I’ve been closely following the various (new & improved!) bailout plans for the big banks — from the modified TARP to the recapitalizations to the “bad bank” plan.

I’ve noticed something I find a bit disturbing about our new Treasury Secretary: He has not yet fully come to terms with his new job, role — and boss. Granted, he’s been in the job for only two days. But given the extraordinary circumstances the financial sector and the economy is in, it is important for the Treasury Secretary to get up to speed as soon as possible.

Consider this statement from Geithner, who said that Treasury  is considering a “range of options” for its financial rescue plan, with the goal of preserving the private banking system“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

No! Defending these idiots was your old gig. In the new job, you no longer work for the cretins responsible for bringing down the global economy. Please stop rationalizing their behavior, and preserving the status quo!

Yesterday’s 13% surge in bank stocks is a clue as to what an obscene taxpayer giveaway this “bad bank” plan is — its free money for the firms that caused the problems, many of whom still have the same incompetent  management in place that caused the problem. Purging toxic assets from bank balance sheets, without punishing the management, shareholders and creditors of these institutions for their horrific judgment will only encourage more of the same in the future. Its moral hazard writ large.

A few reminders for Geithner that are of the utmost importance:

  • ▪ You no longer work for the Banks: The NY Fed is a private corporation, doing the bidding of the FOMC and its private sector owners — primarily, the primary dealers. In other words, the President of the NY Fed works for the biggest commercial and investment banks in New York. That is no longer operational for you.
  • ▪ As Treasury Secretary, your immediate boss is the President, and your ultimate charge are the citizens of the United States, and the finances of the country.
  • ▪ When any conflict comes into play between the nation and the banks, you as Treasury Secretary are on the side of the Nation.
  • ▪ You cannot serve two masters, especially when they are in direct conflict with each other.

When the post-script to this era gets written, I suspect we will learn all sorts of unsavory facts about the former Treasury Secretary, and how he unfortunately had a tendency to believe he was working for the benefit of Goldman Sachs.

The new Treasury Secretary has that mental muscle memory of who his former employers were. He needs to concentrate on the new job, and who he works for. Unfortunately, the early signs suggest that he has yet to figure this out. Let’s hope that changes. Fast.

>

UPDATE:  January 29, 2009 at 11:45 am

I was just on the radio with Mike Norman, who insisted that the NY Fed is not a private company owned by the primary dealers.

Um, wrong:

Article IV – stock of the bank
http://www.newyorkfed.org/aboutthefed/ny_bylaws.html

Ownership of stock of the Bank, issued to member depository institutions in accordance with law, may be evidenced by advices signed by the President or his/her designate, or by certificates bearing the seal of the Bank and the signature of the Corporate Secretary or an Assistant Corporate Secretary.

>

Sources:
Geithner Says ‘Range of Options’ Considered for Banks
Robert Schmidt and Rebecca Christie
Bloomberg, Jan. 28 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aCc8REieouZM&

Geithner Says Plan for Banks Is in the Works
STEPHEN LABATON and EDMUND L. ANDREWS
NYT, January 28, 2009

http://www.nytimes.com/2009/01/29/business/economy/29bailout.html

Bylaws, Board of Directors
Federal Reserve Bank of New York
December 20, 2007

http://www.newyorkfed.org/aboutthefed/ny_bylaws.html

Category: Bailouts, Credit, Politics

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

77 Responses to “The Moral Hazard of the “Bad Bank””

  1. hipster says:

    Will someone, pretty please, send this to every congressman and senator they know. This is bullshit!

  2. rktbrkr says:

    IMO Geithner should not have been chosen for Treasury secy, we need a break from the past, a fresh start, to paraphrase the 70′s , he’s part of the problem not part of the solution.

    Paulson & Bernanke were like tweedle dum and tweedle dumber, offering up secretive concoctions of TARP, Fed and FDIC funding for their too big to fail dependents. Why the inscrutable blend of funding? Things are made complicated for a reason! This Bad Bank plan paying “slightly more than market” for the banks worst assets is a recipe for financial disaster for the taxpayer. If the melange of CDOs ABSs etc were inscrutable what can we expect from a model price that can’t be sanity checked against real world bids. Bend over taxpayers!

    Before we throw good money after bad we should insist that any bank/financial firm “too big to fail” should first: 1) Divest non-core banking assets, like brokers and investment banks and 2) bust up existing banks so they will be small enough to fail.

    CITI has proven the “financial supermarket” model doesn’t work and then BAC confirms it by grabbing ML and immediately suffering massive losses. CITI, Chase, BAC and Wells Fargo are all too big to fail with their 10% deposit limit, cut it back to 2% or 3%, small enough so that the FDIC can manage liquidations. If the Final Four were busted up into 15 or 20 banks we’d have a hell of a lot more competition and we’d be able to allow mismanaged banks to fail, now they have all been given the gift of immortality, thanks to the US taxpayer.

  3. Mike in Nola says:

    Barry, you are, of course, right. Wait – that’s too many commas.

    Anyway, Geithner’s resume was my main objection to him. I also noticed that statement and hoped he was just hiding their real plans, but afraid that BO wanted someone with experience and just got another crony of the crooks.

