FromDC2Iowa: Treasury Secretary Tim Geithner

Showing posts with label Treasury Secretary Tim Geithner. Show all posts

Wednesday, January 27, 2010

A $14 Trillion Opportunity Cost

January 27, 2010, 8:00 a.m.

Understanding Trillions
(brought to you by FromDC2Iowa.blogspot.com*)
When President Obama explains the "State of the Union" to Congress and the rest of us this evening, presumably he'll have something to say about the $1.4 trillion deficit in his budget that will be added onto the national debt.

Even for those who know that, mathematically, a "trillion" is a million million -- a one with 12 trailing zeros -- it's hard to get our heads around any other-than-mathematical meaning.

We need more than counting zeros; we need to know "what does a trillion dollars look like?"

Nomi Prins and Mother Jones magazine have made an effort to help us understand. Prins' book is It Takes a Pillage, Nomi Prins, It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals from Washington to Wall Street (Wiley, 2009).

In the January-February issue of Mother Jones she offers us the graphics that show the relative size of the giveaways from U.S. taxpayers to the banks that total $14.4 trillion dollars -- $7.2 trillion, each, by way of the U.S. Treasury and the Federal Reserve Bank. Nomi Prins, "The Real Size of the Bailout," Mother Jones, January-February 2010. And see, "Behind the Real Size of the Bailout," Mother Jones, January-February 2010.

She's created a very revealing set of numbers, comparisons and totals.

But what really drives the point home is the piece by Mother Jones' Marian Wang. It's a creative effort at researching and revealing what is perhaps the most dramatic example I've ever seen of the meaning of "opportunity cost."

(If you're not yet familiar with that term, it's economists' talk for the experience of having too much month at the end of the money; that money spent on one thing means you have denied yourself the ability, the "opportunity," to acquire something else. Thus, the "cost" of the car may be $15,000; but the "opportunity cost" of the car is that you now cannot afford to drive it anywhere, including that vacation you'd been dreaming about.)

So what has been the "opportunity cost" of handing over $14.4 trillion dollars to impoverished bankers? What else might we have done with that money?

Here's Marian Wang's list. Marian Wang, "12 Better Uses for the Bailout Bucks; Vaccinate kids, fix poverty, buy the world an iPhone. And that's just a start.," Mother Jones, January-February 2010. (If you're not familiar with Mother Jones, but would like to support its work, here's the link.)

10 years of vaccines for kids in 117 countries: $110 billion

10 years of $10,000 bonuses for all US public school teachers: $318 billion

Sending all 2009 US high school grads to private college: $347 billion

Doubling US spending on HIV/AIDS and cancer research for 20 years: $493 billion

10 years of CO2 offsets for all Americans: $559 billion

Meeting UN anti-poverty goals by 2015: $757 billion

20 years of universal preschool in US: $860 billion

Buying a house for every homeless American: $878 billion

10 years of helping developing countries deal with the effects of climate change: $2 trillion

Buying the world an iPhone 3GS: $2 trillion

10 years of private health insurance for uninsured Americans: $2.2 trillion

Paying off 1/3 of US home mortgages: $3.5 trillion

Total: $14 trillion

In case you missed it, that's not a list of things, any one of which we could have done with $14 trillion. That's a list of things all of which we could have done with $14 trillion. That, my friends, is one whopping big "opportunity cost" that comes with handing over taxpayers' money to an Administration's banker friends.

[Credit to Sherman Johnson for bringing to my attention the Johnson County Supervisor Rod Sullivan "Salvos" item about this. Though I'm on the Salvos subscription list, for some reason this one didn't arrive.]

You can do a similar opportunity cost analysis with the projected $1.4 trillion deficit in this year's budget, the $1 trillion already projected for next year, the $14 trillion current federal debt, or the $100 trillion of currently unfunded future federal obligations. (Don't forget the distinction between "deficit" and "debt;" see, “’Debt?’ ‘Deficit?’ What’s the Difference?” Concord Coalition, May 1996.)

And you can also divide any one of these numbers by 300 million to determine each American's share (e.g., for $14 trillion it's $47,000 of additional debt for each of us, every man woman and child -- unless we either declare the United States to be bankrupt and default on all our domestic and global obligations, or so devalue the dollar (and suffer inflation) that the pain is the equivalent of paying off $47,000 in debt).

This is a shell-and-pea game. The State of the Union event, which will get disproportionate play in the media tomorrow, is but a diversion.

The real story for tomorrow's papers? Today's Congressional investigation of the roles of Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner in creating this unconscionable disaster -- including the pass-through of billions from taxpayers to Treasury to AIG to Goldman Sachs, paying this former employer of so many of President Obama's team (as well as President Bush's Treasury Secretary Henry Paulson) 100 cents on the dollar when previous settlements had been arranged for 14 cents on the dollar, and then keeping the whole thing secret from the American people. Gretchen Morganson and Louise Story, "Two at Fed Had Doubts Over Payout by A.I.G.," New York Times, January 27, 2010, p. B1; Mary Williams Walsh, "Audit Faults New York Fed in A.I.G. Bailout," New York Times, November 17, 2009, p. B1. From the Times report at 3:36 this afternoon, it looks like many of the committee members of the House Committee on oversight and Government Reform shared my sense of outrage. Mary Williams Walsh and Sewell Chan, "Under Fire, Geithner Says A.I.G. Rescue Was Essential," New York Times, January 27, 2010.

And for my predictions a year ago of the problems that would flow from President Obama's capitulations to Wall Street, see "Obama's Potential Wall Street Downfall," April 12, 2009, with its links to 43 additional blog entries on related subjects going back to September 5, 2008.

The President has been lobbying for Bernanke to get another term [Edmund L. Andrews, "Obama to Nominate Bernanke to 2nd Term at Fed," New York Times, August 25, 2009, p. B1] and has said nothing really critical of the insider performance of Treasury Secretary Geithner.

Will he tonight? What do you think?

But at least, my taxpaying friends, you now know "what $14.4 trillion looks like."
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson
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Friday, October 23, 2009

TARP Lessons for Iowa's Budget Cutters

October 23, 2009, 7:40 a.m.

Today's blog entry is another in a series devoted to Iowa's budget crisis and its impact on the University of Iowa. Prior entries included:

"How Many Administrators Does It Take? Administrators are Multiplying & Sucking Us Dry," July 16, 2009

"A University's Strategic Communication; A Modest Proposal to the Regents' University Presidents," October 7, 2009

"Iowa's Budget Cuts and the University; Economic Collapse Tests Moral Values," October 9, 2009.

"How to Cut Iowa's Budget; Fairness, Justice and Leadership by Example," October 15, 2009.

