Professional Jealousy

Because Glenn Beck had the foresight to get out in front of an anti-government movement that does not fall neatly along left-right lines, movement conservatives are lashing out at him:

Beck added that McCain would be worse than Obama:

"I think John McCain would have been worse — [laughs] How about this? I think John McCain would have been worse for the country than Barack Obama. How’s that?"

Beck’s opinion elicited a fierce and angry response from right-wing radio host Mark Levin yesterday. “To say [McCain] would be worse is mindless, mindless, incoherent as a matter of fact,” Levin said on his radio show. He then suggested Beck is playing politics: “I don’t know who people are playing to. I don’t know why they’re playing to certain people.”

Levin never mentions Beck by name (he refers to Beck as “the 5 pm’er” because Beck’s show airs at 5 pm on Fox News). He concluded with this final dig at Beck:

"I think there’s enormous confusion and positioning and pandering. It may be entertaining, but from my perspective, it’s not. It’s pathetic."

Levin's right, to an extent. Beck has no coherent worldview, and his de facto leadership of the Ron Paul movement - which he came to very suddenly after expressing contempt for it - is nothing short of opportunistic. And it's killing his competition - Joe Scarborough, Peter Wehner, The American Spectator, even Rush Limbaugh. They're jealous of his attention, his opinion leadership. The fact that the knives came out after the TIME cover story is not coincidental.

But there's something a little more interesting at work. While Beck is a mess from an intellectual standpoint, and his bashing of Republicans is little more than cover, at least a part of the movement he's positioned himself at the front of doesn't have a worldview that falls into any ideological box. Sure, corporate forces aligned with the movement GOP are trying to co-opt it and steer it to business-friendly ends, and the protest audience is as variegated as any would be on the left. But there's an element in there that is not easily defined:

In one important sense, the "tea party" movement is similar to the Obama campaign for "change": it stays sufficiently vague and unspecific to enable everyone to read into what they want, so that people with fundamentally irreconcilable views believe they're part of the same movement.

But all that said, there are some identifiable -- and plainly valid -- underlying causes to these protests that are neither Republican nor Democratic, or even left or right. That's when conventional political language ceases to be useful.

Is opposition to the Wall Street bailout (supported by both parties' establishments) left or right? How about the view that Washington is inherently corrupt and beholden to the richest corporate interests and banks which, through lobbyist influence and vast financial contributions, own and control our political system? Is hostility towards Beltway elites liberal or conservative? Is opposition to the Surveillance State and endless expansions of federal police powers a view of liberals (who vehemently opposed such measures during the Bush era but now sometimes support or at least tolerate them) or conservatives (some of whom -- the Ron Paul faction -- objected just as vigorously, and naturally oppose such things regardless of who is in power as transgressions of the proper limits of government)? Liberals during the Bush era continuously complained about the doubling of the national debt, a central concern of many of these "tea party" protesters. Is the belief that Washington politicians are destroying the economic security of the middle class, while the rich grow richer, a liberal or conservative view? Opposition to endless wars and bankruptcy-inducing imperial policy generally finds as much expression among certain quarters on the Right as it does on the Left.

I don't think, in the end, that it's supposed to make sense. Politics has a tribal component and is waged much like sports fans wage their battles against one another. There will always be a sizable audience for a polemicist, whether viewed as partisan or non-partisan, especially when his or her attacks always seem to fall on the Democratic occupant of the White House. But I think Beck's unpredictability, as well as his reaches into the depths of wingnuttery - wait until the Christian conservatives figure out Beck chose to be a Mormon - frighten the establishment in the GOP. They tolerate him when he's whipping up a frenzy against Obama, but he could just as easily call to break up the banks - whatever he thinks will make him a ratings point - and suddenly the clean ideological lines break down.

Now, if there was a coherent Democratic Party which would argue for the virtues of government and its role as a protector of individual liberty, equality of opportunity and the common good, the ideologies of the parties would be a little cleaner, and the DC establishment wouldn't be such an inviting target. In a way, Democrats have brought this on themselves. They invented a Glenn Beck by failing to make the case for government themselves. And as a result, distrust of government is rising.

Beck's Changing Rhetoric

Mitt Romney went to the Values Voters Summit and slammed the bailouts this weekend, after offering them support not just at the time, but at the Conservative Political Action Conference back in February.

So what. Mitt Romney flip-flopped on an issue? Call the Guinness people, I think he's actually set the record now.

No, the real interesting trip down memory lane today is that Glenn Beck favored the bailouts a year ago, when TARP was being debated in Congress:

But these are anything but normal times. I thought about it an awful lot this weekend, and while it takes everything in me to say this, I think the bailout is the right thing do.

The “REAL STORY” is the $700 billion that you’re hearing about now is not only, I believe, necessary, it is also not nearly enough, and all of the weasels in Washington know it.

Now THAT is an interesting reversal. Before his appearance on Fox News and in everyone's hearts, Beck ran a Morning Zoo-type radio show and had an unremarkable stint on CNN Headline News. He certainly hadn't latched on to any wave of discontent with federal spending or libertarian economic theories. He repeatedly called Ron Paul "a crackpot on so many issues" and prefaced every discussion of him by saying "I don't agree with Ron Paul on everything--not by a long shot." Here's Beck calling Ron Paul supporters terrorists:



"It's really not the way I would go, tying in my movement with a historical terrorist attack, especially in post-9/11 America."

This is the guy who put together a rally on September the 12th.

Beck saw a movement stirring on the furthest reaches of the right and got out in front of it. Before that he was pretty firmly behind his President in bailing out the top banks.

