Contradicting Secretary Geithner

By Simon Johnson

Speaking Thursday morning on the Today show, Treasury Secretary Tim Geithner insisted on two points:

1. If the bank rescue of 2008-09 had been handled in any other way – for example, being tougher on bankers – the costs to the real economy would have been substantially higher. 

“again, what was the choice the president had to make? He had to decide whether he was gonna act to fix [the banking system] or stand back because it might be more popular not to have to do that kind of stuff, and that would have been calamitous for the American economy, much, much worse than what we went through already.”

2. The reform legislation currently before Congress would end all concerns regarding Too Big To Fail in the future. 

“The president’s not gonna sign a bill that doesn’t have strong enough teeth.”

In 13 Bankers, we disagree strongly with point #1 (see this excerpt) and find point #2 so at odds with reality that it is scary.  Friday morning, also on the Today Show, I have a brief opportunity to suggest a different narrative.

First and foremost, it is impossible to believe that the government could not have been tougher on banks and bankers in spring 2009.  The idea that every failed top banker needed to keep his job – and that every director of a failed bank needed to stay in place – is simply preposterous.

Of course, the people who ran our biggest banks onto the rocks think they are indispensible, but as Charles de Gaulle reportedly said, ““The cemeteries of the world are full of indispensable men.”

This is not about being vindictive.  This is about holding people accountable.  We argue in 13 Bankers that the government could have taken over big insolvent banks – and applied a FDIC-type resolution process.  At the very least, top management and boards of directors at failed banks – i.e., all those rescued by the government – should have been fired.

Not only that – but all those people should have had their contracts broken and their bonuses clawed back to the full extent possible.  Losing personal money is the only thing that modern American financial executives ultimately understand.  And if that was breach of contract – let them sue and good luck to them in court; just think of the extra evidence for wrongdoing that would uncover.

The costs of this excessively nice approach are enormous.  “[I]t is certain that a healthy financial system cannot be built on the expectation of bailouts” – that’s what Larry Summers said in his 2000 Ely Lecture to the American Economic Association, and it’s true (see the American Economic Review, Vol. 90, No. 2; no free weblink available).  Now we have a system where the biggest banks expect to be saved, come what may – and the credit markets share that view.  This is monstrously unfair and extremely dangerous.

In fact, it’s exactly the kind of financial structure that Larry Summers railed against in 2000 – that lecture was mostly about “emerging markets” and how they get into repeated financial crises. This is where the US is now heading.

As for the financial reform bill now before Congress, Secretary Geithner is completely wrong if he thinks it “has teeth”.  There is simply nothing there that will rein in our largest financial institutions – and you can see this in the financial markets.  Even as some sort of legislation moves closer to passing, massive banks retain their funding advantage – and continue to look for ways to get larger (see Jamie Dimon’s letter to his shareholders this week).

And as a symptom of these continuing problems, see the latest round on executive pay at banks – we’re back to cash and other short-term oriented payouts.  This administration recognizes that such incentives are dangerous – particularly when combined with implicit government guarantees.  But they can do nothing – and will do nothing – about this or about the deeper underlying issues.

The biggest and most dangerous elements of Wall Street have taken over Washington.

76 responses to “Contradicting Secretary Geithner

  1. I don’t even care what Geithner says anymore. What’s truly amazing is that he’s still around to say it.

  2. Concur!

  3. Why should anyone “even” care what he says to begin with. He is part of our economic crisis.

    Mr. Simon great watching you this am on the TODAY show! Hopefully Meet the Press next!

  4. Thanks for your always insightful commentary, Mr. Simon. I was wondering if you planned to address Krugman’s column in the NYT today discussing why breaking up the large banks is not an effective solution.

    http://www.nytimes.com/2010/04/02/opinion/02krugman.html

    Thanks

  5. Yes, please do that, Mr. Johnson. It seems like he’ll soon be swinging his big Nobel medal around the Op-Ed page to terrify liberals and progressives while purportedly explaining why what more and more seems like this administration’s weak tea of a bill is the best we can do. (And to a non-professional like me, the nefarious and evil “shadow banking” sounds like something I’ll watch in Iron Man II next month. Explanations there of what the heck he’s talking about will be helpful, too.)

    I have bought and started “13 Bankers” and am thus far both enjoying it and learning from it. Ever read any Christopher Lasch, by the way? Seems like you two did—and that a high compliment, by the way.

  6. Given that the working out problems won’t do anything to change the behavior of bankers, does the repayment of TARP and the profit that may be made by the taxpayer for selling bank shares vindicate Mr. Geithner at all?

