Short subjects for November

Allen West, America's favorite Tea Party Negro, finally admitted he lost his bid for a second term in the House.  On the other hand, he has not yet admitted to being a moron, despite his loss to newcomer Patrick Murphy after outspending the former Republican by four to one.  Does Murphy count as a Democratic gain in the House?  Well, he's not nearly as liberal as Nixon, but then neither is Obama.

Israel is losing the media war, having killed a shitload of Gazan children while losing none of its own.  Killing children never is good PR — something to which Our President should pay attention as his drone strikes kill children in Pakistan, Afghanistan, Yemen, and wherever else the CIA has been transformed into a paramilitary organization.  Just because drone strikes don't put American soldiers in peril doesn't mean they don't put America in peril.  After every strike, more people hate our guts.

The fiscal cliff, it seems, is not a cliff — it is more of a bluff.  Wall Street, apparently, has received word that nothing it will mind too much is likely to happen.  Walmart and some other megacompanies have moved up their dividend payments to late December instead of early January, so it looks like taxes on dividends really will go up.  All the stock sales that depressed the market earlier last week might mean the capital gains rate might go back up to 20%, but I wouldn't bet on it.

Timmy Geithner soon will be leaving Treasury, and far less than a few moments too soon — but who will replace him?  If Obama nominates Erskine Bowles, Obama will be further down my shit list than ever before.  How about Sheila Bair?  Hell, she's a Republican, and a hell of a lot more reasonable and intelligent than most of the Obama coterie.  Let's validate responsible Republicans.

Thanksgiving always has been my favorite holiday.  I'm looking forward to mine.  May yours be joyous.

Oh, bloody hell

It seems that war "hero" and current CIA director David Petraeus has been doing some extramarital screwing around.  So what?  His wife probably is a lovely woman, but she has all the physical appeal of the Pillsbury doughboy.  Yes, I'm a little curious to learn a bit about the "biographer" he's been shagging, but, what the hell?  Our curiosity need not be satisfied, and seeing Petraeus gone, all by itself, is just fine with me.

Also gone, it seems, will be Hillary Clinton, who has been doing a very competent job, and Timmy Geithner, who has been pretty much a disaster.  I want to see the ass ends of the entire Robert Rubin team swirling around the toilet on their ways towards sewerland.  Granted, I don't expect to see Robert Reich appointed to Treasury, much less Joseph Stigletz, albeit I'm pretty sure neither of them is illicitly banging any biographers and/or pole dancers.

So, as we approach the alleged fiscal cliff, we just must hold our breaths.  Boehner is making noises like he's hanging tough; the Tea Party types re-elected to the House have no political reasons to change position given the genetic deficiencies of their supporters; and Obama long has appeared far too amenable to bargaining away the safety net for the sake of Wall Street.  All our hopes must be placed in the hope that the president might have a backbone somewhere within his slippery political exoskeleton, and a couple of genuine "community organizer" inclinations.

Oh, bloody hell.

Another reason to dump Geithner

It made the front page of the business section of yesterday's Times, but the broadcast media haven't had much to say about it: it seems that back when Timmy Geithner still was president of the New York Fed, he and his crew had a real opportunity to get the banks that bought credit default swaps from AIG to take a haircut. Some, according to the Binyamin Appelbaum, were ready to do so voluntarily. Nevertheless, Timmy ("Wall Street's Pocket Puppy") Geithner determined that American taxpayers would make good 100% of Wall Street's potential losses.

If you've been around this blog for a while, you may remember how I was especially pissed off by the AIG bailout — here, for example, and here, and here. Well, I certainly am no happier now than I was back then — in point of fact, "pissed" no longer is an adequate description of my feelings of revulsion. Now that the GAO has reported that Geithner, apparently, felt greater obligations to the banks than to the human beings rescuing them from their paroxysms of greed, I am angrier than ever — both at Geithner, and at Barack (Robert Rubin's Pocket Puppy) Obama for appointing him to Treasury.

If Obama wants to align himself with the populist perspective, and portray the Republicans (accurately) as pawns of big finance, he'd better stop being a pawn of big finance himself. Dumping Geithner would be a very good start.

