Friday, March 20, 2009

The Bumbling of the Crisis

What a nice man huh? The champion of the little guy. Going on late-night TV in the midst of the AIG crisis and ragging on the Special Olympics, out of nowhere.

Now everyone go back to your little blogs and write the post you would have written if this was George W. Bush and not Barack Obama doing the talking.

We're coming up on two months in office, and in two months President Obama has presided over a continually shrinking economy, the largest spending package in history and the most unbalanced budget of all time (for any country), a stock market that dropped some 25% in his first six weeks in office, and a response to the financial crisis -- at AIG, the major investment banks and around the world -- that has been as bad as anything I saw happen during the previous administration's (lack of) reaction to the massive problems going on all around them. Pretty soon we're going to be at those crucial "first 100 days" of his term, when people are going to start taking an unabashed look at the state of the union today as compared to three months earlier, and there is little doubt that things are worse today than in mid-January.

What concerns me most about Obama, Geithner, Summers and Bernanke is the totally mixed messages they send almost daily with their words and often strangely and counterproductively inconsistent actions in response to the still growing financial turmoil around the globe. The President talks so much about "the age of irresponsibility" that prevailed during the previous administration -- he is very much correct in that assessment btw -- so one would expect and hope for policies that truly encourage Americans to stop spending beyond their means, running up massive debts, taking on obligations they could never reasonably hope to afford, and just generally changing our attitudes about saving vs. spending over the long run. Instead, the President steps in with his $850 billion "financial stimulus" package, in effect becoming the "consumer of last resort" by committing to spend all that money since it is money that the people of this country won't be spending due to the slowdown in the economy, job losses, increased foreclosures, plunging housing prices, and the list goes on and on. Then it's $50 billion or more to bail out people who purchased homes that they can't afford. Now the Obama Fed announces this week that it will buy $300 billion of U.S. treasury bonds over the next six months -- printing money, this is, make no mistake about it, and Bernanke and Obama would not deny that if asked -- printing $300 billion of new money to flood the system with. It is once again an attempt not to wane Americans from the ultra-consumerist high-money-flow habit that led to all of this in the first place during the very "age of irresponsibility" that the President talks about so much in his public speeches, but rather to artificially extend that very practice, at the direct cost of us, our children and our children's children.

And Treasury Secretary and public tax avoider Tim Geithner is right at the heart of all the inconsistency in the new administration as well. All the furor you're hearing about this week regarding former insurance titan AIG, it all goes directly back to Geithner and everyone knows it. AIG paying $165 million of their bailout money in bonuses to AIG's Financial Products division execs that caused all the troubles with the mortgage-backed securities and credit default swaps in the first place? Tim Geithner knew about it, and he specifically approved it, despite his attempts this week to express mild outrage at the news. As head of the New York Fed prior to finally paying the back taxes he's owed since 2000 and becoming Treasury Secretary, Geithner oversaw the decision to let Lehman Brothers fail in mid-September 2008, and was a primary architect of the AIG bailout(s) later that same month and into this year, and he understood fully the bonuses issue and specifically approved them being paid before all the recent anger and disbelief over them started to build.

Geithner was also very much involved with his predecessor and former Goldman Sachs CEO Hank Paulson in the decision to hand over $180 billion of taxpayer cash to AIG over a four-month period to keep the company afloat, knowing full well that over $100 billion of that money was going directly to the largest investment banks in the world today, many of them outside of the U.S. By far the largest beneficiary of this gift cash from the government, using AIG as a conduit? Goldman Sachs, who got more than $12 billion of cash from AIG, directly after the government provided that cash to AIG expressly for the purpose of making whole its counterparties. The combination of Merrill Lynch and Bank of America received 12 billion in government cash from AIG, Citigroup $2.3 billion and Wachovia $1.5 billion. This, my friends, is what I like to call a "stealth bailout", just as the Obama-Geithner plan has become to "stealth nationalize" the largest financial institutions like Citi which is now proposed to be 36% owned by the government. Geither and former Treasury Secretary Hank Paulson worked out a plan to give $10 billion cash to Goldman, Merrill, Citi and many other large banks like them, and then they knowingly used AIG to pump several billion dollars more of bailout cash into those very same coffers, yet by using AIG as a conduit, they could hide their true intentions from the American people. Not to mention the $8 billion of U.S. taxpayer money that went directly through AIG to U.K.-based Barclays, or $6.4 billion to Germany's Deutsche Bank, or over $5 billion to France's BNP Paribas. Did you know we were bailing out out other countries' banks too?! Of course you didn't, that was exactly Geithner and Paulson's point. Way to effing go, guys.

