New York Times & Sarkozy: Obama says no to financial reform

Financial System Reform?? + update 4.3.09


French President Sarkozy’s earlier high profile threat to wreck the London G20 financial summit if his demands for tougher financial regulations were not met suggested that he well understood the signals coming from the Obama administration that they were not inclined to promote real reform. Much of the same unease was clear in the NYT editorial which detailed the evasions in Treasury Secretary Geithner’s well hyped but discouraging proposals.

The NYT editorial (3.29.09) “Questions for Reform” pointed out that Geithner’s call for large hedge funds and private equity firms to register with the Security and Exchange commission is a good start, but that under his proposal, the SEC would not really have the full authority necessary to address important concerns. Instead it would be reduced to merely reporting issues up a “convoluted chain of regulatory command.”

Secondly, Geithner’s call for oversight of unregulated derivatives includes a loophole “disguised as a new rule.” Despite the clear demand by the public and the international community for effective hedge fund and derivative regulation Geithner’s proposals suggest that the Obama administration has caved in to the worst offenders who seem to wish to maintain the current discredited system.

There’s more. The Times goes on to criticize what Geithner left unsaid. They fault him for not challenging the concept of firms too big to fail. Instead they find that the Geithner plan unaccountably “assumes that such firms will be a feature of the financial landscape going forward.”

The Times also notes the absence of a call for a thorough investigation of all the moving parts of the current system, without which the proper fix may be elusive and Geithner’s proposals merely a “charade.”

If the Obama administration is not going to take this once in a generation opportunity to promote effective reform on this clear and crucial issue, how can we expect them to protect our interests on much more tangled and controversial issues.

Whatever we might think of the right of center Sarkozy, it seems he has a better line on what is currently necessary than does the Obama administration.

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Update 4.3.09

It was embarrassing to read the front page story of the NYT for 4.2.09, “Obama Faces Calls for Rules on Finances.” Instead of enjoying our attractive and well spoken new leader cutting a dashing figure on the world stage, we find the Times forced to confirm that Obama was standing naked for all to see.

Obama’s position seems to be that Europe and the rest of the world – mainly China – should stimulate their economies so they can bail out Obama while he not merely bails out the reprehensibles (some of his major contributors), but, by giving real reform the back of his hand – as we might expect from Cheney – he works to ensure that their time in the sun will continue as long as Obama can create the trillions to do it with.
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Further reading.
There’s so much on the economic misdirection from Obama and his economic sidekicks, Geithner and Summers, that it's difficult to keep up -- not to mention, as Paul Krugman, writes, despair making.

One of many notable and important broadsides comes from the Times op ed page, by Nobel laureate Joseph E. Stigliz, “Obama’s Ersatz Capitalism," 4.1.09.

See also the very good Counterpunch.org website which seems to have article after article detailing the mess. For example:

Mike Whitney, Zombie Economics: Judgment Day for Geithner,” (3.23.09); “Geithner’s Hog Wallow” 3.27-29, 2009)
Dave Lindorff, “Toxic Bailouts” (3.23.09)
Dean Baker, “Billions More for Failed Banks” (3.25.09)
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William Black (Huffington Post) Geithner (Obama) Continues Bush's corruption

With Bush it was malevolence, with Obama it's apparently stupidity and ignorance. Stupidity for believing that Geithner had some answers even though he contributed to the Bush plan that many could see would only help the most corrupt elements. And ignorance in thinking that listening to such discredited veterans as Lawrence Summers would do any good. It's not too early to see that Obama is way off base and has chosen in too many cases, for reasons which are not entirely clear, people who will contribute to failure in too many critical policies. We hoped for change and we got someone in training wheels. We're wondering now if Hillary could have done any worse. --RB
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William K. Black
Associate Professor, University of Missouri; Senior regulator during S&L debacle
February 10, 2009 |
Huffington Post
http://www.huffingtonpost.com/william-k-black/the-audacity-of-dopes_b_165637.htmlThe Audacity of Dopes





We are being played for chumps. The Bush and Obama plans could only have been designed by failed bankers -- for their principal beneficiaries are failed bankers. We already know enough to confirm that the Bush administration made us the "fool" in the market by massively overpaying for assets. The Obama administration is about to compound that scandal with a "guarantee" program. The bankers that caused the crisis designed both programs. The senior officers at big bank aren't very good lenders, but they are expert in maximizing their compensation.