13 Bankers

I just finished reading Simon Johnson and James Kwak's 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. It provides the most cogent narrative of events that led to the crisis in finance, the crisis itself, and the responses of those in power. There is plenty of blame to go around: Ronald Reagan, Phil Gramm, Bill Clinton, Robert Rubin, Alan Greenspan, both Bushes, and an host of other government figures who bought into the myth of the "efficient market hypothesis," as well as those ruthless sons of Moloch who created the complex financial instruments that maximized the profits of megabanks while destabilizing the world's economies.

Johnson and Kwak are much nicer to Barack Obama than I think warranted, perhaps because they want to persuade him that the regulatory reform bills currently struggling through Congress are inadequate, and that he should really be thinking ahead to breaking up the banks that are "too big to fail." They attribute his timidity to being part of (and entirely surrounded by) the New York—Washington mindset that maintains that bigger is better, not to having been co-opted by the big bucks banks have thrown his way.

Maybe they're right, or maybe they just have some compunction against saying that the President of the United States is a pawn of the oligarchs. Me, I have no such compunction: the President of the United States is a pawn of the oligarchs. There. I said it.

Obama is not a stupid man, and even with Geithner and Summers talking into both his ears at once, he should be able to figure out that "too big to fail" is "too big to exist." Hell, even Alan Greenspan, despite what had to be major cognitive dissonance, came around to that point of view. As anybody who's been paying attention understands — including, of course, the bankers — the megabanks have an implicit government guarantee, just by virtue of their size and systemic importance. That is the only reason they can borrow at significantly lower interest than smaller banks — a fact that should be obvious to all.

Wall Street, naturally, has its knickers in a twist over the very limited reforms the Democrats are trying to enact, and is very likely to shift major chunks of its political contributions over to the Republicans — who remain stubbornly opposed to government doing anything at all. Will that be enough to persuade Obama to stop licking their $2000 shoes, and get serious?

Certainly not until his second term — if he gets one.

.....(later the same day).....

Okay, maybe he's not a total pawn — maybe he's just doing his usual "splitting the difference" routine. Halfway between doing nothing (as the bankers would prefer) and the right thing (breaking up the megabanks into smaller units that could be allowed to fail) is the usual, half-assed, universally unsatisfying compromise. That's what we got for health care, and that's what we'll get for financial reform.

So maybe he's not that much a pawn of the banks. Maybe he's just a pussy with no strong beliefs at all — a pussy who wants to be loved and/or re-elected.

Whatever. If it happens to be respect he wants, he's not getting any from me.

Financial regulation

On health care, the Obama administration sat back and waited for Congress to come up with something — anything. On financial regulation, the bill came straight from the administration, and it sailed right through the House.

Obama, as I've noted in the past, picked the wrong Bob — Rubin, rather than Reich. That left us with Geithner and Summers, zombie slaves of the financial industry. I'd feel a lot happier about the package from the White House if it had been written by people less ideologically committed to Wall Street. When a bill starts out weak, it only can end up as an even weaker law.

Oddly enough, I find myself in agreement with the likes of Richard Shelby and John Cornyn on at least one point: it is time to revisit the 1995 repeal of Glass-Steagall, one of the most unfortunate legacies of Robert Rubin's time in the Clinton administration. Commercial banks and investment banks should, once again, be separate — if for no other reason than to reduce the overall size of the largest institutions. Even if that were done, though, there are some institutions which would need further whittling down to ensure that there no longer are any that are "too big to fail."

At this time, the biggest banks have an unfair competitive advantage over smaller banks, in that they can borrow money at lower rates. They get those lower rates because it is assumed that government will not allow them to fail, no matter what pledges come out of Congress and the White House — and they use their surplus profits not to invest in productive businesses, but to place bets in the high-stakes casino Wall Street has become over the past fifteen years.

I can see absolutely no reason for synthetic CDOs to exist. They are nothing but side bets on real economic activity, but bets large enough to disrupt the financial system and create crises. Credit default swaps on synthetic CDOs were a large part of what brought down AIG, and made its government bailout necessary. If the very rich want to make bets on whether bonds they don't own will or will not default, let them open their own betting parlor and gamble with their own money — not with our pension funds.

Other derivatives must be openly traded, on an exchange like the one provided for in the bill now before the Senate Agriculture Committee, but with no exceptions for companies that are particularly large or well-connected. Markets cannot operate properly when they operate in secret.

Naturally, I don't expect much of the current effort to improve financial regulation, but hope it might be a step in the right direction. Yes, my fingers are crossed — but I'm not holding my breath.

Enough?