The difference is that now, the political energy on the right is with the teabaggers, and it makes sense to Beck to capitalize on that energy. But he has nothing approaching a coherent worldview. Whatever gets the most eyeballs.

I really hope that libertarians take a look at the guy who has appointed himself the public face of their movement.

...Here's a Paul supporter video that has the very clips of Beck supporting the bailout:



... This is amusing, Beck claimed on his show today that he hated Bush for those bailouts which he initially supported. I think this shows that the truth about his changing stories is coming out and he's trying to pre-empt the criticism.

Financial Reform FAIL And A New Metric For Recessions

Simon Johnson had the same problem as I did with the President's speech on financial reform:

As a diagnosis of the problems that let us into financial crisis, it was his clearest and best effort so far. He didn’t say it was a rare accident for which no one is to blame; rather he placed the blame squarely on the structure, incentives, and actions of Wall Street.

But then he said: our regulatory reforms will fix that. This is hard to believe. And even the President seems to have his doubts, because he added a plea that – in the meantime – the financial sector should behave better [...]

Louis Brandeis, of course, would have seen things differently. The author of “Other People’s Money: And How The Bankers Use It,” was under no illusions concerning the underlying financial power structures and how they operated. He would have regarded an appeal to the better nature of bankers as somewhere between humorous and sad.

The only thing that will make a different is regulation. This is the lesson of the 1930s in the US – the regulations imposed at that time created a financial sector that did not impede growth after World War II; basic intermediation (connecting savers and borrowers) worked fine and destabilizing frenzies were avoided. During this period, the financial sector came up with venture capital, ATMs, and credit cards – arguably the three most important financial innovations of the past 100 years, and much more helpful of real innovation than anything you’ve seen since 1980.

As Johnson has repeatedly argued, we need to break up the biggest banks, end the revolving door between Wall Street and Washington and ensure that the executives taking the risks put their own fortunes at stake instead of gambling with our money. Sadly, none of these elements exist in the more modest reform proposals from the President, and even those are faltering in the face of institutional pressure.

As a result, we muddle through, resetting the clock to the pre-bailout days without having fundamentally fixed the system or prevented the possibility of a relapse. It's great that Ben Bernanke thinks the recession is over. But the 9.4 million people who have lost their jobs would disagree with him. Their personal depressions continue, and I would argue that this is a direct result of allowing the titans of Wall Street trillions in Treasury wealth while ordinary Americans suffer with a too-small stimulus and not much prospect for recovery.

Fifteen million Americans are locked in the nightmare of unemployment, nearly 10 percent of the work force. A third have been jobless for more than six months. Thirteen percent of Latinos and 15 percent of blacks are out of work. (Those are some of the official statistics. The reality is much worse.)

Consider this: Some 9.4 million new jobs would have to be created to get us back to the level of employment at the time that the recession began in December 2007. But last month, we lost 216,000 jobs. If the recession technically ends soon and we get to a point where some modest number of jobs are created — say, 100,000 or 150,000 a month — the politicians and the business commentators will celebrate like it’s New Year’s [...]

At some point the unemployment crisis in America will have to be confronted head-on. Poverty rates are increasing. Tax revenues are plunging. State and local governments are in a terrible fiscal bind. Unemployment benefits for many are running out. Families are doubling up, and the number of homeless children is rising.

It’s eerie to me how little attention this crisis is receiving. The poor seem to be completely out of the picture.

Joseph Stiglitz has a similar view in today's Guardian, arguing that the Administration through saving the financial system has perversely created banks that are not only too big to fail but too big to resolve, the way you would other entities which cannot meet their obligations. In a separate piece, he argues that the metric for evaluating recession - gross domestic product - now has almost no bearing on everyday lives, and ought to be scrapped in favor of something that truly reflects the outlook for ordinary people.

The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.

I remember Andy Stern coming up with the same idea in his book a few years ago. If we continue to use a metric based on the desires of elites, then they will please themselves with growth results even though the mass of people continue to suffer. Believe it or not, common statistics can actually change policy for the better. The problem lies in getting everybody to use it.

...Kevin Drum offers up real median income growth as a better metric. If that's the case, we've actually been in a depression for a decade.

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.

Too Bigger To Fail

We were told during the financial crisis that the consolidation of the banks presented a situation where they had to be saved. Now we have the resultant outcome, that the banks which managed to survive the crisis are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

A year after the near-collapse of the financial system last September, the federal response has redefined how Americans get mortgages, student loans and other kinds of credit and has made a national spectacle of executive pay. But no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.

FDIC head Sheila Bair is quoted in this article at least sounding concerned about this. Nobody else seems to be.

The American consumer will pay the biggest price for this, by the way. Not just in terms of having to bail out the few remaining banks if things get rough, but in higher fees and charges that accompany less competition.

I'm out, I'm going to a credit union from now on.

Angelides On Pecora II

Tim Fernholz talks with Phil Angelides, the new chairman of the Financial Crisis Inquiry Commission, a modern-day analogue to the Pecora Commission of the 1930s, charged with finding out the origins of the financial crisis, who we should hold responsible, and how we can ensure it never happens again. There are some interesting tidbits in the interview. First, we can be sure that Angelides has an understanding of the problem.

Why is this commission important?

The magnitude of what's happened in this country is astounding. Millions of people have lost their homes, millions of people have lost their life savings, millions of Americans have seen their pensions disappear. We have seen over a trillion dollars in taxpayer money go to prop up a dying financial system. This is a cataclysm. My view is that there is a real hunger in this country to have a pursuit of the truth, to find out what happened and why it happened, so hopefully, instead of sweeping it under the rug, it will not happen again in our lifetimes. This is an important commission with a critical role of serving the nation's best interests because we are called on to look into something that has been fundamentally important to this country: The very foundations of our financial system have been shaken [...]