"UI Budget: Waivers Wave Goodbye to Savings; Consistency, Hobgoblins and Waivers," October 19, 2009

Barofsky: "Anger, cynicism and distrust [an] unnecessary cost of TARP"
(brought to you by FromDC2Iowa.blogspot.com*)
Iowa Governor Culver's axe has begun to fall. Jennifer Jacobs, "1,300 state jobs at risk in proposed cuts," Des Moines Register, October 22, 2009 ("Iowans could see fewer troopers on highways, less treatment for addictions, fewer prison guards, delays in new dental coverage for children, less child abuse prevention work, longer waits for state tax refunds, less aid for college and dozens of other impacts if the governor approves budget cuts his agency directors presented to him. State corrections and human services workers would see the brunt of the layoffs. Those departments account for nearly 600 of about 793 layoffs proposed statewide.").

Next Wednesday the Board of Regents will announce with a little more specificity how the three Regents' universities should respond to the Governor's order that they, too, are expected to further cut their state appropriations by another 10%. See Staci Hupp, "Regents propose surcharge, 6.5-percent tuition and fees increase," Des Moines Register, October 23, 2009.

What an awful, and thankless, responsibility. History records no occasion when a budget cutter's decision was greeted with a standing ovation. Usually the recipients' reactions are just the opposite. No applause; little understanding; just "anger, cynicism and distrust."

These are the public reactions the Department of the Treasury's Special Inspector General, Neil Barofsky, says the Treasury's handling of the TARP program have produced: "Treasury's actions in this regard have contributed to damage the credibility of the program and of the government itself, and the anger, cynicism and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP."

But note that while Barofsky acknowledges the public's "anger, cynicism and distrust," he says that reaction was not a necessary cost, and that it could have been avoided if the government officials involved had behaved differently.

It's a model Iowa's budget cutters would do well to study -- in order to avoid that reaction here, on the part of Iowans generally, and those associated with its universities in particular.

But first an update on another scandal and advice to Iowans on how not to do government programs, whether of largess or of budget cutting.

Wednesday I wrote about another example of Congress handing over taxpayers' money to generous campaign contributors from another sector of our economy -- the developers, contractors, home builders, real estate brokers and mortgage bankers. In addition to the trillions of dollars they already get, they are now pushing to expand and extend their version of "cash for clunkers" (without the need to come up with the clunkers): an $8000 grateful taxpayers contribution for each house sold (which they wish to expand from first time home buyers to all buyers, and from $8000 to $15,000). (Needless to say, there's no provision in this program to help those who are providing the houses through bankruptcy, foreclosure, and their willingness to live on the street.) "Housing for the Wealthy, Unemployment for the Poor," October 21, 2009.

Yesterday we learn of yet one more reason to oppose this program (a program that most economists agree is loony from their perspective as well). It turns out it's been riddled with fraud. Jackie Calmes, "Fraud Reported in Program to Help New Homebuyers," New York Times, October 22, 2009 ("Just as Congressional leaders are calling to extend a popular tax credit for first-time homebuyers, government investigators are reporting new findings that point to widespread fraud in the program. A previously undisclosed report from the Treasury Department’s inspector general said that as of Sept. 30, the Internal Revenue Service had identified 167 suspected criminal schemes and opened nearly 107,000 examinations of potential civil violations. In late July, the I.R.S. announced its first successful prosecution.").

That same Wednesday (October 21) PBS' "Frontline" revealed what those now advising the President were doing to beat back the calls for regulation during the 1990s, efforts that played a major role in creating our current economic crisis -- in the midst of which their Wall Street friends and former colleagues at Goldman Sachs are continuing to earn billions in bonuses.

"The Warning," PBS Frontline, October 21, 2009 ("'We didn't truly know the dangers of the market, because it was a dark market,' says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. 'They were totally opposed to it,' Born says. 'That puzzled me. What was it that was in this market that had to be hidden?' . . . Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. 'Born faced a formidable struggle pushing for regulation at a time when the stock market was booming,' ["Frontline" producer Michael] Kirk says. 'Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves.' Now, with many of the same men who shut down Born in key positions in the Obama administration, 'The Warning' reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one. 'It'll happen again if we don't take the appropriate steps,' Born warns. 'There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.'" From the "Introduction."). If you missed it, you can watch streaming video of the program from the "Frontline" site.

On October 5 the New York Times reported:

The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks. . . . A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky.

The report also provides new insight into the way the Treasury allocated billions of dollars to nine of Wall Street’s largest players.

Louise Story, "Report on Bailouts Says Treasury Misled Public," New York Times, October 5, 2009, p. B2.

[Photo Credit: Larry Downing/Reuters; Time; "TARP recipients testify before the House Financial Services Committee on Feb. 11. From left: Goldman Sachs' Lloyd Blankfein, JPMorgan Chase's Jamie Dimon, Bank of New York's Robert Kelly, Bank of America's Ken Lewis and State Street's Ronald Logue."]

Jim Kuhnhenn, "Watchdog: Bailout Helped, but At a Cost," Associated Press/Time, October 21, 2009 ("[Treasury Special Inspector General Neil] Barofsky said [in his latest quarterly TARP report that] the Troubled Asset Relief Program has come at great cost to taxpayers, to the integrity of the financial system and to the public's perception of the federal government. 'Despite the aspects of TARP that could reasonably be viewed as a substantial success,' he wrote, "Treasury's actions in this regard have contributed to damage the credibility of the program and of the government itself, and the anger, cynicism and distrust created must be chalked up as one of the substantial, albeit unnecessary, costs of TARP.' . . . The integrity of the industry: Many firms considered "too big to fail" last year, and thus in need of government assistance, are even bigger now. 'Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior,' the report states."). (Time has also kindly provided us with "25 People to Blame for the Financial Crisis," Time.)

So now we have "Frontline" passing along former CFTC chief Brooksley Born's warning that "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience," and Neil Barofsky warning that "Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior."

And how is the Obama Administration and Congress -- Democrats and Republicans alike -- responding to this urgent need that their most generous campaign contributors be more effectively regulated in the public interest? With a wink and a nod and an outstretched hand.

As the Wall Street Journal reports,

Some of the biggest Wall Street firms are back in the political-spending game after hunkering down while they were getting government bailout funds. Goldman Sachs Group Inc., Bank of America Corp., Morgan Stanley and other large financial-services firms stepped up their political donations in September to members of Congress . . ..Most Wall Street firms stopped making donations to lawmakers when they were receiving government funds, and many lawmakers stopped accepting them. But now . . . they are making campaign donations again. At the same time, they are increasing their spending on lobbying . . ..

For the details on who has given how much see Brody Mullins and T.W. Farnam, "Wall Street Steps Up Political Donations, Lobbying; Firms Boost Outlays Amid Debate on Financial-Services Overhaul, After Slowing Spending While Getting Bailout Cash," Wall Street Journal, October 23, 2009.

Sadly, this includes as well the President of the United States, Barack Obama, who even personally went to New York earlier this week for another $30,400-a-plate fund raiser. David D. Kirkpatrick, "Wall St. Giants Reluctant to Donate to Democrats," New York Times, October 20, 2009, p. A1.

