What the $%# Is Happening with the Bailout?
We confess once again that we are not really economists, we are your loyal government watchdog, and we've been diligently poring through articles, books, and papers, attending seminars, even obtaining non-public CRS reports, all in an effort to comprehend and then explain this massive $700 billion bailout and what it means for the U.S. taxpayer.
Well, silly us! It really doesn't matter what the Emergency Economic Stabilization Act of 2008 (EESA) says, or how the Troubled Asset Relief Program (TARP) was set up. There's no point in trying to suss out the newly created oversight bodies, or all the overlapping reporting requirements, or how many of those reports will be public (only one is required to be), or even what factoids those reports might contain.
None of this really matters because, as it turns out, apparently the only thing that does matter is whether an institution's chieftains have good longstanding relationships with current or incoming Treasury officials.
Exhibit A might be the Washington Post's excellent piece on the “Familiar Trio at Heart of Citi Bailout,” which explains how the Citigroup bailout, the newest example of this ad hoc response to economic meltdown, was put in play “by three men whose professional lives have long been intertwined”: Treasury Secretary Henry Paulson, Citigroup board member and former Treasury Secretary Robert Rubin, and Timothy Geithner, president of the New York Fed and soon-to-be Treasury Secretary. Rubin and Paulson were colleagues at Goldman Sachs. Geithner worked for Rubin at Treasury during the Clinton administration. As head of the Federal Reserve Bank of New York, Geithner has been directly responsible for oversight of Citigroup, and has been closely involved in discussing its rescue with Paulson. Rubin has been on Citigroup's board since 1999.
As the Post reports, “Rubin called Paulson several times to make the case for intervention on behalf of Citigroup....” Geithner continued to discuss Citi with Paulson over the weekend, but once word got out that President-elect Obama would nominate him as Treasury Secretary, he stepped back from “direct interactions with Rubin and other Citigroup leaders in these negotiations.” The final terms, under which the government [read: the taxpayer] will guarantee $306 billion in assets, do not require Citi to fire its executives, although their compensation must be approved, and the bank must reach out to help homeowners try to avoid foreclosure. One former Fed official told the Post that the deal “strikes me as unbelievably generous.”
As for Citi itself, look at Annys Shin's recent piece in the Post biz section. If Citi has been at the forefront of innovation, it has also been “in the midst of every major financial crisis over the past century.” Time and time again, it seems, Citi's aggressiveness has become recklessness.
Post columnist Steven Pearlstein draws attention to Citi's having been the “very embodiment of the new financial order,” one of the first to profit from the cracking of the regulatory wall between commercial banking and investment banking/insurance. Pearlstein notes that the rationale for saving Citi is that “this was a bank that was too big and too connected with the rest of the financial system to be allowed to fail. The question now is whether an institution of that size and scope is also too big to succeed.”
Pearlstein points directly at Rubin:
What is indisputable is that all of the decisions that have led to Citi's recent troubles were taken while Rubin was chairman of the executive committee, and made by executives with whom he worked closely....The ultimate irony is that just as Rubin & Co. were being bailed out at Citi by the Bush administration, President-elect Obama was announcing a new economic team drawn almost entirely from Rubin's acolytes.
He gives some free advice to the President-elect: listen to that new fabulous economic team of yours, but leave Rubin out of the mix. “At a minimum, it's a glaring conflict of interest. More significantly, it sends a terrible signal about accountability and corporate governance.”
The fact is that Paulson and his (we resist the urge to say cabal or henchmen) tight little circle of decisionmakers seem to be lurching from one putative crisis to the next, imposing a different solution to every problem, seemingly making it up as they go along. And as the Post so beautifully pointed out, the main criterion for being in that circle is having always been there--being a member of the old boys' network. Who needs a conspiracy when you've got your frat brother or former boss or squash partner? And yes, they do all seem to be white males, don't they?
Both the Washington Post and the New York Times recently published excellent pieces on the history of efforts by the former head of the Commodity Futures Trading Commission (CFTC), Brooksley Born, to regulate derivatives and the so-called credit-default swaps during the Clinton administration. She was absolutely convinced they would ultimately lead to chaos in the financial system. However, the then-head of the Fed, Alan Greenspan, then-Treasury Secretary Rubin, along with the then-SEC chief Arthur Levitt, basically ganged up on her, mugged her in the alleys behind Congress, and took away any chance of her imposing any oversight on the dangerous instruments that it is now agreed led directly to much of this year's meltdown.