Let's hope so.

It seems that Rahm and I think alike — well, not that much alike, but enough so that Our President, yesterday, came out with what I asked for on Wednesday. Obama now appears to be an an anti-big-bank populist — and please note the emphasis on the word "appears."

The official story is that Summers and Geithner were working on it — under the genial and gerontological guidance of Paul Volcker — for months. Yeah, right. If they'd actually believed in restraining the banks, you'd think they might have gotten it out before they lost Vote Number 60 in Massachusetts. You'd also have thought they would have spent less time dumping on Volcker over the past few months.

Summers has to go. Maybe Geithner can stay, considering how he's a total wimp who will take whatever orders he is given. Mind you, I haven't forgotten how Volcker brought on the recession of the early eighties (not to mention the collapse of a few emerging economies) with his tight money policies, but what the hell — presumably it got us out of the stagflation, and Carter would have lost anyway (yes, I believe in Reagan's secret deal with the Ayatollah — a belief reinforced by Iran-Contra.)

So let's see what happens. If it's just a lot of wind, I'll be disappointed, but not surprised. If you want me behind you, Barack, just do the right thing.

Debt Burdens

I graduated from Queens College of the City University of New York in 1967. My instructors all were either tenured or in tenure-track positions — I was never taught by an adjunct. Except for very nominal registration fees, the cost to me was zero.

Queens College still is a bargain. In-state, full time students pay about $5000 a year in tuition, and many qualify for some sort of financial aid. If they're living with their parents, it's manageable — less so for those who must be self-supporting. What I'm wondering, though, is why we no longer can afford to provide free post-secondary education?

Two thirds of those attending college depend on loans to pay their way through, and the average debt upon graduation is over $23,000. Starting out in a job that pays $35,000 a year, such a level of debt is an incredible burden. Starting out in an economy that might not provide any job at all makes the burden far greater. Graduates in bad financial straights may defer payment, but interest continues to accrue.

The result is young people putting their lives on hold. Student debt is one reason for delaying marriage and children. It's also a reason to hang onto essentially crappy jobs — just to keep up with the loan payments. Taking a risk means risking bankruptcy — a bankruptcy where student loans and credit card debt are not forgiven.

We are wasting a hell of a lot of talent by strangling it with debt. If I could get my hands on the throat of a bank that has been collecting government subsidies for offering high interest student loans, I would squeeze. Hard.

I don't have solutions. We are at a point where the evil rich should be hammered into pulp by the collective (Yes! Collective!) baseball bats of virtually everybody else, but don't expect anything from Timmy Geithner, whose asshole is open to the fucking of anybody with sufficient assets.

The New Deal wasn't about economics. It wasn't about socialism. It was about morality. It was about doing the right thing. Now, all of that is lost. Had Roosevelt been able to push through a national health care program, you can bet nobody would be trying to dig up the money to pay for coverage so as to avoid paying fines. Frankly, I think the whole "compromise" with single payer is sickening.

Welcome back to the 19th century. Bend over, working people. There's a lovely assortment of shafts all ready to fuck you — hard.

Regulation, again...

Well, I'm still waiting to find out just how "customized" a derivative has to be to escape regulation. So far, it sounds like the bankers will be a lot happier with the outcome than I will.

So far, a substantial majority of the derivatives that have been created have been "customized" to one extent or another -- and the bankers insist that such customization is vital to "serving the interests" of both buyers and sellers. Okay. It makes sense that different CDOs requires different terms and due dates. It makes sense that different credit default swaps will insure different levels of risk to different degrees. Swell. Go ahead and customize them.

I also understand why it might be hard to write regulations for customized derivatives -- especially since we can expect that their creators are sure to "customize" them in ways that would help them avoid any regulations Treasury might write. On the other hand, I don't understand why they can't be sold like other securities -- in an open market, with full disclosure.

The pivotal word in that last sentence, in case you didn't notice the double emphasis, is "can't." Clearly, they can be sold like other securities -- the only problem being that the profit margins of the originating banks would be sharply reduced. Well, we "can't" let that happen, now -- can we?

Hey! Obama! Yes we can!

Regulation and the Free Market

Just in case you haven't noticed yet, Friedman and Greenspan were wrong. Free markets are extremely fragile. Left untended and unregulated, they can't survive -- they succumb to what economists call "market failure." The only institutions powerful enough to prevent market failure are governments, and the only way they have to do that is through economic regulation.