  4. rktbrkr says:

    Another quarter or two of massive job layoffs and RE declines and there will be huge numbers of mortgages 40-50-60% underwater and then it won’t be mark-to-market accounting valuation headaches for the banks, it will be jingle mail and defaults that they will want to transfer to the taxpayers.

    Then we’ll be hearing Geithner and BB mumbling that the defaults on the toxic assets recently purchased for “slightly more than market” were unforseeable and unimaginable.

    Real estate turns over pretty quickly in these warm weather states (CA,FL,AZ,NV) and they’re all non-recourse, so if somebody loses their job or relocates and their McMansion is deeply underwater it’s a no brainer and these banks paper losses will turn into real losses very quickly if they don’t dump them on the taxpayers – thats why they had lobbyists explaining the wisdom of their bailout proposal to our elected reps – and why their tool tiny Tim is trying to rush the next trillion thru.

  5. ben22 says:

    Barry,

    Correct but we should have all known what we were getting in Geithner. I won’t say what the other responders already said b/c I agree with them all so…

    I’ll take this time to complain some about Ken Lewis again, you know, the guy that let Thain go. This go is an absolute ass clown. First, he buys ML for the value of the franchise blah blah blah, oh yeah, paid a huge premium, (won’t even bring up Countrywide) then it was what he thought was right for America, then I read in the journal he isn’t happy with Thain because Thain didn’t tell him about how many writedowns they’d have to take on toxic assets, but a few weeks ago he said they did all the due diligence, but then it was because the treasury told them to.

    Whatever. I’m disgusted by this asshole and all the rest of them. Last year it was popular to blame the shorts for the big market drops (?) if I were wealthy enough I would be more than happy to take the blame for doing everything in my power to take him and that shit hole BAC down.

  6. globaleyes says:

    A heartfelt post by ben22 to which I’ll add: Ken Lewis should’ve known those bonds would decline in value. He is a banker with an eye on the markets, right? Thain did the best he could for ML but ultimately discovered the peril of Merrill.

  7. Stuart says:

    He’s cut from the same cloth as Paulson et al. Perhaps just cynical, I never expected anything different from him. His arrogance and deceit over a simple tax matter further substantiated this cynicism. These latest comments clearly demonstrate that he believes his constituents are the big banks, that same old financial oligarchy that, to date, have largely got away with looting the public purse. Why so many are still walking free is spitting in the public’s face, slapping it, then giving your kids the finger, all with a smile. Yes, TurboTim, an honorable constituency for sure, you 1st rate SOB.

  8. TheReformedBroker says:

    good bank, bad bank…barry, I agree, the bank stocks told u yesterday that this was a free-for-all

    the silliness!

    here’s my take…

    http://thereformedbroker.com/2009/01/29/good-bank-bad-bank-by-dr-seuss/

  9. wally says:

    So far, he looks to be O’s first big mistake… and right out of the chute, too.

  10. call me ahab says:

    Excellent post Barry! You have said much more eloquently what I have been rantng about the last few days. I hope the Treasury changes course on this idea and protects the taxpayers instead of managment and shareholders.

  11. flipspiceland says:

    It’s only a mistake if anyone seriously believes that Geithner is not the handpicked puppet of the men behind the curtain who are ‘running’ this country for their own personal gain.

    Obama either knows before Geithner does what he has been given orders to do or is irrelevant in what
    these men intend to do.

    There is no mistake here.

  12. Political tin ear #3

    I’m thinking he may even be gone before the ice melts in Washington D.C…..maybe even before Washington school kids go back to class

    I’m glad I’m the first one who has a chance to say this. Geithner is looking like the George Bush of the Treasury. :mrgreen:

    He could single handedly give the republicans the right to tell all American liberals to stop laughing

    These guys are like zombies. Kill one and two more pop up to take their place. Are you sure we’re not watching night of the living politician?

    Boy, I’ve waited a long time to turn it on the liberals and their new administration. What’s it been? All of two months? :twisted:

    And some of that time doesn’t count because they weren’t officially in office yet

  13. Mike in Nola says:

    The prologue in this article (link posted by lefty or someone) more or less sums up the situation: the big Wall St. banks v. the rest of the country.

    http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

  14. wally says:

    Simply: it is WRONG to try to ‘save’ the banks. We need them to be changed, not restored. There is no hope to move forward without that.

  15. KidDynamite says:

    this has been the case all along. the Powers That Be have been trying to save the system AND save the stocks of the banks in question at the same time. and that’s just one reason why it hasn’t worked

  16. doug says:

    Good points Barry. As for it being ‘O’s first big mistake’, I understand the comment, but disagree. He is a new employee and I am willing to see if O can instill in him the very points Barry makes. These things are not done in a day. We all expect instant gratification, and we all need to get over it.

    Not saying that Timmay is not a slime ball, just that he has a new boss who may be able to get him to do OUR bidding vs the old masters. Muscle memory(great phrase) will take some time to change…

  17. Gawdfather says:

    Jumped into FAZ premarket, with Turbo Timmy’s mindset, as Barry so ably demolishes above, being one of the reasons why. Tim’s gonna throw another trillion or two at the banks, and still have to eventually serve up the tough medicine Barry and others speak of (wiping out the shareholders, blowing out the brains of what, by then, will be the zombie banks, etc.).

