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Geithner's Plan: It's Not Transparent and It's Still a Bailout
Testifying for a second day before the Senate Budget Committee about the plan he sketched out yesterday to save the banking sector, Tim Geithner promised to inform Congress as quickly as possible if more taxpayer money is needed. He said a supervisory review of banks -- a so-called "stress test" -- would help determine that. It's likely the stress tests will show the banks are in far worse shape than Geithner's plan can deal with. But it seems doubtful Geithner will return to the well any time soon. Neither Republicans, Blue-Dog Democrats, or progressive Democrats like the idea of bailing out Wall Street -- and revelations about Wall Street's malfeasance, misfeasance, and just plain stupidity over the last few years are likely to multiply in the weeks and months ahead.
So far, the Geithner plan requires no new money beyond the remaining $350 billion Congress has already okayed to bail out Wall Street. But in truth, the plan assumes trillions more from the Fed, based on the Fed's seemingly infinite capacity to backstop almost anyone putting up almost any collateral. The idea is to lure private investors into buying up the banks' toxic assets, by having the Fed limit their downside risks. If private investors pay too much, the Fed picks up the tab.
Taken as a whole, this is hardly a model of transparency. To date, the Fed has already committed some $2.5 trillion to rescuing the financial system, yet no one outside the Fed knows exactly how or where this money went. The Fed is subject to almost no political oversight. Yet if the trillions of dollars the Fed has already committed and the trillions more it's about to commit can't be recouped, the federal debt explodes and you and I and other taxpayers are left holding the bag.
In other words, Geithner and Fed Chair Ben Bernanke continue to do pretty much what Hank Paulson and Bernanke did: They hide much of the true costs and risks to taxpayers of repairing the banking system. Those risks and costs should be put on the people who made risky bets on the banks in the first place - namely bank shareholders and creditors. Shareholders of the most troubled banks should be wiped out entirely. Bank creditors- except depositors - should take major hits. And top executives who were responsible should be canned. But Geithner and Bernanke don't want to take these steps for fear of spooking the Street. They think it's safer to put the costs and risks on taxpayers -- especially in ways they can't see.
Geithner's plan is better than the first Wall Street bailout but make no mistake: It's not transparent, and it's still a bailout.
So far, the Geithner plan requires no new money beyond the remaining $350 billion Congress has already okayed to bail out Wall Street. But in truth, the plan assumes trillions more from the Fed, based on the Fed's seemingly infinite capacity to backstop almost anyone putting up almost any collateral. The idea is to lure private investors into buying up the banks' toxic assets, by having the Fed limit their downside risks. If private investors pay too much, the Fed picks up the tab.
Taken as a whole, this is hardly a model of transparency. To date, the Fed has already committed some $2.5 trillion to rescuing the financial system, yet no one outside the Fed knows exactly how or where this money went. The Fed is subject to almost no political oversight. Yet if the trillions of dollars the Fed has already committed and the trillions more it's about to commit can't be recouped, the federal debt explodes and you and I and other taxpayers are left holding the bag.
In other words, Geithner and Fed Chair Ben Bernanke continue to do pretty much what Hank Paulson and Bernanke did: They hide much of the true costs and risks to taxpayers of repairing the banking system. Those risks and costs should be put on the people who made risky bets on the banks in the first place - namely bank shareholders and creditors. Shareholders of the most troubled banks should be wiped out entirely. Bank creditors- except depositors - should take major hits. And top executives who were responsible should be canned. But Geithner and Bernanke don't want to take these steps for fear of spooking the Street. They think it's safer to put the costs and risks on taxpayers -- especially in ways they can't see.
Geithner's plan is better than the first Wall Street bailout but make no mistake: It's not transparent, and it's still a bailout.
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Why do Robert Reich's comments always disappear? There was a good thread starting and now it is gone. It happened the other night too. Where do they go?
For what its worth I happen to think the plan is designed to be obtuse. It seems to me that they have a backdoor plan that will inflate the debt away by having the Fed print money to buy the toxic assets.
