How big are these developments? Think about it. Would you have gone to a Sylvester Stallone movie if Rocky and Rambo were somehow erased from your memory (yeah, I didn't go either, even with Rocky, but play along here).
The American Prospect's Robert Kuttner is even suggesting that we may have been sold a bill of goods. Helping to erase Geithner's "Rocky moment" is the fact that people like Kuttner are starting to look at Geithner's mentors, who (with the exception of Paul Volcker) are now in the financial dog house, and the fact that Geithner was head of the Federal Reserve's New York district office when the market meltdown began. In a few words, Geithner is slowly projecting like a bad Sylvester Stallone movie.
This is important because President Obama came into office with a distinct mission: calm the markets and set the stage for stability and growth down the road. Geithner's performances and his mentors are not helping him now. And it's getting worse. Nakedcapitalism.com is pointing out that the bailout of AIG may simply be a way of funneling money into other market players, here and abroad. If we want to put this in a negative light, AIG is simply a front company - used as a clearing house for shoveling money into financial institutions who bought the toxic garbage (subprimes, ARMs, etc.) produced by Wall Street. Here's a list of companies, compiled by the Wall Street Journal, who have been paid off through AIG:
Goldman Sachs
Deutsche Bank
Merrill Lynch
Société Générale
Calyon
Barclays
Rabobank
Danske
HSBC
Royal Bank of Scotland
Banco Santander
Morgan Stanley
Wachovia
Bank of America
Lloyds Banking Group
The fact that this is a "Who's Who" list of global financial players is not as important as this: the bailout of America's financial institutions is slowly being exposed for being little more than a transfer of taxpayer money to the "Big and the Stupid" (sounds like a Stallone movie already) who made bad bets on bad products with money they didn't have. And Geithner was there, watching it happen.
It now appears that we're shoveling money into these global financial firms because, if we don't, the world will blame us for the financial disaster we're confronting because of how we exposed them to our toxic garbage. This is important because it suggests that the world is telling us that if we don't help rectify the situation with their banks they just might quit playing ball with us financially. This, in turn, would force some real ugliness on the American dollar, and cause political panic as the dollar collapses around the world.
In a few words, we're doing this both to save our own skin, and because we want to maintain global political stability (trade partners that become trade competitors is usually a prelude to economic nationalism).
During the Cold War we paid for the defense of the West, and were able to convince the rest of the world to hold dollars. So from a political perspective what we're doing makes sense - even if we don't like bailing out stupidity and greed on Wall Street. There's only one problem here: We're no longer helping the world stave off the Soviet Union and communism (and, No, al Qaeda is not the greatest threat we have ever faced). The cooperation of our allies is now purely commercial and selfish. They want to keep our markets stable. If we blow it there's no telling what could follow.
So, where does this leave us? Here's what I see. President Obama is going to have to make a decision on Secretary Geithner within the next 3 months. If Geithner continues to come across as Sylvester Stallone Obama's going to have to reach for a political Robert De Niro for Treasury (is Paul Volcker open to stepping in?). Here's why. We're eventually going to have to nationalize the failing banks.
A Treasury Department that does little more than prop up the banks with trillions of dollars (there's at least $45 trillion in CDS counter party contracts) that doesn't reach U.S. consumers is simply not sustainable. Few will have much confidence in a partial nationalization game plan (or any Obama plan) if Geithner continues to falter.
What we're facing is too important to continue messing around with weak personalities and a steady drip of shell game AIG bailout stories. We need a Shakespearean performance from the Treasury Department on this one. At this point I'd even settle for the smoke & mirrors of a Rocky movie if it meant buying time for Geithner to grow into his position.
We simply need a better performance from Geithner.
- Mark
I understand that Paul Volker has stated he feels too old, (the dude is 81, and has worked hard all his life) to shoulder the workload which would come with actively making policy everyday. I think the best we could hope for here is for Obama to really listen to Volker and give more weight to his advice than to, say, Summers or some of his other advisors. I sense a certain reticence from Obama on this, and hope he shows some cojones soon.
ReplyDeleteGreat post!
ReplyDeleteAlso notice that the shadow banking sector is being replace by the TALF with profits being funneled through the primary dealers to the investor class. Please note the returns to investors will be 60% on government guaranteed student loans.
washingtonpost.com/wp-dyn/content/article/2009/03/05/AR2009030503762.html?hpid=topnews
Some firms that issue consumer credit questioned the program’s limitations. Executives at one leading bank said restricting the program to securities backed by only the highest-quality loans would be too constraining.
For example, many loans taken out by auto dealerships to stock their inventory do not have the highest ratings. Government officials, who want to make sure dealers can get these loans, are considering expanding the TALF to slightly lower-quality assets, sources said.
Some officials are concerned there may not be enough highly rated loans that can be combined into securities to sell to investors.
Another matter of discussion among federal officials is whether to lengthen the term of the financing extended by the government to investors, sources said. With securities backed by auto loans, for example, a relatively short period was deemed appropriate because these loans mostly carry three-year terms. But when the TALF expands in the coming months to aid other segments of the credit market, such as commercial real estate loans, the Fed may have to lengthen the time because such loans carry 10-year terms or longer.