"Heckuva job, Timmy..."
by bobswern, Mon Mar 02, 2009 at 04:46:41 PM EST
Yet again, Robert Kuttner, economist and urban theorist, co-founder and co-editor of the American Prospect Magazine, Boston Globe columnist and author of , "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency," nails it. In fact, perhaps this time, he delivers a grand slam homer in: "Geithner's Folly."
As Kuttner tells us:
President Obama deserves immense credit for being willing to spend serious money to prevent recession from becoming depression. He has resisted pressures from fiscal conservatives to put budget balance first, or to make social insurance bear the brunt of spending cuts down the road. And he has used his gifts as a teacher to enlist the broad support of the American people for a far-reaching strategy of public investment.
However, all of this good work will be for naught if his team doesn't get the banking system functioning again. And so far the grand design of Treasury Secretary Tim Geithner is entirely on the wrong track.
Kuttner then continues, slamming Geithner's negotiated details with regard to the Citi deal, announced last week, saying nothing less than: "...the terms were appalling...the government gets more preferred stock with little voting power...Treasury has declined to convert its de facto ownership into effective management control, preferring to bargain with Citi's executives at arm's length."
Kuttner tells us the federal examiners were asleep at the wheel.
"Where have the examiners been all along? Why wasn't there serious investigation of bank balance sheets all along? Why should stress tests be performed only after disaster has struck (shades of Hurricane Katrina)?"
He then makes a point of calling out an entity near and dear to him: "...the worst culprit among the feeble regulators," referencing the Federal Reserve Bank of New York, "...whose examiners are responsible for assessing the safety and soundness of the holding companies of Wall Street's largest banks. It was high risk speculative activities by holding company affiliates that put the big banks under water."
Who dropped the ball? You may recall that Secretary Geithner, before he assumed his present post, was president of the New York Fed Bank. According to a withering feature piece from Bloomberg, he was asleep at the switch, and far too cozy with the banks. Heckuva job, Timmy.
So, let's take a little closer look at the New York Fed Bank Branch, shall we? And, please pardon me while I simultaneously parse Kuttner and expound upon his thoughts with a few of my own (a little "license," as it were).
EPIPHANY: You see, a lot of what Kuttner tells us about Geithner's actions with regard to the Citi deal also applies to what Geithner's doing with the AIG deal. In fact, if you look closely at what's occurring, this cycle is being repeated for all of our nation's economic "problems."
OUR ECONOMY'S REALITY, SIMPLIFIED
If one were to draw "food chain" with the Treasury Department's primary agents of federal paper
(a list of 19 firms, trimmed down from 22 just within the past year, which represents most of the leading players on Wall Street--no coincidence there) and the owners of the NY Federal Reserve branch (all of the member banks in the NY region) in the next position; followed by the U.S. Treasury Department (with the Federal Deposit Insurance Corporation ["FDIC"]) next; then, the Federal Reserve Board; immediately underneath the would be the Federal Reserve System; then, AIG and Citigroup (along with Fannie Mae, Freddie Mac and Bear Stearns), then continue back to the top of the food chain (with the 19 firms currently acting as gov't agents--let's call them the status quo for purposes of one of the points I'm making), you'd have a pretty good picture of where I'm going with this diary, as in right here (which is, in lay terms, all you ever needed to know about our current economic crisis in one, simple list):
THE TOP OF FOOD CHAIN: 1ST LINK (a/k/a: the status quo)--
THE WALL STREET STATUS QUO:
SOME LEAD PLAYERS IN THE NY FED AND/OR FEDERAL RESERVE PRIMARY DEALERS:
- BNP Paribas Securities Corp.
- Bank of America Securities LLC
- Barclays Capital Inc.
- Cantor Fitzgerald & Co.
- Citigroup Global Markets Inc.
- Credit Suisse Securities (USA) LLC
- Daiwa Securities America Inc.
- Deutsche Bank Securities Inc.
- Dresdner Kleinwort Securities LLC.
- Goldman, Sachs & Co.
- Greenwich Capital Markets Inc.
- HSBC Securities (USA) Inc.
- J. P. Morgan Securities Inc.
- Mizuho Securities USA Inc.