Ironically, the "reluctance" to which that headline refers is the Wall Street executives "fear of getting caught in the public rage over the perception that Wall Street titans profiting from their government bailout may use their winnings to give back to Washington in return. And the timing of the event, as the industry lobbies against proposals for tighter regulations to address the underlying causes of last year’s meltdown on Wall Street, has only added to the worry over public appearances."

This is not the most laudatory basis for reluctance, perhaps, but at least it's better than that of a President who seems to be either unaware of or unconcerned about "the public rage over the perception" -- what Barofsky identifies as the unnecessary public "anger, cynicism and mistrust" fomented by such fund raisers.

This is probably enough reference to stories for a blog entry. But here are a few more for those interested in pursuing this, The Crime of Two Centuries, before turning to the lessons for Iowa's budget cutters.

U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program. . . . including $6.8 trillion in aid offered by the Federal Reserve, Barofsky said in a report released today. . . .

Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs. . . .

Barofsky offered criticism in a separate quarterly report of Treasury’s implementation of TARP, saying the department has “repeatedly failed to adopt recommendations” needed to provide transparency and fulfill the administration’s goal to implement TARP “with the highest degree of accountability.”

As a result, taxpayers don’t know how TARP recipients are using the money or the value of the investments, he said in the report. . . .

The Treasury has spent $441 billion of TARP funds so far and has allocated $202.1 billion more for other spending, according to Barofsky. In the nine months since Congress authorized TARP, Treasury has created 12 programs involving funds that may reach almost $3 trillion, he said. . . .

Barofsky said the TARP inspector general’s office has 35 ongoing criminal and civil investigations that include suspected accounting, securities and mortgage fraud; insider trading; and tax investigations related to the abuse of TARP programs.

Dawn Kopecki and Catherine Dodge, "U.S. Rescue May Reach $23.7 Trillion, Barofsky Says," Bloomberg, July 20, 2009.

"Watchdog: Treasury and Fed Failed in AIG Oversight," Associated Press/New York Times, October 14, 2009 ("Treasury Secretary Timothy Geithner is 'ultimately responsible' for regulators' failure to rein in massive bonus payments at American International Group because he led the agencies that provided AIG's lifelines, according to a bailout watchdog. Geithner was president of the Federal Reserve Bank of New York before taking over at Treasury in January. He has said he did not learn until March about the $1.75 billion in bonuses and other compensation promised to AIG employees. But Geithner's subordinates at the New York Fed learned of the payments in November, according to Neil Barofsky, the special inspector general for the $700 billion financial bailout.").

Pallavi Gogoi, "TARP report slams lack of transparency," USA Today, October 20, 2009 ("In a scathing report out Wednesday, a government watchdog blasts the Treasury Department for its handling of a $700 billion bailout program and for not adopting all of its earlier recommendations [and] Treasury's failure to provide more details about the use of TARP funds . . ..").

"Bailout watchdog Barofsky: Too early to say how much of $700B will be refunded to taxpayers," Associated Press/Baltimore Sun, October 21, 2009.

"U.S. 'unlikely' to recoup aid to banks; TARP watchdog's report is also critical of secrecy," Bloomberg/Washington Post, October 22, 2009.

William A. Barnett, "Who’s Looking at the Fed’s Books?" New York Times, October 21, 2009 October 22, 2009, p. A35.

And the meat-less, dry bone thrown the public's way turns out to be little more than public relations window dressing in front of what looks very much like same-old, same-old in the back rooms. Joe Nocera, "Pay Cuts, but Little Headway in What Matters Most," New York Times, October 23, 2009, p. B1. (They don't affect many people; for those they do affect, it only impacts their salaries for November and December of this year, then they can be renegotiated; stock options are exempted, so there's no limit to that continuing source of income, so long as they hold them for two to five years -- which they'd do anyway to ride up the price; and they can make more if things improve for their company, regardless of what they personally had to do with that. As the headline puts it, there's "little headway in what matters most."). See also, Editorial, "Symbolic Cuts Need to Set Tone for Real Cuts," Iowa City Press-Citizen, October 23, 2009 (regarding Governor Chet Culver's self-imposed salary cut).

As for Iowa's budget cutting, it's important for us to keep it in context. Take a look at this report prepared by one of the other Nicholas Johnsons (in addition to this one a couple of the others are the law professor at Fordham, and the literal rocket scientist). Nicholas Johnson, Phil Oliff, and Jeremy Koulish, "An Update on State Budget Cuts; At Least 41 States Have Imposed Cuts That Hurt Vulnerable Residents; Federal Economic Recovery Funds and State Tax Increases Are Reducing the Harm," October 20, 2009 (with a link to the full report in pdf).

One of the consequences of the Washington-Wall Street Axis, described above, is that it really is tough all over. Those SOBs have harmed every single American -- except for themselves, their friends and colleagues, and others in the top 1% of the wealthiest. Iowa is even in some ways, such as unemployment, better off than many.

In terms of the universities all Iowans, not just the Board of Regents, Iowa Legislature, and the universities' presidents, need to do some serious and heavy thinking about the role of "public education."

I've written about this before, and undoubtedly will again. Here's a summary:

o A century ago or more the American people and their elected officials decided that a fourth- or eighth-grade education was not enough for our kids. If nothing else, our economy and our military required a minimum of 12 years of schooling (what is popularly referred to as "K-12"). We agreed this was so important that it would be provided free to all at taxpayers' expense, because we all benefitted.

o It is not a stretch to say that if K-12 was essential a century ago, K-16 (that is, a college education; or its equivalent for those in the trades, something similar to the German system) is equally essential for today's economy and military -- not to mention the "life, liberty and pursuit of happiness" of our citizenry and their self-governing democracy. This is also sufficiently important that it should be paid for by all.

o The GI Bill after World War II brought returning veterans to the University of Iowa and other colleges and universities throughout America, at little or no cost to the students, but with an economic return many times over for our post-War economy and the American people.

o An economic downturn is precisely the time when it makes sense to increase the number of citizens getting additional education. (a) Rockwell and other corporations are pleading with educators to help create a better educated workforce. What better time to do it than when there are fewer jobs available? (b) Isn't laying out money for public education better than laying out the same amount of money for unemployment compensation? (c) If we're looking for long term economic growth, and not just short term fixes, there's no better investment than education.

o As recently as 1981 the State of Iowa paid 77.4% of the cost of an Iowan's university education; the student, and his or her parents, paid 20.8%. Today that has dropped for the State from 77.4% to 42.8%, and increased for the student from 20.8% to 51.3%. (See the Register story and chart, below.)

o One can argue over the most appropriate allocation of the costs of education between those who benefit directly (the students, and to some extent their parents) and indirectly (every American taxpayer). But whatever that most appropriate relationship is thought to be, what is the rationale for the enormous disparity between the relationship for K-12 (0% for students; 100% for taxpayers) and the 13-16 of K-16 (51.3% for students; 42.8% for taxpayers)? Would we ever consider, as a budget cutting measure, going back to the days of K-8 -- providing free public education through junior high, and then charging parents 51.3% of the actual cost of providing high school education? Think about it.