If so Geithner's in a tough spot. You can't just announce that inflation is your plan. Instead you need subterfuge. So watch for more high profile announcements like the upcoming mortgage plan, bank "stress tests", new financial rules and overhaul of Regulatory commissions, etc. This will likely be followed one or two show nationalizations with some shareholders taken to the cleaners to appease the growing public anger (I am routing for Citi and BofA- but Ken Lewis probably saved himself with good behavior during the Merrel debacle).
In the meantime the real alchemy will be going down at the FED.
February 12, 2009 12:08 AM | Reply | Permalink
inflate the debt away
This will also have the happy effect, in five years or so, of bringing rents up enough that house values can at least come up to par with their encumbrances.
February 12, 2009 1:58 AM | Reply | Permalink
Saladin asks:
"Why do Robert Reich's comments always disappear? There was a good thread starting and now it is gone. It happened the other night too. Where do they go?"
I noticed this too, but I first noticed it happening a couple of weeks ago with an MJ Rosenberg column.
February 12, 2009 10:44 AM | Reply | Permalink
Geithner's plan is . . . not transparent, and it's still a bailout. Robert Reich
Wow; you heard it here first, folks!
We're all trying to decide what we, were we in charge (we're not and no one's going to listen to us anyway), would do with these zombie banks (Citi and BoA for sure; others to be determined).
But we have little idea of what the effects on other banks and financial institutions would be if we put these zombie banks into FDIC receivership or conservatorship.
It's all well and good to say that "bank creditors" should take "major hits." But what if the particular "bank creditor" is a currently sound bank or an investor in a currently sound bank?
To ask it differently -- do we have any idea of what the ramifications of letting these mega-banks go under are?
February 12, 2009 12:25 AM | Reply | Permalink
Keep double talking Ellen. Early, you were pushing us to let the system wash out. Now you're leaning towards a bailout of the rich? What gives?
February 12, 2009 1:52 AM | Reply | Permalink
Two different matters -- entirely.
I'd let the zombie banks fail; Reich's not prepared to do that. He's prepared only to criticize Geithner's and Bernanke's policies because certain creditor classes he doesn't favor aren't suffering enough. That is small beer.
Meaningful criticism must explain how Geithner's and Bernanke's policies will harm the economy more than the policy that Reich favors (assuming he has a policy in mind).
February 12, 2009 2:43 AM | Reply | Permalink
It is really strange to me that you seem to be so annoyed by Reich. I recall earlier that you posted an policy prescription of bottom up recapitalization by sending direct checks to American households (10k plus) instead of bailing out the banks, that you have consistently argued to let fail.
To me it seems like a strategy that Reich would also embrace (he appears perfectly happy to have 'certain creditor classes' that currently own the Zombies fail). But whenever he posts you immediately lambast him. Whats the beef?
February 12, 2009 3:06 AM | Reply | Permalink
Look -- there are two parties in these arguments about what to do with these "too big to fail," "systemically significant" zombie banks -- the Recapitalizers and the Liquidators.
Reich's a Recapitalizer who's annoyed that every recapitalization plan put forward will result in the unjust enrichment of bank creditors (and perhaps, shareholders).
I say to Reich, "Stop carping. Either come over to the party of Liquidationists or say how you'd recapitalize these banks without rewarding the creditors. And until you're ready to bite that bullet, hold your tongue."
February 12, 2009 10:28 AM | Reply | Permalink
I was under the impression that Mr. Reich would nationalize the larger of zombie banks, wipe out shareholders, reorganize, then sell the back to private sector. Maybe I'm wrong but that sounds like best plan I've hear. Currently, Obama and the rest of Washington DC are trying to get the tax payer to swallow the bad assets thru one big bad bank idea. I think that is the worst possible out come their is because the banks are counting on never taking any responsibility. The banks will do it again and again if you let them. There has to be consequences. Right now there aren't any.