Do you believe we already have a broad understanding of what led to this crisis, or do you feel there are a lot of questions still unanswered?

All of us come with our personal views. I'll start by saying that in the early part of this decade, as early as 2002, I was concerned about what was happening the marketplace. I was deeply concerned about executive compensation so I mobilize shareholders across the country to push back on executive compensation. I was concerned about lax enforcement at the SEC. ... I was part of a movement of activist shareholders in an effort to bring some common sense to the market place. In the wake of the Enron and Worldcom, we had some momentum, but the economy recovered and the regulators took their foot off the brakes. We all come in with our own viewpoints, but our job is to look at this fresh.

Next, he's willing to give his Republican colleagues on the committee some input, but he's setting ground rules and he thinks he can get the others on the commission to play ball:

The commission has the ability to subpoena information, but only if at least one of the Republican appointees supports the decision. Are you at all concerned about disagreement within the committee hurting its ability to gather information?

When the Speaker and the Majority Leader asked me to serve as chair, [I knew] this would be a hard and difficult road. I'm starting on the assumption that other commissioners, like myself, are interested in getting to the facts and the root causes. If we have to issue subpoenas, I hope we can do that. Hopefully people [with information] will cooperate, but if not, we were given the tools to get the facts. I would want to start on the basis that no commissioner would want to deprive us of information to make a good judgment on behalf of the American people. The commission is interesting because it really focuses on the inquiry, rather than the policy and political implications. I think that gives us a better chance of coming up with a nonpartisan, bipartisan findings of facts.

And finally, he seems to recognize something that a lot of people don't - the regulators probably had the capacity to stop at least the most egregious criminality happening in the markets, but they didn't use the authority they had. What the Financial Crisis Inquiry Commission can offer is, in Angelides' words, "a road map" and "a guidebook" to the next generation of regulators, so they know what to look for and where to go.

Now, Zachary Roth has a long piece about Bill Thomas and the other Republicans on the FCIC, or Pecora II, and how they are partisan enough to resist a real inquiry. The provision that one Republican must vote with Democrats in order to issue subpoenas could allow anyone Republicans don't want testifying to be able to do so; and all of the Republicans appear, to Roth, to be candidates to hang together:

None of the three rank-and-file Republican appointees seem like good candidates to break ranks. Peter Wallison is a fellow at the American Enterprise Institute, who has been a prominent advocate of the favored conservative notion that Fannie Mae and Freddie Mac are the true culprits in the crisis, and who argued this week in the Washington Post against creating a consumer protection commission for financial products -- an idea seen by many as a cornerstone of any effort to reform the financial regulatory system. Doug Holtz-Eakin, for his part, was John McCain's top economic adviser at the time when the GOP presidential nominee declared the fundamentals of the economy strong. And Keith Hennessey is a former economic adviser to President Bush and a former aide to Sen. Trent Lott.

But it's the identity of the Republican-appointed vice chair -- whose support is required by law for the commission to perform several other key functions, like hiring staff -- that's the really ominous sign. That's Bill Thomas, the Republican former congressman from California, who earlier this decade chaired the House Ways and Means committee.

During his years in Congress, Thomas, who now works for a major DC lobbying firm, acquired a reputation as a smart, highly-skilled and acutely partisan supporter of big business, who once tried to have Democrats forcibly ousted from a capitol meeting room, and was accused of being literally in bed with a corporate lobbyist.

I'd agree that Wallison and probably Hennessey and Thomas are useless, but Holtz-Eakin, a former head of the CBO, has at least displayed flashes of intellectual honesty when he wasn't in charge of a Presidential campaign's economic policies. He has acknowledged the need for higher taxes. He has called for the Bush tax cuts to expire. He's definitely conservative and he sometimes says some boneheaded things, but I don't see him as a hardcore partisan, actually. And if Angelides structures this as a just the facts inquiry, there's at least the promise of a legitimate investigation.

Still Masters Of The Universe

What we're seeing from the big bank earnings reports is that the government reacted to a situation where the financial industry titans were too big to fail, and facilitated theconsolidation of them so that they grew even bigger. Goldman Sachs and JP Morgan Chase are the biggest of the lot, having seen their competition either eliminated or weakened.

“One theme here is that Goldman Sachs and JPMorgan really have emerged as the winners, as the last of the survivors,” said Robert Reich, a professor at the University of California, Berkeley, who was secretary of labor in the Clinton administration.

Both banks now stand astride post-bailout Wall Street, having benefited from billions of dollars in taxpayer support and cheap government financing to climb over banks that continue to struggle. They are capitalizing on the turmoil in financial markets and their rivals’ weakness to pull in billions in trading profits.

Even Bank of America and Citigroup posted big profits in the last quarter, although the elimination of mark-to-market accounting plays a major role in hiding the true weakness of a lot of these banks. The imminent failure of more community banks and larger firms like CIT present opportunities for JP Morgan and Goldman Sachs as well.

Paul Krugman gets shrill on Goldman Sachs today, and he makes the larger point that we have only made Wall Street more dangerous to the overall economy through no-strings bailouts and failing to rein in the excess.

Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.

Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers [...]

The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.

And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.

Basically, Krugman hinges the success of the bailout on meaningful financial regulation to keep Wall Street from making the same gambles. I'm not hopeful about that. But what I am hopeful about is the recognition, from across the political spectrum, that the bailout has produced perverse incentives that need to be reversed in whatever way possible.

