Why should bankers get more of our money?
looks at the latest phase of the bank bailout plan proposed by the Obama administration--and explains why it will put untold billions more dollars of taxpayer money in the hands of the Wall Street financiers who caused the crisis in the first place.
THE BANK bailout plan announced on Tuesday by Treasury Secretary Tim Geithner recycles an idea from the discredited Bush administration: use enormous amounts of government money to buy up toxic debt from the banks.
Geithner's plan was short on details--and that vagueness triggered drops of more than 4 percent on the New York Stock Exchange as analysts debated the possible effects.
Nevertheless, the Geithner plan seems to contain big giveaways to the most vicious Wall Street sharks--unregulated hedge funds and private equity firms.
The central focus is what Geithner calls a Public-Private Investment Plan. According the a Treasury Department fact sheet, "This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion."
Just how this will work wasn't spelled out--which is why the stock markets went into a downward spiral after the plan was unveiled. But if leaks from Treasury are to believed, the government will loan private investors money to buy up dodgy mortgage-backed assets from banks. The banks would then, in theory, be cleared of bad loans and begin lending once again.
Meanwhile, the hedge funds that buy the mortgage-backed securities would profit if the loans pay off. But if those assets decline in value, the Treasury would cover some or all of the losses--with taxpayers' money.
When the administration began rolling out this plan last week, there was an emphasis on putting limits on outrageous compensation for executives of any bank or financial firm that gets bailout money from the federal government. "[W]hat gets people upset--and rightfully so--are executives being rewarded for failure, especially when those rewards are subsidized by U.S. taxpayers," Obama said last week.
In giving more details on the plan yesterday, Geithner again stressed the $500,000 pay limits on CEOs, though without mentioning the several loopholes analysts have already uncovered. He also said that there would be a comprehensive "stress test" to prove the viability of the bailout plan.
But it's clear that the talk about executive compensation was a public-relations cover to appease popular anger with the bankers--while presenting a plan that is essentially a reworking of former Treasury Secretary Henry Paulson's proposal, which the business press coined "cash for trash."
"[F]or all of its boldness, the plan largely repeats the Bush administration's approach of deferring to many of the same companies and executives who had peddled risky loans and investments at the heart of the crisis and failed to foresee many of the problems plaguing the markets," the New York Times observed.
UNDER THE original terms of the $700 billion Troubled Asset Relief Program (TARP), Paulson planned to use government money to directly buy up mortgage-related assets that are dragging down the banks. Now, Geithner's plan aims to accomplish the same thing--but by enticing private capital into the program, by limiting their risk and creating the possibility for big profits.
As New York Times financial columnist Floyd Norris explained, "[U]nder the Obama administration's plan, it would be the government that stood ready to absorb losses if they were too large, while also providing some of the financing for the purchases."
As another Times journalist reported, "Officials hope that part of the plan is not labeled a 'bad bank' administered by the government, although they expect that some might call it that. No matter what it is called, the government would assume some of the risk of declining assets at the heart of the economic crisis."
In other words, if the bad debts taken over by the hedge funds stay worthless, U.S. taxpayers are on the hook. But if these assets rise in price, the hedge funds will profit--big time.
To help sell this transfer of wealth to the banks, the Geithner plan also includes at least $50 billion in relief for homeowners threatened with foreclosure on their mortgages. This would be a big change from Bush administration policy, which offered relief to just a fraction of those at risk of losing their homes. But the new proposal still falls far short of what's needed to provide comprehensive relief.
And $50 billion is only a small part of the overall package. The bulk of the Obama plan is another gargantuan bailout for Wall Street--one that aims to use taxpayers' money to absorb the mortgage-related losses that have crippled banks.
Former Treasury Secretary Paulson originally wanted to spend the $700 billion TARP to buy up the banks' toxic debt. It was only after Britain used government funds to directly invest in its own loss-ridden banks that Paulson flip-flopped and used Treasury money to do likewise in the U.S. With the British government moving to stand behind its biggest banks, the U.S. had no choice but to follow suit to ensure that Wall Street banks would remain competitive.
