Strings, Strings and More Strings

As far as I'm concerned, if a bank wants another handout, it's time to tie it up in strings. My suggestions:

Accountability for Any Prior Handounts - If the bank has received a prior infusion of bailout funds, it must provide a full accounting of the use of the funds;



An Honest Balance Sheet - Any banks who want handouts must present an honest assessment of any troubled / toxic holdings they possess, with bailout money being directed based on need. If a bank wants to pretend that its toxic holdings are worth 80 - 90 cents on the dollar (or more), we are equally entitled to pretend that they're telling the truth and that the don't need our money;

A Business Plan - Require a clear statement from the bank of how it got into this mess, and precisely how the cash it requested will help it get out.

An Insolvency Plan - In case it gets the funds and still can't get its act together, a plan for how it will enter Chapter 11 proceedings, or how it will otherwise facilitate the FDIC in arranging its takeover by another bank.

Henry Paulson doesn't appear to have the cajones to stand up to even a tiny bank, and seems happy to have bailout money wasted on huge salaries and bonuses, corporate jets, shareholder dividends, or whatever secret uses a bank may find for our money, so this will have to come from Congress.

Or, perhaps better, Congress can hang on to the remaining bailout funds for a month, until Pauson is just another historic participant in the Bush Administration's sordid legacy of failure.

Vanity Fair on Henry Paulson

This seems like a pretty accurate capsule summary:

The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding—and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

I would add, Paulson's refusal to hold a steady course, and his willingness to throw "no strings attached" billions at banks based upon criteria only he appears to know (assuming he actually has criteria) could not possibly have created confidence in the banking system, as it's been entirely unpredictable.

Cheap Oil - Forever!

Or at least for five years? Does anybody know what Paul Day was saying about the price of oil a year ago? Perhaps he wasn't among those who believed that we would never again see oil below $80-$100/bbl, but I suspect that most of the people presently projecting five years of low oil prices were then projecting indefinite high oil prices.

These low oil prices are a mixed blessing. It's nice to be able to fill up a gas tank for less than $50, and that fewer people will be fretting over whether they can afford to heat their homes this winter. But if prolonged, low gas prices will lead again to short-sighted manufacturing decisions by carmakers, and short-sighted purchases by consumers. It will make it harder to argue for, or justify the budget necessary for, preparing for the inevitable future in which energy prices again hit record levels. If low oil prices persist, they also reduce the amount of exploration for, and development of, hard-to-reach sources of oil, where the cost of production may be $70-$80/bbl.

I suspect that a big part of the drop in oil prices is less a question of world demand, and has more to do with wealthy investors and hedge funds having to sell off their oil futures to cover margin calls. We seem to be in an odd state of uncertainty, in which those large investors are afraid to buy up certain commodities in case their value continues to drop, but where that lack of investment perpetuates a cycle - the falling prices force additional sales, but again with no buyers, so prices continue to drop (or at best hold steady). That uncertainty extends into other markets where the wealthy once thought it was safe to hold their money - anybody looking to buy some contemporary art? (Maybe Hank Paulson should buy up a few billion dollars worth, to restore confidence to the markets....)

Governing Like Bush?

Michael Gerson's the latest to pen an "OMG! He's Just Like Bush!" column about Barack Obama - the type of column that suggests that his only sources of information about Obama are party memos and McCain's campaign ads.

Conservatives have generally feared that Obama is a closet radical. He has uniformly voted with liberal interests and done nothing to justify a reputation for centrism.

Until now.

Because there is no evidence that Obama is a cautious politician with a history of working from consensus and not making waves. Oh, wait. I guess there is plenty of evidence if you base your analysis of Obama's record on, you know, his record. I believe Larison overstates his case in respect to the implications of this:

Most people in the broad “middle” seem to be relieved by Obama’s moves in the last few weeks, so I have to conclude that they don’t have much of a problem with conventional Washington thinking, either. The majority is not just getting the government they deserve, but apparently it is also the government they want. When it fails them, as it is going to do, I don’t want to hear them complaining about the problems of the status quo.

