GM’s “no plan” more of a plan than Citi’s “plan”

Days after the Big Three automakers were sent home without any supper—told to come back after Thanksgiving with a “plan” that shows them to be deserving of $25 billion of taxpayer congressional Treasury largess—Super-sized financial institution Citibank was handed roughly that much cash in an attempt to prevent the bank’s complete collapse. (That is new money added to the estimated $25 billion Citi has already received under the Paulson TARP/injection/bailout extravaganza.)

But one of the big car manufacturers, General Motors, already seems to be ahead of Citibank as far as making plans for financial stability is concerned. GM’s Buick division announced that it has cancelled its five-year, $40 million endorsement deal with star golfer Tiger Woods, while Citibank has confirmed that its 20-year, $400 million deal for the naming rights to the new home of Major League Baseball’s New York Mets is still very much a “go.”

GM’s Chief Executive, Richard Wagoner, was lambasted for taking a private jet to last week’s congressional hearings (and that was bad form), but just a week earlier, the company had already decided to let go of two of its five private jets (all five are leased, not owned). General Motors has also made many other (arguably small) cuts in an effort to trim costs—from slashing worker uniform stipends and buying cheaper wipe-up towels, to trimming the size of test fleets and turning off escalators at corporate HQ after 7 p.m.

These cuts could fall under the “penny wise and pound foolish” category, but they stand in striking contrast to the kinds of cuts Citi has made:

At Citigroup, executives had announced more than 27,000 job cuts, including ones shed through the sale of the company’s Indian outsourcing operations and German banking franchise and prior layoffs. But the bank stepped up its efforts on Monday with plans to eliminate 17,000 workers in the coming months. It will also cut an additional 7,000 or so employees by divesting businesses in the future and could shed more jobs through attrition.

The job cuts would be in addition to about 23,000 layoffs already this year and leave the bank with about 300,000 employees, down from its peak of about 375,000 in the fourth quarter of 2008. And Citi executives said there could be more layoffs ahead as they moved forward with plans to reorganize the company next year.

Meanwhile, back at GM, failure to get a bridge loan this year could result in the direct loss of some 120,000 jobs—with an additional seven-and-a-half times as many spin-off jobs potentially lost as a ripple effect. That’s over a million jobs total from GM’s hardships—and that doesn’t figure in Ford or Chrysler.

Though the failure of another big financial institution is likely not in the country’s economic interests, either, based on recent history, it is hard to argue that Citi is more deserving of its backstop than America’s automakers.

(photo by me)

(cross-posted on The Seminal and guy2k)

Too late

Over the next two months, Mr. Paulson must impose some coherence and clarity on the bailout. Otherwise he will only fan anxieties and mistrust, which will undermine the effectiveness of his good decisions and amplify the fallout of his bad ones. With markets gyrating wildly, and the economy deteriorating rapidly, the nation needs clear leadership and a sound plan.

After spending the entire length of today’s lead editorial demonstrating just how badly Treasury Secretary Hank Paulson has handled the economic crisis and ensuing attempts at a “bailout,” the New York Times undermines its point with this half-hearted admonition. Honestly, if the Times editorial board knows of a good decision by Mr. Hanky, might they have shared it?

The nation does need clear leadership and a sound plan, but, to date, the nation has gotten neither. As pointed out in this very editorial, any “modest easing the bailout initially brought about in the credit markets is now being reversed over doubts about the Treasury’s stewardship of the plan.” Paulson’s actions have been reactive and woefully behind the curve; he lacks anything like a coherent strategy, and the moves he has taken seem less motivated by an interest in protecting wage-earning Americans than in protecting Paulson’s pals and ideological biases.

There is also zero transparency—something many econ-watchers consider of utmost importance to stabilizing credit markets. . . not to mention the stock market. Beyond the lack of oversight as to what the banks are doing with the billions in bailout cash that they have received (much will end up going to bonuses, balance sheets, and the buy-ups of competing banks), it has now been revealed that there was another $2 trillion (!) dispensed by the Fed that is completely opaque.

Paulson has refused to use any of the TARP cash to help homeowners facing foreclosure, even though that might slow the bleeding and even stimulate some local economies, and now he has also rejected using his precious kitty to help the auto industry. Though it’s true that an auto-industry bailout administered with a similar chaotic attitude and the same lack of rules and requirements would do little in the long run to fix systemic problems in this sector, deciding that Goldman Sachs was “too big to fail” but GM is not is as stupid as it is hypocritical.

Given that record, I have no need to extend the rhetorical lifeline the Times so generously offers. Clear leadership and a sound plan cannot come soon enough, and given the noted rapid deterioration of the economy and the number of Paulson’s remaining days, it probably won’t.


(cross-posted on guy2k and The Seminal)

Mr. Hanky’s reverse Midas touch

I have, in recent days, taken to calling Treasury Secretary Henry “Hank” Paulson Mr. Hanky, not because of any complex metaphor, but more because I just knew he was full of shit. Well, thanks to his most recent actions, Hank has given my allusion a new, improved accuracy.

As discussed in recent days, Paulson changed his position on stock injection, and decided to use $250 billion of bailout money to pump equity into troubled banks. He made his announcement after Still President Bush broke the ice for him on Tuesday morning. . . which was a day after Hank made the directors of America’s nine largest banks an offer they couldn’t refuse. . . .

Or so the story goes.

The thing is, it was an offer that the bankers couldn’t refuse, but not in that Godfather way. It was an offer they couldn’t refuse because the deal was so sweet!

As Dean Baker noticed:

[T]here is a big issue about the terms under which they were given capital. Secretary Paulson decided that a 5 percent rate of return on preferred share was good enough for the taxpayers. Warren Buffet got a 10 percent return for his investment.

