Tim Geithner did a good job on the Sunday talk-show circuit yesterday. He has survived his near-death experience of two weeks ago, and the betting odds that he'll be ousted by June have fallen back to 10%.
But there's one question he still refuses to answer. Why is he bailing out the people who lent trillions of dollars to our now-insolvent banks?
Each of the financial institutions that Geithner is desperate to bail out has tens or hundreds of billions of dollars that could be used to cover losses before the taxpayer had to cough up a dime. And with the exception of Lehman Brothers (and, now, General Motors), Geithner has protected these gigantic pools of money to the tune of 100 cents on the dollar.
Who are these people?
The bondholders. The folks who lent AIG, Citigroup, Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, and other disasters the hundreds of billions of dollars that they subsequently vaporized.
In any fair world, the bondholders would lose everything before any taxpayer money was put on the line. Ever since Lehman Brothers, however, Tim Geithner & Co. have been so afraid of a Lehman-repeat that they refuse to even publicly discuss the possibility of making bondholders share the pain. Whenever anyone suggests this idea, moreover, Geithner & Co. immediately dismiss it by saying it would lead to another Lehman.
At best, this is wrong. At worst, it's disingenuous.
The reason Lehman caused such havoc was that it was an uncontrolled and unexpected bankruptcy. No one is suggesting that AIG, Citi, et al, be forced into one of those. What LOTS of people are suggesting, including Paul Krugman, is that Citi, et al, be put into a managed receivership. This is what happened to WaMu last fall, and the process went so smoothly that few folks can even remember it.
WaMu bondholders took a hit. General Motors bondholders will take a hit. So why can't the bondholders of Citi, AIG, etc, take a hit?
The answer, Tim Geithner would probably tell you (if he could be induced to comment on the elephant in the room) is that insurance companies, pension funds, and other companies that hold the future of Americans in their hands invest in those bonds. And if we force those companies to take a loss, we'll hurt ordinary Americans.
Which is just another way of saying "all financial sector debt has always had a Triple A rating like Treasury bonds--you were just too stupid to notice."
And that's ridiculous.
The folks who lent money to AIG, Citi, etc., knew exactly what risks they were taking. It's time to at least discuss the possibility that they should have to answer for this.