Obama said today that bank nationalization was off the table because the nations historical temperament towards such action. The "too many banks argument" doesn't wash because as Josh pointed out we don't have to nationalize all of them just three of four too big to fail ones. Since he said no to nationalization, that leaves us with the government buying assets at inflated prices and the FED eventually printing money to devalue the dollar. Here comes inflation just when you need it least. Our country is hymned in by or anti-socialist ideology. Plus, we aren't really free marketeers either so letting the banks under as you suggest and thus the rich go under, is off the table too. There for the government must bankrupt itself for the good of the status quo, which is what I've argued was the plan all along. "Drown the government in the bath tube" is working like a charm. With the government crippled, so is democracy. The will of the people has diminished from token representation to vapor in a single decade. The Oligarchs have won. They are just trying to get us to lay down and die quietly. Can't you hear the music?
February 12, 2009 3:26 AM | Reply | Permalink
Obama said today that bank nationalization was off the table because the nations historical temperament towards such action
When you hear Prez say something stupid and self-defeating like that, do you think maybe the hustle is on?
Could it be that the banks, even now, are being gently lulled by this re-assurance which would seem to say that the one generally agreed upon principal of banking system re-habilitation. "kill'em quick", (which means temporarily nationalize or face Lehman Brothers Squared) cannot effectively be vindicated.
But that principal must and will be vindicated, albeit Prez will evince regret at having to go so against the National character, and his own moderate tendencies...
February 12, 2009 3:41 AM | Reply | Permalink
I edited and reposted this as a blog entry. It's serious that he won't even make they effort to convince the public. I don't think there is a grand strategy like some. Obama is doing what he thinks he can with the cards he's dealt. But the best players in the world often take bet the risks in order to alter a loosing game, and sometimes it works. I think if he does what the banks want him to here, his will ultimately be a fail presidency. He has to weaken the oligarchs in order to govern effectively in the rest of his presidency. If he doesn't American democracy will end explicitly instead of metaphorically as it already has.
February 12, 2009 4:06 AM | Reply | Permalink
take big risks....be a failed presidency.
February 12, 2009 4:08 AM | Reply | Permalink
Well if he is a 'card player' he might realize his best bet is to nationalize the zombie banks. Many top economists, specifically DeLong, Krugman and Roubini but not limited to them, that short term nationalization is the best, and probably only effective way, to tackle the root cause of the problems with our economy. If Obama is the orator, and leader, we all think he is there is little reason why he can't effectively make the case. First off the proposal isn't to permanently nationalize the zombie banks and the banks will be returned to the private sector post haste...so the 'socialism' vampire meme from hell can have a stake easily driven through its heart. Secondly I feel the temporary nationalization option gives a better opportunity for the economy to recover quickest. The stimulus plan isn't going to get the job done quickly, that'll take time. And trying to do it by a slow motion 'bailing out' of the banks will be long and very costly. A case could be made by comparing Japan in the 90's, and how long it took for that country to turn its economy back around taking half measures as opposed to Sweden which temporarily nationalized the banks with very positive economic results, at a much lower cost to the taxpayers, when compared.
The people when they go to the polls next will view either his success or failure based on the economy...and the economy stands a much better chance of improving by that time if Obama takes the bold move to temporarily nationalize the failing banks.
February 13, 2009 12:07 AM | Reply | Permalink
Some good points, but can I suggest some paragraph breaks.
It gets hard the eye to follow without some dead space here and there.
February 12, 2009 9:47 PM | Reply | Permalink
I'd say we need to work to a better definition of "bank creditors".
Reich's clarified that he excludes depositors. What else do we exclude? For starters I'd assume we're excluding accounts payable -- no point in stiffing the electric company or the cleaners.
So what's left and how do we get there by legal bankruptcy procedures? If we're just talking bondholders of the bank holding company, then Reich may have a point.
February 12, 2009 8:11 AM | Reply | Permalink
Priorities are set forth on the FDIC's website, here.
The office cleaners look to be services provided "within thirty (30) days prior to the receiver's taking possession" and to have the second highest priority for payment.
Note: Insolvent banks are closed down under special statutes related to the FDIC's interest in maintaining its trust fund. Unlike bankruptcy where a private creditor can initiate bankruptcy against a failed firm, only the FDIC can start the process of liquidation.
February 12, 2009 10:07 AM | Reply | Permalink
That's a good find, Ellen. Care to hazard what it would result in against, say, Citigroup's balance sheet?
February 12, 2009 10:29 AM | Reply | Permalink