"We Can't Get There From Here"
by bobswern, Wed Feb 11, 2009 at 09:36:50 PM EST
If there's one thing the public, the press and the investment community will agree upon, it's that they don't like uncertainty. And, when it comes to the Wall Street TARP II bailout (and related) proposals not being defined with any degree of detail, as of this writing, by U.S. Treasury Secretary Tim Geithner, that's exactly what the Obama administration has been telegraphing to just about everyone over the past 36 hours.
As noted Progressive Economist Dean Baker, the first economist to point out the bubble in the US housing market back in 2002, stated today in his article entitled: "The TARP Dog and Pony Show," Secretary Geithner said in his press conference Tuesday that he...
...wanted to partner with private firms to arrange for purchases of the banks' bad assets. The Treasury would provide guarantees that would limit the losses that private firms would incur, as it has done with hundreds of billions of assets held by Citigroup, J.P. Morgan, and Bank of America.
In principle, government guarantees could make bad assets attractive to private investors. The problem is that the guarantees are in effect a subsidy to the banks, since they add an enormous amount of value to their assets. It may be difficult to know the full extent of the subsidy, since many of the prospective buyers of the banks' junk are likely to be private-equity funds and hedge funds, both of whom have very little by way of disclosure requirements.
As Baker continues to tell us in his article, it's really quite simple: We have a lot of insolvent banks. There's lots of interest in keeping the banks functioning, but "...we have zero public interest in giving taxpayer dollars to bank shareholders or to the executives that wrecked the banks they ran."
Baker sees all of this in an elegantly concise context, commenting on Geithner's upcoming dog and pony show to sell his quite vague proposals to the public:
Geithner can design as complex a dog and pony show as he wants, but if his plan takes up hundreds of billions of taxpayer dollars and does not involve wiping out the shareholders and sending the bank executives packing, then he has ripped us off.
Robert Borosage, Founder and Chair of the Progressive Majority Political Action Committee and President of the Institute for America's Future (and also the Issues Director for Jesse Jackson's 1988 Presidential Campaign) puts it quite succinctly right in the headline of his great piece today on his blog: "Can't Get There From Here."
The plan isn't likely to get the administration where it needs to go for two simple reasons. It is wrong about where we are starting from. And it is wrong about where we're going to. If you don't know where you are and don't know where you are going, it is very hard to get there.
Borosage goes on to reiterate what we're now hearing from a veritable cacaphony of economists in the Progressive world: the plan won't work because the major banks in the US are insolvent.
This is basic stuff! But, we're just not getting it as a country, are we? As Borosage boils the problems in Geithner's ideology and vague proposals down to seven very clearly understood words: "The plan won't admit where we are:"
...the major banks in the US are insolvent. They aren't addled by a temporary fever. They are broke. If they actually marked their toxic paper to the market price -- where there is one -- their losses would wipe out their capital, even including the billions kicked in by the government in the first round. Clearly, the Obama administration -- like the Bush administration before it -- hasn't accepted that reality.
The plan won't get us where we need to go: we need to restructure -- and downsize -- our financial sector. Its baroque excesses -- billions in bonuses, golden parachutes, million dollar office renovations, $35,000 "commodes on legs," $50 million private jets, legions of employees --were constructed atop a housing bubble that finally burst. Now the banks and financial houses must be downsized, chastened, and regulated. As President Obama stated, "the party is over." But the administration's plan envisions a restoration, not a restructuring. We don't want to go there even if we could afford it.
Borosage follows-up by referencing the lead economics writer of the Financial Times, Martin Wolf, who tells us that Geithner's plan--what very little we do know about it--has three erroneous assumptions:
1.) No nationalization
2.) No losses for bondholders
3.) No new money from the Congress
But, lo and behold, Borosage reminds us of a very basic fact, ruling out nationalization means we're ruling out how we have always dealt with bad banks until now: it's what happens when the FDIC moves in and restructures, merges, or sells the bank back to private investors! If we don't do now what we've always done in the past, very simply, we--the taxpayers--"are left paying tribute to zombie banks!" And, that's what Geithner is vaguely proposing we do now.
LOSSES FOR BONDHOLDERS
If bondholders don't take a loss here, then the taxpayers will. When banks are declared insolvent, shareholders lose their investment. That's the way it's always been done. At that point, the creditors of the insolvent bank eat losses, as well. But, as Borosage also reminds us, "...with neither the shareholders nor the creditors taking the hit, only taxpayers are left."
NO NEW MONEY FROM CONGRESS
No new money from Congress "...means that the plan is immensely complicated, combining guarantees from the Federal Reserve, small capital injections, inducements to lure private investors."
Borosage then comments on the one "potentially redeeming feature" of Geithner's plan: "The stress test." Borosage indicates that if it's an honest stress test, then the determination will be made that many of our largest banks are, indeed, insolvent.
At that point, Borosage contends, we then should implement our standard form of "nationalization," involving the FDIC, as noted four paragraphs above.
Borosage concludes that in order to get through this, the Obama administration has to stop conveying all this uncertainty and simply face the facts, invoke "the N-word," and move forward accordingly.
Dean Baker agrees with Borosage, and I do, as well.
Baker opposed the US government bailout of Wall Street banks on the basis that the only people who stood to lose from their collapse were their shareholders and well-paid CEOs. As regards any alleged, negative effects of not doing the bailout, he has explained repeatedly that, "We know how to keep the financial system operating even as banks go into bankruptcy and receivership," citing US government action taken during the S&L crisis of the 1980s. He has ridiculed the US elite for favoring it, asking, "How do you make a DC intellectual look less articulate than Sarah Palin being interviewed by Katie Couric? That's easy. You ask them how failure to pass the bailout will give us a Great Depression."
(I love that Sarah Palin line!)
David Reilly, over at Bloomberg sums up Borosage and Baker's sentiments far better than I could, myself, labelling it all: "Stealth Recapitalization,""Geithner Can't Find Gun, Let Alone Silver Bullet."
Geithner Can't Find Gun, Let Alone Silver Bullet
Commentary by David Reilly
Feb. 11 (Bloomberg) -- That's it? That's all Geithner had to offer?
...Still, the lack of details means investors don't know if that [Stealth Recapitalization] is the goal, or if this is simply an attempt to use private investors as a vehicle for government-subsidized purchases of bad assets from banks.
In other words, it could still turn out to be a taxpayer-funded stealth recapitalization reminiscent of the first Troubled Asset Relief Program proposed last fall by former Treasury Secretary Henry Paulson.
Another worry: Geithner said the government would undertake special examinations of banks to determine if they have sufficient capital to survive the crisis.
This is new? Investors thought that is what bank regulators do all the time...
No worries, though. Geithner isn't proposing that the government seize banks that don't measure up to these examinations. He plans to shovel more money their way, bailing out common stockholders, management and the directors.
Small wonder then that Geithner received such a hostile reaction...
All this muddling and uncertainty, when the answer is right there in front of us for all to see.
What do you think?