The chief component of the market failure that created our current economic crisis was lack of information. For markets to operate properly, buyers and sellers must be aware of the real value of what they buy and sell. In the case of derivatives, as we now know, that information just wasn't available. Not only were buyers misled by the ratings agencies -- who were paid by the sellers -- but derivative sales were private. Buyers had no means of knowing what other buyers were paying for very similar instruments. The derivatives market was totally obscure, and totally unregulated.

"Then, let there be regulation," intones Obama. "Right on it, boss," cries His Boy In Treasury, Timmy G. And there shall be regulation. Effective regulation? Um, well...

Some Democrats in Congress, like Senator Tom Harkin (whom I recall supporting in a presidential primary a great many years ago), want all derivatives to be traded in an open exchange -- like stocks or commodities. That would provide full transparency, and make a repeat performance of the current mess just about impossible.

Timmy G. has another idea, though -- derivatives would be traded through privately managed "clearinghouses," which would make the trades, well, sort of semi-transparent. More complicated, "customized" securities, however -- like the credit default swaps that brought down AIG -- would remain outside the system, and totally opaque.

You get one guess: which plan does the industry prefer? Here's a hint: if buyers get to know what the securities really are worth, they won't pay as much for them.

Maybe Obama will surprise me, and get behind the idea of an open exchange. Somehow, though, I doubt it. Bill Clinton signed the December 2000 bill exempting most derivatives from regulatory oversight, and so can claim a fat share of the responsibility for our current problems. Barack Obama, who took even more in campaign contributions from the financial industry than Clinton did, is not likely to be a major improvement.

As Dick Durbin pointed out recently, "the banks ... are still the most powerful lobby on Capitol Hill. And they frankly own the place." I'm afraid that probably is true of the White House as well.

Well, so much for free markets. How can markets be free when the government that's supposed to protect them is bought and paid for?

Must Reading

Anybody seriously following the bank bailouts cannot afford to miss this article in today's New York Times, an extensive review of Tim Geithner's relationships with Wall Street firms and executives, as well as his policy recommendations both as chair of the New York Fed and Secretary of the Treasury.

This article is not "commentary" or "news analysis," but a review of Geithner's history. We are left to draw our own conclusions. For me, it reinforces my ongoing belief that the "change" promised by the Obama administration, at least as far as the financial industry goes, continues to be mostly smoke and mirrors.

The Citi share swap

Pretty clearly, Citigroup (despite its vaunted "profits" for the past quarter) is in big trouble.

When the government swaps out its preferred stock in Citi for common stock, a liability is magically transformed into an asset, Citi no longer has to pay the 5% dividend the preferred stock involved, and the taxpayers instantly own 36% of the company. Note that when that happens, the value of a share of Citi is diluted by about a third. Why would the existing stockholders go along with that?

Easy. Two-thirds of something is worth more than all of nothing. They appear to believe -- with good reason, no doubt -- that the only other alternative is to be wiped out.

Mind you, they still could be wiped out, but the prospect becomes a little less likely. The government, which will become the largest single shareholder, will feel a certain obligation to the taxpayers, and work a bit harder to keep Citigroup solvent.

The reasoning of the Obama administration is obvious. Citi is "too big to fail." Citi needs more capital to avoid insolvency. Congress won't provide more capital. Hence, the only way forward is to convert the preferred stock liability into a common stock asset. Clever boy, our Timmy G.

The biggest political problem is figuring out what to do with the voting rights that come with common stock. There are plenty of free-marketeers out there who already are saying that the conversion amounts to partial nationalization. Raise the red flag, comrades!

I am not looking forward to watching Obama & Co. weaseling around, looking for ways to not exercise government's voting rights in Citi. I think that we've had enough problems because shareholders -- private shareholders -- have abrogated their responsibility to exercise control over the companies they own, and left it all to management. I don't see why government, too, should be irresponsible. Summers and Geithner are said to be two of the brightest lights in the field of economics. Let's give them a chance to show just how good they can be -- at Citigroup.

Stress positions

I can hardly wait. Two more weeks, and Treasury will be releasing the results of its stress tests of the banking industry. Maybe. Sort of.

I can hear it now: "We have completed exhaustive testing of the nineteen largest banks, and we are pleased to report they all passed. No details are available right now, but maybe in a month or two..."