The (Wall Street) Journal's take -- "We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business" -- is actually more in keeping with that of Robert Reich, who says that "Goldman's resurgence should send shivers down the backs of every hardworking American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs.... Goldman's high-risk business model hasn't changed one bit from what it was before the implosion of Wall Street." [...]

There is much in the Wall Street Journal that I don't agree with but, when it comes to the failure of the administration to address and fundamentally reform what Kessler calls "the structural problems that got us into trouble in the first place," we are of the same mind. There is no daylight between a progressive position focused on the paramount need to get the real economy going and one based purely on what makes free markets work.

The editorial goes so far as to suggest imposing a tax (yes, the Wall Street Journal is proposing a tax!), an FDIC-style bailout tax to be precise, "for those in the too-big-to-fail camp."

Even Reagan-era economist Bruce Bartlett is arguing for higher taxes, albeit regressive ones. I actually think the proper context is in terms of the health care debate. Goldman Sachs and other Wall Street firms took advantage of a financial crisis to redistribute wealth upwards. To pay for health care for the indigent, we should unwind that redistribution, perhaps with Charlie Rangel's surtax that adds brackets at the high end. It is impossible for conservatives to argue against redistribution of wealth with a straight face, given the example of Goldman Sachs.

...Simon Johnson:

We are looking at a concentration of political power in the US banking system that we haven’t seen since the 1830s: Shades of Andrew Jackson vs. the Second Bank of the United States. We put up with a lot from our banking elite in this country, but historically we draw the line at financial power so concentrated it can confront the power of the President.

The logic for reform and for breaking up the big banks begins to build. Bank of America’s fall was, in some senses, a fortunate accident for Goldman and JP Morgan. But it has also given them an excessive and unsustainable degree of political power.

Of course, you also have to ask: Who can break that power, when, and how?

...This is a dangerous time, politically. 80% of the public believe that Wall Street benefited from the bailouts, and not taxpayers. That's an unsurprising result. The question is how the public reacts. We could see a right-wing populism take shape if the teabaggers ever get their act together, or a New Deal coalition reformed. I talked to a writer last night who said he felt like he was living through history, as the Depression-era battle lines are being drawn. We don't know who will win yet, but it doesn't look good from where I sit.

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.

Color Me Surprised

No bailout for CIT. Reserved for the 20 richest banks in the world, thank you very much.

CIT Group Inc. shares tumbled more than 75 percent Thursday morning as its inability to get emergency government funding raised expectations that the commercial lender will file for bankruptcy protection.

But it is unclear how such a filing by a company that lends to thousands of small and mid-size businesses would affect shaky financial markets hobbled by an economy in recession and bleeding hundreds of thousands of jobs a month. Small businesses are seen as keys to economic recovery.

I fully expect conservatives to rally around the President letting the free market work and allowing businesses who get themselves in trouble to fail.

Oh wait, they'll probably accuse the President of not caring about small businesses.

Simon sez:

CIT had friends, but not enough - and maybe this tells us something about the shifting political sands. The Financial Services Roundtable (top financial CEOs) came out in force, the House Committee on Small Business reportedly made worried noises, and Barney Frank sounded supportive. But the American Bankers Association (the broader mass of bankers) publicly stood on the sidelines and Senate Banking – and prominent senators – seemed otherwise engaged.

CIT’s small and mid-size customers are important to the recovery. But the reckoning is that this business can be easily sold to someone else – after all, this is exactly what bankruptcy can get right in the U.S.

So the question became: is CIT too big – on its liabilities side – to fail? And if $80bn financial firms are now “too big to fail”, what does that imply for other potential bailout conversations and for our fiscal future? [...] The bottom line: we need fewer $800bn firms and more $80bn firms. If Goldman Sachs were broken into 10 independent pieces, we could all sleep much more soundly.

Instead, something like CIT's core businesses will be absorbed by a Goldman.

You Get A Rescue, You Get A Rescue...

Initially, the top 20 banks received bailout funds from the TARP program. Number 21 on the list was CIT, a small-business lender. And predictably, without bailout money they are a threat to go under, and in turn dissolve a lot of funding for small businesses. So the Obama Administration may rescue them as well.

While CIT has about $75 billion in assets, it was not included in the government's stress tests of major financial firms, and most analysts agree that its failure would have relatively modest consequences for the financial system. But it has grabbed the administration's attention because of its focus on small-business lending, an area of outsize political importance. The New York company is mounting an increasingly public case that its failure would crumple thousands of fragile firms.

Administration officials met yesterday afternoon to review CIT's problems and to consider possible responses, according to a person familiar with the matter. Some officials would like to leave CIT alone, to show that the economy is strong and that the government will not rescue every faltering firm. But at a time when the administration already is working on ways to increase lending to small businesses, other officials see rescuing CIT as a necessary and obvious step.

This isn't playing out on the necessity of rescuting CIT, but the politics. And that's the wrong way to determine this. Whether or not people take lessons from CIT, their presence or absence will have an effect on the economy at large, and we can plot that in a cost-benefit fashion. Basing these decisions on political questions is why we rescued Wall Street and offered no conditions or strings on much of that aid in the first place.

It looks as if the aid package will go through. Hopefully that makes sense on the merits.

Simon Johnson has more on this, coming down on the side of not allowing a rescue to CIT.

The issue of the day is obviously CIT. It’s hard to sort out the real news from clever PR/planted stories in this situation, but it looks like the FDIC is coming out strongly against being involved in a rescue package. Given Sheila Bair’s successful political positioning and strong popular appeal, it’s hard to see how – once dug in – the FDIC can be moved [...]