No one would confuse Henry Paulson for Warren Buffet, but come on -- he could get a 4.0 percent return buying treasury bonds. I can't believe that he had such bad business sense when he was CEO of Goldman Sachs.

And a commenter on Baker’s post noticed even more:

[I]t's not just the 5% "coupon" (dividend, technically), that marks this as bad relative to the Buffet deal. Buffet received an equivalent amount ($5 billion) of favorably-priced common stock warrants that he can exercise anytime during the next five years. The rough plan for Paulson, as I understand it, is for the Treasury to get warrants equal to just 15% of the preferred stock injection.

Also striking is how different this is than the Treasury-AIG deal. I understand that the AIG bailout was for different purposes -- AIG was going immediately bankrupt whereas the solvency of the banking system over the next, say, 24 hours, is relatively assured (with diminishing levels of confidence the farther one goes out) -- but the Treasury charged AIG for its loan facility a rate of LIBOR + 8.5%. While I understand that there is a difference between a loan and a preferred stock purchase, they are not all that different: preferred stock is like a bond, but with fewer recovery protections, and like a stock for capitalization purposes, but it doesn't share in the broader common stock market gains. The important point with the present Paulson action is, to my eye, that the Treasury picked a very low fixed rate for a LONG time (five years!) without reference to LIBOR.

OK, kind of technical there, but the point is clear: Paulson took what was a fairly good idea as structured by Gordon Brown (or even by Warren Buffet), and turned it into shit. Don’t believe me, check out what investors thought (again from Baker):

The markets gave Paulson's investment strategy a big thumbs down from the taxpayer perspective. Goldman Sachs shares jump 10.7 percent after the details were made public. Shares of Bank of America rose 16.4 percent and Citigroup's stock rose 18.2 percent. Obviously the market thinks that Paulson gave the banks a really good deal.

Conversely, the United Kingdom’s big three all saw their stock prices fall after Brown exchanged equity for preferred and common shares and exercised their voting rights to make changes in bank leadership.

(This might sound a little counterintuitive, but if you are not a board member of a bank, you actually want to see this result, at least in the short term. It actually means that screwing up has repercussions—which means less of that “moral hazard” that so many of the serious set warn us about when plans to help those facing home foreclosure are mentioned.)

The former King of Goldman has turned what was his Midas touch when it came to private capital, and turned it into the reverse for his public service. Even when shown a golden blueprint by the UK, Paulson’s fingerprints changed the result into a shitpile.

So, congratulations, Mr. Hanky, the Treasury Poo, you’ve now wholly embraced your nickname. Alas, it is the rest of us that are left holding the bag. . . .


(cross-posted on The Seminal)

How cute. . .

Hank is going to let Bush pretend he’s still in charge. . . .

The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks, according to officials. The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers, officials said.

And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

. . . .

Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes.

President Bush plans to announce the measures on Tuesday morning. . . .

Henry Paulson, who himself had to be dragged kicking and screaming to this equity injection plan, worked out the details in private with the biggest players on Monday. . . and then kept it on the QT so that Still President Bush could come out on Tuesday morning and make it seem like he had some role to play in all this.

He didn’t.

Truth is, Mr. Hanky didn’t much either. Democrats in Congress inserted the language (over Paulson’s objections) in the TARP bill that gave Treasury the authority to do this; Paulson then did nothing for ten days, until markets tanked, credit got tighter, and UK PM Gordon Brown got most of the Europe on board with a similar plan. Hank Paulson is just desperately trying to keep up.

Meanwhile, Hank’s old pals at Goldman Sachs have cut a deal with New York state to headquarter their newly configured full-service bank in New York City. So, they get more from the federal government, and a state tax break, too.

How cute.


(cross-posted on The Seminal)

What’s the opposite of leadership?

When last we spoke, the Dow was starting Friday in freefall while all eyes turned to a meeting of the G7 called by the chief executive of the United States, George W. Bush Henry Paulson. During the course of Friday, the Dow did a bit of a rollercoaster rebound, but I am not going to tell you it was because investors were expecting x or y from the G7 or the US Treasury Department, or because there was some bargain hunting, or because Mercury was in retrograde. (I utterly despise this kind of Stock Market analysis—it’s post-hoc hooey—so when you catch me doing it, and I assure you I will, take it with appropriate measures of sodium.)

What happened next? Well, the G7 released an abysmal document pledging future efforts, sunshine and lollipops, etc., but when it came to the details of actually doing something, one can sum it all up with, “splunge!” The next day, the IMF mostly followed the G7’s “lead.”

That was all very bad news.

As I wrote last week, economists out here in the real world had coalesced around a “stock injection” or “equity injection” plan, coupled with government guarantees on interbank loans—essentially a partial nationalization of banks willing to enter into the bargain—as the best way to quickly loosen up the credit market (and, ideally, provide time for more and better long-term changes to our global economic systems). It was an option that Hank Paulson rejected outright in late September. However, language permitting an equity injection was inserted into the $700 billion bailout signed into law ten days ago.

Still, Paulson did nothing last week to use that new authority. Never mind asking about the actual president of the United States. . . what was he up to? (You can’t see me, but I’m tipping my head back and pointing my right thumb toward my mouth while mimicking gulping sounds.) Well, there were those morning pep talks. . . zheesh!

Prime Minister Gordon Brown of the UK, however, did float the idea of equity injection and guarantees last Wednesday—and, late Sunday night, Brown made the float flesh, moving to pump 50 billion quid into British banks, and guarantee interbank lending, to boot. The European Union appears to be following suit.

Lo and behold, Hong Kong, European, and London markets are up sharply this morning. (You see, I told you I’d do it.) (Afternoon update: the Dow is also up sharply. The US and Japanese exchanges have Monday off.)