In the meanwhile, the banks are doing their best to impress us with their "better than expected" "profits."

Yes, I had to do two sets of quotes in a row. Neither turn of phrase is what it seems, and judging by today's action on financial stocks, investors haven't been fooled.

When the "results" of the stress tests are "released," it will not be the credibility of the banks that will be evaluated, but the credibility of Tim Geithner and the Obama Treasury Department.

Mark to mock-up

In case you missed it: the allegedly independent Financial Standards Accounting Board (FASB) just succumbed to heavy political pressure from our duly elected pawns of the banking industry and did away with "mark-to-market" reporting. What does that mean? Basically, it means that banks now are allowed to lie about the value of their assets.

Yes, I know. You thought they probably were lying all along -- and, pretty clearly, they were lying. Under the new rules, however, they now are specifically authorized to lie by FASB.

Under mark-to-market accounting rules, banks report the value of their assets based on market value -- that is, what somebody is willing to pay for them. Of course, since the beginning of the current banking crisis, no investor has shown any interest at all in purchasing the derivatives now commonly called "toxic" assets. One might think that would give those assets a mark-to-market value of zero, but actually that left the banks fairly free to value them, shall we say, optimistically, based on what they might fetch once the "liquidity crisis" was resolved. Once investors had some free cash and some affordable credit again, the banks maintained, those frozen assets would be purchased at fairly high prices.

The whole Obama plan for unfreezing the banking system seems to be based on the assumption that the problems banks are having with those assets are problems of liquidity -- that if government provides enough cheap credit and takes on nearly all the risk, then the market for derivatives will start moving again. With so much government incentive, the more adventurous hedge fund managers are beginning to show interest -- and others are sure to follow. The problem for the banks is that hedge fund managers are notorious bargain hunters. Even with government assuming 93% of the risk, they still will do their best to low-ball the banks when they make their offers.

Under mark-to-market, a low-ball offer of 20 cents on the dollar, even if a bank refused to accept it, would establish a market price. If the bank had been valuing the asset at 80 cents on the dollar, it would be forced to write down the asset's value by 75 per cent. Enough write-downs of that magnitude, and it would be impossible for the bank to pretend it still was solvent. The new rules make it possible for banks like Citi and B of A to hide their zombification and avoid being sent to their graves.

Those who recognize that our banking problems are problems of solvency, rather than liquidity, tend to believe that it is better to bite the bullet now -- admit that most of the "wealth creation" that took place in the finance industry over the past ten years was an illusion, and that an investment in Citigroup really was no better than an investment in Enron. The Enron scandal, you will recall, was made possible by lax accounting standards -- and yes, all Enron's investors were wiped out.

So now FASB, certainly with approval from the Obama administration, is relaxing accounting standards for the big financial firms. Why? Do the president and his economic advisors really believe the toxic assets have significant value -- that is, that the problem really is entirely one of liquidity? More likely, they are just really, really hoping the assets have some real value -- that questionable loans written to finance questionable loans written to finance pools of questionable loans collateralized by real estate might actually be worth something.

Clearly, though, the real estate collateralizing those loan pyramids will never have the value it was assumed to have when all those loans were written. Remember? Why do you think they called it a real estate "bubble?" As it was with Enron, and as it was with Bernard Madoff, the huge profits investors enjoyed during the run-up to the collapse were paper profits -- not real profits. No real value was added to the economy while it was taking place, and the "losses" suffered by investors in real estate derivatives are paper losses.

It's not that hard to put a market value on a straight mortgage backed security -- that is, one directly collateralized by mortgages. There is available data on how the mortgages in the pool are performing -- how many homeowners are up to date on their payments, how many are late by one, two, or three payments, how many are actively in default, and how many already have been foreclosed. It is my sincere hope that the banks will not be allowed to fantasize the value of those assets, and that Geithner's "stress tests" will ascertain their real, current values.

It is a lot harder to put a market value on securities several times removed from the collateral that ultimately guarantees them. A highly motivated hedge fund might invest in tracking down their real value before offering to buy such securities. More likely, though, hedge funds will do a few computer simulations to select a bouquet of securities with a high probability of producing a profit after a 93 per cent assumption of risk by government is factored in. In the meanwhile, you can bet the banks will be finding ways to game the system and unload the worst of their assets at taxpayer expense. Now that mark-to-market is gone, it will be that much easier.