Essentially, by trying to refloat an undercapitalized banking system, Treasury has created pervasive financial vulnerabilities to CIT-sized shocks. These are now the basis for more bailouts and even great fiscal costs.

If CIT is determined to be “too big to fail” in today’s context, this has far reaching implications. Instead of financial entities with assets of at least $500bn creating systemic risk, we now have to worry about anyone who has not much more than $50bn. This is a profound change – and a point that seems to have escaped the Financial Services Roundtable, which is pushing hard for a CIT rescue.

The Thing Is, We Cannot Default As A Matter Of Law

I've seen a bit of confusion in traditional media accounts of California's budget situation, and whether or not the state should receive a federal bailout. This seems to go toward the idea that without federal aid, California will default on its creditors and go bankrupt, and the federal government has a compelling interest in keeping that from happening. You can argue whether or not it would actually make sense for the state to default - it certainly worked pretty well for Argentina, despite neoliberal fuming to the contrary. And as noted by Peter Schrag in the above-linked entry, the Governor has never asked for any help of this kind, and given his status as a born-again Friedmanite, would probably reject it. But Paul Kedrosky, who has read the relevant law, explains in a piece supporting default that California really cannot do so.

The root issue, of course, is that California is insolvent, and irritating people like S&P analysts keep noticing. The state -- let's call it Latvia by the Pacific -- has a $24-billion budget gap that must be closed for it to continue operating (and I use that word advisedly). Without a clear sense of how that will happen rational creditors are going to be increasingly skittish about filling the hole. Now, does that mean California can't sell enough bonds to backfill the gap this time? You bet it can, and it will. This is part Schwarzenegger/Lockyer Financial Theater, and partly a laughably transparent attempt to demonstrate budgetary semi-competency in hopes of a few basis-points of relief on the inevitable bond sale. That's all.

Because California has $5.7-billion in debt servicing obligations. And while that will grow, debt occupies pride of place in California's constitution -- only education must be paid off before the next slug of cash goes to creditors. Get that? Healthcare, prisons, and other frivolities can all go to rack and ruin, but creditors must be paid, constitutionally speaking. That means, if you're looking at this through the gimlet eyes of muni-bond ghouls, that California has something like $50-billion in budgetary space to make its $5.7-billion in payments. It's pretty easy to calculate that California can make the payment nut, even if it has to close hospitals, release prisoners and stop patrolling the highways to do it.

Now, Kedrosky thinks this is theatrical and should not be rewarded. I say it's the perfect reason for California, and actually all states with this kind of constitutional arrangement, to receive those federal loan guarantees to stop gouging from Wall Street for short-term bonds. Not only do Schwarzenegger and Lockyer know we have to pay back all out debt, so do the bondholders and the rating agencies. It's almost literally impossible for us to default on those bonds, short of the entire state's residents spontaneously getting fired at once. If those loans will obviously get paid back, the interest shouldn't be set at payday-loan rates. And the federal government could very easily remedy that situation, at no cost and probably at a profit, as they reaped from the loans to New York City in the 1970s.

Is it a problem that California operates at the mercy of its creditors? In a sense. Is there a remedy? At the least, there's a way to get some equitability into the process so that we aren't blowing money on Wall Street firms who have been bailed out by those same Feds ten times over. In addition, this kind of thing weakens the municipal bond market, and the federal government has an interest in keeping credit flowing through that.

Actually, I Don't Want Your Bailout

I have about 30 posts I want to write about the developments of the past week and a half, but I want to try and alleviate the confusion over that Washington Post article stating that the Obama Administration spurned a request for aid for the state. Outside of Zoe Lofgren, a Congresswoman, nobody is named in this request, nor is the request defined. It refers late in the article to one letter from Bill Lockyer to Tim Geithner that appears to reference federal loan guarantees, which is, again, not a bailout. And the Governor has tried to rule out borrowing to deal with the cash crisis anyway. So I question whether anyone has discussed any kind of dollar transfer from the federal government to California at all. I think this article hangs on an extremely thin reed.

Now, I do think the government should consider offering loan guarantees, to stop the gouging of California going on from Wall Street. But I do not think that California progressives should WANT a "bailout" in the more traditional sense. It sounds like it would be a nice and tidy solution, and maybe the strings attached could make it easier for the state to get its business done. But that's very speculative, and so we have to consider who such a solution would bail out. Clearly, it would bail out the failed Democratic legislature for refusing to lead and take a long-term view on reforming the state governmental process to allow a return to stability. We know that, with revenues dropping like a rock, in six months the projections will fall short again. They have for about 15 straight months. Which means what, another bailout? That simply isn't a long-term, sustainable solution. Some may say that it would keep the poor from dying, but it seems to me it would only delay such an outcome. Heck, we know that California last issued IOUs during a budget crisis in 1992, during a MILD recession. The structure of state finances simply means that we will lurch from crisis to crisis forever without a permanent fix.

We have solutions and we know what they are; there's really no mystery, other than the fact that legislative Democrats refuse to dare speak their name. A federal band-aid would delay those solutions once again, as they have been delayed for 30 years. We simply will never fix this if we keep deferring the California dream and persuading others to mop up the mess caused by failed leadership.

More generally, a while back on Calitics (can't find it right now) I argued for a permanent federal fiscal stabilization fund that could be tapped if deficits hit a certain percentage. States could contribute with a federal match at 6:1 or something. We need to permanently end the paradox of state budget cuts during an economic downturn, and it should not be a stopgap fix. If people want the federal government to help, it should be mechanized and durable, and enhance economic recovery by kicking in when recovery is needed.

