assets because their essential insolvency will be too obvious to ignore. And they don't want the stress tests revealed for basically the same reason. At no point has the government appeared willing to end the stranglehold that the elites and the financial interests have over this economy.

I continue to worry that the Administration’s “wait-and-see” strategy is just increasing the ultimate costs - in terms of financial losses and unemployment. No government ever likes to tackle a severe banking crisis head on (mostly because that would greatly upset the financial elite), but it’s almost always the right thing to do.

I remain unconvinced by the Treasury’s line that “there is no alternative” to their approach. Or perhaps they are shifting towards the line that: “based on information that only the government has (and can have), it is our assessment that all other approaches would be more damaging.”

If that is now their position, we have built a financial system that is immune to democracy - today’s complexity and lack of transparency mean that it is easier than even to become too big to fail. The major banks now know this and will behave accordingly.

Oh, and by the way, the PPIP plan may be open to fraud and puts the taxpayer on the hook for close to $2 trillion.

It's their world, we just live in it.

More at TPM Muckraker.

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.

Banksters Getting Money From Everyone

Cue the world's tiniest violin for the poor souls who just can't cut it for under $1 million a year on Wall Street.

There is an air of exodus on Wall Street — and not just among those being fired. As Washington cracks down on compensation and tightens regulation of banks, a brain drain is occurring at some of the biggest ones. They are some of the same banks blamed for setting off the worst downturn since the Depression.

Top bankers have been leaving Goldman Sachs, Morgan Stanley, Citigroup and others in rising numbers to join banks that do not face tighter regulation, including foreign banks, or start-up companies eager to build themselves into tomorrow’s financial powerhouses. Others are leaving because of culture clashes at merging companies, like Bank of America and Merrill Lynch, and still others are simply retiring early.

Yes, I'm awfully choked up about the assholes driven out of the big Wall Street firms.

To the Times' credit, they go on to explain how this is a good thing, because it shrinks the size of the bigger banks and spreads the risk-taking. To their detriment, they fail to explain that the most likely reason for executives darting from the biggest banks is that they are insolvent. Sure, they're playing accounting games to keep up appearances, at the same time trying to raise billions in private money from investors. Simon Johnson explains all this.

How can the large banks persuade potential shareholders to put large amounts of new capital with them, given that their systems just failed massively, these systems have not been substantially changed, and - while there has been a bailout for insiders and creditors - shareholders were largely wiped out from mid 2007-end 2008?

It could, of course, be the case that shareholders see great upside. Anything that has fallen greatly may see some rebound. The large banks have demonstrated their political muscle, so that should help with other forms of government protection and “rents” (economics jargon for easy money from business that others aren’t allowed into). In the early stages of a recovery, perhaps the banks will be more generous to their shareholders; it could be that the excessive tunneling is a feature of a mad boom, and we seem some distance from having another of those.

But probably we are looking at a deeper market failure. Big money managers - including mutual funds, pension funds and insurance companies -have arguably failed in their fiduciary duty to ensure that major financial companies are run properly and in the interest of shareholders. These money managers have great resources, many years of experience, and real power vis-a-vis the companies. Why didn’t they push for stronger risk management? Why are they so eager to hand over our money again? Where exactly was or is their due diligence?

We're coming to a reckoning between the banksters and the regulators trying to rein them in. Shareholders really ought to know the risks at this point, and I weep little for them if they want to finance Goldman Sachs. What we cannot allow are the same people sucking the Treasury dry to then fleece their customers.

The committee overseeing federal banking-bailout programs is investigating the lending practices of institutions that received public funds, following a rash of complaints about increases in interest rates and fees.

Since the Troubled Asset Relief Program was launched last October, banks bolstered by capital infusions have boosted charges on a wide range of routine transactions, hiked rates on credit cards and continued making loans criticized as predatory by consumer advocates. The TARP funds are intended to open lending spigots and make it easier for people to borrow money.

Let me try to put this all together. The banks took billions from the government. They're offering stock sales to get billions from investors to pay some of the TARP money back (but they're balking at the interest rates the government is demanding). And they're bilking their customers for even more money.

No wonder they show good earnings.

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.

Goldman Will Shut It Down

As exasperated as I am with Congress, they do seem to know how to investigate, if they don't always get the follow-through right. And they seem to be looking in the right places. For instance, Elijah Cummings wants to know about the counter-party payments from AIG:

He's currently circulating (and I have obtained) a letter to colleagues, seeking their support for a TARP inspector general investigation into every aspect of the payments AIG made, with government money, to counterparties whose risky investments it had insured.

"Goldman Sachs claimed in September that they had no material exposure to AIG; however, after AIG released the counterparty information on March 15, we found out that Goldman Sachs received almost $13 billion in counterparty payments.

The Special Inspector General for the Troubled Assets Relief Program was created to ensure that transparency and accountability stay firmly rooted in the government's efforts to revive and sustain the American economy. This letter proposes that the Special Inspector General examine the nature of the counterparty payments - including the recipients, the process by which they were made whole, and the justification, if any, for that level of payment."

