The blogosphere is having a field day with the news that Willem Buiter, the caustic London School of Economics professor who has delighted in launching blog posts like grenades throughout the course of the global financial crisis, has been named Citigroup's Chief Economist.
A staunch critic of bailouts, Buiter has been especially vicious towards Citigroup; in April he called the financial institution "a conglomeration of worst-practice from across the financial spectrum" and in June he described the decision by U.K. finance minister Alistair Darling to appoint former Citigroup CEO "Win" Bischoff to "to co-chair the writing of a report on UK international financial services" as "the most ridiculous appointment since Caligula appointed his favorite horse a consul."
I'd like to suggest my own contribution from the Buiter archives. In September 2007, Buiter took issue with what he characterized as then-Financial Times columnist Larry Summers' "never seen a potential bail out he did not like" predilection in a blog post titled "Support Markets, Not Banks."
I cannot think of a single financial institution that is too big to fail, in the sense that it would damage some systemically important social institution.... I recognize the upside of bail-outs for those who arrange them: they look like movers and shakers, making and shaping events. It's heroic, in an industry where heroism can be rarely displayed. But in all of the examples mentioned above, the bail-out did more harm than good.
So now Buiter will be taking a paycheck from one of the very biggest of the bailed-out too-big-to-fail institutions. Which means, whether he likes it or not, Buiter is being bankrolled with the support of the American taxpayer... and implicit backing of Larry Summers. If Citigroup hadn't been bailed out, would Buiter have gotten this job?
One out of four homeowners is now under water, owing more on their homes than the homes are worth. Why? The biggest single factor behind the housing crisis is rising unemployment. According to the latest ABC-Washington Post poll, one out of every three Americans has either lost their job or lives in a household with someone who has lost a job. Today it takes two and sometimes three incomes to buy the groceries and pay the mortgage or the rent. So if one of those incomes is gone, a homeowner can't make the payment.
The scourge of unemployment is splitting America into three groups: 1) the third just mentioned, whose households are in danger of losing their homes and whose kids are surviving on food stamps (that's up to one in four children in America today); 2) the vast majority of Americans who are managing but worried about keeping their jobs and homes; and 3) a small number who are taking home even more winnings than they did in the boom year 2007.
Prominent among Category 3 are Wall Street bankers, many of whom are now concluding their most profitable year ever. Goldman Sachs is so flush it's preparing to give out bonuses in a few weeks totaling $17 billion. That will mean eight-figure compensation packages for lots of Goldman executives and traders. JPMorgan Chase is rumored to have a bonus pool of around $5 billion. The three other major Wall Street banks are ratcheting up their compensation packages so their "talent" won't be poached by Goldman or JPMorgan.
Wall Street is booming again in large part because the rest of America -- categories 1 and 2, above -- bailed it out to the tune of $700 billion last year. The Street has repaid some of that but, according to the bailout program's inspector general, much of it is gone forever. For example, the taxpayer money that bailed out giant insurer AIG went directly through AIG to its "counterparties" like Goldman Sachs -- to whom Tim Geithner, according to the inspector general, gave away the store. As Goldman Sachs prepares to dole out some $17 billion to its executives and traders, it's worth noting that Goldman received $13 billion a year ago from the rest of us via AIG and Geithner, no strings attached.
Which brings us back to homeowners who are falling further behind. The $75 billion federal program designed to bribe banks to modify mortgages has been a bust. No one knows the exact number of mortgages that have been modified (that will be reported next month) but housing experts I've talked with say it's a tiny fraction of the number of homeowners in trouble. Seems that the big banks can't be bothered. "Some of the firms ought to be embarrassed," Michael Barr, the assistant Treasury secretary for financial institutions, told the New York Times.
Barr says the government will try to use shame as a corrective, publicly naming institutions that have moved too slowly. But the banks have done almost nothing to date. "We've made dramatic improvements, and we continue to try to get better," says a spokesman for JPMorgan Chase, but as a practical matter JPMorgan has done squat.
Shame? If we've learned anything over the last year, it's that Wall Street has none. Ten months ago Wall Street lobbyists beat back a proposal to give bankruptcy judges the right to amend mortgages in order to pressure lenders to reduce principle owed, just like Wall Street lobbyists are now beating back tough regulations to prevent the Street from causing another meltdown.