    Therefore, FAZ will likely face months of absurd volatility, as the market applauds Son of TARP, and FAZ takes some big haircuts, but eventually, when the zombies are roaming the streets, and Obama cans Turbo and brings in Tall Paul for one last ride, I’ll enjoy the FAZ rocketship, until it gets outlawed.

  18. Expat says:

    mmm, and the President swears an oath to protect and defend the Constitution.

    Right now, Geithner is sitting at his big, new desk, contemplating how he will bail out all his buddies in NY and then get an eight figure job there in four years. “Mmmmm,” he thinks out loud, “All your money are belong to us. Hee hee hee.”

    What? We’re shocked that Geithner is just another scumbag?

  19. You guys are making excuses and handing out passes already?

    How long is it going to be before people are on this board stating that they can’t understand how 22% of Americans can still support this corrupt administration?

    I think I’ve changed my perspective. I don’t think the revolution will be triggered over outrage due to corruption. I think it will be triggered over embarrassment due to incompetence…….and bad acting

  20. Stuart says:

    I don’t know. My money is on corruption. It could start in California as they withhold the repayment of what is really your own money, overpaid in advance. It’s your own money owed back and you’re being told you’re not going to get it back. This while Trillions are being thrown at the very same institutions, run and manned by the very same people who took it in the 1st place. To expect the public not to get unruly is extreme self-delusion and naivety.

  21. Larry G says:

    Actually, Larry Summers is his de facto boss. The reason they’re so keen on Geithner is he’ll mindlessly follow Summers, the man who brooks no disagreement.

  22. @Stuart Says: January 29th, 2009 at 8:51 am

    I don’t know. My money is on corruption.

    You are probably right. There is always the faint hope that the public could one day wake up and say, “These guys are Homer Simpson!” and away we go. :D

  23. ChickenDinner says:

    Geithner and Barney Frank should lock themselves in a room. The way they are trying to ramrod this nonsense down the taxpayer’s throats is disgusting.

  24. Brad says:

    Thank you Barry, for pointing out how the BKX viewed the “bad bank” idea: “Yesterday’s 13% surge in bank stocks is a clue as to what an obscene taxpayer giveaway this “bad bank” plan is — its free money for the firms that caused the problems, many of whom still have the same incompetent management in place that caused the problem. Purging toxic assets from bank balance sheets, without punishing the management, shareholders and creditors of these institutions for their horrific judgment will only encourage more of the same in the future. Its moral hazard writ large.”

    Another good point, *applause to you sir.* Was very disappointing to see Paulson serve private interests groups in association with him, colleagues of yesteryear and those who may have contributed the most to the American Bankers Association or similar associations (‘Friends of Paulson Inc,’ etcetera). … “When any conflict comes into play between the nation and the banks, you as Treasury Secretary are on the side of the Nation.”

    BR, do you have any positive ideas how we can organize a full court press against this kissing-cousin-type ideas which are overtly friendly to look after the interests of banking cousins and colleagues of same?

    At wits end, I am about to organize a ‘friends with shotguns’ charity to counter the ‘friends of paulson’ special interest group on Capitol Hill. This is obviously the option of last resort, in case democrats in congress and senate (our representatives) fail, again, to listen to the nation as it is voting “NO” on bank bailouts.

    It seems crazy and absurd there is much talk of enacting a bad bank policy and this is leaking or coming out of Treasury or Federal Reserve… Would rather apply myself in effort of diplomacy. But not completely persuaded Obama has the country’s best interest in mind. Any recommendations what can be done to meet this latest challenge peacably?

    Seems Obama is leaning too far their way, with the appointment of Geithner and not withdrawing that appointment, when his ghosts starting coming out of the closet. When it comes to rewarding bankers for mischievous or dishonest practices, Obama is seeming to side with their desire to weasel out of being accountable. If he fails in this regard, what can the people do that is peaceable?

    If Obama fails, and bad bank is put into effect, complete with shell entity, paying 70-90 cents on the dollar for bad assets, it would seem to signal defeat – as if the people’s representatives turned a deaf ear on their vote “NO” for bank bailouts. And being so close to engaging that alarming and dishonest business practice, that no other peaceable option is left or made available to the nation.

  25. wally says:

    doug, I don’t just say Tim G. is a big mistake for this one reason. I’d have said ‘no’ based on the tax dodging and on the clumsy China comments, too. However, this pro-bank anti-people attitude is potentially the most damaging to the country. I would also be willing to make a pretty large bet that his attitudes will get entrenched and defensive within a short time – and that’s because his peer group will support what everybody else will see as obvious favoritism.

  26. lvargas says:

    I completely agree with Geithner. In the short term, to satisfy our need for (1) abundant credit and (2) sense of moral outrage, clearly nationalization is the best path. But then what? I have lived my early life in a country with a heavy presence of the state in the banking sector, and that creates all sort of problems (different problems, for sure) like political corruption (if you think the USA is corrupt now, you haven’t seen anything), political allocation of credit, politicization of the management of the banking sector, all that severely distorting the banking system. Honestly, I would rather have the US system, warts and all, instead of that.
    On top of that, how do you actually nationalize? Confiscation, maybe? Where do you stop? One bank, two? The whole system? That is likely, as no bank will be able to access private capital if the state start nationalizing, and as deposits will flock to the nationalized bank they will need capital (I would yank my money out of any private bank and put it in the nationalized bank: whether they are conservatively managed or not doesn’t matter anymore, as they cannot have better credit that the government).
    In summa, has any of the posters and Barry for that matter, stopped for a minute to think about the medium term implications? I am really glad that is Geithner there, not Barry.