In addition, investigators for the House Oversight Committee are delving into Joseph Cassano, the former head of the AIG Financial Products unit and essentially Patient Zero of the global financial crisis.

Investigators for the House Oversight committee intend to interview Cassano about his role in the firm's collapse, and have already contacted his lawyer, a committee staffer told TPMmuckraker.

As CEO of AIG Financial Products, Cassano, based in the unit's London office, was the prime mover behind the credit default swaps, whose implosion brought the firm to its knees. He stepped down in March 2008, signing a $1 million-a-month "consulting" contract with the firm. (The contract was canceled last September.)

Federal investigators, as well as Britain's Serious Fraud Office, are also probing AIGFP. The Feds are reportedly focused in particular on whether Cassano and then-AIG CEO Martin Sullivan made false or misleading pubic statements about the company's potential exposure to losses on its credit default swaps. A December 2007 shareholder presentation the two men made is said to be of special interest.

The focus appears to be those counter-party payments from AIG, and how they made big international banks whole on their CDS bets. What worries me is that all roads lead to Goldman Sachs, which clearly has its tentacles around the Administration. Goldman vowed yesterday to return all the TARP money it received while neglecting to mention that they received even more government relief from AIG and other sources. And Goldman is a linchpin to the Geithner plan for toxic assets:

Tim Geithner suggested that Goldman Sachs could be one of five institutions helping to manage the public-private partnership program to buy up a bunch of toxic legacy assets from ailing banks.

Goldman has played a central role in this drama. As an institution, it's been extremely close to the Treasury department. And, as Josh noted, it's also about to pay off all of its TARP money (with the help, perhaps, of the other government money it received as an AIG counterparty) which will free it up to return to a status quo of paying enormous bonuses.

It's also, of course, one of the institutions that helped bring the financial system to its knees--it holds many of the toxic assets in question and may be well placed to bid them up and inflate their prices at auction. (How you manage the fund to rescue financial institutions with toxic assets while you yourself hold those same assets has yet to be sussed out by committee members.)

My point is that Goldman may be the eventual white whale for Congressional investigators, but the Treasury Department as currently structured will work overtime to shield them from any harm.

Sigh.

Finding A Scapegoat

Good to see that the Treasury Department is so concerned about the AIG bonus babies that they are throwing Chris Dodd to the wolves to deflect criticism.

The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken. The official noted that even a provision recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place.

That's just not true, as both Jane and Glenn Greenwald explain pretty definitively. Under a Dodd-written amendment, the Senate version of the stimulus bill included executive compensation limits for all recipients of TARP money, only to have the amendment stripped of retroactivity and applied strictly toward future payouts, after negotiations with none other than Tim Geithner and Larry Summers:

The administration is concerned the rules will prompt a wave of banks to return the government's money and forgo future assistance, undermining the aid program's effectiveness. Both Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, had called Sen. Dodd and asked him to reconsider, these people said.

This wasn't a small behind-the-scenes fight, it was a major contention in the stimulus debate, subject of several articles. Obama's economic team didn't want limits on executive compensation, and Dodd did. The Administration won, and now in the midst of this furor they're trying to rewrite history by putting Dodd and themselves in opposite roles.

Dodd is a threatened incumbent who the right wing has been slandering for months, and now some anonymous official in the Obama Administration has taken the heat off themselves by allowing a firestorm based on a myth. Chris Bowers writes:

Now, some elements inside the administration have reached the point where they are placing blame for something Geithner and Summers did--block legislation that would have stripped the bonuses--on the person who wrote the legislation that would have stripped the bonuses. And that person just happens to be the most vulnerable Democratic Senators in 2010.

Glad to see that some senior administration officials value Geithner and Summers more than either Democratic Senate seats, or even more than honesty. There is a serious problem inside the Obama administration on this matter, and dismissals are needed to solve it.

In a related development, Republicans tied Democrats in the congressional generic ballot in one poll today, and took the lead in the other. I guess the new "Geithner uber alles" strategy isn't working out to well for Democrats.

I think it's premature to hype those poll numbers, especially when other ones taken at the same time show an opposite dynamic, but unquestionably, there is a rot at the heart of the economic team. This is the first incident that Obama has truly owned, regardless of the deflections. Republicans don't completely have their act together on this - they're too conflicted, having argued for free market fundamentalism for so long that the knee-jerk response is to argue for more. Even their ideas for clawing back the bonuses are crude copies of what the President has already decided. But anyone can plainly sniff out the villains here, and in addition to hyping the bogus Dodd assertion, the GOP is going after Geithner.

Reps. Steven LaTourette (R-OH) and Thaddeus McCotter (R-MI) introduced a resolution of inquiry today that would force Geithner to reveal the full extent of his department's communications with AIG.