Let us be clear on one point: we are not presuming to decide whether the various transactions and interventions of the past several months make good financial or economic sense. Our point is that the process has been almost completely opaque. We can appreciate that Secretary Paulson may not want to broadcast his every intention to act prior to doing so, for fear of affecting the markets--apparently his merely hinting that the government was finished with bailouts for a while was all the market needed to destabilize Citi last week, as Floyd Norris points out in the New York Times today. However, once the Secretary has taken a step to intervene, we strongly believe the public deserves to understand its details and ramifications.
Norris also notes that earlier this year when Bear Stearns and Lehman Brothers collapsed, the SEC, which had been responsible for their regulation, was “effectively forced out of that financial soundness regulation area” and the Federal Reserve stepped in. Aye but here's the rub: “But Citigroup had always been under Fed regulation, and the need for repeated bailouts there shows both that the regulation was ineffective and that even after the crisis began, the government underestimated its severity.” Again, the Fed governor overseeing Citi has been Mr. Geithner.
You do not have to be a conspiracy-monger to note, as did one of our insiders, that this inconsistency is very destabilizing. No one knows how the government will handle any particular crisis. It is hard to understand why the government didn't seize Citi, sell off the valuable parts, and absorb the rest.
Just today, the plan announced by the Fed and Treasury together to inject the government into a wide range of consumer and business credit, would, according to today's New York Times, “…in effect close the circle in the chaotic evolution of the Treasury rescue effort” or TARP. Does anybody here know what's going on???
As we pointed out in our letter to Congressional overseers last week, what we're looking for is transparency, openness, and oversight.
-- Beverley Lumpkin
Wow, great post Beverly. It's pretty tough to even follow the type of 'spending' this issue involves. But as we move forward, the POGO side of things will remain vital. Good luck!
Posted on: Nov 27, 2008 at 01:39 AM
Could you imagine the fiasco at DOD had Citi gone under? Traveling would have been a total nightmare. At least Citi stands to gain billions for running the DOD's travel card program.
Posted on: Nov 26, 2008 at 09:48 PM
Fed spending is up to $8 trillion and you're still worried about the $700 billion our elected officials voted to spend? Not having any luck finding that elephant in your microscope? $8 trillion, that's, what, 60% of GNP? Yeah, who cares about accountability for that paltry sum?
"Whether it's lending or spending, it's tax dollars that are going out the window and we end up holding collateral we don't know anything about," said Rep. Scott Garrett (R-N.J.), who serves on the House Financial Services Committee. "The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones." - http://www.newsday.com/services/newspaper/printedition/wednesday/news/ny-d5942206nov26,0,4016179.story
Posted on: Nov 26, 2008 at 11:12 AM
As it turns out there is new legislation that was introduced on 11/20/08 to immediately terminate the authority of the Secretary of the Treasury under the Emergency Economic Stabilization Act of 2008 to purchase troubled assets. To make a portion of the unused funding for such program available to meet critical "infrastructure needs" in the United States.
$100 BILLION to be redirected for transportation infrastructure
HR 7306
http://willnevergiveup.wordpress.com/2008/11/25/hr-7306/
Posted on: Nov 26, 2008 at 12:21 AM
Dear POGO, 11/25/2008
Dear Ms. Lumpkin,
My having not fully read this/your Article and in my mostly responding to you first sentence, which I appreciate and your last few paragraphs, please allow me to again reteriate the following few seemingly obvious mentions.
First and foremost, please continue and with hopefully as one of your highest priorities to appeal to our US Executive, Legislative and Judicial Branches and Leaders to immediately bring to a full floor vote the 'Federal Employee Whistleblower Protection Restoration Act' and the proper and forthright endeavors of the Sabersky Plan and also for immediate and/or as soon as possible implementation.
Also as important appears to be another direct concern within this Article. As I have and successfully previously posted blog comment replies replies on your website for several years and that I continue to sadly concurr with my conclusions and that 'We the People' have obviously not heard the necessary and obvious truth from our Current and New incomming Economic Team and/or our current and new Government Leaders and/or Legislatures for the obvious and necessary 'Oversight and Accountability" and Transparency nor to this date have we heard the necessary and obvious, seemingly proper and forthright identification of the problems and the endeavors to a necessary and obvious resolve(s).
Should you concurr with my summations then I am as sadly worried as I would imagine would be a reasonable concern to all reasonable persons, especially and as I have previously mentioned the short term Financial problems are seemingly mostly and easily identifiable and with the short term solutions seemingly mostly and easily resolved and therfore should and would allow proper and forthright reasonable persons to tender and submit the solutions for the obvious and necessary problem identifications and corrective resolves of the long term concerns.
If you have any questions or concerns, please contact me at your convenience.
Thank you and all for your time and considerations.
Sincerely,
Axel
Axel V. Sabersky
Posted on: Nov 25, 2008 at 07:51 PM