Which all raises an interesting question: If Brown came to Washington’s G7 confab with the equity plan in tow, and we now see that the EU was ready to go along with that framework, then why was the G7’s statement so unproductively obtuse? In other words, who prevented the G7 from simply issuing a statement saying, “What Gordon said”?

Hmmm. . . .

There is, clearly, only one possibility—Why, hi-de-ho, it’s Mr. Hanky!

And perhaps even more amazing, today, Monday, after the UK and EU have taken decisive action, the US Department of Treasury has let it be known that they will maybe, probably start injecting some of our bailout billions directly into banks in exchange for equity. . . but they have not issued any instructions or details of how, or who, or when, and they are offering this without the other part of the Brown plan, the guarantees!

What is Paulson’s rationale? What is the opposite of leadership? (Again, forget about “the leader of the free world”—and again, head tipped back, glug, glug, glug.)

Paulson fought against getting this authority, and now, once granted it, despite movement from economies much smaller than “his,” he still drags his feet. Contrast this with Hammerin’ Hank, say, September 17, hyperventilating and threatening the end of civilization as we know it if he didn’t get his 70 billion Benjamins to spend however he pleased. How can we explain the difference?

Well, as we seem to have to say too much these days, we can’t know what is in a man’s heart. . . but might the behavior gap have something to do with the ideological purity of this administration, and the company Paulson supposedly left behind to gallantly take over at Treasury?

Yeah, that was a rhetorical question.

First, the Bush Administration’s—hell, the whole Republican/Conservative movement’s—“private good, public bad,” “markets know best” philosophy not only helped usher in this nightmare, it lead to a stunning inability to entertain any viable solutions.

Second, from the beginning (or before the beginning) of this credit calcification and market tumble, it seems that Treasury has worked to protect, and even enrich, Goldman Sachs.

Just look at some of this: Lehman Brothers, a direct competitor of Goldman, was allowed to fail. Treasury said it had to draw a line. But a week later, the government steps in to save AIG by injecting capital (at first $80 billion; now well over $100 billion) in exchange for equity. It turns out that AIG owed Goldman something like $30 billion—in fact, a representative from Goldman Sachs was in the room when the AIG bailout was being negotiated.

With the big five investment banks reduced to the big two, many expected Goldman would be the next to go. Investors start shorting Goldman stock. The government’s response? Ban all short selling (not just naked short selling, as some had recommended).

That was quickly revealed to be a disastrous move for a variety of reasons, and the ban was lifted. Paulson went back to demanding his near trillion dollar blank check so that he could buy toxic assets off the hands of banks. . . investment banks included. Never mind that Paulson never was able to explain how that plan would actually solve the problems at hand.

All of this dicking around took weeks, of course; weeks where markets tanked, credit froze, jobs were lost, and the whole mess, by most accounts, grew worse and more expensive to fix.

By the way, there is a downside to the equity injection plan—that is if you own bank stock. If you own shares in a bank that opts in to an injection plan, a bank like, maybe, say, Goldman Sachs, the value of your shares will be diluted because the bank will have to issue additional preferred shares to exchange for government capital.

You don’t think that might adversely affect Hank’s “blind” trust, or the coffers of many of Paulson’s pals, now, do you?

I guess that’s a kind of leadership.


. . . .

Congratulations to Paul Krugman, Nobel Laureate.



(cross-posted on Daily Kos and The Seminal)

Paul Krugman, Hank Paulson, and me

Why, it seems like only yesterday (but was, in fact, Monday) that I was wondering out loud about the chances the US Treasury would exercise an option written into the final version of the bailout law to demand stock in exchange for the money funneled to the banks. This so-called “stock injection” plan sounded to me like the preferable way to spend our $700 billion (give or take), seeing as it gives the government some real equity in exchange for our real cash, it is has both longstanding (FDIC) and recent (AIG) precedent, and could provide for some of that accountability demanded by most of us on streets named other than Wall.

Well, on Wednesday, New York Times columnist/Princeton economist Paul Krugman, and, as you will read, UK PM Gordon Brown, gave my laymen’s interpretation a little street cred:

Readers ask what I think should be done about the financial crisis. The answer is, what Gordon Brown in doing in Britain: a bailout, yes, but one that gives the government an ownership stake in the bailed-out institutions. That plus a serious fiscal stimulus plan that includes emergency aid to state and local government.

The Brown plan, by the way, is 50 billion pounds; scaled by GDP, that would be the equivalent of a $500 billion plan here. The headline number would be smaller than the Paulson plan, but the probable effectiveness much, much greater. Not so incidentally, my reading of the TARP as passed is that thanks to the equity participation provisions, it could be converted into a version of the Brown plan at the Treasury secretary’s discretion; let’s hope that he does so discrete, or something like that, as soon as possible.

Which leads us to Thursday morning’s revelation.

Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

. . . .

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.

Now, I don’t know if Paulson had something like this in the back of his mind all the time (it wasn’t exactly spelled out in the original “three-page plan”), or if someone like Senator Chris Dodd or Senator Chuck Schumer clued him in to what was added to his authority; I don’t know if Hank checks out Planet Money, Paul Krugman, any of a number of other fine economist bloggers, or me (OK—pretty sure he doesn’t check out me). . . or if the Secretary of the Treasury just has no other flipping idea what to do. . . but Paulson let the idea of equity for injection slip out in a press conference late Wednesday. . .

Now, I will pull back the curtain just a touch, and confess that all of the above was written about 24-hours ago—so what has happened since?

Well, the short answer is: Nothing.

OK, let me be a little less short. The Dow dropping another 678 points is not nothing—the industrials average is now off 40% from its record high exactly one year ago. The Nikkei is in full-on panic mode—it suffered its worst one-day loss in 21 years on Wednesday, and is plunging more as I write this. European markets are also opening with big, big losses. The feds guaranteed AIG another 38 billion samolians because they have almost burned through their initial $80 billion.