This may be a contrarian view, but I think a bailout would delay the changes desperately needed, nor would it even help the most vulnerable in society over the long-term or even the short-term. We need to deal with the problem at hand.

Myths and Falsehoods About The Backstop

When the traditional media followed the lead of the Hooverists on the right and started calling California's desire for federal loan guarantees to secure short-term borrowing a "bailout," which it isn't, support for the measure collapsed. But not only was California seeking a solution to being gouged by bankers and investors, but other localities would like the option as well, putting the lie to the notion that California seeks "preferential treatment." In fact, other localities want a simple payback to cover losses to their municipal bonds from the Lehman Brothers meltdown, which would cost far more to the Feds than a loan guarantee program. Moody's has downgraded the ENTIRE muni bond sector, not just California, so the costs have gone up across the board. Overall, there is an acknowledgement that the recession has made borrowing costs too exorbitant, and backing from the Feds could save municipalities billions at no cost to the government.

All of the proposals are meant to help struggling state and local governments that are facing a cash-flow squeeze. The economic downturn has eaten into their tax bases as local businesses shut, houses are lost to foreclosure and there is a resistance to raising taxes. The risk to the federal government is that it could lose money if things get worse for municipalities and states. Although backing debt with a guarantee does not require an immediate outlay of funds, the federal government could have to cover losses if there are defaults — which could be substantial if the economy weakens or states and municipalities cannot bring their budget deficits under control. Nonetheless, these overtures by state and local officials reflect a sense — perhaps just a hope — that municipalities suffering from a downturn in revenues and creditworthiness may find some relief in Washington beyond the stimulus money the federal government already is spending.

Emphasis there on "could." Those who know the market and understand it admit that California, and all the other states, would certainly repay the bondholders. The state has never missed a payment in its history, and bond repayment has a stronger priority in the California constitution than most other states. All the bond analysts I've seen say uniformly "California's not going to default." Not to mention the fact that the savings from being rescued from out-of-control interest rates would leave more money available to aovid cuts.

"There's simply no better stimulus than guaranteeing state and local bonds, particularly those that are being used to get through the crisis and avoid layoffs," said Rep. Brad Sherman, one of 15 Democrats in California's House delegation who signed a letter earlier this month asking for the federal loan guarantee.

Plus, supporters of the idea note that Washington stands to make a profit from loan fees as it did after bailing out New York City in 1975, a move that brought the city back from the brink of ruin [...]

"We are not asking for a bailout," said state Assembly Speaker Karen Bass, a Los Angeles Democrat. "We're asking for the federal government to step in where commercial banks can't this year because of the crisis within the financial industry."

In other words, the state didn't create the economic crisis, they didn't create the financial crisis, and they shouldn't be unable to secure normal short-term borrowing because of either.

Also contrary to the myths in the media, the federal government has NOT foreclosed this option whatsoever. The Treasury has been somewhat noncommital on the specifics, but agreed in broad terms that the municipal bond market needs to work better than it does today. In addition, Tim Geithner had this warning for the wordsmiths on the right and in the media:

But, according to a Bloomberg News account of the speech, Mr. Geithner cautioned: “I wouldn’t use the word bailout.”

The GM Bankruptcy

The offer to GM's bondholders was even punier than the offer to Chrysler's. And the bondholders predictably rejected the offer. So off we go into another bankruptcy. Under the terms of the deal, the government would take a much higher stake than they did with Chrysler.

The latest plan for the troubled automaker, which is expected to file for bankruptcy by Monday, calls for the Treasury Department to receive about 70 percent of a restructured G.M.

Including the more than $20 billion that has already been spent to prop up G.M., the government will provide G.M. at least $50 billion to get the company through Chapter 11, people with direct knowledge of the situation said Tuesday. By some estimates in Detroit, tens of billions beyond that amount may be required.

The United Automobile Workers, meanwhile, will hold up to 20 percent through its retiree health care fund, and bondholders and other parties will get the remaining share. Shareholders would be virtually wiped out.

Because of the publicly traded nature of the company, this will be a long and complex bankruptcy filing, unlike Chrysler, which appears to be moving right along. The government would be a silent partner, hoping to sell their shares as soon as the carmaker gets back on its feet.

Taxpayers will have invested around $50 billion into GM before this is over. I'm trying to understand how this makes sense. That's a lot of money to put into the hopes of the Chevy Volt. Maybe you can see this as an extension of the stimulus, saving another million or so jobs by keeping the architecture of the auto industry, and its suppliers, in place. That's about the only way I can stomach it.

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.

The Next Auto Bankruptcy

As soon as I heard that GM and the United Auto Workers reached a deal similar on the merits to the Chrysler/union restructuring deal, I knew that the bankruptcy filing wouldn't be far behind. WaPo says next week, but more interesting than that, they claim that Chrysler will come out of bankruptcy as GM goes in:

The Obama administration is preparing to send General Motors into bankruptcy as early as the end of next week under a plan that would give the automaker tens of billions of dollars more in public financing as the company seeks to shrink and reemerge as a global competitor, sources familiar with the discussions said.

The move comes as the administration prepares to lift the nation's other faltering car company, Chrysler, from bankruptcy protection as soon as next week, industry sources said.

The shifts into and out of bankruptcy are landmarks in the Obama administration's attempt to broker a historic restructuring of the American auto industry in the space of months.