For the Register's chart, and story, see Gunnar Olson and B.A. Morelli, "Tuition now top funding source for regents universities," Des Moines Register, October 23, 2009 (including a chart showing the relative percentage of costs covered by tuition vs. appropriations increasing from 20.8% vs. 77.4% in 1981 to 51.3% vs. 42.8% in 2010). And see the news this morning that Staci Hupp, "Regents propose surcharge, 6.5-percent tuition and fees increase," Des Moines Register, October 23, 2009.

I sympathize with you, Iowa's budget cutters. Yours is not an enviable task. But you can learn from the errors of Washington, and try to avoid them.

Be fair and just in your judgments. Be rational, and fulsome in your explanations. Be transparent and open in your process.

And keep in mind Barofsky's observation that the public's "anger, cynicism and distrust" -- while warranted and understandable -- is a dangerous thing, with long lasting consequences, and that it is, above all "unnecessary."
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson
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Friday, April 17, 2009

This One's a 'Must Read'

April 17, 2009, 8:20 a.m.

What You've Always Wanted to Ask About the Financial Collapse
Except for Your Fear As to What the Answer Might Be
(brought to you by FromDC2Iowa.blogspot.com*)
Since June 23, 2006, I have written 639 entries for this blog.

Never before have I ever said something was a "must read."

Nor am I now saying that some creation of mine is a "must read."

But what I am prepared to say is that what I am going to tell you about, and encourage you to read for yourself -- or watch as an online video -- is a must read for all Americans.

No issues over the past year -- indeed, over the past 70-plus years -- come close to the significance of those surrounding the economic harm we're all now suffering, brought on by what turns out to be deliberate, knowing, criminal fraud perpetrated by the so-called leaders of our financial and political establishment.

This is something every American has an obligation to understand -- as best we can, given the efforts of those responsible to cover up the facts (notwithstanding their professed commitment to "transparency") and the seeming lack of motivation by the establishment media (as with the onset of the second Iraq War) to investigate and report what's going on. For our sake and that of the future generations who will be paying for these crimes, we need to know what happened -- historically and recently -- that brought us to where we are, who played what roles, why they're not even being replaced let alone prosecuted, and what's going on now in Washington and Wall Street.

For those facts turn out to be far more startling and worse than anything I've even imagined, let alone actually asserted in any of the 47 blog entries I've uploaded on this subject over the past eight months (and are linked from the bottom of this entry).

What I'm referring to is Bill Moyers' interview with William K. Black, broadcast by PBS on the April 3, 2009, "Bill Moyers Journal." Here is the video, and a transcript, of that interview.

Only a smattering of brief excerpts are going to be reproduced here, but they should be enough to prompt you to want to watch, or read, the entire exchange.

First off, just who is this William K. Black? Here are some excerpts from his Web page at the University of Missouri-Kansas City School of Law (where you will find more, if you're interested):

Associate Professor of Economics and Law; A.B. (University of Michigan); J.D. (University of Michigan Law School); Ph.D. (University of California at Irvine) . . .

Bill Black is an Associate Professor of Economics and Law at the University of Missouri – Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

He was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and General Counsel of the Federal Home Loan Bank of San Francisco, and Senior Deputy Chief Counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement. His regulatory career is profiled in Chapter 2 of Professor Riccucci's book Unsung Heroes (Georgetown U. Press: 1995), Chapter 4 (“The Consummate Professional: Creating Leadership”) of Professor Bowman, et al’s book The Professional Edge (M.E. Sharpe 2004), and Joseph M. Tonon’s article: “The Costs of Speaking Truth to Power: How Professionalism Facilitates Credible Communication” Journal of Public Administration Research and Theory 2008 18(2):275-295.

In short, Black is not just a member of cable television's shouting, "chattering class." In terms of education and experience, he knows what he's talking about.

Here's how Bill Moyers introduced him:

For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, the man you're about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s. . . .

Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, "How do they get away with it?" Well, no one has asked that question more often than Bill Black. . . .

During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate's so-called "Keating Five" were named — he sent a memo that read, in part, "get Black — kill him dead." . . .

Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters."

Here are some excerpts from the interview. To give the text a little more appearance of organization, and to find what you may be looking for, I have put in bold "headings" of sorts, either emphasizing their words or [bracketed inserts] of my own.

BILL MOYERS: How did they do it? . . .

WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.

BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?

WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that. . . .

BILL MOYERS: Why did they call them liars' loans? . . .

WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets. . . . [T]hey were also called, in the trade, ninja loans . . . no income verification, no job verification, no asset verification. . . . One company produced as many losses as the entire Savings and Loan debacle. . . . IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion. . . . Even Ronald Reagan, you know, said, "Trust, but verify." They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.

BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them? [NJ: And the role of AAA ratings.]

WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad.

And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste. . . .

BILL MOYERS: Is there a law against liars' loans?

WILLIAM K. BLACK: Not directly, but there, of course, many laws against fraud, and liars' loans are fraudulent. . . . because they're not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.

BILL MOYERS: Why is it so hard to prosecute? Why hasn't anyone been brought to justice over this? [NJ: And FBI warning 2004, but radical reduction in FBI investigators today.]

WILLIAM K. BLACK: Because they didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. . . .

[T]he FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. . . [T]his crisis is . . . certainly 100 times worse than the Savings and Loan crisis [and yet there are only] one-fifth as many FBI agents [available to investigate the crimes involved in it] as worked the Savings and Loan crisis. . . .

[NJ: Role/responsibility of President Clinton, Summers, Rubin, Senator Graham]

WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan.

And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Graham came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle. . . .

BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?

WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, "contracts, sacred." But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.

BILL MOYERS: The cover up? . . .

WILLIAM K. BLACK: Geithner is . . . covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine. . . .

Geithner . . . was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. . . . as president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. . . .

Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts . . . about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds? . . . Taking away people's bonuses? . . .

[NJ: What's wrong with the Obama Administration approach? Refusing to obey the law.]

WILLIAM K. BLACK: . . . [1] [F]irst, the policies are substantively bad.

[2] Second, I think they completely lack integrity.

[3] Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law. . . .

BILL MOYERS: So, Paulson could have done this? Geithner could do this?

WILLIAM K. BLACK: Not could. Was mandated--

BILL MOYERS: By the law.

WILLIAM K. BLACK: By the law. . . .

BILL MOYERS: What the reason they give for not doing it?

WILLIAM K. BLACK: They ignore it. And nobody calls them on it. . . .

[At a minimum] where's the Pecora investigation? . . . The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?

What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.

[NJ: Best practices; worst practices]

WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result.

So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.

BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

WILLIAM K. BLACK: Absolutely. . . .

BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?

WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We've seen how horrific AIG -- and remember, they kept secrets from everyone . . . Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG. . . .

[NJ: What can we do? Why not keep CEOs in place?]