Worse, Mr. Geithner, the senior public official who, with former Treasury Secretary Paulson, designed the failed Bush plan is the architect of the disastrous Obama plan. Indeed, as theNew York Times has just revealed, it should be called the Geithner plan. He overcame intense opposition within the Obama administration and designed a plan that is even worse than the failed Bush program. Geithner's gifts to the bankers that caused the crisis include: a unnecessary taxpayer bailout of "risk capital," a massive coverup of their banks' insolvency, gutting the proposed limits on executive compensation, and devising a "guarantee" mechanism designed to hide the expenses of the unprincipled bailouts from the American public. Remember, executive compensation is not "merely" a fairness issue. Executive compensation and the compensation systems used for appraisers, accountants, and rating agencies were designed, and served, to create the perverse incentives and ethical rot that caused the ongoing financial crises by producing a "Gresham's dynamic" in which fraudulent and abusive lending and accounting practices drove good practices out of the marketplace.

Here's the amazing part -- the bankers are so arrogant that they bragged to a sympathetic CNBC commentator they are playing us:


"

What a delicious irony this is--last week, just as President Obama was publicly bashing the stupidity of the banks ... his economic team [was] privately begging for input from Wall Street. The administration was conducting around-the-clock discussions and interviews with senior Wall Street executives, including many from the same firms he was theoretically appalled with, about how to fix the lingering financial crisis. "

There are proven ways to resolve the crisis that are far cheaper and more effective because they don't subsidize bankers and "risk capital." We know how to resolve failed banks. The Federal Deposit Insurance Corporation (FDIC) can place even the largest banks in "pass through" receiverships on Friday at the close of business and reopen them as "New Federal" bank Monday morning with minimal disruption to customers and creditors and retain "going concern" value. This is how the Reagan administration resolved failed S&Ls during the debacle.

The FDIC appoints a senior manager to ensure that "New Federal" is run prudently. There is plenty of unemployed banking talent available. Hundreds of good bankers lost their jobs during the financial bubble because they refused to make bad loans. Research has shown that its sister agency, FSLIC, appointed receivership managers that greatly reduced losses during the S&L debacle. Leaving the managers in charge of failed banks that they led into insolvency is suicidal. The new senior leader is picked based on expertise in prudent lending and integrity. If we want failed banks to return promptly to making prudent loans and help lead an economic recovery an S&L style "New Federal" is the best possible device. The existing managers have terrible incentives -- to cover up existing losses and to make bad or even fraudulent loans that produce the greatest (fictional) accounting income and to "live large" through bonuses and perks. (The Obama compensation limits are political cover. The bankers have designed the "guarantee" plan to ensure that the compensation limits will be illusory.)

The FDIC managers have the correct incentives to finally produce an honest evaluation of which assets are toxic and how much they are worth. This transparency is essential if we are to end this crisis. Under the Bush and Obama plans we retain the existing managers that have overwhelming incentives to cover up the losses. The bankers have designed the guarantee plan to encourage banks to continue to cover up their toxic assets and not recognize their losses. These cover-ups make a financial crisis last longer and increase the taxpayers' costs.

The FDIC managers preserve the going concern value by making prudent loans and get the "New Federal" in shape to be acquired. By providing reliable information about the toxic assets the managers reduce acquisition risks, which expands the number of bidders and reduces the financial assistance required to aid the acquisition.

"New Federal" receiverships dramatically reduce cash needs. Most costs are deferred until the New Federals are sold.

Pass through receiverships save the taxpayers money and prevent perverse managerial incentives because they do not subsidize "risk capital" when banks are insolvent. Common and preferred stock and subordinated debt in banks are "risk capital." Their holders are supposed to receive nothing if a bank becomes insolvent, but the Bush and Obama plans reward them. There is no need to do this. Subsidizing risk capital and maintaining the failed managers at insolvent banks creates the worst possible incentives. It will cause future crises. It will delay the recovery from the ongoing crises. It robs the U.S. taxpayers and primarily benefits the wealthy -- many of them non-U.S. citizens. The contract they made was that they would get nothing if the bank failed. It has failed, and they are often complicit in those failures. The bankers have convinced the Bush and Obama administrations that the taxpayers should be looted to bail out risk capital. We should stop listening to the folks that caused the crisis and have interests hostile to our interests. Let's stop them from using us as chumps.

Read more:

http://www.huffingtonpost.com/william-k-black/the-audacity-of-dopes_b_165637.html

William K. Black, Associate Professor of Economics and Law, University of Missouri - Kansas City. He held senior regulatory positions during the S&L debacle and is the author of "The Best Way to Rob a Bank is to Own One" (2005)