To me, it looks like the Obama administration has decided that saving the big banks is better for the public good than letting them fail. It looks like Obama (read Geithner and Summers) believe our best course of action is to restore the system that created the current crisis -- albeit with more regulation. To get there, though, the taxpayers have to bail out the very same assholes who fucked it all up in the first place. (Note to readers: when vicworld resorts to foul language, vicworld is very angry!)

The solution they appear to propose is to distribute those paper losses between the financial firms and the ordinary taxpayers -- even though the ordinary taxpayers are the ones who have suffered the real losses. Think about the family that saved for years to afford a down payment on a house with a conventional mortgage, only to see the bottom fall out of home prices and find themselves underwater. Think about the families who have seen the price of their homes plummet because they live in neighborhoods with many foreclosures. These are people who had no reason to believe they were taking on excessive risk. They were screwed, both by the financial industry and by the government that failed to oversee and regulate that industry. If there is any good reason those people should be subsidizing speculators, I can't think of it.

Now, Geithner says government should have the authority to take over any firm that creates "systemic risk." Once again, the details are missing, though. Is there a real plan to help those of us who are not "masters of the universe?"

Right now, I have very serious doubts.

Detoxification of the banking industry

I've had a chance to look at the new bank detoxification plan. On the surface, it has some positive features, foremost among them the opportunity to get a better idea of what the frozen assets are worth. If hedge funds or private investors are willing to risk any of their own money, one would assume they think there is a reasonable chance of turning a profit -- especially in the current, risk-averse environment. If "Hedgehog Investments", say, will bid fifty cents on the dollar for a batch of Citi's CDOs -- even with 93% government leverage -- one could finally establish at least a nominal value for those CDOs -- half of face value.

True, without the government leverage Hedgehog would not have bought them at all, but by buying a diverse assortment of derivatives the Hedgehog traders might assume that some of those would turn out to have real value. (This is the classic definition of a "hedge.") On the winners, Hedgehog takes 50% of the profits. On the losers, the taxpayers take 93% of the losses. Do the math. If a substantial majority of the paper is pure crap, Hedgehog still comes out ahead -- but unless the opposite is true, and most of the paper turns out to be worth more than the price paid, the taxpayer loses, big time.

Great deal, huh?

Let's look a little harder. Under Treasury's plan, the banks get to decide which assets go up for sale. The most senior tranche of a security -- the shareholders entitled to be paid first when the asset pool is distributed -- is fairly safe even if the security as a whole is not performing well. Banks traditionally hold on to those senior shares. The problem for megabanks like Citi and BofA was that they were unable to unload the more junior tranches, and are stuck holding them on their books. Only those junior tranches will go to the auction block, and I think it is safe to assume that, by this late date, the banks have a pretty clear idea of which are likely to yield a profit and which are completely worthless.

Trying to get rid of the ones that are totally worthless may be tempting, but hedge fund managers rarely are total idiots, so nobody will want to buy the most junior tranches. Nobody buys a turd, no matter how deeply discounted it may be -- so the bank that made the offering would be forced to mark down the unsold turds on its books, perhaps all the way to zero. Uh oh! Here comes formal insolvency! Better to keep the turds on the books, and pretend they're still worth thirty or forty cents on the dollar.

So all trading necessarily will be in the middle tranches, but even with their heavy government subsidies, private investors still may be unwilling to pay as much as the banks need to regain real solvency. It's quite possible that hedge funds will make large profits, taxpayers will suffer enormous losses, and the big banks still will fail.

Here is one last scenario -- and I certainly hope somebody at Treasury has thought of it and is making sure it can't happen:

Citi bids 100 cents on the dollar for $300 billion worth of B of A's most toxic "assets." Under the government program, Citi puts in $21 billion of its own money, and the rest comes from the government. In the meanwhile, B of A bids 100 cents on the dollar for $300 billion worth of Citi's most toxic assets, similarly investing $21 bilion of its own money. Then, both Citi and BofA "discover" that the assets they bought are worthless, so each writes down $21 billion in losses. Each bank ends up $279 billion ahead of when it started, and the government is on the hook for $558 billion. Brilliant!

In that scenario, the taxpayers have purchased a truckload of worthless crap for 93 cents on the dollar -- probably a substantially higher price than even Henry Paulson would have been willing to pay. Could the banks get away with it? Not in the form I just presented it, but with appropriate use of proxies and the usual lack of transparency, perhaps. With complicity from key players in government, well...