But the banks that took TARP money haven't loaned it out to businesses and individuals--which was the justification for pouring government money into the banks to get credit moving again. On the contrary, many banks staggered toward collapse despite the influx of government funds.
The Obama administration, having inherited this disaster from Bush and Paulson, has the opportunity to use the second half of the TARP money to do something radically different. Instead, Geithner--who worked closely with Paulson in the earlier bank bailouts--is stumbling down the same path.
And that isn't the only bailout for Corporate America in the works. Geithner also announced a huge expansion of the Federal Reserve Bank's Term Asset-Backed Securities Loan Facility (TALF) from $200 billion to $1 trillion. Under TALF, the government will loan money to investors who buy securities based on consumer and business loans, including for autos, small business, credit cards and commercial mortgages.
Under this plan as well, taxpayers absorb much of the risk--this time through the Federal Reserve Bank--while private capital makes money.
THE ONLY explanation for why the Obama administration would come up with such complicated schemes to repackage the same failed policies is that it is desperate to avoid nationalizing the banks.
Given the drop in the value of bank stocks, the government could already exert control if it chose to do so, based on earlier investments including $45 billion each at Bank of America and Citigroup--not counting Citi's $300 billion government guarantee against losses.
Indeed, it's arguable that the main U.S. banks are already nationalized, but the government is intent on leaving private managers in control and propping up the value of the banks' stocks to benefit shareholders.
Economist and New York Times columnist Paul Krugman, in his blog, called for an honest assessment. "Let's be clear what this is: it is lemon socialism, pure and simple: socialized losses, privatized profits," he wrote. "Is this really the best we can do?" The best course of action, Krugman argues, would be to temporarily nationalize the banks to stabilize the financial system.
What's more, by putting potentially hundreds of billions of government dollars on the hook with unregulated hedge funds, the U.S. is sending huge amounts of money down a black hole, even though there's barely been any accounting, let alone oversight, of the original TARP funds.
Even if everything in Obama's bailout scheme goes according to plan, and the banks are relieved of their worst assets, there's still no mechanism to compel the banks to begin lending once again to revive the economy.
According to a fact sheet issued by the Treasury Department, banks that receive government investment under a "capital support" plan will have to file public reports about their lending. But there's nothing to prevent them from continuing to hoard the money.
And with the underlying economy in freefall, what appears to be a good asset for a bank today may not be so in six months or a year. That's because the commercial real estate market is fast unraveling, and will deal another blow to the banks' balance sheets. The banks will also be hit by the wave of corporate bankruptcies anticipated for 2009, as even profitable companies are finding it impossible to refinance their debts.
All this makes it ever more likely that the U.S. government will be compelled to nationalize the banking system--whether the Obama administration will use that term or not.
It was George W. Bush who blazed the trail, with the nationalization of the mortgage giants Fannie Mae and Freddie Mac and the insurance company AIG, as well as direct investments in the big banks.
Yet despite this huge transfer of wealth from working peoples' tax money to finance capital, the façade of private ownership remains. This fiction is deemed necessary to preserve the sacred myths of U.S. free-enterprise capitalism--and, more importantly, to help Wall Street avoid political accountability for their actions.
As former World Bank chief economist Joseph Stiglitz wrote recently:
In effect, the American taxpayers are the major provider of finance to the banks. In some cases, the value of our equity injection, guarantees and other forms of assistance dwarf the value of the "private" sector's equity contribution; yet we have no voice in how the banks are run...
What's the alternative? Sweden (and several other countries) have shown that there is an alternative--the government takes over those banks that cannot assemble enough capital through private sources to survive without government assistance.
The banks should be nationalized--but without compensation to shareholders. Bankers and finance capitalists bear huge responsibility for the rapidly worsening world slump and shouldn't be allowed to keep their jobs. The banks should be placed under democratic and social control. This would be a step toward remaking the economy in the interests of working people.