Shame? For Wall Street, it all comes down to P.R., at minimal cost. Goldman Sachs, attempting to preempt a firestorm of public outrage when it dispenses its $17 billion of bonuses, is setting up a crudely conceived $500 million P.R. program to help Main Street.
Shame won't work. Only political muscle and courage will. Congress and the Obama administration should give homeowners the right to go to a bankruptcy judge and have their mortgages modified.
And while they're at it, resurrect the Glass-Steagall Act that used to separate investment from commercial banking, so Wall Street can't continue to use other people's money to gamble.
Finally, before Goldman hands out $17 billion in bonuses, claw back the $13 billion Goldman took from AIG and the rest of us and add it to the pool of money going for mortgage relief.
Most ridiculous economics-related story of the week (I know, it's early yet, but it's a short week): A New York Post article by Mark DeCambre suggesting JPMorgan Chase CEO Jamie Dimon as a replacement for Treasury Secretary Tim Geithner.
Yes, Geithner is under fire from legislators from both parties right now, but neither Republicans nor Democrats are likely to be looking for a figure even more deeply embedded in Wall Street than either Geithner or Larry Summers.
JPMorgan Chase has been a prime beneficiary of government bailouts, cheap credit, and the orchestrated devourment of both Bear Stearns and Washington Mutual. The liberal Democrats who are hammering the Obama administration as insufficiently progressive would have a collective seizure if Geithner stepped down, only to be replaced by the CEO of one of the world's largest financial institutions. Nor would Republicans who have suddenly become populist banker-bashers and defenders of the working man be likely to cheer. The political "optics," as Washington-watchers like to say, would be simply awful.
The idea is too dumb for words. OK, maybe not as dumb as Goldman CEO Lloyd Blankfein getting the nod, but still absurd.
What does it mean when a conservative Republican and a liberal Democrat both call for Treasury Secretary Tim Geithner to be fired? Is it a sign that he's lost the confidence of both parties and should be immediately disposed of? Or is it confirmation that he is steering safely down the middle of the river, while the left and the right banks seethe with rage?
This morning, the normally almost supernaturally composed Geithner got into it with Texas Republican Kevin Brady, a pillar of the conservative right, during a Joint Economic Committee hearing in Congress.
The Wall Street Journal's Damien Palleta has the transcript:
Mr. Brady opened up his questioning by telling Mr. Geithner Republicans, Democrats, and the American people had lost confidence in the Treasury Secretary and asked him to resign.
"It is a great privilege to serve this president," Mr. Geithner responded. "I agree with almost nothing you said."
Mr. Geithner then took it a step further: "You gave this president an economy falling off the cliff."
Mr. Brady wasn't done: "Remind me, Mr. Secretary, what post were you holding when President Obama took office?"
Geithner: "I was the President of the Federal Reserve Bank of New York."
Brady then accused him of "shirking responsibility for the design of this bailout."
Mr. Geithner said the government's steps were "absolutely necessary to break the back of this financial panic." He said without the Obama administration's steps, "you would have an economy still falling, not growing."
Meanwhile, last night, Oregon Democrat Peter DeFazio, a staunch member of the House's progressive caucus took some hard swings at Geithner for paying more attention to Wall Street than to Main Street during an MSNBC interview with Ed Schultz. He finished by calling for both Larry Summers and Geithner to be fired, saying with a smirk, "We may have to sacrifice just two more jobs to get millions back for Americans."
Brady, of course, is mad that Congress passed a stimulus bill while DeFazio is furious that the stimulus bill wasn't even bigger. Hard to satisfy both those constituencies... My own opinion is that conservative Democratic Senators are a far greater obstacle to direct government assistance to Main Street than either Summers or Geithner, and I agree with the Treasury Secretary that the financial panic had to be broken with extreme measures or we would be in a much worse position now than we already are. But, as noted by DeFazio, Geithner's performance during the AIG bailout can be easily faulted and the pivot that the entire White House is making towards emphasizing deficit reduction is ill-timed and insensitive to what this country really needs right now.
Ultimately, I seriously doubt whether President Obama will heed either the conservatives or the progressives at this point. I'm betting he continues on with his team intact. But like everything else, the political future of the White House and all his economic advisers can be pinned to one economic indicator -- the unemployment rate. The further up it goes, the hotter the kitchen will get.