WILLIAM K. BLACK: We need some chairmen or chairwomen . . . in Congress, to hold the necessary hearings. And we can blast this out.

But if you leave the failed CEOs in place, it isn't just that they're terrible business people, though they are. It isn't just that they lack integrity, though they do. Because they were engaged in these frauds. But they're not going to disclose the truth about the assets.

BILL MOYERS: And we have to know that [the truth about the assets], in order to know what?

WILLIAM K. BLACK: To know everything. To know who committed the frauds. Whose bonuses we should recover. How much the assets are worth. How much they should be sold for. Is the bank insolvent, such that we should resolve it in this way? It's the predicate, right? You need to know the facts to make intelligent decisions. And they're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses. . . .

BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.

WILLIAM K. BLACK: Yes.

BILL MOYERS: Why?

WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud. . . .

BILL MOYERS: It was relatively a handful of people.

WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don't prosper. So, instead of being bad for capitalism, it's what saves capitalism. "Honest purveyors prosper" is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn't need to happen at all. . . .

[NJ: Black's four-point plan.]

Now, going forward,

[1] get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system. So stop that current system.

[2] We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right?

[3] Follow what works instead of what's failed.

[4] Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.

[End of transcript excerpts.]

Following this interview there was at least one person, a woman Black refers to only as "a commentator," who questioned Black's charge that Paulson and Geithner have violated the requirements of The Prompt Corrective Action Law. He answers at length in a statement (which at least I find persuasive) on the "Bill Moyers Journal" site, William K. Black on The Prompt Corrective Action Law. Here is a very brief sampling excerpt:

Before the legal minutia, let’s not lose sight of the policy issue

To review the bidding to date: there is a consensus among economists and white-collar criminologists (and senior regulators that have successfully resolved prior crises such as William Seidman, Edwin Gray, and Paul Volcker) that failing banks should be placed promptly into receivership if they cannot recapitalize. So the fundamental question, even if the PCA law was never passed, is what can the nation do to end the disastrous Paulson/Geithner policy of covering up the largest banks’ losses and leaving the CEOs and senior officers that caused their failures, often through fraud, in power? How many of those of us that voted for Mr. Obama believed that they were voting for a continuation of Bush’s failed financial regulatory policies? Given the terrible cost to taxpayers during the early years of the S&L debacle of “forbearance” for failed S&Ls, the horrific failure of Japan’s embrace of the cover up of its bank losses, and the great success of the vigorous reregulation of the S&L industry why would we adopt the failed strategy instead of the proven success? The way we reregulated the S&L industry was not simply an economic success, it was vital to restoring at least some integrity. We insisted on honest accounting, used prompt receiverships, and rooted out the control frauds. This led to over 1000 felony convictions related to the debacle – the greatest criminal justice success in history against elite white-collar criminals.

On to the legal specifics

The commentator argues that the PCA law does not mandate receiverships, citing exceptions to the mandatory language. None of the exceptions apply in the circumstances we are discussing and neither the Bush nor the Obama administration purports to be following such exceptions. Instead, what is occurring is a coverup designed to evade the PCA that relies on abusive accounting to hide the banks’ losses that arose due to mortgage and accounting fraud. There is a certain awful symmetry to thinking that the cure for accounting fraud is greater accounting fraud countenanced, even arguably mandated, by the government. Governmental abuse of accounting makes it far harder to prosecute bank officials that enriched themselves through accounting fraud.

Monday, March 23, 2009

Punishment to Fit Financial Crimes

March 23, 2009, 8:20 a.m.

Punishing Thieves in Suits:
Piano Wire or Stocks?
(brought to you by FromDC2Iowa.blogspot.com*)
As I've repeatedly conceded, I don't claim expertise as an economist. On the other hand, I've also urged that our instincts and intuition are entitled to more weight than we're modestly inclined to accord them. Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008.

Clearly, Tim Geithner, Ben Bernanke and Larry Summers do know something about economics.

Equally clearly the New York Times staff of editorial writers and columnists are not necessarily among the nation's top economists -- although one did win the Nobel Prize in economics, which is not something those three can claim .

Nonetheless, it was reassuring in terms of my "trust your instincts" theory that so much of what appeared in the Times over the weekend echoed analyses and concerns I've expressed over the last six months in the blog entries linked below.

For example, while I'd prefer to let the market sort this out, rather than simply throw taxpayers' dollars at bankers, if we are going to bail out those who have brought us this disaster I'd rather it be used to purchase the banks ("nationalization") rather than their so-called "toxic assets."

On Saturday the Times editorialized:

This crisis is unlikely to turn around until President Obama and his aides come up with a plan for failing banks that does not arbitrarily reject the idea of nationalization.

Thursday morning [March 19] I wrote:

And if it makes no sense to try to revive the auto economy by giving billions to auto executives [when consumers would rather save their money than buy cars], it makes even less sense to try to revive an entire economy by transferring trillions of taxpayer dollars to bankers. Here again, the problem is not that businesses and consumers don't have the opportunity to run up even more debt. The problem is that they have the wisdom not to want to do so, especially at this time. ["What a Mess," March 19, 2009.]

Saturday's editorial continues:

On Wednesday [March 18], it [the Fed] announced that it would buy hundreds of billions of dollars more [of mortgage-backed securities] and as much as $300 billion of Treasury bonds. . . . Unfortunately, there is no guarantee that this will work. With unemployment rising, debt loads high and household wealth falling, consumers may be reluctant to resume spending anytime soon, no matter how low rates and prices go. And even if consumers and businesses want to borrow, banks — stung by their own losses — may not be willing to lend.

I have repeatedly noted that the multi-trillion-dollar transfer of taxpayers' money to the banking and financial community has emphasized only the benefits of a rational benefit-cost analysis. There are potential downsides of this approach as well -- most notably, inflation -- and that the Administration and Congress have, at a minimum, an obligation to evaluate, and then share with the American people, those costs and risks.

The Times editorial went on:

To buy up securities, the Fed creates money. To provide fiscal stimulus, Congress borrows money. The more money that is created and borrowed, the greater the risk of future inflation and higher interest rates. . . . [A] forthright acknowledgment of the risks is necessary to keep policy makers from venturing too far into dangerous territory.rates.

Editorial, "The Fed Does Battle, Again," New York Times, March 21, 2009.

By this morning [Monday, March 23] at least four, count 'em four, Times columnists, card-carrying members of the "liberal media," were expressing something far shy of enthusiasm for President Obama.

Paul Krugman (that Nobel Prize winner) writes of his "Financial Policy Despair":

If the reports [of the Administration's bank rescue plan] are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

I have expressed concern about the Administration and Fed secrecy regarding what the banks and AIG have done with the money we gave them. Krugman notes that,

the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.

From the outset I've expressed concern about the President's close ties to the financial community, that community's financial contributions to him and members of Congress, the role of Goldman Sachs and Geithner's selection of the firm's lobbyist, no less, as his chief of staff, and the seeming obliviousness of the lot of them to the public feelings about corporate excesses.