And John McCain has revised his merely crappy half-assed mortgage proposal (scrubbing from his website the line about buying mortgages at their current, lower values) so that it is now a completely terrible half-assed proposal. . . wait, that is pretty much nothing.

But the other things—the continued downward rush of economic indicators (including things like the LIBOR and the TED Spread—neither of which I dare try to explain because I barely understand it all myself)—those are something. . . something that makes one want to do, uh, something.

Unless you are Secretary of the Treasury, Henry Paulson. . . because, as best I can tell, he has done (and here’s why I use this word) nothing.

What is now weeks after Hammerin’ Hank and Sideshow Bob Bernanke laid it all (supposedly) on the line and warned Congressional leaders that if they didn’t act immediately (immediately!), we would have no economy to rescue, and weeks after those Congressional leaders and Still President Bush and much of the establishment media all lit their own hair on fire to reify the bubble boys’ hysterical frame, and, now, a week after said Congress and president gave Paulson all he could have wanted, and, frankly more, what has the SecTreas done?

Weeeeeelllllllllllllllllll. . . he has appointed a (another) Goldman Sachs alum to start designing some sort of system to purchase the shitpile of bad. . . you know I was going to say “assets,” but that just doesn’t seem like the right word anymore, especially when you are not only dealing with subprime mortgages but intangible gambler’s chits like credit default swaps. Anyway, there is now a guy working on a plan—maybe some sort of reverse auction, maybe just a way to shrink wrap bricks of 10,000 $100,000 bills—that should be ready in, eh. . . four or five weeks.

As mentioned by me, and even floated by Paulson, Hank now has the authority to give banks a direct cash infusion in exchange for equity—so why is he sitting on his hands?

I have read that Paulson might have caught deflationary disease. This is the idea that things are rapidly losing value—so, why buy some chunk of equity today, when the same amount of money could get you a bigger chunk tomorrow? Sounds like a sound investment strategy, right? Well, if you were a traditional investor, maybe. . . but the federal government wasn’t empowered by the bailout bill to act as an investor—at least that’s what I thought—supposedly, this “TARP” was supposed to be thrown quickly over this drowning pool. . . . OK, enough with the metaphors—Paulson is supposed to use this money and his new authority to backstop the financial system, to loosen up credit markets, to buoy investor confidence (there is some debate about whether that third point is a good idea).

Instead, it seems like the Treasury Secretary, after yelling “Fire!” (new metaphor, sorry) in a crowded theater, is now watching everyone stampede out (trampling many on the way), and waiting until the fire gets big enough to justify his earlier histrionics.

Of course, some will argue that it was behavior very much like this that helped transform the Crash of 1929 into the Depression of 1933.

And, of course, none of this—none—does the first thing to help the here-and-now, day-to-day economic problems of working or formerly working Americans.

So, what now, mes amis? (Wow, I’m like the French John McCain!)

It seems most economists agree that Paulson needs to use his stock injection authority, and pronto. He needs to give the banks a good chunk of change with the understanding that they will, in turn, start lending again. The US government will get bank stock in exchange—but I want to make sure that we taxpayers get preferred stock, and, I’ll go further and demand voting shares. Without voting shares, it will be impossible for the government to ensure that banks act in the interests of the American people and the global economy. Everybody claims they want accountability—exchanging cash for voting shares is the way to get that accountability. (Of course, this assumes that we have a government that acts in the interests of its people—big assumption, I know.)

Then—and this is equally important—Congress needs to come back and pass some real economic stimulus. No, I am not talking about some winky tax rebate—too small and too slow. I, as mentioned before, support a FICA holiday on the first $10,400 earned by every working American (because this will start putting money in the pockets of those that need it most starting the same week that such a law was enacted), coupled with New Deal-style programs to support and educate the poor, repair our nation’s aging infrastructure, and begin planning and building the electronic infrastructure needed for this information century.

Or, at least, find a way to put real money quickly in the pockets of those hit hardest by this recession (yes, we can now use that word without qualifiers)—then come back in late January with a new Democratic president and bigger majorities in Congress, and pass a full, new New Deal, adding affordable healthcare for all, tax equity, and investment in post-hydrocarbon technologies and green jobs to the programs mentioned above.

OK, more backstage news: I wrote up to this point, and before posting, I decided to open up (electronically speaking) Friday’s New York Times, and read what Paul Krugman had to say. Well, surprise, surprise:

[K]ey policy players have largely wasted the past four weeks. Now they’ve reached a moment of truth: They’d better do something soon — in fact, they’d better announce a coordinated rescue plan this weekend — or the world economy may well experience its worst slump since the Great Depression.

. . . .

[W]hen Mr. Paulson announced his plan for a huge bailout, there was a temporary surge of optimism. But it soon became clear that the plan suffered from a fatal lack of intellectual clarity. Mr. Paulson proposed buying $700 billion worth of “troubled assets” — toxic mortgage-related securities — from banks, but he was never able to explain why this would resolve the crisis.

What he should have proposed instead, many economists agree, was direct injection of capital into financial firms: The U.S. government would provide financial institutions with the capital they need to do business, thereby halting the downward spiral, in return for partial ownership. When Congress modified the Paulson plan, it introduced provisions that made such a capital injection possible, but not mandatory. And until two days ago, Mr. Paulson remained resolutely opposed to doing the right thing.

But on Wednesday the British government, showing the kind of clear thinking that has been all too scarce on this side of the pond, announced a plan to provide banks with £50 billion in new capital. . . together with extensive guarantees for financial transactions between banks. And U.S. Treasury officials now say that they plan to do something similar, using the authority they didn’t want but Congress gave them anyway.