Ironic juxtaposition of the day:
From Rasmussen Reports, via Naked Capitalism:
50 percent of Americans say interest rates on their credit cards have been raised in the past six months, as Congress seeks to limit the ability of banks to raise those rates...
77 percent of Americans believe that credit card companies take unfair advantage of consumers with the interest rates they charge. Just 14 percent do not agree.
From a Bloomberg News article detailing the prospects of TARP overseer Elizabeth Warren's brainchild, the Consumer Financial Protection Agency:
"The time for pitchforks and torches is over," [said Scott Talbott, chief lobbyist for the Financial Services Roundtable]. "The focus should be on reforming the system and making it better."
Pity the poor bankers, trapped in their castles while the peasants storm their walls, shrieking blood and murder! It's almost as if the financial industry hadn't been bailed out to tune of trillions of dollars of taxpayer money, or hadn't managed, so far, to successfully neuter every bit of proposed regulatory reform that has come down the pike. From the banking industry's perspective, everybody has just been so unfair. Why do all those mean people keep saying nasty things about us?
Railing against the tone-deaf arrogance of banking industry lobbyists gets old fast. People like Talbott are paid well to say exactly what they are saying, and judging by their success, they're worth every penny of it. But at some point, by their own rhetoric, they will incite exactly the kind of boiling-over rage that they make-believe is currently afflicting them. Seventy-seven percent of Americans, among whom can be counted many who have lost their jobs and homes because of mistakes made by bankers, feel that credit card companies are taking advantage of them. Imagine that! But couldn't it be possible that their real reason for rage is that the time for pitchforks and torches never came?
Most mainstream media reports on special inspector general Neil Barofsky's audit of the Fed bailout of AIG summarized the findings as an implicit remonstration: Tim Geithner's Fed looks bad because it was unable to get AIG's counterparties to agree to a deal in which they received less than what they were owed under the terms of the credit default swaps AIG had entered into. But in the econoblogosphere, it's Rashomon all over again.
Naked Capitalism's Yves Smith exploded in anger, calling the report "far too forgiving" of the Fed, accusing Barofsky of being just "as badly cognitively captured as the Fed is" and declaring that the "uncritical reportage of defenses by the officialdom is annoying."
You get the sense that at this point in the game, Smith would not be satisfied by anything less than a firing squad. What she sees as uncritical reportage others could interpret as "leaving the Fed hung out to dry." For example, the audit reports that Fed was worried about "violating the principle of the sanctity of contract." Come on! The financial world was falling apart and the U.S. government was on the hook for hundreds of billions of dollars in a frantic effort to stave off utter disaster. In that milieu, the supposed sanctity of contracts is a bogus excuse, mere cover for doing nothing. As Smith points out:
Companies that get into trouble renegotiate their obligations as a matter of course. You cannot get blood from a turnip. And the fact that the Feds stepped in to prevent the financial system from collapsing is NOT THE SAME as an open-ended commitment to honor the obligations of a dead company.
Meanwhile, Felix Salmon is feeling charitable today. The fact that the financial world was falling apart, he argues, is reason to cut Geithner and the Fed some slack.
It shouldn't have happened, that's true: for the sake of putting a knife into the moral-hazard trade, some haircut -- any haircut -- should definitely have been imposed, even if it was only the 2 percent that UBS offered to accept.
But the government owned AIG, which created the situation that Germans call Anstaltslast: the fact that state-owned companies simply don't default on their obligations. The government was also battling a major crisis using the only weapon at its disposal: enormous amounts of liquidity. When you're putting out a fire, you don't stop to worry that large amounts of liquidity are going to end up where you don't particularly want them -- the important thing is putting out the fire.
So yes, given a bit more aggression and foresight, the Fed could have tried to cram down a haircut onto AIG's counterparties. But at the time, no one was particularly interested in being harsh to the global financial sector; instead, they were trying to rescue it.
Regular HTWW readers will know that in the past I have been sympathetic to the view that in the mad rush to keep the global economy functioning, mistakes were going to be made. But after reading Barofsky's report, I feel much less inclined to go there. The sequence of events is too blatant: The Fed asked the companies to take a haircut, the companies said no, and there is no evidence that the Fed pushed back at all. What kind of negotiating stance is that? It looks like pusillanimous capitulation.