We're looking at $45 billion in loans, making it the largest investment in any company outside of AIG, I think. And the government would take 50% ownership in the deal. And the government is probably buoyed by the success and speed of the Chrysler bankruptcy, where virtually all the bondholders were eventually crammed down and the bankruptcy judge has expedited the process. Presumably they believe the same will happen with GM.

The loss of 2000 dealerships will really put a cramp on local economies. At least in Southern California, some cities have dozens of dealerships along a particular boulevard, and they account for a substantial portion of local sales tax revenue. These communities have already felt the pinch, but closure would devastate them.

Clearly the Administration has made up its mind that this is the best solution. But this is also why a robust public health care option must be invoked. The government has spent something like $55 billion on GM and Chrysler (with another $10 billion or so on GMAC, the financing arm). It could apply that to health care and suddenly make companies like them, and thousands of others, globally competitive.

The Backstop Is Not A Bailout

I heard a bunch of California Republicans yesterday talking about the effort to get the US Treasury to backstop state borrowing as a "bailout," and the media has fallen for it, using phrases like "California is too big to fail" and other snickering.

This is ridiculous.

Let me explain this fairly clearly. California will need to borrow billions of dollars to cover their cash flow issues, the same way they do every year. Traditionally, the money comes in at different times then the money goes out, necessitating short-term borrowing. Because of the state's miserable credit rating, the interest rates that investors charge for this borrowing are ridiculously high. Usually, banks guarantee those loans, but this year they are balking because of the severity of the state's fiscal picture. So the state has asked the Treasury to step in and guarantee the loans instead.

This would cost the Treasury Department approximately $0.00 dollars to perform. Providing loan guarantees simply means that you are insuring against default, which has never happened in the history of California. Not through the Depression or at any other time. What this would do is stop Wall Street from gouging the state with abnormally high interest rates, pure and simple.

Here are the words of an idiot:

Rep. Jerry Lewis (R-Redlands) predicted little sympathy for the Golden State on Capitol Hill. "I have the feeling that it's going to be a long time before Washington decides that they're going to ask Kansas or Wisconsin to help with California's funding problem," he said.

Nobody would be helping anybody. The federal government would guarantee loans that California would pay back. This is about lowering interest rates to make the price of short-term borrowing lower.

I understand that President Ford rejected these types of loan guarantees for New York City in the 1970s. But later he approved them. By the way, after that so-called "bailout," every single dollar was repaid by the city of New York. How on earth could this be characterized as a bailout?

The Ford Administration, under the direction of Treasury Secretary William Simon, imposed certain conditions on the loan guarantees (which will actually delivered directly by Treasury, so this is somewhat different). That could also happen here, and the Shock Doctrine possibilities are not pleasing. Still and all, this savings (which would only represent about $1 billion dollars in all, 1/20 of the current deficit) would not cost the federal government one red cent and thus shouldn't be used to cram down California in a punitive way. The possibility exists, but it's worth the risk.

Why Arnold's In DC Today

It has nothing to do with the announcement on fuel efficiency standards, which by the way is very welcome news, basically bringing the nation under the California standard while still giving the state the flexibility to strengthen those standards after 2016. But no, Arnold didn't need to be at that announcement.

And he's not in Washington because Dick Cheney's undisclosed location beats hanging out in California to watch his special election go down in flames. That's a collateral benefit.

No, contrary to his own rhetoric, he's already given up on the special election. The next move is to convince the Obama Administration to loosen the rules regarding stimulus money. Buried in this article about the Governor skipping town on Election Day is this nugget:

Schwarzenegger planned to meet with Democratic Sens. Barbara Boxer and Dianne Feinstein and members of the California House delegation Tuesday afternoon to discuss the state's fiscal crisis.

On Wednesday morning, he plans to meet with Health and Human Services Secretary Kathleen Sebelius before heading back to California. The governor plans to ask Sebelius for special permission to make $750 million in cuts to the state's Medi-Cal program.

Let me reiterate what Robert and Brian are saying - the Obama Administration needs to just say no here. The reason that rules were set for stimulus eligibility were to encourage a basic level of funding to counter any counter-cyclical spending cuts, which would prohibit a recovery. You can't just waive those rules at this point. California remains locked in a recessionary spiral and Arnold's slash and burn techniques would only make things worse. California may need a bailout, but allowing the state to keep funds while cutting spending does not represent one.

Bring On Johnny Law And Break Up The Banks

Many of us have been insistent on the message that, when it comes to the banking industry, if it's too big to fail, it's too big to exist. Yesterday, the Obama Administration at least hinted at using antitrust law to ensure such a scenario will not happen again.

President Obama’s top antitrust official this week plans to restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market share.

The new enforcement policy would reverse the Bush administration’s approach, which strongly favored defendants against antitrust claims. It would restore a policy that led to the landmark antitrust lawsuits against Microsoft and Intel in the 1990s [...]

Ms. Varney is expected to say that the administration rejects the impulse to go easy on antitrust enforcement during weak economic times.

She will assert instead that severe recessions can provide dangerous incentives for large and dominating companies to engage in predatory behavior that harms consumers and weakens competition. The announcement is aimed at making sure that no court or party to a lawsuit can cite the Bush administration policy as the government’s official view in any pending cases [...]

Ms. Varney is expected to say that the Obama administration will be guided by the view that it was a major mistake during the outset of the Great Depression to relax antitrust enforcement, only to try to catch up and become more vigorous later. She will say the mistake enabled many large companies to engage in pricing, wage and collusive practices that harmed consumers and took years to reverse.

While Ms. Varney is not expected to mention any specific companies or industries vulnerable under the new policy, those who have talked to her about the speech say she is aiming at agriculture, energy, health care, technology and telecommunications companies. She may also be reviewing the conduct of some in the financial services industry, which is now undergoing a wave of consolidation as a result of the financial crisis.