The question now is whether these moves are too little, too late. I don’t think so, but it will be very alarming if this weekend rolls by without a credible announcement of a new financial rescue plan, involving not just the United States but all the major players.

And Krugman finishes with this cheery bit of encouragement:

[T]he time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.

So, with that, I think I better wrap this up and post it—the economic situation is evolving rapidly, and, who knows, Hank might need some ideas!


* * *


I would be terribly remiss if I did not recommend that everyone interested in these sorts of things read this amazingly comprehensive post by Stirling Newberry. Yes, it is long, but it provides a level of insight and clarity too scarce during this time of economic turmoil. Stirling gives us a great deal of history and makes proposals far more radical than mine. I was going to quote a little, but I can’t possibly do it justice, so please click on over and give it a look.



(cross-posted on Daily Kos)

Bailout Homework:Find a way to get our fair share(s)

Adam Davidson, who reports on matters financial for NPR’s Planet Money and PRI’s This American Life tends to describe the credit hysteria of recent months in more dire terms than I would use (again, it’s not that I don’t think there are big problems with our economy, it’s just that I just don’t think that the way the problem has been framed promotes solutions that benefit the majority). However, oddly enough (or maybe this isn’t odd at all), Davidson also sees reason for some hope based on language he believes made its way into the final bailout, er, um, excuse me, rescue bill that passed the House and was signed into law by President Bush on Friday.

The language relates to something called a “stock injection,” which, as I understand it, would require that the government get some form of stock from banks in exchange for our (by which I mean the US taxpayer’s) money instead of just acquiring the crap assets of no determinate value.

But there are, as I see it, a number of questions:

There seems to be some debate about the version of the stock injection provision that made it into the final bill. You’d think this would be an easy enough question to answer, but since this massive bill was rushed through and signed into law in an absurdly short time, when I look for the final version, I still can only find one House and one Senate version. Theoretically, the Senate bill (which was passed as an amendment to another bill, because, in actuality, it would be unconstitutional to start a bill like this on the Senate side) was sent to the House and passed unchanged on Friday, but until I see it, I will take nothing for granted.

Working from the Senate version, there is still a ridiculous amount of wiggle room. It seems to be at the discretion of the Treasury Secretary as to whether he wants to insist on equity, and as to what kind of stock he will seek, should he choose to do that. Will it be common or preferred? This could make a world of difference, especially if the bank fails. Preferred stock should recoup most of their value after liquidation; common, not so much. Amazingly, the bill leaves this open to the discretion of Treasury.

And, will they be voting shares? There actually seems to be language that encourages the government to take nonvoting shares, and if those are not available, seems to prohibit the government from exercising voting power. Voting shares would give the government power to influence whom is on the board, which, in theory, would give the feds power to fire the people who mismanaged the banks to a place where they needed government intervention. This seems to be just the kind of accountability so many demanded in the fight over this bailout. (It is also not without precedent, since when the FDIC steps in to rescue a bank, they have the power to relieve the board, and often exercise that power.)

There are also accounting exceptions for purchases under $100 million. Yes, that’s $100,000,000. Any purchase of assets valued less than that doesn’t need to meet the requirements of the stock injection provision. (This is apparently an improvement; an earlier version set the bar at $300 million.)

And this is just what I could figure out today. I am not a lawyer, I am not an economist, and I am not an accountant, so I am guessing there is plenty here that I don’t get, but here’s what I think I understand in the broadest terms: under the current regime, there is little reason for optimism. Hank Paulson was not enthusiastic about requiring equity in exchange for our money, so there is no reason to believe he will exercise his option to demand it.

However, by all accounts, there will be a new team moving into Treasury come late January, and only a portion of this bailout money will be turned over to Paulson before then. Will Paulson be able to spend all of his allotment on toxic debt before he leaves? I don’t know, but I bet he tries. Will the next Secretary of the Treasury, presumably appointed by Obama and confirmed by a Democratic Senate, be any more inclined toward demanding preferred stock instead of shitty assets? I can’t answer this, either. Obama’s economic brain trust includes many who had a hand in the fast and loose model that helped get us to where we are today—not to mention some very prominent Goldman Sachs alumnae.

So, while the questions and confusion tends to tarnish my perception of this potential silver lining, it could present some room for concerned citizens, who might have felt all was said-and-done with Friday’s vote, to continue to exert pressure. As has been noted throughout this crisis, Warren Buffet insisted on preferred stock as part of his package in exchange for his $5 billion investment in Goldman Sachs, and the United States Government should accept nothing less. I don’t know the degree to which voters can pressure Congress to in turn pressure Paulson to demand “Buffet shares,” but I would like to think that if we started now and continued through next year, we could leave an impression on the incoming Obama Administration.


(cross-posted on Daily Kos and The Seminal)

Before you think too kindly of House Republicans...

Let me start with an extended quote from Glenn Greenwald:

Retired New York Times reporter David Cay Johnston, writing at The New Republic yesterday, makes a critical point, in a piece entitled "Celebrating the Bailout Bill's Failure":

Whether you favor the $700 billion bailout or not, the House vote today should make you cheer -- loudly.

Why?

Because the majority vote against it shows that Washington is not entirely in the service of the political donor class, by which I mean Wall Street and the corporations who rely on it for their financing. These campaign donors, a narrow slice of America, have lobbied and donated their way into a system that stacks the economic rules in their favor. But faced with as many as 200 telephone calls against the bailout for every one in favor, a lot of House members decided to listen to their constituents today instead of their campaign donors.

Johnston's celebration that "Washington is not entirely in the service of the political donor class" is probably premature given that Congressional leaders are falling all over themselves to assure everyone that this deal will pass in a few days after it is tinkered with in one direction or the other. . . . The corporate donor class and political establishment may lose a battle here and there, but they almost never lose the war, since they own and control the political battlefield.