Krugman comments:

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing. It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street.

In "What A Mess" I wrote:

[E]ven the world's best and most honorable bankers couldn't solve this problem with that much money. Trickle down doesn't work. In addition to common sense, intuition, and long history, we now have the lack of results from the most recent six months of trying.

Paul Krugman shares this conclusion:

But the real problem with this plan is that it won’t work. . . . And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

Paul Krugman, "Financial Policy Despair," New York Times, March 23, 2009.

On Sunday [March 22] Tom Friedman bemoaned the consequences of what he called "politics worse than usual":

There don’t seem to be any adults at the top — nobody acting larger than the moment, nobody being impelled by anything deeper than the last news cycle. . . . Right now we have an absence of inspirational leadership. From business we hear about institutions too big to fail — no matter how reckless. From bankers we hear about contracts too sacred to break — no matter how inappropriate. And from our immature elected officials we hear about how it was all “the other guy’s fault.” . . . [Meanwhile,] our country, alas, is not too big to fail.

Thomas L. Friedman, "Are We Home Alone?" New York Times, March 22, 2009.

Maureen Dowd shares my concern about the consequences of the close ties between the Administration, AIG and Wall Street. She thinks "we need less smooth jazz and more martial brass" and, inspired by Michelle Obama's declaration that the President (and their daughters) are going to be pulling weeds in her new White House garden "whether they like it or not," believes "the wrong Obama is in the Oval."

[T]he fury directed at the robber barons by the robbed blind in America has been getting hotter, not cooler. And that’s because the president and his Treasury secretary have been coddling the Wall Street elite, fretting that if they curtail executives’ pay and perks too much, if they make the negotiations with those who siphoned our 401(k)’s too tough, the spoiled Sherman McCoys will run away, the rescue plan will fail and the markets will wither. . . .

The shafters of the universe have been treated with such kid gloves that they remain obnoxiously oblivious. Vikram “Pandit the Bandit” at Citigroup, which received $50 billion in bailout money, is . . . spending $10 million to renovate his Park Avenue offices . . .

Fannie Mae . . . brazenly intends to give $1 million apiece in retention bonuses to four top executives, even though the word retention in a depression is pure Ionesco. Freddie Mac . . . has yet to disclose its planned bonuses. . . .

Treasury Secretary Tim Geithner, who grew up as a Republican . . . sees things from the point of view of that wellspring of masters of the universe, Goldman Sachs. (His Treasury chief of staff was a Goldman lobbyist, who fought then-Senator Obama’s attempt to curb executive compensation — just as Geithner has done within the administration.) . . .

Virtually unnoticed amid the bonus imbroglio was A.I.G.’s grudging disclosure that it had funneled $93 billion — more than half its federal money to date — to its high-flying insurees, including Goldman Sachs . . .. Yet as Goldman sneers at the federal money at the front door, it’s taking delivery of billions in no-strings federal money through the back door. . . .

The issue is how much we must pay to preserve financial stability over all, not how much one company promised to pay. At this point, A.I.G. seems to be the only party paying face value on toxic derivatives.

Maureen Dowd, "Toxic R Us," New York Times, March 22, 2009.

Frank Rich used some very tough language to hit on a number of the issues that I have written about, many of which are identified above. He also mentions an issue (the legality of much of what was done) that I've often described in these words: "the problem is not just that corporations violate the law, the much more serious problem is that they are writing the law."

A charming visit with Jay Leno won’t fix it. A 90 percent tax on bankers’ bonuses won’t fix it. Firing Timothy Geithner won’t fix it. Unless and until Barack Obama addresses the full depth of Americans’ anger . . . his presidency and, worse, our economy will be paralyzed. . . .

The White House seemed utterly blindsided by the public’s revulsion at the moneyed insiders’ culture illuminated by [former Senator Tom] Daschle’s post-Senate career. Yet last week’s events suggest that the administration learned nothing from that brush with disaster.

Otherwise it never would have used Lawrence Summers, the chief economic adviser, as a messenger just as the A.I.G. rage was reaching a full boil last weekend. Summers is so tone-deaf that he makes Geithner seem like Bobby Kennedy. . . .

[AIG] has, in essence, been laundering its $170 billion in taxpayers’ money by paying off its reckless partners in gambling and greed, from Goldman Sachs and Citigroup on Wall Street to Société Générale and Deutsche Bank abroad.

Summers was even more highhanded in addressing the “retention bonuses” . . ..

[M]ost Americans don’t know how A.I.G. brought the world’s financial system to near-ruin or what credit-default swaps are. They may not even know what A.I.G. stands for. But Americans do make the connection between their fears about their own jobs and their broad understanding of the A.I.G. debacle.

They know that the corporate bosses who may yet lay them off have sometimes been as obscenely overcompensated for failure as Wall Street’s bonus babies. . . .

Since Americans get the big picture of this inequitable system, that grotesque reality dwarfs any fine print. That’s why it doesn’t matter that the disputed bonuses at A.I.G. amount to less than one-tenth of one percent of its bailout. . . .

What made Jon Stewart’s takedown of Jim Cramer resonate was less his specific brief against CNBC’s cheerleading for bad stocks than his larger indictment of the gaping economic inequality that defined the bubble . . . [the] “two markets”. . ..

No one is more commanding on this subject than our president. . . . But rhetoric won’t tamp down the anger out there, and neither will calculated displays of presidential “outrage.” . . .

Obama must do what he has repeatedly promised but not always done: make everything about his economic policies transparent and hold every player accountable . . . actually answering the questions that officials like Geithner and Summers routinely duck.

Inquiring Americans have the right to know why it took six months for us to learn (some of) what A.I.G. did with our money. . . . [W]hy Goldman, which declared that its potential losses with A.I.G. were “immaterial,” nonetheless got the largest-known A.I.G. handout of taxpayers’ cash ($12.9 billion) while also receiving a TARP bailout. We need to be told why retention bonuses went to some 50 bankers who not only were in the toxic A.I.G. unit but who left despite the “retention” jackpots. . . . And where are the M.R.I.’s from those “stress tests” the Treasury Department is giving those banks?

[I]t's hard to imagine taxpayers shelling out billions for a second bank bailout unless there’s a full accounting of every dime of the first, and true transparency for the new plan whose rollout is becoming the most attenuated striptease since the heyday of Gypsy Rose Lee. . . .

[W]hy . . . has there been . . . so much evasiveness so far? The answer, I fear, is that too many of the administration’s officials are too marinated in the insiders’ culture to police it, reform it or own up to their own past complicity with it. . . .

The “dirty little secret,” Obama told Leno on Thursday, is that “most of the stuff that got us into trouble was perfectly legal.” An even dirtier secret is that a prime mover in keeping that stuff legal was Summers [of whom his mentor, Robert Rubin] wrote in his 2003 memoir . . . underestimated how the risk of derivatives might multiply “under extraordinary circumstances.”

