The Political Imperative For TemporaryTakeover Of Financial Institutions

Tom Friedman writes:

If you didn’t like reading about A.I.G. brokers getting millions in bonuses after their company — 80 percent of which is owned by U.S. taxpayers — racked up the biggest quarterly loss in the history of the Milky Way Galaxy, you’re really not going to like the bank bailout plan to be rolled out soon by the Obama team. That plan will begin by using up the $250 billion or so left in TARP funds to start removing the toxic assets from the banks. But ultimately, to get the scale of bank repair we need, it will likely require some $750 billion more. The plan makes sense, and, if done right, it might even make profits for U.S. taxpayers. But in this climate of anger, it will take every bit of political capital in Barack Obama’s piggy bank — as well as Michelle’s, Sasha’s and Malia’s — to sell it to Congress and the public.

Forget for a moment that Friedman actually has no idea whether "the plan makes sense." Let's deal with the fact that there is no one who has enough "political capital" to sell the idea described by Friedman. At this point, only a temporary takeover of major bailout recipients will work politically. More.

The "bailout through the backdoor" that was the AIG bailout is now exposed. Eliot Spitzer wrote yesterday:

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars? . . . [W]ho were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already. . . . Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed? . . . AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

After all this, what are the chances that the country will just go along with another trillion dollar free handout to the financial institutions? Precisely zero in my opinion. Friedman writes:

Unfortunately, all the money we have already spent on A.I.G. and the banks was just to prevent total system failure. It was just to keep the body alive. That’s why healing the system will likely require the rest of the TARP funds, plus the $750 billion the administration warned Congress in the new budget that it could need.

Best I can piece together, the administration’s recovery plan — due out shortly — will look something like this: The U.S. government will create a facility to buy the toxic mortgages off the balance sheets of the major banks. They will be bought by a public-private fund or funds in which taxpayers will, in effect, be partners with hedge funds and private equity groups. The hedge funds will be there to provide expertise in pricing and trading the assets. The taxpayers will be there to guarantee — gulp — that the hedge funds won’t lose money if they take the early risks and to also lend them money to make some of the purchases. Taxpayers will benefit from any profits these partnerships make.

Once the banks sell their toxic assets, many will need capital, because, while they may be carrying these assets on their books at 85 cents on the dollar, they initially may have to sell them for less. So, the government will probably have to inject capital into more banks to maintain their solvency, but once the banks begin to clear their balance sheets of those toxic assets, they will likely attract the private capital they need and relieve the government of having to put in more.

(Emphasis supplied.) If Friedman is probably describing the Obama Administration's plan, it has not a chance in hell of being approved. The only way to sell a new financial industry bailout is for the government to take over temporarily these insolvent institutions. The government then can negotiate the sacrifices that will be made by the various players and insure that any windfall that comes goes to the government.

Friedman writes:

Will it work? We can only hope. But I know this for sure: unless the banks are healed, the economy can’t lift off, and that bank healing is not going to happen without another big, broad taxpayer safety net.

The only way that happens is if temporary takeovers are part of the equation. President Obama can not sell, indeed should not even attempt to sell, another no strings bailout.

Speaking for me only

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  • Display: Sort:
    that imperative occurred on Jan 22 -don't hold (5.00 / 1) (#3)
    by Bornagaindem on Wed Mar 18, 2009 at 07:58:02 AM EST
    yourr breath

    Unfortunately Tim Geitner is as much over his head as Obama himself. As Dan Schorr on NPR said Obama doesn't realize the campaign is over and he has the job. His great ideas consist of going "out" on the campaign trail and "selling" his plans -unfortunately the details aren't there so there isn't much to sell.

    Nationalizing a few of the banks should have occurred out of the box on Jan 22 but boldness is not a characteristic of this administration.  They will continue to piddle along with half a$$ed attempts while Rome burns.

    I guess it is a bit tougher being the president than playing one for the cameras.

    If only.... (5.00 / 1) (#4)
    by jbindc on Wed Mar 18, 2009 at 08:32:44 AM EST
    ...he'd stayed at a Holiday Inn Express last night....