Still, Johnston's overarching point is absolutely right. For better or worse, yesterday's vote was the rarest event in our political culture: ordinary Americans from all across the political spectrum actually exerting influence over how our Government functions, and trumping the concerted, unified efforts of the entire ruling class to ensure that their desires, as usual, would be ignored.

I like both Greenwald and David Cay Johnston a lot—I have especially appreciated Johnston’s writing on this latest manufactured “crisis”—and I hate to rain on anyone’s parade, but I think both of these men are giving “We, the People,” too much credit for making our voices heard, or, if not quite that, giving they, the House Republicans, too much credit for listening to we, the people.

Though Greenwald will correctly point out that whether Republicans are listening out of concern for their constituencies or concern for their jobs is a distinction without a difference, there is another possible—and I think probable—motivation at work. It is not the fear of losing their jobs, but the desire to make political hay, to use this bailout to destroy Democratic prospects (this year, and, even more so, in 2010), that is most likely the unifying force behind the Republican revolt.

Well, that prospect, and a guy named Newt:

NBC’s Andrea Mitchell reported this morning that conservatives may have been taking their marching orders from former House Speaker Newt Gingrich, who “was whipping against this up until the last minute” — despite issuing a statement supporting the bill as the vote was taking place:

MITCHELL: I’m told reliably by leading Republicans who are close to him, he was whipping against this up until the last minute when he issued that face-saving statement. Newt Gingrich was telling people in the strongest possible language that this was a terrible deal, not only that it was a terrible deal, that it was a disaster, it was the end of democracy as we know it, it was socialism. And then at the last minute comes out with a statement when the vote is already in place.

Reacting to the news, NBC’s Mike Barnicle said he had been told by congressional conservatives that the move was “the opening salvo of Newt Gingrich’s presidential campaign four years hence.”

That is not to say that the phone calls by concerned Americans were pointless—not at all—but it is to say that one should never assume there is the possibility of common cause to be struck with the post-Reagan Republican Party. They, like their latest standard-bearer, John McCain, are interested in power for power’s sake, and are the very embodiment of the corporate donor class-backed political establishment that Greenwald and Johnston believe took a body blow on Monday.

It is not so long ago that Gingrich haunted the corridors of power with his nasty brand of us-versus-them politics and sanctimonious hypocrisy. It was never enough that he and his party should win, it was also necessary that Democrats loose.

The man and his caucus are little changed today. If progressive Democrats want to stop the NPLB (No Plutocrats Left Behind) bill and advance a real economic fix, then they are going to have to do it themselves.

. . .

As to that final point—progressives doin’ it for themselves—there is an alternative bill with the less than compelling name “No BAILOUTS” (it’s an acronym—don’t ask) now introduced in the House. It is a mixed bag, but on the whole, much better—and much cheaper—than Paulson-plus. Sirota has a rundown and a plan of action.

The Senate plans to vote on a bill similar to the House version of Paulson with some tax cuts to woo the right and some incentives for alternative energy to then woo back liberal members. It’s still a monumental piece of crap. It will not fix the problem—though it will artificially inflate the markets for a while—in the long run, it could make things much worse. If you feel like picking up the phone today, please ignore my above cynicism and call your Senators—urge a “no” vote on this Paulson-plus plan. Instead, ask your Senators to pass the stimulus package previously approved by the House.

Then, while you’ve got that bakelite in your hands, call your US Representative, tell them of your continued opposition to a $700 billion bailout, and ask him or her to consider something like No BAILOUTS as an alternative.


(cross-posted on Daily Kos and The Seminal)

Damn Yankees

Even though I am anything but a Yankees fan (I am the fan of two teams, to paraphrase a quote the provenance of which I can’t remember, I am a fan of the Dodgers, and I am a fan of whichever team is playing the Yankees), I could not help but watch the ESPN broadcast of the final baseball game to be played at Yankee Stadium with a heavy heart. Simply known as “The Stadium” in metropolitan New York, it is—or was, I should now say—a living piece of history, a working facility that could provide present enjoyment alongside a palpable link to the past. Even with the terrible mid-Seventies remodel, seeing a game at Yankee Stadium still felt like spending a few hours in another era. You could look around and recognize tableaus from old newsreels and videotapes; you could feel like you were part of the history, not just of baseball, but of American popular culture.

Listening, however, to the broadcasters detail that history, not just of the stadium and the Yankees, but of the team’s majority owner, George Steinbrenner, I grew not only heavy of heart, but also sick of stomach. Talking about the Yankees’ marketing might without talking about what it has done to the economics of baseball is absurd; talking about “The Boss” (as Steinbrenner is unaffectionately known) without talking about the crimes he has committed—against individuals, baseball, and the United States of America—is offensive.

There is much to be said about Steinbrenner’s authoritarian, bullying management style that could still be dismissed as a subjective evaluation, but here is a point that is inarguable fact: George Steinbrenner is a crook.

In 1974, Steinbrenner was indicted on fourteen counts relating to his large, illegal under-the-table contributions to Richard Nixon’s re-election campaign. General George copped a plea—guilty of an illegal campaign contribution and guilty of obstruction of justice—and got off with a five-figure fine. Then Commissioner of Baseball Bowie Kuhn banned Steinbrenner from the game for two years—later cutting that penalty to 15 months. Ronald Reagan did Kuhn one better, granting Steinbrenner a full presidential pardon in the waning hours of the Reagan Administration.

Around about the same time as the pardon, George Steinbrenner grew weary of his all-star outfielder Dave Winfield, a player he had signed after the 1980 season to a ten-year, $23 million contract (the largest in the sport to that point). Or, more accurately, Steinbrenner got cheap. Having reneged on a contractual obligation to donate $300,000 to Winfield’s charity for poor, inner-city youth, The Boss was sued by Winfield. Steinbrenner’s response was to pay $40,000 to known gambler and all-around slime-ball Howard Spira in exchange for dirt on Winfield that could be used to derail the lawsuit.