Given that Summers worked for a secretive hedge fund, D. E. Shaw, . . . you have to wonder how he can now sell the administration’s plan for buying up toxic assets with the help of hedge funds. It will look like another giveaway to his own insiders’ club. As for Geithner, people might take him more seriously if he gave a credible account of why, while at the New York Fed, he and the Goldman alumnus Hank Paulson let Lehman Brothers fail but saved the Goldman-trading ally A.I.G.

Frank Rich, "Has a 'Katrina Moment' Arrived?" New York Times, March 22, 2009.

To remove any possible question I want to repeat that with which I began. I suffer no illusion that anyone -- members of Congress, the Obama Administration, or New York Times' columnists -- are even reading this blog, let alone influenced by it. Nor do I believe that I've come up with insights over the past six months or so that had not occurred to others. Indeed, that's exactly my point.

If I, and thousands of other bloggers, can come up with these insights and analysis drawing on nothing much beyond intuition, why oh why cannot our elected and appointed officials do as well?

So what should we do with these folks who've brought the world to this economic disaster?

At dinner last evening talk turned to appropriate punishments for those who are coming to taxpayers for multi-trillion-dollar bailouts necessitated by a 40% (give or take) decline in home values and stock prices brought on by their own incompetence and greed.

Nicholas Night, who hails from Bisbee, Arizona ("the town too high to care" -- a response to Tombstone's claim to be "the town too tough to die"), made reference to AIG Ed Liddy's concern regarding threats he's received from those who believe piano wire should be put around the necks of the most guilty of AIG executives. Bisbee is something of a music town, and Nick observed that there are now so many electronic keyboards in use that there may well be a shortage of piano wire -- at least in Bisbee.

So what he next proposed is that they be put in stocks. No, not the kind they're already in, the stocks of profiteers; the stocks the Puritans put folks in, with criminals' heads, arms and legs sticking through and locked down. Guards would be provided to protect them, so that nothing more damaging than tomatoes and rotten eggs would be thrown.

After being freed from the stocks they, and indeed all white collar criminals in Nick's proposal, would then be required to pay back in full whatever losses they'd caused or thefts they'd pulled off. They would have to earn that money selling ice cream bars by driving a truck through neighborhoods primarily occupied by persons of a different color from themselves. And these customers could pick a 38-second excerpt from a song that the perps would have to listen to over-and-over, constantly, until the debt was paid.

It's possible you had to be there, but I think Night is on to something. If Obama is going to continue to refuse to prosecute and imprison them the least we can do is identify who they are and do some form or another of public shaming.
__________
Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

Nicholas Johnson, "Quick Fix: Support Jobless, Not Bankers," February 7, 2009

Nicholas Johnson, "Geithner's Same Old, Same Old," February 10, 2009

Nicholas Johnson, "Terrorist Bankers," February 13, 2009

Nicholas Johnson, "Financial Crises for Dummies," February 17, 2009

Nicholas Johnson, "They're Back!!" February 20, 2009

Nicholas Johnson, "The Burden We Ought to Bear," February 23, 2009

Nicholas Johnson, "Candid Conservatism," February 27, 2009

Nicholas Johnson, "Bankers as Arsonists," March 3, 2009

Nicholas Johnson, "Don't Buy Stuff," March 6, 2009

Nicholas Johnson, "The Story of Stuff," March 16, 2009

Nicholas Johnson, "What a Mess," March 19, 20, 2009
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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Tuesday, March 03, 2009

Bankers as Arsonists

March 3, 2009, 6:30 a.m.

No More For AIG
and the View from the "Frontline"
(brought to you by FromDC2Iowa.blogspot.com*)
Prologue

I dreamed I was having a beer with Tim Geithner and Ben Bernanke. (I had to explain to them that we were fresh out of champagne.)

"So what do you think is the answer for AIG?" I asked.

"We think handing over billions of taxpayers' dollars to the company is the way to go," Geithner said. Bernanke nodded, while looking suspiciously at his glass of beer.

"Have you tried that?" I asked.

"Oh, yes." Bernanke smiled. "Three times. I think we're up to about $150 billion now, aren't we Tim?"

"Yeah, about that." Geithner took a sip and scowled.

"So how's that been working for you?" I asked.

They both looked down and said nothing.

"How's that been working for you?" I repeated.

"Not really all that well," Geithner finally replied in a near whisper. "They lost another $60 billion this last quarter, and the Dow just dropped below 7000."

"Oh, my." I paused. "So what are you going to do now?"

They both smiled and said, as if in chorus, "We thought we'd give them another $30 billion."
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What the hell is the Obama Administration and Fed thinking to give AIG another $30 billion of our (taxpayers') money?! When you find something that doesn't work, repeating it over and over in the hopes that it will is one definition of insanity. This means we've now underwritten a single company to the tune of what will soon be a quarter of a trillion dollars -- two and a half times the entire federal budget when I was in government!

AIG, this so-called "insurance company," just reported a $61 billion dollar loss during the last three months! That's nearly $1 billion every business day. Andrew Ross Sorkin and Mary Williams, Walsh, "A.I.G. Reports Loss of $61.7 Billion as U.S. Gives More Aid," New York Times, March 3, 2009 ("the deal . . . presents more financial risks to taxpayers at a time when the public and Congress have been sharply questioning the wisdom of risking federal money to bail out private enterprises").

Stories like that always kind of make me wonder. If you were paying even a modicum of attention wouldn't you kind of notice after a day or two that there was $2 billion missing from the petty cash drawer?

These are the guys, you'll recall, who celebrated one of our early infusions of billions by heading off to a luxury resort to spend some of it.

And let's get straight why these losses are occurring.

Bankers, through greed or ignorance, were issuing mortgages they knew, or should have suspected, would not be paid ("sub-prime mortgages"). So long as they could mix them up, package them, call them a security, and sell them, the profit (and resulting bonus) was theirs and the risk of loss was someone else's.

Those holding these worthless ("toxic") securities wanted protection. So AIG issued insurance -- an agreement to make good on the mortgage/security if it turned out to be worthless because the debtor defaulted on this "credit" -- a "credit-default swap."

For more details on what AIG and the banks did to our economy see Joe Nocera, "Is AIG the Worst of Them All?" New York Times, February 27, 2009 ("the practices that led to its troubles . . . were shocking"); and "Propping Up a House of Cards," New York Times, February 28, 2009 ("Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more . . . Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. . . . either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up. That would be us, the taxpayers").

Normally insurance, whether home, auto, or life, is designed to spread the rare or occasional loss among a great many premium payers. Every homeowner has fire insurance, but very few have fires -- there's no "bubble" that suddenly bursts and causes all homes to burn, thereby bankrupting an insurance company suddenly called upon to pay full value for 40% or more of the homes it insured.

Moreover, regulated insurance companies are required to maintain "reserves" sufficient to pay off an unexpectedly large number of claims. (AIG's conventional insurance operations are still profitable.)