    Right (none / 0) (#13)
    by Lacey on Wed Mar 18, 2009 at 10:37:29 AM EST
    Obama hasn't done anything since becoming president. I mean, the $800 billion stimulus package, a housing plan to deal with the mortgage crisis, the new small business plan just released, among other things, are meaningless. Oh, wait, then there was the proposed budget. But you know, go ahead and live in your littel Obama-hasn't-done-anything dream world. I guess posting a comment on a blog is lot different than actually thinking.

    I thought (none / 0) (#16)
    by jbindc on Wed Mar 18, 2009 at 10:50:31 AM EST
    the budget was "last year's business"?

    Keep in touch (none / 0) (#22)
    by gyrfalcon on Wed Mar 18, 2009 at 11:11:24 AM EST
    There was the leftover funding bill that just passed, and then there was Obama's proposed future budget outline.

    It was snark (none / 0) (#26)
    by jbindc on Wed Mar 18, 2009 at 11:49:29 AM EST
    Thanks for link to Spitzer piece (5.00 / 4) (#5)
    by Munibond on Wed Mar 18, 2009 at 08:37:24 AM EST
    The greater scandal is the use of AIG as a conduit to secretly flow taxpayer dollars to Goldman and other favored financial institutions.  Here's hoping the public starts paying as much attention to this as to the bonus scandal and that the facts of the original deal with the Fed, Treasury and Blankfein/Goldman are forced into the open.  To give credit where due, the NYT seems to be making some effort to keep this issue alive in the op/ed and front pages.  

    Support for Obama and his policies... (5.00 / 2) (#8)
    by kdog on Wed Mar 18, 2009 at 09:10:19 AM EST
    dips with every dollar handed to extortionist economic terrorists...and rightly so.

    No fooling. (5.00 / 1) (#9)
    by Radix on Wed Mar 18, 2009 at 09:28:43 AM EST
    I wonder what people thought the AIG money was for? The AIG bailout money was always going to pay off their counter parties.

    Thank you (none / 0) (#12)
    by gyrfalcon on Wed Mar 18, 2009 at 10:33:43 AM EST
    Golly gee, common sense.  The whole reason AIG was in trouble was the counterparty claims.

    This is disingenous (5.00 / 2) (#15)
    by Big Tent Democrat on Wed Mar 18, 2009 at 10:50:27 AM EST
    The fact that it was for counterpoarty payments is not the point. It was not, at least in my mind, for FULL PAYMENT of counterparties.

    Then my question is (5.00 / 2) (#19)
    by jbindc on Wed Mar 18, 2009 at 10:56:11 AM EST
    Why did THOSE creditors get paid first with the bailout money, since they were already getting assistance?  Whey didn't creditors who weren't getting a hand out get paid first?  Instead, we have groups like Goldman getting money from both ends here.

    Good question (none / 0) (#21)
    by Big Tent Democrat on Wed Mar 18, 2009 at 11:08:57 AM EST
    Because the assistance they (none / 0) (#23)
    by Radix on Wed Mar 18, 2009 at 11:16:43 AM EST
    were getting was to pay of the people who held CDS's that they had written. AIGFP wasn't the only company writing these things. These people were pretending that CDS's were free money.

    Unsubstantiated assertion (none / 0) (#29)
    by Big Tent Democrat on Wed Mar 18, 2009 at 11:53:25 AM EST
    The fact that to "your mind" (5.00 / 1) (#20)
    by Radix on Wed Mar 18, 2009 at 11:08:43 AM EST
    it wasn't for full payment does not make my argument disingenuous. If you can point to where these payments would only be partial, in any of the lending agreements, then potentially my argument might be disingenuous. Since no such agreement has been made public, how then, can you say I made a disingenuous argument?  

    I did not respond to you (none / 0) (#28)
    by Big Tent Democrat on Wed Mar 18, 2009 at 11:52:55 AM EST
    But to take up the substance, I feel confident that it was not for that purpose period.

    And it is disingenuous to assume it was.


    Yep (none / 0) (#14)
    by Radix on Wed Mar 18, 2009 at 10:42:39 AM EST
    Dear Mr. President: (5.00 / 2) (#17)
    by oculus on Wed Mar 18, 2009 at 10:51:42 AM EST
    Please bring Mr. Spitzer on board.  He could be a "consultant"  (see L. Summers).  