Doesn't it make a lot more sense to nationalize all the big banks that can't make it on their own -- now? Fire the thieving buffoons who ran their banks into the sewer, and replace them with technocrats on the government payroll. Let those specialists take as many years as necessary to break up the megabanks and and sell off their assets, getting the best price possible for the taxpayers. In the meanwhile, Congress must enact legislation to make certain that no bank ever again becomes too big to fail. (Glass-Steagal comes to mind, for starters!)

A bank that is too big to fail is too big to exist. If Obama and company would just grow some balls and stop cringing when Republicans call them naughty naughty socialists, they will discover a great deal of popular support. Americans will accept nationalization, provided the "evil, greedy bankers" who "did it to us" are punished.

Clinton in blackface

Anybody who knew me back in the nineties will recall that I was no fan of Bill Clinton, the Democrat who made me feel nostalgic for the liberalism of the Nixon administration. If you happened to notice me driving down the road on November 12, 1999, when the radio announced that Clinton had signed the repeal of Glass-Steagall, you'd have slowed down and moved into the most distant lane in an effort to avoid a total lunatic.

So now, after eight disastrous years of Bush, we have Obama -- putatively "the change you can believe in." Okay, I believe some changes have taken place. From Bush, we seem to have moved about halfway back to Clinton.

I'm not blaming you for this, America. It's not as if you had a hell of a lot of options -- and electing a (sort of) black guy made a lot of people feel like they were voting for change. The problem was that real change never was an option. The plutocrats were in charge, and they remain in charge. Lehman Brothers, Goldman Sachs, JP Morgan Chase, and UBS were among Obama’s top contributors. They gave him the early lead in the “money race” that made his candidacy viable.

In return, he let Robert Rubin create his economic team. Rubin, lest we forget, spent 26 years with Goldman-Sachs before he joined the Clinton administration. Together with acolyte Larry Summers and free-market ideologue Alan Greenspan, he quashed the regulation of derivatives and championed the repeal of Glass Steagall, making the current financial meltdown inevitable. Shortly before I found myself in my car, screaming at the radio, Rubin left the Clinton administration to sign on as senior advisor to Citigroup. Still working in that capacity, he signed on as chief financial advisor to Barack Obama.

So, what would you expect -- specifically, what would you expect of Rubin protégé Timothy Geithner, other than more "lemon socialism?" The private sector will "join" with the public sector to buy toxic assets from the afflicted banks that so generously supported Obama, and reap the rewards of any profits that might be made. Losses, of course, will be absorbed by taxpayers.

Clinton -- either one -- would have behaved no differently. On the other hand, if Hillary were president now, it's possible that a few other decisions would have been less Bushlike. A couple that come to mind are Obama's failure to overturn the Bush order allowing "faith-based" organizations receiving government funds to discriminate, based on religion, in hiring; and the continued use of "state secrets" as an excuse to protect Bush administration war criminals.

Well, maybe she'd have been no better. The same oligarchs who supported his campaign supported hers as well.

More questions than answers

I listened to Geithner's speech four times, and took notes. He made some of the right noises, but the devil always is in the details -- and the details were conspicuously absent.

He said that "gradualism" won't do -- except, I suppose, for announcing the specifics of the new administration's approach -- and warned against making the mistake of "applying the brakes too early." He made a lot of noise about transparency. Okay. Swell.

He spoke of a "comprehensive stress test" for banks, with government agencies assessing bank balance sheets. Does that mean government will take on the task of valuing all those frozen assets? No, I guess not, because he gets to that later, in a different context. Anyway, the banks get to draw on a "Financial Stability Trust" as a "bridge" to private capital. Do banks have to pass the "stress test" -- demonstrate that they still have some net worth -- before they get to draw capital from the FST?

Valuing the frozen assets, apparently, will be done by defrosting them. Geithner spoke of a trillion dollar "public/private investment fund" that would use government capital to "leverage" private capital, and start the unsalable securities selling again. What role will government play, and what will be necessary to get the hedge fund managers and other investors interested in buying? Nobody seems to know, but the term "bad bank" keeps coming up in the news analysis.

One thing I do know is that every time I hear the phrase "public-private," my blood runs cold. Typically, "public-private" means the public absorbs any losses while the private sector absorbs any profits -- more corporate socialism.