Those last two grafs are the key ones, although I would welcome a return to Clinton-era antitrust enforcement in all aspects of business - the Bush Administration's Justice Department did not file a single case using anti-monopoly statutes.

Simon Johnson, who has long advocated for using antitrust law to break up the banks, sees hope in this new outlook. Since the beginning of the financial meltdown, the industry has consolidated massively, often at the request of the federal government. As a result, consumers are seeing higher charges in bank fees, and considering that banks need profit to negate their capital shortfalls, I expect that to only grow. Antitrust law has a role to play here, though obviously they will run into tension from the Treasury Department. Not to mention wealthy Obama donors, who have brought their opinions to bear on a separate debate, the proposed closure of offshore tax havens:

A report by the General Accounting Office found that 83 of the largest 100 publicly traded US companies had subsidiaries in tax havens or "financial privacy" jurisdictions, as do 63 of the largest US federal contractors (PDF).

Joe Conason wrote earlier this year about the tax havens of bailed out banks around the world. "Don't expect to find out from Fox News Channel or the New York Post, because News Corp. has its own constellation of strange subsidiaries, including 33 in the Caymans alone," he notes.

But back to the class war business. Who is the anonymous "hedge fund" manager sending ominous warnings to Obama in the press? It seems to be the all the rage among rich donors these days -- Orin Kramer has certainly done it before, as has Pimco's Bill Gross, and of course poor little rich girl Penny Pritzker.

Nobody should really be surprised that rich people don't want to pay their taxes. I guess the bigger question is: why aren't there more cosponsors in the House and Senate?

We have very powerful interests, both rich individuals and corporations, asserting their right to break the law, and imploring the Obama Administration to allow them to continue to do so. We'll see where they come down.

Happy Stress Test Day

Well, huzzah, the stress tests are here, and good news, everything's OK, just a matter of $75 billion dollars and we're ready to roll, just a rounding error, really. I can see why everyone's so excited. After all, if you can come up with a solution to a capitalization problem that involves "get(ting) the government to pay them more than three times the market value of their stock," I don't think you'd have anything to worry about either. And of course, the more that investors consider the banks to be healthy, the more healthy they quantitatively are, in a sense.

So my best guess is that this is a quite deliberate effort (there are credible reports of active efforts to squeeze short sellers) to pump up the bank stocks to facilitate their fundraising. John Dizard had urged central banks sponsoring road shows nearly a year ago to help them raise the needed equity. I'd prefer an open sales effort to this mingling of hucksterism with supposed regulatory policy. And they have clearly been intermingled. Note how the prime objective of the stress tests has been above all to restore confidence. Huh? The most important aim should be to assess their condition so as to determine what if anything needs to be done. To subordinate proper regulatory action to reassuring "the markets" is backwards. If the public had faith in the integrity of the process, the need for a confidence exercise would vanish.

One problem for the banksters: the outliers. Several bigger banks do need a good degree of capital, and at least in the case of GMAC, a lot more capital, comparatively speaking.

The federal government has ordered the financing arm of General Motors to raise $13.1 billion in new capital to ensure the firm's stability in the face of heavy losses in mortgage and auto lending and costs related to taking over new loans for Chrysler dealers and customers, said sources familiar with talks between government and industry officials.

The sum is among the biggest required for any U.S. financial institution, and could prove difficult for GMAC to raise because of the limited nature of its business and poor quality of its loans. The firm has struggled in the past to raise money from private investors and has already received $5 billion in federal assistance. It is likely that the federal government would end up providing much, if not all, of the needed capital, but it remained unclear where that money would come from.

About $4 billion of the total would be needed to cover the cost of assuming Chrysler Financial's dealer and retail auto loans, said one senior financial industry executive.

As James Kwak notes, this means that GMAC has negative capital at the moment, which, um, means insolvency.

Some smart people at the Times' Room for Debate series give their thoughts. I basically consider this a sham based on rosy scenarios and grade-grubbed by the subjects, but as has been said, we lost the debate inside the White House, and they're going to do what they must to keep the banks afloat. I think we have to focus on this Pecora Commission idea that's passed both houses of Congress (some helpful background here), which can lay the groundwork for major regulatory reform, through investigation of what happened to create the crisis. Obviously this comes out of Congress, so who knows what kind of teeth it will have, and historically blue-ribbon panels don't have much of a track record, but take a look at the potential of this thing:

The Financial Markets Inquiry Commission is empowered to hold hearings and to issue subpoenas either for witness testimony or documents and will have more than twenty substantive areas of focus, including:

the role of fraud and abuse in the financial sector
state and Federal regulatory enforcement
tax treatment of financial products
credit rating agencies
lending practices and securitization
corporate governance and executive compensation
Federal housing policy
derivatives
GSEs
short-selling

Additionally, the bill requires the commission to examine the role of fraud and abuse towards consumers in the mortgage sector, examine the extent to which the legal and regulatory structure governing financial institutions creates the opportunity for financial institutions to engage in regulatory arbitrage, examine the role of credit default swaps and the impact of financial institutions that are “too big to fail” on market expectations, and examine the causes of major financial institutions that failed or were likely to fail without government assistance. The Commission will report their findings and conclusions to Congress by December 15, 2010 and is required to refer any person who may have violated U.S. law in relation to the financial crisis to the Attorney General (AG) or state AGs.

We can put people in jail. We can set the future. We can shrink the financial sector. And we can do it through this panel. Let's push for a real commission.