Our system is constructed to impede radical change. If you want disappointment, elect your ideological hero in the form of a Dennis Kucinich or a Ron Paul, and see how his agenda for reform never even gets out of the starting blocks. But that aside, it's always been readily apparent that Obama's far from being the socialist revolutionary the McCain campaign, and portions of the right-wing punditocracy, attempted to argue. But back to Gerson:

Obama's appointments reveal not just moderation but maturity - magnanimity to past opponents, a concern for continuity in a time of war and economic crisis, a self-confidence that allows him to fill gaps in his own experience with outsize personalities, and a serious commitment to incarnate his rhetoric of unity.

Again, which part of this wasn't apparent from Obama's record?

Obama is benefiting from being the only player on the stage - all his pretensions of moderation could be quickly undermined by a liberal Congress, unhinged by its expanded majority. And Obama's social liberalism could still turn Washington into a culture-war battlefield.

I suspect that Gerson means this as a caution, or as a distinction from G.W. - But if you look at the history of G.W.'s administration, perhaps instead he's warning us that Obama's first term could look like G.W.'s administration, during his first eight months and starting again with his reelection, where his popularity plummeted and he ran both his administration and (with their active complicity) his party into the ground.

Though Obama's campaign savaged the administration as incompetent and radical, Obama's personnel decisions have effectively ratified Bush's defense and economic approaches during the past few years. At the Pentagon, Obama rehired the architects of President Bush's current military strategy - Gates, Gen. David Petraeus and Gen. Raymond Odierno. At the Treasury Department, Obama has hired one of the main architects of Bush's current economic approach.

This continuity does not make Obama an ideological traitor. It indicates that Bush has been pursuing centrist, bipartisan policies - without getting much bipartisan support.

Good grief, does Gerson pay attention to anything? When Obama launched his campaign, we were told of the superiority of Bush's war policy, and that Obama's call for ending the war and fixing a date for withdrawal of the troops was defeatism that would reward terrorists. Around that same time, Bush brought in Gates to replace the disastrous leadership of Donald Rumsfeld and within months "every single one of the top commanders running the war ha[d] been replaced." Bush has since negotiated a timetable for the withdrawal of U.S. forces from Iraq. That is, in the face of significant public opposition to his war and his policies, Bush shifted his position from his prior (failed) partisan policies to something to what he would formerly have described as letting the terrorists win.

Gates was appointed by the Senate in a 95-2 vote. When Bush started moving from partisanship toward the positions shared by the majority of Congress and the majority of the American people, he got plenty of support. It isn't Obama who has shifted on these issues - it's Bush.

In terms of treasury, Gerson is apparently talking about Timothy Geithner. There's good reason to believe that Geithner has worked with Henry Paulson to fashion the response to the present crisis in the financial industry, but... you know, funny thing, you would expect the president and CEO of the Federal Reserve Bank of New York to be involved in this sort of crisis. Although I am not at all impressed with Paulson's inconsistent approach to this crisis, or his tendency to indiscriminately and unconditionally throw money at banks while refusing to hold bank executives responsible for their incompetence, he's clearly been given a lot of discretion to respond to this crisis. To some degree you have to credit Bush with giving him that discretion, but Bush's desperation is hardly reflective of centrist policy. In normal times, the political center would be horrified by what Paulson has been doing - actually, it's hard to imagine any segment of the political spectrum that wouldn't be horrified. So again, this is a horrible example of Bush's supposed centrism.

Particularly on the economy, Bush has never been a libertarian; he has always matched a commitment to free markets with a willingness to intervene when markets stumble.

I'm not sure what Bush has been "on the economy", other than a failure by the measure of the political left, political right, job market, stock market, housing market.... But I'll grant, he's no libertarian.

Third, Obama is finding the limits of leading a "movement" that never had much ideological content.

This notion of a "movement" seems to emerge from two separate phenomena - the fact that some individuals and loose-knit groups projected their own political goals onto Obama (as, frankly, happens with pretty much any new, charismatic political leader who builds a coalition sufficient to win a national election), and the caricature advanced by people like Gerson. But you know, there's one person whom I've not once heard speak of Obama as a leader of a cohesive "movement" - Barack Obama. And there's a guy who has been willing to disappoint large groups of his supporters on issues such as Iraq policy and FISA, even before he was elected. (Can Gerson guess his name?) But then, Gerson was apparently taken surprise that Obama reappointed Gates, despite, you know, Obama promising to reach across the aisle when composing his cabinet.