But not to everyone. To the structured finance lawyer who writes The Economics of Contempt blog, the report vindicates Geithner! (That sound you just heard was Yves Smith popping like an over-inflated balloon.)
[The report] makes clear that the NY Fed did try to negotiate haircuts with AIG's counterparties, but not at all surprisingly, the counterparties (and the French regulators) refused, and the NY Fed was left with no choice but to pay par value. Geithner, contrary to popular belief, didn't have the powers of a bankruptcy court.
Economics of Contempt is relying here on one of the crucial reasons why the Fed's bargaining position differed from, say, the Obama administration's stance with regard to the hedge funds who were refusing to take haircuts in the negotiations over the GM and Chrysler restructurings. In the case of the automakers, the government could say, you're going to get a worse deal from the bankruptcy judge, so you better take this one now. That was a threat with some juice to it. But the whole point of the government bailout of AIG was to avoid a Lehman-like bankruptcy that would take everyone down with it. So, it is true, the Fed's leverage was not terrific.
I am less sure what to make of Economics of Contempt's position that for the Fed to play hardball would be an abuse of "its regulatory authority for purposes of retaliation." I don't think anyone was considering the Fed's attempt to get a haircut as "retaliation." Instead, a more appropriate framing would be that the Fed should be attempting to get the best deal for its taxpayer money. The Fed had moral authority -- We're saving all of your asses, so play ball!
Just such a position is taken by The Epicurean Dealmaker, who imagines a scenario in which the Fed stared down the reluctant banks and shamed them into compliance.
A sample:
I have also been authorized to inform you that we are fully aware of the legal rights and fiduciary duties which constrain each of you to do what you think is best for your firms and your stakeholders. Under normal circumstances, we would be entirely supportive of these obligations. However, these are not normal times. Furthermore, and because these are not normal times, I would like to inform you that the government of the United States of America will take an extremely dim view of any individual or institution which chooses to pursue simply its own interest and its own duties without regard for the consequences to the broad economy, this country, and indeed the entire world. This government has a fiduciary duty too, gentlemen, and I am afraid that it trumps yours.
There's a lot more where that came from, and it makes for very entertaining reading. There's just one problem. For the speech to work in real life, one would have to imagine it being delivered by Tim Geithner.
And I just don't see the Secretary of Treasury as a guy who could deliver, in this or any other reality, a passage like this:
I am not your fucking friend. As far as you are concerned, you should view me as the Angel of Fucking Death. Because the time has come for each of you to do what is right for the greater good. It is time to think about survival, gentlemen -- your own and that of your institutions -- both now and in the future. For let me assure you that the decisions you make in this room today will be remembered. They will be remembered, gentlemen, as long as there is a United States of America. And if, God willing, we all come through this terrible crisis to a safer and more stable world, those people who helped us get there will be remembered. And, perhaps more importantly, those people and institutions in this room which did not help us, which put their own narrow personal and corporate interests before the interests of this nation and its people, will be remembered as well.
The funny thing: Although that speech never was given and never could have been given by the parties involved, it contains an essential truth -- the decisions made during that fateful week will always be remembered. For its role, Goldman Sachs is now widely reviled, and it's very difficult to see how that will change, any time soon.
We own the banks. Now what do we do with them?
As the majority shareholders in failing banks, the American public should push management to cut executive compensation and make more loans to Main Street.
By Robert Reich, Salon
Who caused the economic crisis?
Economist Simon Johnson and "Obamanomics" author John Talbott say there's plenty of blame to go around.
By Simon Johnson and John Talbott, Salon
Does Obama's plan for Wall Street measure up?
Take a wild guess.
By Robert Reich, Salon
The $1 trillion game of chicken
Getting to the bottom of the government stress tests.
By Andrew Leonard, Salon
NPR's Planet Money podcast
A cogent, entertaining way to keep up with the increasingly complex financial crisis.
NPR
Bailout blues: why bank nationalization makes sense
Maybe nationalization is not such an incendiary notion after all.
By Ruth Conniff, The Progressive
The quiet coup
Recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
By Simon Johnson, The Atlantic
Worlds Apart
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