  27. Graphite says:

    Just saw Howard Dean on CNBC say he thinks we could make money on these toxic assets.

    Do the Democrats honestly believe that if they lose hundreds of billions of dollars on the “bad bank,” the voters will just say “Oh bother!” and keep voting for them.

    Hmmm, actually, maybe they’re on to something.

  28. Brad says:

    This “bad bank” end game must be stopped.
    fiat justitia, ruat caelum

    If not by diplomacy, then it leaves few options available.

  29. Mannwich says:

    Me-thinks Turbo-Tax Timmay merely revealed the truth – he and all of the feds (and by extension the American people) are all beholden/subservient to the “private banks”. Not good times.

  30. dead hobo says:

    A “Bad Bank” is a bad idea. So is any idea that promotes incompetent and corrupt banks and bankers over the people who actually use and need credit.

    If a bank is ready to fail and likely to drag a large number of people down with it, then fix the bank.

    This is not the problem now. Banks may not be flush, but they’re not in dire straits and ready to dirt nap.

    Ordinary people are now in need and they are the ones who should be emphasized in any new bailout scheme. Trickle down economics is a lie, a farce, the stuff of crooks and liars, and the mantra of the incredibly stupid. Bailing out banks only keeps bankers in their jobs, nobody else. And, I suspect, the worst bankers are the ones who are the most secure in their jobs.

    Infrastructure programs are good, event though they have a long lead time. Unless you are building bridges to nowhere or idiotic vanity projects, roads, bridges, broadband, and the like all have impressive multiplier effects. They are the gifts that keep on giving. True, they are not the usual Republican Welfare for the wealthy (live on borrowed money and stick someone else with the bill), but we don’t need or want that form of human waste polluting the economy any longer.

    Short term, people need to feel secure so they can start contributing ot the consumer economy. Giving cash to a banker will not help out in the slightest. Sending a few to jail, however, might have an effect.

  31. ottovbvs says:

    lvargas Says:

    January 29th, 2009 at 9:13 am
    In summa, has any of the posters and Barry for that matter, stopped for a minute to think about the medium term implications? I am really glad that is Geithner there, not Barry.

    I’m with you Ivargas. The “Cancel my subscription immediately” tone of most of the comment here and from BR who should know better is a bit …well…you decide. The last thing we want is the govt running the banks rather than supervising them from a distance. Geithner is clearly a well qualified technocrat who knows what he’s doing. Did he skirt legality with his taxes, perhaps, but let him without sin cast the first stone. It’s about as relevant to his ability to do his job as all the bs about Clinton bonking women. It’s obvious they’ve looked at and/or tried most of the other policy prescriptions, and it’s all experimentation at the end of the day, if you could just turn a light switch anyone could do it. And it looks like they may be gravitating towards the bad bank as the solution although we don’t know yet. That’s ok with me. Unlike BR and many of the posters here I don’t think I’m smarter than Summers, Bernanke and Geithner. We hired Obama as CEO so let him get on and do it.

  32. Barry,

    Weren’t you asking the other day why these bankers would be so foolish as to buy up their own shares?

    I think now we know why.

    So why did uncle Warren buy GE? What are the plans there?

    These guys are always thinking three and four moves ahead aren’t they?

  33. Brad says:

    .

    Sic Semper Tyrannis
    “Thus Always to Tyrants”

    State seal for commonwealth of Virginia:
    http://en.wikipedia.org/wiki/File:Seal_of_Virginia.svg

    .

  34. The last thing we want is the govt running the banks rather than supervising them from a distance.

    They should do one or the other. Up to this point they were doing niether

  35. wnsrfr says:

    Punishment for those responsible=good idea. Punishment for all associated with a bad bank=bad idea.

    Nationalizing banks? What? No way!

    Maybe what needs to be done is figure out what incentive environment was in place that led to the roll-up of banks into the big Citi and BOA monoliths, and hit that.

    I was a Fleet Bank customer, then a Bank of Boston then a Bank of America. It took three years for my online banking experience with BOA to recover to that which Fleet had 5 years ago. One very nice manager at the local branch in my small town retired last summer and she told me she was taking the lump sum payout for her pension/retirement plan (smart lady!).

    If she was still working, I would be pissed if you got her fired and had her pension/retirement dissolved, Barry! Was she involved in the the decisions on toxic assets? I don’t think so.

    We need to establish management incentives that are as health-inducing for the system as asset ratios used to be (well, that is, before the geniuses figured-out how to maintain fictional asset ratios)…the old Ben and Jerry’s CEO maximum compensation ratio compared to lowest-paid employee comes to mind, until it is noted that B&J had to abandon that at one point so they could attract someone to work in Waterbury, VT…but something like that.

    Somehow, the CEO club in banking just became a big game of selling your bank or buying some other bank, like some goofy board game with big and little bank buildings getting aggragated.

  36. km4 says:

    Barry spot on post !

    Trust is US banking system is all but dead.

    Appointing Geithner does nothing to change this.

    Just more the same FUD.

