We are being played for chumps. The Bush and Obama plans could only have been designed by failed bankers -- for their principal beneficiaries are failed bankers. We already know enough to confirm that the Bush administration made us the "fool" in the market by massively overpaying for assets. The Obama administration is about to compound that scandal with a "guarantee" program. The bankers that caused the crisis designed both programs. The senior officers at big bank aren't very good lenders, but they are expert in maximizing their compensation.
Worse, Mr. Geithner, the senior public official who, with former Treasury Secretary Paulson, designed the failed Bush plan is the architect of the disastrous Obama plan. Indeed, as the New York Times has just revealed, it should be called the Geithner plan. He overcame intense opposition within the Obama administration and designed a plan that is even worse than the failed Bush program. Geithner's gifts to the bankers that caused the crisis include: a unnecessary taxpayer bailout of "risk capital," a massive coverup of their banks' insolvency, gutting the proposed limits on executive compensation, and devising a "guarantee" mechanism designed to hide the expenses of the unprincipled bailouts from the American public. Remember, executive compensation is not "merely" a fairness issue. Executive compensation and the compensation systems used for appraisers, accountants, and rating agencies were designed, and served, to create the perverse incentives and ethical rot that caused the ongoing financial crises by producing a "Gresham's dynamic" in which fraudulent and abusive lending and accounting practices drove good practices out of the marketplace.
Here's the amazing part -- the bankers are so arrogant that they bragged to a sympathetic CNBC commentator they are playing us:
"What a delicious irony this is--last week, just as President Obama was publicly bashing the stupidity of the banks ... his economic team [was] privately begging for input from Wall Street. The administration was conducting around-the-clock discussions and interviews with senior Wall Street executives, including many from the same firms he was theoretically appalled with, about how to fix the lingering financial crisis. "
There are proven ways to resolve the crisis that are far cheaper and more effective because they don't subsidize bankers and "risk capital." We know how to resolve failed banks. The Federal Deposit Insurance Corporation (FDIC) can place even the largest banks in "pass through" receiverships on Friday at the close of business and reopen them as "New Federal" bank Monday morning with minimal disruption to customers and creditors and retain "going concern" value. This is how the Reagan administration resolved failed S&Ls during the debacle.
The FDIC appoints a senior manager to ensure that "New Federal" is run prudently. There is plenty of unemployed banking talent available. Hundreds of good bankers lost their jobs during the financial bubble because they refused to make bad loans. Research has shown that its sister agency, FSLIC, appointed receivership managers that greatly reduced losses during the S&L debacle. Leaving the managers in charge of failed banks that they led into insolvency is suicidal. The new senior leader is picked based on expertise in prudent lending and integrity. If we want failed banks to return promptly to making prudent loans and help lead an economic recovery an S&L style "New Federal" is the best possible device. The existing managers have terrible incentives -- to cover up existing losses and to make bad or even fraudulent loans that produce the greatest (fictional) accounting income and to "live large" through bonuses and perks. (The Obama compensation limits are political cover. The bankers have designed the "guarantee" plan to ensure that the compensation limits will be illusory.)
The FDIC managers have the correct incentives to finally produce an honest evaluation of which assets are toxic and how much they are worth. This transparency is essential if we are to end this crisis. Under the Bush and Obama plans we retain the existing managers that have overwhelming incentives to cover up the losses. The bankers have designed the guarantee plan to encourage banks to continue to cover up their toxic assets and not recognize their losses. These cover-ups make a financial crisis last longer and increase the taxpayers' costs.
The FDIC managers preserve the going concern value by making prudent loans and get the "New Federal" in shape to be acquired. By providing reliable information about the toxic assets the managers reduce acquisition risks, which expands the number of bidders and reduces the financial assistance required to aid the acquisition.
"New Federal" receiverships dramatically reduce cash needs. Most costs are deferred until the New Federals are sold.
Pass through receiverships save the taxpayers money and prevent perverse managerial incentives because they do not subsidize "risk capital" when banks are insolvent. Common and preferred stock and subordinated debt in banks are "risk capital." Their holders are supposed to receive nothing if a bank becomes insolvent, but the Bush and Obama plans reward them. There is no need to do this. Subsidizing risk capital and maintaining the failed managers at insolvent banks creates the worst possible incentives. It will cause future crises. It will delay the recovery from the ongoing crises. It robs the U.S. taxpayers and primarily benefits the wealthy -- many of them non-U.S. citizens. The contract they made was that they would get nothing if the bank failed. It has failed, and they are often complicit in those failures. The bankers have convinced the Bush and Obama administrations that the taxpayers should be looted to bail out risk capital. We should stop listening to the folks that caused the crisis and have interests hostile to our interests. Let's stop them from using us as chumps.