This move got Georgie banned from baseball “for life.” In 1993, Fay Vincent, that era’s baseball commissioner, decided “life” meant “three years.”

I’m telling you this now; the good folks at ESPN mentioned none of it. Instead, they talked about Steinbrenner’s inevitable induction into baseball’s Hall of Fame. They’re probably right, but considering there are poor players who were banned from baseball for being caught hosting small-change crap games in their hotel rooms, and others that have been kept from the Hall for taking tiny bribes to supplement slavish salaries, Steinbrenner’s induction would make a mockery of the institution.

But all of this would just be inside baseball, as they say (well, except that he violated federal election laws, but, gosh, he was pardoned for that), were it not for the cause of Sunday’s lamentations and celebrations. Across the street from the old House that Ruth Built now rises the New Yankee Stadium. The old one will be torn down before next season to make room for a parking lot.

The Yankees didn’t really need a new stadium. The historic old one was more than serviceable, and has in recent years drawn over 4 million visitors a season. But in the last decade or so, as the Yankees were winning title after title, leveraging their brand, and increasing their revenue even faster than their payroll (much, much faster, really), George Steinbrenner neglected The Stadium, allowing for some very visible cracks and crumbles, making minimal repairs, and complaining about his plight all the way to the bank.

Steinbrenner demanded a fresh stadium. He threatened the city. He wanted a new ballpark, and better access roads for suburban commuters, and more space for parking, or else he’d take the New York Yankees out of New York.

New York City, faced with this manufactured crisis, eventually gave in. . . and gave in big, issuing hundreds of millions in tax exempt bonds to finance construction of the new stadium, along with pledging city funds to improve transportation and infrastructure around the area, seizing park land by imminent domain to make way for more parking, and over-valuing the land under the new stadium in order to facilitate a payment-in-lieu-of-taxes arrangement.

Negligence, a manufactured crisis, a gunless holdup, greed and corruption at every turn—sound familiar? You and I are not the only ones who think so. I was surprised and impressed to hear Bill Moyers close the Friday broadcast of his weekly show with an essay making some of the same observations—and doing so in harsh terms:

This last couple of weeks, ordinary mortals below could almost hear the ripcords of golden parachutes being pulled as the divinities on high prepared for soft, safe landings. All this while tossing their workers into the purgatory of unemployment, like sacrificial lambs.

. . . .

But let's change our metaphor for a moment. Let's go to our sports desk. Because if religion is no longer the soul of capitalism, we have to look somewhere else to understand this new gilded age. And there it is, just a few miles north of Wall Street, the "House that Ruth Built". . . . Yankee Stadium, as fabled a place to Americans as Ilium was to the Greeks.

But believe it or not, this Sunday — weather permitting — the Yankees will play their last game here. The stadium's being demolished, to be replaced next year with a brand new one. What a history to disappear down the memory hole.

. . . .

[Yankees] owner, George Steinbrenner, is one of the country's richest tycoons, among the Forbes 400. But when it came to paying for the new pleasure dome costing $1.3 billion, the millionaires on the field and King Midas in the skybox came up with some razzle-dazzle plays to finance their wealth machine. Tax-free bonds, requiring ordinary citizens to subsidize the construction, and hundreds of millions more for new parking garages, a train station and parks. Those parks, by the way, will supposedly replace the ones seized by the city to make room for the new stadium. The little league games that used to flourish on sandlots just outside the old ball park have been moved miles away, sent down to the minors on a long road trip.

That's okay, you may think, there will be plenty of room for the tax-paying public to come root, root, root for the home team — even the coliseum in ancient Rome had bleachers, for the commoners. But in fact there will be 5,000 fewer seats in the new stands.

And while the Yankees reportedly have promised that half of what's left will cost $45 apiece or less, those seats that used to cost $250, right behind the dugout, will cost you $850. And if you want to be near home plate, you'll have to cough up $2,500...per game.

Meanwhile, there will be more luxury suites and party rooms where the fat cats gather, safely removed from the sweaty masses. Corporations and wealthy individuals will be able to rent the luxury suites for anywhere from $600,000 to $850,000 tax deductible dollars a year, assuming they haven't filed for bankruptcy this week.

. . . .

Why aren't the fans and tax payers giving the Yankees a Bronx Cheer? They are. But city officials rolled over them while making sure local politicians stay in the line up. The pols are getting their own luxury suite at the new stadium for free and first shot at buying the best available seats.

And so this Sunday evening we will bid farewell to dear old Yankee Stadium, and await the new colossus to rise from its ruins. It will cast its majestic shadow across one of the country's poorest neighborhoods, whose residents will watch from the outside as suburban drivers avail themselves of 9,000 new or refurbished parking spaces. Never mind all the exhaust, even though in this part of town respiratory disease is already so high they call it "asthma alley."

Not that the well-to-do in the infield seats will have to hear that wheezing. They'll have access to a private club, a private entrance and a private elevator. Totems of this Gilded Age. Let the games begin.

Moyers is wonderfully on point, but as hard-hitting as this commentary is, it actually misses the chance to land an additional punch. . . or two. Perhaps Moyers didn’t realize, or perhaps he just had to edit for time, but missing from Friday’s story was an even more direct link between the meltdown on Wall Street, and the teardown in the Bronx.

Almost all Yankees games are broadcast in New York on the YES Network, a cable station formed after the Yankees and the NBA’s New Jersey Nets got into a pissing match with their previous television home and some of that station’s owners. The Nets have since landed in the pocket of wealthy real estate mogul Bruce Ratner, but the Yankees restructured the company with a new partner and kept YES a growing concern. Today, the television network is believed to be worth $1.5 billion (about $200 million more than the Yankees themselves).