  37. Concerned American says:

    Obama has two very large strikes against him already.

    1) Geithner, enough said above.
    2) Standing on stage with the very CEO’s that have sold us out to China and continue to do so in a flamboyant way.

    I am still behind Obama, but just barely. Only because the last administration was SO BAD. I won’t be behind him long.

    These CEO’s are crooks and cheats (led by Ken Lewis). They sell America out for their personal gain. Helping America is the last thing on these people’s minds.

    BAC and Ken Lewis has ruined and continues to ruin good hard working Americans by arbitrarily rasing their interest to really what ever they think they can get away with. The are many people with good credit scores that have found themselves having to use credit and then seeing interest go to as high as 30%, because BAC did a review and decided.

    You are real close to going in the same toilet with Bush, Obama. Wake up while you can.

  38. Graphite says:

    “I’m with you Ivargas. The “Cancel my subscription immediately” tone of most of the comment here and from BR who should know better is a bit …well…you decide. The last thing we want is the govt running the banks rather than supervising them from a distance.”

    You can easily nationalize without running the banks. First, you wipe out however many equity holders you need to absorb the first losses. If that’s not sufficient, then you convert debt to equity, in rising tiers of seniority, until the bank no longer has a capital problem. If that’s *still* not sufficient to absorb the bank’s losses, the Treasury can inject its own common equity until the bank is sufficiently capitalized, and sell that equity off to private bidders, via auctions, over time.

    I’m a *libertarian* and an *Objectivist* and I would rather see the banks seized, nationalized outright, than endlessly bailed out by taxpayers!

  39. DeDude says:

    I would be surprised if Geithner last more than a year. He seems to suffer the same type of arrogant stupidity that haunted Poulson. At this point only a complete idiot would try to be the shield protecting the clowns on Wall Street from the anger of the people. This economic disaster will get worse before it gets better, and there will be bonfires in congress and on the streets roasting both guilty and innocent villans. But since he appears unable (or unvilling) to hear and get behind the collective message, he may be a good one to burn (or should we say sacrifice to save the king). Obama cannot avoid getting some of the heat when it gets obvious to evberybody that his plan was not able to fix this mess in a few months. It’s very hard to get the electorate to compare “current situations” with “what would have happened if we had not done this”.

  40. Graphite says:

    “I am still behind Obama, but just barely. Only because the last administration was SO BAD.”

    This is a reason to be behind Obama why, exactly? As near as I can tell, the guy had sold out before he even made it to the White House. He was, what, the third largest Congressional recipient of campaign donations from Fannie & Freddie?

  41. TDL says:

    lvargas definitely agree with you.

    ottovbvs, President does not equal CEO and it’s the technocrats who have caused the most harm to the U.S. through out it’s history. After all, technocrats are too smart to need to be humble & learn from their mistakes. They have models dammit!

    BR, Geithner serving two masters as Treasury Sec. is just the way Hamilton designed the office. If anyone was serving two masters it was indeed our first Treasury Sec. (and the banking/manufacturing interests always won with him.) I don’t get the surprise about how Geithner is acting and will most likely continue to act in his new position. He was brought on board precisely b/c he was the execution man for the TARP, the various Fed facilities, and other activities. Geithner was brought precisely b/c he represents the status quo. Again, why the surprise at this fact?

    Regards,
    TDL

  42. Greg0658 says:

    from the main post “goal of preserving the private banking system. (by Tim)“We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.” (by BR) No! Defending these idiots was your old gig.”

    Barry you’ve got so many you missed one .. let me pull it from the dusty bin
    “Private Profits / Public Losses”

    and on Geithner – heres what I’m hope’g what’s going on “keep your friends close and your enemies closer”

    you know if the system worked better – the job of Sec of Treasury would be a “sentence” not a step into a better job as a trained informant

  43. rktbrkr says:

    We’re getting the worst of both worlds with bailouts without nationalization, an ever changing mix of inconsistent and ineffective bailouts. These incompetent managments want it both ways – unregulated federal funding.

    The bank BODs should get a simple choice, do you want to be nationalized or continue as a free market bank, with insured deposits but subject to liquidation if you don’t meet FDIC standards. Put the ball in their court!

  44. Not only is Geithner corrupt, he’s stupid. He called China a “currency manipulator” in written answers to his Senate confirmation hearing.

    China’s currency has been more or less pegged to the US dollar for the last decade, in effect, off-shoring the management of the value of its currency to the US Federal Reserve. WE determine the value of the Chinese currency!@! How hard is it to get that the only “currency manipulation” that is and has taken place is from our very own federal reserve?

    Besides getting his facts wrong, he also risks getting crosswise with the country most important to funding our current account deficits. If China quits financing our current account deficits, the only way we’ll be able to buy oil with dollars is at the point of a nuclear-tipped missile.

  45. TDL says:

    Concerned American,

    As someone who employs people in one of those third world countries that some how “sells out” or otherwise undermines America I object to your comment. Furthermore, no one is entitled to cheap credit. Those who extend credit take a risk and can charge whatever they want (and by the bye, this is not a defense of today’s mega-banks by any means; they are an odious lot), after all it is their property or the property of those the entrusted them to loan out. I know that the notion of private property is a quaint one today, but it is still important. If you want to place blame, look square at the Federal Government & the Federal Reserve, they are the ones who impose costs on doing business and just simply living life.