William K. Black, Associate Professor of Economics and Law, University of Missouri - Kansas City. He held senior regulatory positions during the S&L debacle and is the author of "The Best Way to Rob a Bank is to Own One" (2005)
i will be the first to say i am disappointed in obama for picking geithner. obama wont or cant stop these banks from looting us. he cant or wont stand up to them. that is very disappointing.
We've been dopes for a long time now. See the "ascendency of the credit card industry" for an disturbing history of how our leaders in business and govt decided to make a virtue instead of a curse of usury. http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/rise.html
1.) Look at his V-President & Cabinet! How Democratic Old Guard could he have possibly gotten?
2.) He's against harsh limits on banker compensation! Kissing banker ass just like Bush?
3.) $78 Billion gone missing from 1st TARP! That's OK we won't go after it, let's give them more!
It's only been a couple of weeks, but you would have thought he might have shown a glimmer somewhere that he is any different then the OLD DEOMOCRAT POLITICAL MACHINE which makes if slightly different then the REPUBLICANS. BUT "NO" HE HAS PROVEN it was all a lie and he is the POSTER BOY for 4 more years of the same old bullshit!
http://payam.minoofar.com/2009/02/11/wish-there-were-an-american-twit-of-the-year-contest/
Really, what happened to satire in the US? Harry? Care to weigh in, again?
Remember...the S&L crisis occured during a republican administration (Reagan) and the current banking crisis happened during a republican administratiion (Bush). Note any trend here?????
pt. 1
http://www.youtube.com/watch?v=of4sVULsAJM&feature=PlayList&p=5A7FE38D944CDB40&playnext=1&index=1
pt. 2
http://www.youtube.com/watch?v=o27fGAeM5vk&feature=PlayList&p=5A7FE38D944CDB40&index=2&playnext=2&playnext_from=PL
Checking fees. ATM fees. Savings account fees. Minimum check penalties. Bounced check fees, and it's not your check, you deposited it. Minimum balance fees. Withdrawal penalties for taking your money out. Points on mortgages. Insane closing costs. Mortgage rates that look like sports scores. Creative (criminal) lending. Allowing the max home equity loans. Balloon loans. Sub sub subprime loans. Credit card interest rates in the 20's and sometimes 30's. Annual fees. Broker fees. Interest calculation fees (not a joke). Late fees.
Anyone care to add, feel fee... I mean free.
With all the fees, and penalties, what REWARD POINTS Jane Q Citizen get for bailing them out?
How can we teach them a lesson?
We can't. If they recover, it will be your money making it business as usual.
1- remove all our funds from large, national banks & bank locally
2- pull out of all markets...search for micro-investments
3-never again use credit
Are you kidding me. This is the banks problem? Pay off the debt. This is is a big part of the problem this country is in. Living beyond one's means.
The most what the government can do is buying some time, so bankers can figure it out between themselves what they are worth. The simplest way of buying time is issuing at hoc emergency loans to individuals who cannot afford paying their mortgage. If by issuing these loans, the government would guarantee that no one house would be foreclosed within the next six months, but six month only, than within this time banks would figure it out the real value of their assets. Just to be clear, if an individual receiving a loan to cover the next six-month mortgage would fail in paying mortgage afterward, bank would repay government first before getting any money from the foreclosure.
My wife and I have paid out taxes all our working lives and not complained, services don't come free. We are tired of whining Republicans and rollover Democrats; how much is each one of these pathetic people costing the taxpayers?
Where's the public outrage? What's the alternative-- you have to have a bank account (or you can't even get paid by your job, much less pay any bills), and politicians and media of all stripes seem to think that the meaning of America is make the most money you can in whatever way you can get it. Try to voice outrage and stand up for something like fairness & you're being unamerican (or leftist, pinko, socialist, and all the rest)....
It's time to get back to the understanding that a significant part of any government's job is regulation, for the public good. We do still have an india of public good, don't we?
The large banks were dog eat dog. Now that they've created a dog that they can't fight, ATTRITION and TRIAGE is UNFATHOMABLE. If they fail it will be APOCALYPSE. Or so THEY TELL US.
How about dispersing TARP money to local financials that show some measure of prudence in lending and investing.
Add a stipulation that more than half loaned to each bank must be utilized for investment in small business, loan refinance, and projects that promise employment and re-vitalization.
Allow no LARGE CAP business lending what-so-ever.
Monitor it with a state agency, that reviews every cent and reports to the FEDS.
It would definitely be cheaper than continuing to shovel benjamins into the failing furnaces we have now.
You cannot calculate the cost without adjusting for the tax write off itself! It is only one-half of the equation. Taxpayers pay for those write offs!
A better solution is to recapitalize the banks until a market exists for the 60% of those assets that are still performing and then have the banks pay us back with interest.
If we want to unfreeze credit we should focus on housing values and workouts which is a related and underlying problem that nationalization does nothing to fix. That issue is addressed differently than forcing the banks into a faux insolvency due to mark to no market accounting rules.
Which one is the bigger chump?