- Morgan Stanley & Co. Incorporated
- UBS Securities LLC,
$$$--Sells Paper And Acts As Agents For Gov't Among Other Things--$$$
THE FOOD CHAIN: 2ND LINK--
U.S. TREASURY DEPARTMENT (Geithner, etc.)
* Federal Deposit Insurance Corporation
(funded by Treasury w/backstops for banking industry which is supposed to repay Treasury Department in times of banking emergencies)
$$$--Treasury Disburses Funds To Third Parties And/Or Advises Fed To Do Same--$$$
THE FOOD CHAIN: 3RD LINK--
FEDERAL RESERVE BOARD (Bernanke, etc.)
THE FOOD CHAIN: 4TH LINK--
FEDERAL RESERVE SYSTEM
12 Branches: New York branch and 11 others
THE FOOD CHAIN: BOTTOM LINK--
AIG, CITIGROUP, FANNIE MAE, FREDDIE MAC, BEAR STEARNS, OTHER BENEFICIARIES, ETC.
$$$--AIG: "Settles" CDS's and CDO's w/participants in 1ST LINK (see top of list)--$$$
$$$--Citi: "Settles" MBS's and CDS's and CDO's w/participants in 1ST LINK (see top of list)--$$$
$$$--Fannie Mae and Freddie Mac: Buy "conforming" mortgages from lenders/brokers in 1ST LINK (see top of list)--$$$
$$$--Bear Stearns: "Settles" CDS's, MBS's and CDO's w/participants in 1ST LINK (see top of list)--$$$
Conclusion: Government money flows from taxpayers back to entities in first link along w/other usual suspects.
LATHER. RINSE. REPEAT.
THE FEDERAL RESERVE BOARD AND THE FEDERAL RESERVE SYSTEM ARE TWO VERY DIFFERENT ENTITIES
The Federal Reserve Board is appointed by our government. The Federal Reserve System is owned and run by the banking industry.
Perhaps the overriding reason this is the case is simply due to the fact that the Federal Reserve System is, for all intents and purposes, autonomous. It is owned and operated by the banking industry, although we're led to believe that it's under public control; the reality is it's 12 bank branches, established in 12 districts; and the "System's" banks are owned by the banks within their respective districts. (i.e.: The New York Fed, which Secretary Geithner ran prior to being appointed Treasury Secretary, is actually owned by the banks in the New York Fed District--i.e.: Wall Street; and, these folks, if you include the list or Federal Reserve Primary Dealers [see below] represent the lion's share of those receiving Fed bailout assistance now; at least once one realizes where all of those AIG bailout funds are going, in any event.)
The Constitution acts as the framework for governance of most entities here in the U.S. But, the Federal Reserve System marches to the tune of a different drummer: The Federal Reserve Act of 1913.
Historically, if you read the full Wiki entry linked in the previous sentence, the New York Federal Reserve branch is easily more powerful than all of the other branches, combined. In the 96 years the Fed's been in existence, little has changed to deviate from this reality, too. In fact, from a practical standpoint, it could be said that (in many ways) the New York Federal Reserve branch is more powerful than the Federal Reserve Board, itself.
Here's a little insight into who's actually calling the shots over at the NY Fed (the largest folks that either own it and/or provide it with most of its revenue acting as the Fed's agents):
LIST OF FEDERAL RESERVE PRIMARY DEALERS
The primary dealers form a worldwide network that distributes new U.S. government debt. For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.
As of February 11, 2009 according to the Federal Reserve Bank of New York the list includes (same as list, above; no coincidence there):
* BNP Paribas Securities Corp.
* Bank of America Securities LLC
* Barclays Capital Inc.
* Cantor Fitzgerald & Co.
* Citigroup Global Markets Inc.
* Credit Suisse Securities (USA) LLC
* Daiwa Securities America Inc.
* Deutsche Bank Securities Inc.
* Dresdner Kleinwort Securities LLC.
* Goldman, Sachs & Co.
* Greenwich Capital Markets Inc.
* HSBC Securities (USA) Inc.
* J. P. Morgan Securities Inc.
* Mizuho Securities USA Inc.
* Morgan Stanley & Co. Incorporated
* UBS Securities LLC.