    Regards,
    TDL

  46. ottovbvs says:

    How the Common Man Sees It Says:

    January 29th, 2009 at 9:34 am
    The last thing we want is the govt running the banks rather than supervising them from a distance.

    They should do one or the other. Up to this point they were doing niether

    Do you want the govt running the banks on a day to day basis? Clearly there has been inadequate supervision but I hardly think that’s likely to continue.

    The Curmudgeon Says:

    January 29th, 2009 at 9:49 am
    Not only is Geithner corrupt, he’s stupid. He called China a “currency manipulator” in written answers to his Senate confirmation hearing.

    And what do you say to someone who thinks Geithner is stupid because he points out the, I would have thought, self evident truth that China manipulates its currency……………????

  47. Greg0658 says:

    ps – to edit and clarify my November 5th recommendation of Barry for Treasury Sec
    “if the system worked better” well .. let me hedge and say if the system was perfect it would be an honor and a lovely escape for a short time from the salt mine

  48. mjohnson says:

    Barry and everyone else,

    While I’m all for nationalizing the bad banks, which appears to be almost all of them, firing management, and wiping out the equity and most of the unsecured creditors, given the spineless nature of our government and their repeated displays shortsightedness, at what point do you just throw your hands up and say, “fuck it, if you can’t win, join em”?

    The fundamentals say the stocks should go to zero and we should nationalize the banks. However, if that doesn’t happen, you will see a huge transfer of wealth (which has already happened with Tarp I). Personally, I’m debating how to play this transfer. If Tarp II, III, and IV are more of the same, I’d rather make some money along the way than just give it away via my taxes.

    Mike

  49. We need to establish management incentives that are as health-inducing for the system as asset ratios used to be

    Last time I checked it was still illegal to shoot people

  50. “And what do you say to someone who thinks Geithner is stupid because he points out the, I would have thought, self evident truth that China manipulates its currency……………????”

    When a country pegs the value of its currency to another country’s currency, it is, in effect, offshoring the determination of that value to the central bank of the country to which it’s currency is pegged. China can only be a “currency manipulator” if we believe that by allowing the US Federal Reserve to determine the value of China’s currency, it knew that our central bank was so feckless that it would ensure China’s currency retained a value that would be advantageous to China. Of course, given how stupid are our (the US) central bankers, that might not be a bad assessment of the situation.

  51. Concerned American says:

    TDL,

    If you are doing that to justify an unethical bonus like most CEO’s I see, I do think you are undermining America. When all your paying American customers are eliminated, you may start getting it too.

    Regards,

    Concerned American

  52. @ottovbvs Says: January 29th, 2009 at 9:58 am

    Do you want the govt running the banks on a day to day basis?

    Was that a rhetorical question? ;)

    @mjohnson Says: January 29th, 2009 at 9:59 am

    at what point do you just throw your hands up and say, “f*** it, if you can’t win, join em”?

    Personally, I’d rather hang separately

  53. Greg0658 says:

    DeDude says “economic disaster will get worse before it gets better, and there will be bonfires in congress and on the streets roasting both guilty and innocent villans”

    lets hope not … NEVER forget who holds the trump card .. the SYSTEM

    I like Blago’s term: PIC (Political Industrial Complex)
    then there is the MIC (Military Industrial Complex) and until recently the MSM (Main Stream Media)

    and so they don’t get their shorts in a knot for leaving them out of TBP .. OR (Organized Religion)

    lets HOPE you do not forget the system holds the trump card in a world this big
    … baby steps and don’t forget what you can only imagine what’s is in the logs books of the Kings and Queens private library

  54. Sherlock says:

    Barry…Brilliant observations. Personally, I find the Obama’s money team less than meets the eye. Check out Luigi Zingales “bad bank” solution; it’s quite enticing!

    http://www.reuters.com/article/newsOne/idUSTRE50R70A20090128

  55. @ Greg0658 Says: January 29th, 2009 at 10:16 am

    You are only as strong as the coterie of gladiators who have sworn to give their lives for the worthless trinkets, land and pieces of paper you are giving their families in exchange for blood. That is also what the leaders and people of the U.S.S.R. eventually learned too

  56. DeDude says:

    Greg0658

    No the system will not be at risk. But it will have to give a little and throw a few dispensable servants on the bonfires to save itself. That is what it always has done and will do again, when needed.

  57. jlj says:

    One aspect of this problem I have not heard much about is the political money problem. Obama set up a campaign funding machine with a small amount of dollars from millions of people. That works for a national race. Obama can be agnostic then as to how political contributors are affected by the economic collapse we are in. Senators and Congressman cannot. Whether Democrate or Republican the $$ still come from the same socio-economic segment. Takes a whole lot of money to run a race. Their major class of contributors have been hit hard the last 18 months. From that viewpoint the way the gov has spent the tarp money to date and the idea of a bad bank is probably the best % shot at getting money to the large $$ political contributors. So it is not the Banks vs the people, it is the banks vs the people vs the need for campaign contributions. 2010 is around the corner, bet on the latter and hope a few swelling wallets lift all paychecks.

  58. Transor Z says:

    @ottovbs:

    “[Not paying self-employment taxes is] about as relevant to his ability to do his job as all the bs about Clinton bonking women. ”

    Not quite. Not when the Tax Commissioner reports to you.