On top of all that, there is a major, and very worrisome in my view, inconsistency with the Obama/Geither/Bernanke approach to the entire financial crisis at this point in time. It is an undisputed fact that right now the financial institutions in this country are weak, at least by historical terms. Some of them have failed (Lehman, Indymac and several others), many have essentially failed but then been bailed out by the government for pennies on the dollar at the last minute (Bear Stearns, Fannie, Freddie, AIG, Merrill, WaMu, Wachovia, Citi, Bank of America and, again, many many others), and others are simply teetering with their stocks at multi-year lows and waiting for some direction (basically everyone else). Many well-known scholars and economic participants have stated openly their belief that the entire financial system in our country is insolvent, and that basically every bank in the country is under water due to exposure to mortgage-backed and other complex financial instruments in illiquid markets. Our banks need excess capital, which Treasury Secretary Geithner himself estimated at over $1 trillion in needs just last month, and we want to help them to get it by using Geithner's no-details revised bank bailout plan to use public and private funds to purchase the bad assets off of the banks' books in exchange for cold, hard cash.

And yet, through all this, Geithner, Bernanke and especially President Obama insist that the banks must increase their lending. The President has repeatedly expressed outrage that the banks are taking government (taxpayer) funds and then hoarding it, using it to pay bonuses that the bankers who created the original TARP plan did not prevent them from doing, instead of lending it out and making funds available to spur economic expansion and innovation. Now part of the new Geithner plan is that they are "stress-testing" all the nation's major banks as part of the new bailout process. Think about what that means for a minute. It's not like stress-testing the banks means we put the company on a treadmill and attach diodes to its head and abdomen and check it out when its heartrate gets moving. Instead, they are reviewing all of the bank's capital and asset ratios, and subjecting them to models predicting further financial deterioration and prolonged economic weakness, and seeing where those ratios go, how safe the banks will be under circumstances of economic duress. These are mathematical ratios, nothing more, generally relating to how much capital or assets the bank has on its books, compared to its liabilities. The issue I have is what message are Obama and Geithner trying to send to the banks, when they push push push on them to lend, and at the same time impose ratio-based stress tests on them as a part of the process to ensure all the banks get access to the capital they need to be effectively shored up? Forcing the banks to undergo stress tests will undoubtedly influence -- and has already influenced -- the banks to hoard their cash, to try to make the numerators of those asset and capital ratios being tested look as strong as possible, because one of the very few details we have gotten out of Geithner on his new bank bailout plan is that he only plans to provide more free taxpayer money to the banks that are strong enough to survive if they get it.

So on the one hand you're telling these banks to lend lend lend, get the economy going, we can't have real economic recovery in this country until the banks loosen up the money supply again (a very true statement by the way). But with all the losses still slated to come down the pike for the banks in terms of writedowns and bad assets, the banks desperately need to hold on to what capital they have and in fact have to increase that capital, and we should not be encouraging anything other than that. What's more, just the specter of the bank stress tests, let alone the reality of them, very clearly incentivizes these banks to hold on to their cash. A big bank like Citi, Wells Fargo, US Bancorp, these guys would be crazy to be lending out money right now, if they're afraid that lack of capital on their books would cause them to fail a totally not-defined stress test being conducted by Treasury over the coming months to see if they are healthy enough to be kept afloat or instead should be shut down. Think about it -- if you're the CEO of one of those banks, what are you doing right now? Loaning money out of your historically-depleted capital reserves to any shlub who comes in the door with a business idea? Financing the short-term operations of a longtime corporate client of yours experiencing major financial distress due to the shrinking global economy? Or hoarding your cash, making those financial ratios look as strong as possible for when Geithner and his tax-avoiding friends come along to review your bank's financial numbers?

Me too. And that's exactly my problem with the whole mess. You want to know why the markets are languishing so much that we have to be content with a 15% rally up to Dow 7500? Because the people who understand this stuff know. They know that the current administration is all backwards with the entire financial bailout concept. They don't have a clue what started it, and they don't have any more a clue how to finish it. So far, the best plan they've come up with -- providing very little details at that -- has been to create incentives for banks to hoard their cash while proclaiming that they should be lending it out, and all the while just printing billions and billions and billions -- hundreds and hundreds and hundreds of billions -- of freshly minted dollars into the economy to artificially make it seem like there is far more economic activity than there would otherwise naturally be. And the thing is...that idea simply won't work from an economic perspective. The banks won't lend (they're not), and the real economy won't pick up (it's not). You can artificially stimulate the economy and stem the bleeding for a while, but that's all you're doing, and it's all artificial. You force the banks not to lend, and you increase taxes on the wealthy, and on small business, and you fail to promote more sensible spending and saving practices in our country when you have the perfect opportunity to do so, and it sounds to me like a recipe for a longer-lasting downturn that might otherwise be necessary.

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Blogger Riggstad said...

I don't know man... everything seems to be on par for Dec. 2012!

Maybe the Mayans were right :)

Hopefully the Phils can get another one in the next 3 seasons!


9:50 PM  
Blogger Chad C said...

Obama's bracket looks good though....

2:30 AM  

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