Three notable changes to the list have occurred in 2008. Countrywide Securities Corporation was removed on July 15 due to its acquisition by Bank of America. Lehman Brothers Inc. was removed on September 22 due to bankruptcy. Bear Stearns & Co. Inc. was removed from the list on October 1 due to its acquisition by J.P. Morgan Chase. On February 11, 2009, Merrill Lynch Government Securities Inc. was removed from the list due to its acquisition by Bank of America.
Kuttner continues to mention the stress tests, and tells us that we're going to find out what we already know: "Surprise, the big banks are bust." He then concludes by mentioning the Federal Deposit Insurance Corporation ("FDIC"), which is really funded--contrary to popular perception--via an ancilliary account within the Treasury Department, into which the member banks also deposit annual payments. (The Treasury Department, provides extended lines of credit when bank failures exceed the industry's ability to cover them. In this instance, we're probably talking about decades for the industry to catch-up with the havoc wrought here, however.)
What the FDIC does well, historically, as Kuttner reminds us, is provide for the management of failed banking entities. And, with so many banking (insert: "mortgage,""insurance," etc., here, when discussing AIG, Fannie, Freddie, or Bear Stearns, etc.) sector folks unemployed right now, as Kuttner also reminds us, there's lots of talent out there ready to pickup the slack on the government's behalf now, too.
But, even with the F.D.I.C. program discussed below, good ole' Timmy is going back to the same status quo agenda (see "Food Chain" list towards top of this diary) that seems to be the blueprint for everything else that's occurring now. This past Friday: the Federal Deposit Insurance Corporation ("FDIC") formally extended--and has now grossly contorted--a Bush Administration Treasury program that was orignally established this past Fall to free up consumer credit markets, to the point where taxpayers are now insuring virtually all banking industry "senior unsecured debt that converts into (bank) shares no later than the guarantee's expiration, which can last through June 30, 2012."
Known as the FDIC's Temporary Liquidity Guarantee Program ("TLGP"), today's announcement means that the FDIC is now getting into the business of insuring investors' funds when they buy into the preferred stock or warrants of a given bank, where (which covers most transactions of this nature) those investors may then convert their notes and/or preferred shares to common stock shares of that entity.
"FDIC to Guarantee Bank Debt That Converts Into Equity."
By Gabrielle Coppola and Jody Shenn
Feb. 27 (Bloomberg) -- The Federal Deposit Insurance Corp. plans to back new debt sold by banks that would later convert into common shares in an expansion of its Temporary Liquidity Guarantee Program.
Under the interim rule approved today at an FDIC board meeting, the agency's backing will be available to senior unsecured debt that converts into shares no later than the guarantee's expiration, which can last through June 30, 2012.
"This modification will give institutions greater flexibility to attract longer-term sources of funding that otherwise may be unavailable in today's distressed funding markets," FDIC financial analyst Steve Burton said today.
Putting it bluntly, the FDIC has now decided that it's going to contort a program originally established to loosen up interbank lending and credit markets for a few months, so that the government may get into the business of guaranteeing investors that make preferred share purchases in banks now and going forward (at least until June 30, 2012).
Imagine that you're an investor buying stock in a company and being told that the U.S. taxpayer now guarantees that if that company (in which you're purchasing preferred stock) goes bankrupt, you'll get your money back?
The reality is that only major institutions (again, see "Food Chain" list, above), such as hedge funds and investment banks, will be purchasers of most of this banking industry preferred stock in coming weeks, months and years; and we're the ones insuring they don't get burned.
Yes, in conclusion, Kuttner asks:
" Why is Geithner dithering? Because he is asking the wrong question. The question he is posing is: how can the government save Citigroup?* The right question is: how can the government rebuild the banking system?
*=Insert name of failed bank, insurance or mortgage institution here.
"Heckuva job, Timmy," indeed.
Tags: AIG, banks, Bear Stearns, Citigroup, depression, Fannie Mae, fdic, Federal Deposit Insurance Corporation, Federal Reserve, Federal Reserve System, Freddie Mac, New York Federal Reserve Branch, President Barack Obama, Recession, U.S. banking industry, US Treasury Secretary Tim Geithner (all tags)