Another trillion, from the Treasury, the Fed, and the FDIC, will go to "support" consumer and business lending. This sounds a bit like my "good bank" idea, but I have a bad feeling that some way will be found to further enrich a bunch of private bankers in its application. As for foreclosure relief and regulatory reform -- well, maybe we'll hear something about that next month (!)

In the meanwhile, I haven't heard anybody in the administration openly criticizing the Senate's 50% cut in the amount of aid to states that will be in the upcoming stimulus package. Of course, it makes absolutely no sense for the federal government to try to stimulate the economy and create jobs while state governments are forced to decimate spending programs and throw vast numbers of state workers out of work -- unless, of course, you're a Republican.

Obama should take the time to listen to Rush Limbaugh once in a while, and he might wake up to what the Republicans really are trying to do. Rush openly states that he wants Obama to fail. Guess what, Barack? So does almost every Republican in Congress. They don't care at all if the country sinks into Great Depression 2.0 provided they can get back into power. You're still singing Kumbaya, Barack, but nobody's singing along.

The next bank bailout

It's Saturday. Geithner won't give his speech until Monday, and who knows how much he'll be willing to lay on the table even then? I figure it is incumbent upon me to speculate a bit, so that, as events develop, my forecasting ability may be evaluated. (By the way, I never go back to edit earlier postings -- except for obvious typos.)

And, so, it looks like what will be announced Monday could be a fairly clever compromise. Instead of "sin eating" Wall Street's toxic assets, government will invite private investors to buy them -- but with reduced risk because of government insurance. In essence, the Treasury would be issuing credit default swaps.

If done right, it could work. The only way to get a fix on what all those "troubled assets" are worth is to get people buying and selling them again -- but will it be done right? That remains to be seen.

To my mind, doing it right involves a few basic rules. First, no asset should be insured for more than half of what the investor pays for it. Insuring assets for full "face value" is the same as buying them outright, except without the opportunity to sell them if their value increases.

Second, pre-existing credit default swaps should not be re-insured. Since the lion's share of those were sold to buyers who did not even own the securities they supposedly insured, covering them is tantamount to insuring gambling losses.

Third, government should charge a fee for the insurance it issues. Investors were willing to pay for credit default swaps in the past, and they still should be willing to do so -- especially since the insurance is being issued by government, an institution which will not default.

Fourth, participating banks should be required to write down the alleged value of all derivatives that do not find buyers in a reasonable period of time. Only in that way can we discover which banks are essentially healthy and which are among the walking dead.

"Bad" bank? Why not a "GOOD" bank?

The more I read about the "bad bank" idea, the less I like it.

Obama, by any rational measurement, is a major improvement over W -- but the same might have been said of any of the Democratic primary candidates, or of Wile E. Coyote, or Richard M. Nixon, or even Oprah. Where Obama falls down, though, is in surrounding himself with Clintonistas who instinctively herd towards what they perceive as the "center." They don't seem to have noticed that "liberal" isn't a dirty word anymore, nor that while the right is as bombastic as ever, fewer are listening. And so, Geithner and Summers and the rest of the Robert Rubin protegés are having their way: nationalization remains verboten, and it looks like the American people as a whole will have to eat the losses racked up by the banking industry -- not just the industry's stockholders and bondholders.

It's true that Obama owes a debt to Wall Street, which provided the funds that let him take the lead in the "money race" early in the primary season. It was that lead which got him serious attention from the media, which in turn enabled him to mount a successful campaign for the small contributions that won him the presidency. Honestly, though, I don't think he owes the bankers over a trillion dollars -- at least not our trillion dollars.

So, instead of wasting taxpayer money on a bad bank -- a kind of financial sin eater that would absorb the toxic assets of possibly zombie banks and transfer them to current and future taxpayers -- why not use the remainder of the TARP funds to create a good bank, government owned and operated, which would provide loans directly to businesses that will create jobs and creditworthy individuals who want to make major purchases? There are plenty of out-of-work bankers available to organize and staff the new bank, and the vast majority of those had nothing at all to do with the derivitives failures that caused the current mess.

Yes, I know. That would be socialism. Shame on me for being both unregenerate and unrepentent. It wouldn't have to be permanent, though -- the good bank would exist just long enough for zombie banks finally to stumble into their graves. After that, the good bank's assets could be sold -- at a profit -- and we all could go back to private banking again.