    “Unlike BR and many of the posters here I don’t think I’m smarter than Summers, Bernanke and Geithner. ”

    Fair enough. But the smart policy and the politically expedient policy often have nothing in common. For example, there’s been a lot written (including by BR) about the Fed’s unwillingness to raise rates as being more about a lack of political sack than a lack of smarts.

  59. I am on the radio with Mike Norman, who incorrectly tells me that the NY Fed is not a private company owned by the primary dealers.

    Article IV – stock of the bank
    http://www.newyorkfed.org/aboutthefed/ny_bylaws.html

    Ownership of stock of the Bank, issued to member depository institutions in accordance with law, may be evidenced by advices signed by the President or his/her designate, or by certificates bearing the seal of the Bank and the signature of the Corporate Secretary or an Assistant Corporate Secretary.

    Um, wrong.

  60. toneybrooks says:

    We read here and there the bells have tolled for free market capitalism, but I don’t believe it. What’s dead, hopefully, is fundamentalist laissez faire capitalism. Fundies like the religious right in the U.S., the Taliban in Afghanistan, or the light-touch free market ideologues in Washington share this trait: mind numbing myopia.

    Geithner says he wants to preserve a “private,” corrupt and bankrupt, financial system run by idiot buddies. Until Washington can get its collective head around the simple fact that the financial system is defunct, the banks are insolvent, and the taxpayers are becoming outraged, there will be no end to this nightmare. In the final analysis, the zombies must be nationalized. Over $1.5-trillion in new capital is required. That’s on top of a $2-trillion deficit! Welcome to Talibanking – got a dime?

  61. Graphite says:

    “We read here and there the bells have tolled for free market capitalism, but I don’t believe it. What’s dead, hopefully, is fundamentalist laissez faire capitalism.”

    Yeah, because a mixed economy, with the Fed fixing the price of money and throwing credit around like candy, with fiat money, endless bailouts, cartelized government-sponsored rating agencies, and regulatory agencies that bought into the same bull market bullshit as Wall Street, has worked so much better.

    Yeah, laissez-faire really failed us here.

  62. expatjourno says:

    Obama is just as corrupt as Bush.

  63. willid3 says:

    so we get a choice of bad bank or nationalization of the banking system? the credit problem appears to be spreading as the commercial loans that the regional and local banks made are also going bad. that will take them down next. we can’t let the banks go as they make the economy work. so maybe the cheaper version of the fix is to nationalize them to save tax dollars. then break them up and sell them later. And set up rules that will keep banks from getting so big that if they fail they take us with them. and make sure we have real regulators in charge, not warmed over lobbyists and make believe ones. may have to make it so that a 2/3 majority in Congress has to approve changes to these rules. and make it so that even if they get them changed it take 20 years to actually take affect. we have seen how deregulation works. its like having no traffic rules (think how bizarre to us the traffic patterns are in Rome for example). and nobody is making sure the rules are being followed. thats where we have been. and the bad part, is we have been here before

  64. toneybrooks says:

    “so we get a choice of bad bank or nationalization of the banking system?”

    Excellent post. The most significant problem with the bad bank idea is this: the government will overpay for the toxic assets. That is a given since paying what they are worth exposes the banks’ balance sheets for what they are: insolvent. The hole is upwards of $400-billion BEFORE recapitalization. Nationalization averts this absurd process of “valuing” worthless assets. In the bad bank scheme, taxpayers overpay and subsidize bank equity and bond holders, as you noted.

    The wrong policy response to the financial system crisis will throw us into a deflationary depression. That is also a given.

  65. DL says:

    I could almost understand Bush letting Paulsen run the show, as far as bailouts were concerned. Bush probably knows nothing about economics, and in any case just wanted to paste on a few band-aids before leaving town. One would hope, however, Obama is a little smarter than Bush, and that he isn’t going to just let Geithner do whatever he wants to help his friends in the banking industry. Furthermore, Obama presented himself during the campaign as being interested in the plight of ordinary citizens, and not the “fat cats”; in fact, he often criticized the fat cats during the campaign. So it will be disappointing, to say the least, if Obama just lets Geithner throw trillions of dollars at the banks.

  66. patient renter says:

    The NY Fed is a private corporation, doing the bidding of the FOMC and its private sector owners — primarily, the primary dealers. In other words, the President of the NY Fed works for the biggest commercial and investment banks in New York. That is no longer operational for you.

    Amen. Thanks for calling attention to this Barry, as this has been my biggest worry of the new administration.

  67. toneybrooks says:

    Geithner does not seem to be finding his sea-legs as quickly as we’d hoped. So far, he started a row with the Chinese over currency manipulation — that can lead to protectionism — and tipped the administration’s hand on how they’d deal with the banks — no nationalization. I hope Obama reins him in.

  68. johnbougearel says:

    O-badbank-ma ought to take a cue from Meridith Whitney who opined. “Simply removing ‘toxic’ assets from bank balance sheets will not directly cause banks to increase lending,” Whitney wrote in a note today. The banks likely won’t participate in selling assets if the Obama administration wants to pay fair market value for the assets “as capital hits would be too dear,” Whitney said.

    “We believe private capital will readily invest in businesses that make money and grow,” Whitney wrote. “However, the banks do not fit this description.”