Reappointing Gates is also politically savvy, as it makes it harder for Republicans to blame Obama if the Iraq phase-down goes poorly. But whatever Obama's motivations, take a step back and think about what it means for Gates to be accepting this reappointment. He had the alternative of cashing in, big time with a book deal, private sector jobs... think Cheney at Halliburton. It's a testament to his character that he's continuing in the job, and a testament to Obama that he's again willing to disappoint supporters who wanted a clean break from past war policy in order to retain somebody who may in fact be the best available choice for the job. So with regard to Gates, although my reasoning is different, I'll accede to Gerson's conclusion - That's centrism we can believe in.

As for Gerson's having his hopes raised by Obama's "disappointing the ideologues", he may be onto something. After all, had Bush been more willing to stand up to factions exemplified by PNAC, the Club for Growth, the domestic energy industry, etc., his administration might not have been such a miserable failure.

Heads Should Be Rolling

Thomas Friedman, following up on this New York Times article, makes the case that the leaders of the financial industry, now reaping the benefits of the gargantuan, taxpayer-funded bailout, are incompetent or worse:

Why? Because in searing detail it exposed - using Citigroup as Exhibit A - how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.

With due respect to Friedman's acknowledgement that responsibility spreads well beyond those financial institutions, and duly acknowledging his focus on the leaders of finance and that he's not defending Paulson's decision to treat them with kid gloves, how can you argue but that those at the top of the financial industry who were either too stupid or too greedy to put on the brakes should be keeping their jobs, even as they get tens to hundreds of billions of dollars of taxpayer money and guarantees for their junk securities?

Also check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Portfolio.com. Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge — including Meredith Whitney, a little known banking analyst who declared, over a year ago, that “Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,” wrote Lewis.

“This woman wasn’t saying that Wall Street bankers were corrupt,” he added. “She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.”

Corrupt? Stupid? Or is it that they are so used to being lionized by a nation captivated by wealth, despite their limited knowledge and skills, and so immersed in a culture where almost anything goes in the name of profits, that they weren't aware that they should even try to look past their greed?

A few months ago, with this crisis looming, Friedman wrote,

Come August, though, I predict both men will be looking for a financial wizard as their running mates to help them steer America out of what could become a serious economic tailspin.

I wish he had "named names", as I am curious as to whether the reputations of the "financial wizards" he had in mind would have survived the past five months.

"If We Keep Throwing Cash On The Fire...."

"... Surely we'll eventually smother the flames."

Watching Paulson and friends scurry around pouring money on one fire after another, with no apparent concern for consistency other than protecting the jobs of their peers and the wealth of stockholders, is fascinating. It's a mad world.

Mad World....

Had Kerry been elected in 2004 and had he initiated a similar "bail-out", can you imagine how Republicans would be responding to the near random manner in which Bush and Paulson are running around, throwing bushels of money at the financial industry? Or that the auto industry's request for $25 billion in federal loans would seem miniscule as opposed to the Bush/Paulson blank check for the financial industry? A year, or even six months ago, could you have imagined a blasé reaction by Congressional Republicans to a Democratic President-Elect's proposed two-year $600 trillion economic stimulus package?

You can blame whomever you want for those aspects of this crisis that predate Bush's tenure. Certainly, financial deregulation that occurred under Clinton played a role in this mess. But it's difficult to get past the top-to-bottom, front-to-back incompetence of the Bush Administration. And despite their lies protestations, the leaders of financial giants like Citigroup knew that they had flushed lending standards down the toilet and were taking enormous risk in the hope of reaping huge profits - and paychecks. I don't want to seem vindictive, but if they've run their companies into the ditch to the point that they need these multi-billion dollar handouts, given that context their CEO's should be tendering their resignations.