The resolution would affect not just talks over bonuses but about the very structure of the Federal Reserve's investment in the company -- which appears to have included built-in limitations on the government's influence over management.

This is the real deal, folks: resolutions of inquiry (ROIs) are a crucial procedural tool for the minority party to seek information from the executive branch. Democrats did this during the Valerie Plame/Spygate scandal and the debate over the Bush administration's extraordinary rendition. The Congressional Research Service found in a November study that ROIs oftentimes succeed in prying out information even if they fail on the House floor.

No rational Democrat can disagree that we need to know about those communications. Geithner's connections with AIG go all the way back to the initial bailout decision, and are tied to the tens of billions in payments to counterparties, which is the far more damaging element of this - essentially a double-dip for banks who already received government money. While the bonus scandal raises the right-wing phony populist ire, the drumbeat for more investigations into Geithner's contacts with AIG and what he knows about the counterparties and maybe about why the Federal Reserve is injecting billions into foreign central banks and why more than half of the AIG bailout money is leaking over the border and a whole host of other issues which involve Geithner but also the previous Administration. And the very clear potential exists to drown the entire Administration agenda into a day-by-day recitation of whether the President still has faith in his economic advisers, etc.

The President brought this upon himself through his hirings. But if he wants to find a way out, he could stop the practice of his team blaming others and start living up to his own rhetoric.

Taxation Everyone Can Believe In

Congress is showing that they can think of options when it comes to AIG. This is from Carolyn Maloney (D-NY), Chairwoman of the Joint Economic Committee:

Like many of you, I was outraged to learn over the weekend that AIG is paying out another $165 million in bonus compensation. For a company that has required $170 billion in U.S. taxpayer assistance and is 80% owned by the United States Government, this is clearly unacceptable. That is why I will be introducing legislation that will instruct the Secretary of the Treasury and the Internal Revenue Service to develop guidelines that tax at 100% any bonus compensation that is not directly related to a commission for any recipient of TARP funds where the United States government is the majority owner of the company. This will allow AIG to continue to meet their "contractual obligation" to pay these bonuses, but will ensure that the recipients are not allowed to keep this money.

Gary Peters (D-MI) has a similar proposal. As Chris Bowers notes, it would be hard in the current political environment for any member of Congress to vote against like this. The added bonus (for us, this time!) is that a vote would ferret out the real corporate whores, and because of the profile of this issue, everyone would know their names.

I hope the Congress chooses not to wait for the White House to come up with a solution. The Treasury and the Federal Reserve knew about this since the fall, and Obama's economic team had ample opportunity to design something that would work. It's time for the lawmakers to step in. They have no reason to wait for the White House to take the lead.

Big Bank Strikes Again

Seriously, I am so done with these elites.

WASHINGTON - The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the premiums for a decade, according to banking officials and analysts.

Now with 25 banks having failed last year, 17 so far this year, and many more expected in the coming months, the FDIC has proposed large new premiums for banks at the very time when many can least afford to pay. The agency collected $3 billion in the fees last year and has proposed collecting up to $27 billion this year, prompting an outcry from some banks that say it will force them to raise consumer fees and curtail lending.

So for ten YEARS, these banks didn't pay their insurance premiums, secure in the knowledge that they were the masters of the universe and nothing could ever hurt them. Keep in mind that the Asian financial crisis hit right in the middle of that time. But these banksters were invulnerable. But now the FDIC is eating banks left and right, and everybody expects the money just to magically appear in their account.

And I'm not leaving the policymakers off the hook, either. This was clearly a bipartisan swoon, a fealty to rich Wall Street greedheads that shouldn't be bothered with the imposition of insuring their customer's deposits. Congress agreed that there was enough reserves in the fund not to charge banks for ten years. Sheila Bair was, if anything, a hero in this, pleading since before she took over the FDIC that the program needed more capital.

Bair said yesterday that the agency's failure to collect premiums from most banks "was surprising to me and of concern." As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry.

"That is five years of very healthy good times in banking that could have been used to build up the reserve," Bair, a former professor at the University of Massachusetts at Amherst, said in an interview. "That is how we find ourselves where we are today. An important lesson going forward is we need to be building up these funds in good times so you can draw down upon them in bad times."

It is astonishing what is being revealed about how much banking interests ran the country for the last 15 years. Now, after taking hundreds of billions of dollars from taxpayers, they're whining about all the burdens the acceptance of public money is placing on them, like executive pay caps and selling corporate jets. Of course, they're not going to give back the money, just whine about it enough so that Congress loosens the reins. And even if they did return a portion of the TARP money they'd just make an end run to grab their corporate welfare through AIG. Because we wouldn't want a crisis on our hands by not paying them out.

So when times are booming, the banks want no regulation and won't even condescend to meet their own financial obligations with the government. When the casino closes up and they're tapped out, they come back for a handout. Which they get, at massive expense without taxpayers sharing in the upside. But don't you dare tell them how they can and can't spend the money. After all, they know best, right?