    “If a bank were to sell its ‘bad’ assets into a ‘bad bank,’ it would still be left with lower earnings power from higher losses on ‘good loans’ and the requirements to build reserves, lower earnings power from lower assets and a higher legacy expense structure, or both,” Whitney wrote.

  69. Porsche87 says:

    Nationalize the banks and destroy all shareholder value? Who are the shareholders? Mostly, the baby boomers who have socked away billions (trillions) in their IRA’s and 401(k)s. Nationalize the banks and they will suddenly see another 10% – 20% drop in their investments (due to all of the idiotic financial advisors telling them not to panic and that stocks are the best investment). The problem with losing that percentage is it is gone forever, not for some number of years or decades. And they didn’t invest in the banks, they invested in some fund that was offered to them. When Aunt Jenny gets her quarterly statement and calls up her broker to find out what happened, they tell her it was the government’s fault. Can you say political suicide?

    Amen to removing the ass hats who ran their firms into the ground. I would even like to see a few politicians take perp walks. But look at the immediate fallout and focus on the realities of what can be done. Considering the market value of these banks, how about a government buyout? Shareholders get some amount of money back, the bond market doesn’t fall apart and the government can then slice and dice the banks to create entities that work, that are not too big to fail and sell them off to private investors. I bet the market caps to buy all of them is less than the bailouts!

    BTW, as someone else said, I hope Timmy is gone by the time the snow melts. Even though his replacement will still be a bank shill, at least it will look better.

  70. jmay says:

    The peanut gallery is a wee bit cranky today, no?

  71. rich says:

    Hi,

    I’m a bit bewildered by your article and would like to ask some questions to flesh out your position.

    You have emphasized a statement by Mr Geithner….

    “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

    …and condemned him for his position, implying that it is one that must be arrived at as a result of being beholden to special interests.

    My primary question is what alternative you see for the future of the US banking system other than the privately system we have today? I don’t see any alternative solutions being presented here…only criticism.

    There are umpteen millions of Americans employed in the financial service industry. Clearly, you are going to need most of them in the future. Maybe you want to get rid of the boards and top executives of these banks? How far down the org chart do you go? And how do you determine who is going to lead them in the future? What is the selection process?

    Like you, I am disgusted with the societal-wide breakdown of checks and balances including the unsustainable distribution of wealthy to the richest. And psychically, I’ve been kicking and screaming for the last 8 years watching it go down. For better or worse, we now share the result as a nation and need to work together toward solutions.

    Are you simply bitching here or do you have a better idea?

    For now I’m going to support the administration and Mr. Geithner until he demonstrates that he doesn’t deserve it.

  72. Jono says:

    The Moral Hazard of big government.

    This quote had my laughing:
    No! Defending these idiots was your old gig. In the new job, you no longer work for the cretins responsible for bringing down the global economy. Please stop rationalizing their behavior, and preserving the status quo!

    Actually, that quote is back to front. Geithner now works for the thugs who are responsible for bringing down the global economy. US dollar hegemony and fractional reserve banking must perish.

  73. rich says:

    Is there anyone reading or writing this column who has a suggestion as to what a desired solution to this crisis should look like? And how it would be clearly different than the approaches currently being considered by the administration?

    I got to this site via a link from TPM. Josh is a pretty sharp guy in general..but I’m not so sure about this referral.

    Prove me wrong ladies and gentlemen. Tell us how we should fix this mess or forfeit your right to slander those who are doing their best.

  74. gloppie says:

    “I was just on the radio with Mike Norman, who insisted that the NY Fed is not a private company owned by the primary dealers.”

    This goes to show that everybdoy is clueless about the Fed. Poor Joe six pack does not stand a chance. Literally everybody I talk to in my day to day life (I’m not in finances) thinks that the Fed is a Federal Reserve….as the name implies.
    Some pile of money or gold somewhere, that the government somehow “grows” magically so we can all retire.
    The great Jekyll Island con still works perfectly. Half the people think I am a hack when I explain (as best as I can) that the Fed is a private corporation made of the “primary dealers”, which some are being bailed out. The other half gets angry, sometimes at me even.
    I am telling you, when J6P understands what is really happening, there will be blood in the streets. There is just no way that the populace will remain calm.

  75. @ rich Says: January 29th, 2009 at 8:54 pm

    Rich,

    Our ship the Titanic is leaving the harbor and we have just replaced the captain of the ship. We here on this board are arguing that there is a fatal engineering flaw in the ship that will sink it the first time it runs into anything no matter who is piloting it. The government is currently arguing that they have the best trained Titanic captain on the planet and that we, who only had to take five minutes studying basic ship building to see the real problem, should just quiet down and take a seat

    Until you fix the fatal flaw that is in the banking and credit system you, your kids and your grandkids will continue to get hosed as taxpayers no matter who is running the currency printing press. Going out and getting people who are just going to alter the speed and leverage of the presses is absurd in the eyes of most of the people around here

  76. dunnage says:

    The problem is that Geithner is not confused.

  77. Sam_Deprist says:

    Barry,

    could you retrieve the names of the stockholders of NY Fed and the number of shares? That would be the true disclosure. Shouldn’t the Fed of NY disclose it itself, if it is related to the government?

    Thanks,
    Sam