By contrast, when the real estate bubble bursts during an economic downturn it tends to burst nation wide. Providing "insurance" for mortgage defaults means the insurance company has assumed the risk that when the bubble bursts it will be responsible for the losses sweeping an entire industry, not just those of a handful of individual investors.

Not only is this not a normal -- or sensible -- risk for anything called an "insurance company," credit-default swaps are not regulated, and therefore do not require reserves -- creating the risk of a kind of double whammy of losses.

In short, the taxpayers are bailing out, assuming executives' and investors' losses, brought on from fraud, greed (or, at best, stupidity and ignorance). This includes the folks who sold the mortgages originally, who bundled them into securities, who bought and traded those securities, and who insured those investors -- all a pretty scummy lot who should have known better and were engaged in fraud-like behavior bordering on, and sometimes crossing over into, criminality.

They must be thought of, in moral terms, as the equivalent of the arsonists who cause major forest fires, with injury and death of the individuals caught in the fire and those brought out to fight it, property damage in the millions or billions of dollars, seriously disrupted lives, and a drain on taxpayers' resources.

Those fires are not "acts of God." Nor is this economic calamity. Both are the clearly predictable result of reckless and irresponsible behavior by humans. The only difference is that those who deliberately set the woods on fire don't personally profit financially from their acts. These men and women did. It's like crashing the power grid, causing Americans to freeze in the dark, or setting loose a computer virus that ultimately brings down the Internet and causes billions of dollars of losses

In short, the harm these corporate executives have done goes far beyond their own investors, employees and retirees. It goes beyond their customers. It has resulted in what may prove to have been the most serious body blow ever suffered by the American economy and the people whose welfare depends upon it. And we now know not only does the suffering go far beyond our shores and fall most heavily on those least able to withstand it, but it has become a threat to our national security far more serious than anything threatened by "terrorists" -- as the CIA must now brief the president each morning on the potential threats to our country, foreign and domestic, brought on by this sorry lot of bankers. See, Nicholas Johnson, "Terrorist Bankers," February 13, 2009.

So why has our government given them a single dime, let alone the trillions of dollars it has -- including what will soon reach $250 billion for one company alone, AIG?

It's the old "they're too big to fail" ruse. My response? Any company too big to fail is simply too big; the sooner it can be broken up into manageable-sized pieces the better.

These "toxic assets" have some value -- or would if the government would get out of the market, remove any possibility of a bailout, thereby forcing the holders, and potential buyers, to do the sorting through of what's in those securities, and put a price on them. Of course no one's going to buy them for their true value so long as the government can't make up its mind but may, in the end, buy them for much more than they're worth. These securities actual market value may be a lot less than what the holders paid for them. That's too bad. But that's the way their beloved "marketplace" is supposed to work.

No one ever promised them this system of privatized profits and socialized losses that these johnny-come-lately socialists now believe is their birthright.

One of the best television explanations of how we got into this mess, and how little the relevant government officials really knew about how to get us out, was prepared by PBS' "Frontline" in its show titled "Inside the Meltdown," February 17, 2009 (the link goes to a complete online video, transcript, timeline of the economic collapse, and other features).

If you think global economic collapse is of sufficient significance to warrant an hour of your time coming to understand the tension between the competing concerns over "moral hazard" and "systemic risk," and the meanings of "toxic assets," "bundled, securitized mortgages," and "credit-default swaps," I highly recommend the show. Not only is it a balanced effort to inform, it's also entertaining -- not in a "Daily Show" way, but because it is so well written, shot and edited into a classic "Frontline" presentation.
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Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

Nicholas Johnson, "Quick Fix: Support Jobless, Not Bankers," February 7, 2009

Nicholas Johnson, "Geithner's Same Old, Same Old," February 10, 2009

Nicholas Johnson, "Terrorist Bankers," February 13, 2009

Nicholas Johnson, "Financial Crises for Dummies," February 17, 2009

Nicholas Johnson, "They're Back!!" February 20, 2009

Nicholas Johnson, "The Burden We Ought to Bear," February 23, 2009

Nicholas Johnson, "Candid Conservatism," February 27, 2009

Nicholas Johnson, "Bankers as Arsonists," March 3, 2009

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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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Who is this Nicholas Johnson?

This Nicholas Johnson is best known as a former Commissioner of the Federal Communications Commission. For more about him than even his mother would ever have wanted to know, check out his web page, https://www.nicholasjohnson.org. [Photo credit: Andrea Chapman Day; Creative Commons Attribution 3.0 License.]

His 5 most recent books:

Catfish Solution (1st edition; Lulu)
Columns of Democracy (1st edition; Lulu)
Test Pattern for Living (2nd edition; Lulu)
How to Talk Back to Your Television Set (3rd edition; Lulu)
How to Talk Back to Your Television Set (4th edition; Amazon Kindle)

To preview or purchase go to:

Nick’s Books

• 2019: Catfish Solution (1st edition; Lulu)
• 2018: Columns of Democracy (1st edition; Lulu)
• 2013: Test Pattern for Living (2nd edition; Lulu)
• 2013: How to Talk Back to Your Television Set (3rd edition; Lulu)
• 2013: How to Talk Back to Your Television Set (4th edition; Amazon Kindle)
• 2012: From D.C. to Iowa: 2012 (1st edition; Lulu)
• 2012: From D.C. to Iowa: 2012 (2nd edition; Amazon Kindle)
• 2012: Predicting Our Future Cyberlife, 1970-2040 (1st edition; Lulu; with 15 Iowa law students)
• 2009: Virtualosity: Eight Students in Search of Cyberlaw (1st edition; Lulu)
• 2009: What Do You Mean and How Do You Know: An Antidote for the Language That Does Our Thinking for Us (1st edition; Lulu)
• 2008: Are We There Yet? Reflections on Politics in America (1st edition; Lulu)
• 2008: Are We There Yet? Reflections on Politics in America (2nd edition; Amazon Kindle)
• 2008: Your Second Priority: A Former FCC Commissioner Speaks Out (3rd edition; Lulu)

To preview or purchase go to:

• Your local bookstore (in Iowa City, Prairie Lights, http://prairielights.com)
• Nicholas Johnson's Amazon Author Central Page, https://www.amazon.com/stores/Nicholas-Johnson/author/B00B138MYQ
• Nicholas Johnson's Lulu Press Page, https:// www.lulu.com/spotlight/NicholasJohnson

CREDITS
With thanks and appropriate credit to Gregory Johnson, http://aboutgregjohnson.com, for his contributions, creativity, and cheerful assistance with the creation and maintenance of this form of "publication" over the years since its creation.

DISCLAIMERS
No Legal Advice
Nothing posted on this blog is intended as, constitutes, nor should be taken to be, "legal advice," nor as creating an attorney-client relationship.

Personal View
This blog is neither affiliated with nor hosted by the University of Iowa or any other institution or organization. It is maintained by Nicholas Johnson in his individual capacity. Nothing posted here should be construed as anything other than the personal views of the author.

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