    Payments to the Counterparties .. (5.00 / 2) (#18)
    by santarita on Wed Mar 18, 2009 at 10:52:22 AM EST
    need to be explained.  The identity of the counterparties was a rather foregone conclusion.  But the details of payments that have leaked out suggest preferences and overpayments.  If they are simply backdoor assistance to banks and investment companies that have already received TARP funds, the question is why the need for backdoor assistance?  But if they were overpayments and preferences that's another kettle of fish altogether.  

    The payments to the foreign banks are less troublesome but should be looked at for the same reasons.

    The bonuses and payments to the counterparties are symptomatic of a larger issue (at least to me) is how the Feds make their decisions and then communicate them.  At this point, the Feds have been distressingly opaque.  

    If we as taxpayers are the owners of a controlling interest (or in the case of nationalization - total ownership) in institutions we deserve much more transparency.  And a feeling that our representatives (like Geithner) are doing adequate due diligence.

    I think Obama is in trouble (none / 0) (#1)
    by Saul on Wed Mar 18, 2009 at 07:26:31 AM EST
    with his political capital.  If they can show today or tomorrow with the Liddy hearing that Geither and Obama knew since last year about the AIG bonuses then it will be very hard to get the confidence back of the public and the republicans which was almost non existent to ask for any more bail out money

    I think Spitzer's point is generally right, though (5.00 / 3) (#2)
    by andgarden on Wed Mar 18, 2009 at 07:51:29 AM EST
    The bonuses are a (politically inflammable) red herring.

    Red herring is right (none / 0) (#6)
    by ricosuave on Wed Mar 18, 2009 at 08:50:42 AM EST
    The bonuses are this week's "executives riding to Washington on private jets".  Everyone is talking about them, but nobody (save for a few legislators talking about new taxes) has any intention of keeping those bonuses out of the hands of the AIG employees.  Those guys will keep their bonuses and nobody will raise a finger to stop them.

    I don't think they are a deliberate misdirection, though (i.e. I don't think that the Obama folks or members of congress are raising the issue to divert our attention from real issues).  I think they are just a convenient bandwagon for politicians to jump on because they are out there in the noise machine.  For a politician, talking about the bonuses requires no original thought, and might even get you on the news without having to do or say something controversial.


    The term of art... (5.00 / 1) (#27)
    by lambert on Wed Mar 18, 2009 at 11:50:05 AM EST
    is kabuki.

    Remember the executive compensation brouhaha? At the end of the day, Obama watered down the rules, and it all came to nothing. But it was great theatre!


    Not so sure. (none / 0) (#7)
    by dk on Wed Mar 18, 2009 at 08:54:07 AM EST
    Obama is still a media darling.  Unfortunately, that means that if he wants to give away more TARP-style money (which he apparently does) he will probably get away with it.

    He'll be an absolute (none / 0) (#24)
    by cal1942 on Wed Mar 18, 2009 at 11:26:22 AM EST
    hero in the Village and on Wall St if he manages to insure that they won't lose a red cent.  The Village will swoon if Obama is able to socialize their losses and insure that the old system remains intact. That sounds like the plan.

    Hmm... (none / 0) (#10)
    by coast on Wed Mar 18, 2009 at 09:32:12 AM EST
    this plan sounds familiar.  Nah...I'm sure they have come up with some new twist rather than dusting off the original TARP plan.

    BTD (none / 0) (#11)
    by AlkalineDave on Wed Mar 18, 2009 at 10:01:00 AM EST
    have you seen this article for nationalization? http://www.economist.com/opinion/displaystory.cfm?story_id=13184761

    What could go wrong? (none / 0) (#25)
    by lambert on Wed Mar 18, 2009 at 11:48:26 AM EST
    I mean:

    The hedge funds will be there to provide expertise in pricing and trading the assets.

    If the gvt had taken over AIG (none / 0) (#30)
    by sarcastic unnamed one on Wed Mar 18, 2009 at 12:07:27 PM EST
    would the bonuses not have been paid?

    Probably not imo (5.00 / 1) (#32)
    by Big Tent Democrat on Wed Mar 18, 2009 at 12:25:19 PM EST
    pay would then sue the gov? Any chance of prevailing?

    Clearly a Well Placed Smackdown (none / 0) (#31)
    by squeaky on Wed Mar 18, 2009 at 12:10:46 PM EST
    Of populist pandering Cuomo, by Spitzer who hits the nail on the head.