Oh, that new partner in the YES Network? That would be Goldman Sachs.

Goldman Sachs is one of the last two of the once “big five” independent investment banks. . . wait, what’s that? Goldman Sachs is now not an investment bank? This just in: Sunday night, during that Yankees game, or there abouts, Goldman and its only remaining rival, Morgan Stanley, sought and got permission to change themselves into full-service banks. They will argue that this makes them more competitive in these new tough times, but, in point of fact, they did this today because it will mean that they can partake of a much larger slice of the pending federal bailout. But, I digress. . .

Goldman Sachs, majority owner of the YES Network, is also the institution that gave us current Treasury Secretary Hank Paulson (as well as Clinton Treas-Sec Robert Rubin). Paulson is the architect of the proposed financial sector bailout—a bailout that is an even better example of the shock doctrine than the New Yankee Stadium.

Paulson’s substantial portfolio is now in a blind trust, but it is more than possible that it still contains plenty of shares of both Goldman and YES. Inside baseball, indeed.


(cross-posted on Daily Kos and The Seminal)

Bush on econ crisis: I got nothin’

With the US economy in crisis and the markets in something close to freefall Wednesday, the White House let it be known that President Bush would deliver an important statement come Thursday morning. At about a quarter after 10am yesterday, Bush stepped to a lectern placed in the Oval Colonnade and read the following:

The American people are concerned about the situation in our financial markets and our economy, and I share their concerns.

I've canceled my travel today to stay in Washington, where I will continue to closely monitor the situation in our financial markets and consult with my economic advisors. I spoke to Secretary Paulson this morning, and I will meet with him later on today.

In recent weeks, the federal government has taken extraordinary measures to address the challenges confronting our financial markets. We've taken control of Fannie Mae and Freddie Mac -- the home finance agencies -- to help promote market stability and to ensure they can continue to play a role in helping our housing market recover. This week, the Federal Reserve acted to prevent the disorderly failure of the insurance company AIG -- a development that could have caused a severe disruption in our financial markets and threatened other sectors of the economy. Yesterday, the Security and Exchange Commission took action to strengthen investor protections and step up its enforcement actions against illegal market manipulation. Last night, the Federal Reserve, in coordination with central banks around the world, took a substantial step to provide additional liquidity to the U.S. financial system.

These actions are necessary, and they're important. And the markets are adjusting to them. Our financial markets continue to deal with serious challenges. As our recent actions demonstrate, my administration is focused on meeting these challenges. The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence.

Thank you.

And that was it. Bush took no questions, and submitted no supplementary materials.

This, of course, is not an important statement—it is a recap. There are no proposals or directions here, no new policies, not even a hint that the president might have a next step up his sleeve. Nothing.

Needless to say, this statement did nothing to calm the markets. What, you say, but the markets rebounded on Thursday—the Dow had its biggest one-day gain in years.

True, but that gain is even more impressive considering that after Bush made his remarks, the Dow had actually continued to fall another 200 points. The late day rally of some 600 points was not because of the US president’s words, but because there was a rumor circulating that Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke were close to announcing a plan of their own.

Paulson and Bernanke, along with the recently unpopular SEC head Chris Cox, did meet with Congressional leaders from both parties on Thursday night, but they emerged several hours later with no plan to announce.

Senate Majority Leader Harry Reid (D-NV) said he expected a proposal from the Administration not in days, but “in a matter of hours,” but, as of this writing, there is still nothing to report.

Asian markets are as of now holding their own based on the continuing belief that Treasury and Congress will craft a deal. . . a deal to bail out the multitude of troubled financial institutions.

Should Paulson, Bernanke, et al. disappoint, however, expect to start next week with another round of financial panic.

The problems here are myriad, but let me just focus on one: what are we doing hanging on every word from a disengaged, incurious, and uncaring president; what are we doing betting the house (no pun intended) on a last-minute deal for another stopgap government bailout?

This crisis is not a surprise—none of it. The Bear Stearns collapse was in March; the subprime mortgage bubble burst last year. And yet, the current administration—the CEO President (remember that boast?) and his pro-business brain trust—did nothing to reform the system; they didn’t even do anything to minimize the risk to the system.

Instead, we get the continued privatization of wealth hand-in-hand with the continued socialization of risk. The upper echelons of bank/investment house/insurance industry management continue to be rewarded for pushing financial instruments designed to skirt regulations and maximize short-term gain; when those schemes fail, the government must attempt to walk a lose-lose line between public expenditure and global economic fallout.

President Bush, as evidenced by his “important statement,” has offered zero leadership and zero desire to reform the system. The man who wants to continue his Republican economic policies, John McCain, has looked just as ridiculous. He opposed the AIG bridge loan before he was for it, he proposed a “9/11-style commission” to examine the roots of the crisis while almost simultaneously bragging that, as head of the Senate Commerce Committee, he had a hand in every aspect of this economy, and he claimed he would, if elected, fire SEC Chair Cox, even though he helped confirm him, can’t legally fire him, and won’t get the chance to try because Cox has made it clear he leaves with the current administration—and that was just this week.

It would be amusing if it weren’t so terribly real. Jobs will be lost, life savings will disappear, homes will have to be abandoned. Bush has personal wealth and a federal pension, Wall Street CEOs have gargantuan compensation packages and golden parachutes, and John McCain has his twelve houses and Cindy’s beer money. But American workers (you know, the “strong fundamentals” of the American economy), what do they have?

In too many cases, after decades of market deregulation, tax cuts for the wealthy, and Republican class warfare, they have what Bush had on Thursday morning—nothing.


(cross-posted on The Seminal and Daily Kos)