As recently as March, we were given projections like this:

You can see this for yourself in Table VI.F8 in Social Security's 2007 trustees' report. Compare "income excluding interest" with "cost," and you get cash flow numbers. (I'm ignoring interest, because it's paid with Treasury IOUs, not with cash.) You see that the system's cash flow is projected at about positive $92 billion this year. Nice. But by 2020 it's negative $96 billion, rising to about negative $280 billion in 2025, half a trillion in 2030.

Oh my.... half a trillion dollars in twenty-two years? Strangely, back in March that seemed like a big number. So what's the cure?

It would be nice to have $2.3 trillion in useful assets in an equivalent of a sovereign wealth fund - but we can't turn back time.

We can still buy time by investing current cash surpluses in non-Treasury assets. But that would require a change in the law and a change in the Washington mindset, neither of which seems to be in the offing.

Darn shame, because if we had invested the Social Security trust fund in private securities that follow the Dow, we would have earned, no wait, lost $800 billion. You know, on paper. I think Social Security privatization is off the table for a while.

What I wonder is, has the scale of this bail-out blown any notion of fiscal responsibility straight out of the budget. What will it take to get us back into a world where a half-trillion dollars is a "big deal"?

Remember When We Had a Chance of Turning a Profit?

I'm not sure that Paulson's current plans are any better, but remember when we were told that we should buy up the financial industry's garbage, and could (or, in the mind of some people, inevitably would) even turn a profit after a few years? If you believed it then what do you make of the collapse of Citigroup's stock? The WSJ has an explanation:

Weighing down the shares has been the Treasury Department’s decision last week not to buy troubled assets from banks. Citigroup’s balance sheet includes battered securities and loans that many investors hoped could be offloaded to the government.

Go figure.

Paulson's Got Some Explaining To Do....

CJR looks behind the claims that Goldman Sachs didn't benefit from the AIG bailout, and finds that's not actually the truth. And it gets worse:

The AIG bailout, it is now apparent, is basically a pass-through from taxpayers to the counterparties. It is clear the tax money is barely stopping at AIG for a cup of coffee.

Even AIG’s former chief Hank Greenberg, not exactly Ralph Nader, says the bailout is going straight to Wall Street banks on the worst terms.

* * *

Can the U.S. get a better deal? I have no idea.

But what strikes me as utterly unacceptable—a true scandal—is that the recipients of U.S. taxpayer funds in the AIG bailout are not even disclosed. We pay them, and we don’t even get to know who they are? Has this ever happened before?

This is disgraceful, and something Congress should remedy.

The Worst Government Money Can Buy....

Whatever the outcome on Tuesday, let's hope it's at least marginally better than what we're continuing to suffer under Bush. We've seen the harm caused by Bush's many incompetent appointees, and now we're being, in essence, robbed by one of his few competent appointees.

The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.

These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them. Open an immediate Congressional investigation into how Paulson and his staff determined such a sweetheart deal for leading players in the financial sector and for their own former employer. Paulson's bailout staff is heavily populated with Goldman Sachs veterans and individuals from other Wall Street firms. Yet we do not know whether these financiers have fully divested their own Wall Street holdings. Were they perhaps enriching themselves as they engineered this generous distribution of public wealth to embattled private banks and their shareholders?

Meanwhile, bailout money is being used to fund astronomical "bonuses" for the employees who ran their companies into the ground. In the U.K. they saw that possibility coming, and thus forbade it as part of their bailout package. Here Paulson saw it coming as well, and made sure that the recipients of taxpayer $billions had a green light to shovel taxpayer money into their pockets.

I can only hope the next President tells companies like Goldman Sachs, "We appreciate that you needed to fritter away the bailout money we gave you in order to pay bonuses to the people who bankrupted you. And don't worry - we're still here for you. Yes, if you need an additional penny of taxpayer money to stay afloat, we'll help you be taken over by a competent institution in the manner of Merrill Lynch, or help you enter the bankruptcy process in the manner of Lehman Brothers. Feel free to ask, any time."

If We Are To Judge By Appearances....

Then Henry Paulson's financial industry bail-out seems ill-conceived, unfocused and ineffective. The only consistent inference is that, top to bottom, start to finish, it appears designed to benefit financial industry insiders.

I can easily find Paulson's explanation that his current plan won't work. But where can I find him explaining how it will work.