  7. They say the seating occupancy is about 100 people, and recommended reservations (but not required). So anyone wanting to reserve and attend the Los Angeles in-person appearance by Simon will either have to wait on another list starting at 6:30 p.m. that evening, hoping someone doesn’t show at the 7:30 p.m. presentation; or having spent another hour getting there, only having to turn around and go back. My mistake (again) after trying to make those online reservations yesterday. The convenience of uploading podcasts doesnt have the same impact but it is what it is. I’m truly sorry…but may be it wasn’t really meant to be (not much has gone right so why would this be any different).

  8. “let them sue and good luck to them in court; just think of the extra evidence for wrongdoing that would uncover”

    The counterclaims for breach of fiduciary duty practically write themselves. I don’t know why there aren’t more derivative actions already. (Or maybe there are, and they just aren’t publicized?)

  9. Nice job on the Today Show. Thanks for being a constructive voice out there Simon. We appreciate it.

  10. As you noted in your excellent book, the greatest danger isn’t necessarily “legislative capture” but “ideological capture”.

    When you’ve drank the cool-aid and invested your life in a specific paradigm, it’s very hard to turn around and embrace another one.

    Clearly it isn’t just the leaders of the banks that need to be purged, but the regulators who were in incestuous lockstep with them – regulators like Geithner.

  11. The Fed in Hot Water

    April 1, 2010 – Huff Post – Robert Reich – excerpts

    “The Fed has finally came clean. It now admits it bailed out Bear Stearns — taking on tens of billions of dollars of the bank’s bad loans — in order to smooth Bear Stearns’ takeover by JP Morgan Chase. The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed. The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout.

    The losses from those deals still total tens of billions, and taxpayers are ultimately on the hook. But the public never knew. There was no congressional oversight. It was all done behind closed doors. And the New York Fed — then run by Tim Geithner — was very much in the center of the action.

    That it chose to reveal the truth about its activities during a week when Congress is out of town, when much of official Washington and the Washington media have gone on vacation, and only after several federal courts have held that the Fed must release documents related to its bailout of Bear Stearns, suggests it would rather remain secret than become transparent.

    Much of what Ben Bernanke and Tim Geithner did (when Geithner was at the New York Fed) in 2008 was presumably necessary. But the public has no way of knowing….That’s not a record on which to build public trust.”

    http://tinyurl.com/yja8r42

  12. Thank you Simon!

    Its good to know that there are people out there that have the courage to speak up and tell the emperor that he has no clothes.

    PS I would go further and reinstate glass-steagall: it just makes a lot of sense to separate investment bank risk taking from FDIC-guaranteed deposits. The financial industry worked fine with this separation for a long time. It seems strange that going back to this tried and true solution is off-limits.

  13. I strongly agree there needs to be accountability. I did find this profile of Geithner in the Atlantic http://www.theatlantic.com/magazine/archive/2010/04/inside-man/7992 very thought provoking. It seems Geithner’s position was to keep confidence in the system through a policy of “first, growth”, not to save “indispensable” bankers. But, if not followed up with reform it is indeed dangerous. I’d also like to propose a return to higher tax rates (yeah, good luck, I know) for the richest of the rich. In America, you can make a million, but make a billion, and you’re screwing someone out of their share. (forget the source of that quite). It’s just indefensible that one’s own efforts could justify so much value going to one person. Reward hard work, not playing with other people’s money.

  14. Chuck Swanson

    NO !
    .

  15. “Just because this was the worst economic crisis since the Great Depression,” Geithner said, “a huge amount of damage was done to businesses and families across the country … and it’s going to take us a long time to heal that damage. ” (Geithner)

    Are you kidding me? How can he say these words with a straight face, when he was right there in the thick of it, causing some of that damage. My Grandma used to say “I can’t trust him any further than I can throw him.” She was right. Only Wall Street has emerged intact from this Great Depression; Main Street is still in shambles. What a joke!

  16. Paul Piersma

    TARP is only the top of the iceburg re taxpayer support of the mega banks. The Fed took (without recourse) $29 billion of bad assets from Bear Stearns. Adding to it, the Fed now has trashed it’s balance sheet w roughly $1 trillion in mortgage backed securities. Fannie Mae and Freddie Mac have bought (and overpaid for) more from the banks. Meanwhile, without Congressional authorization, the Treasury has agreed to cover Fannie and Freddie’s losses over the $200 billion approved by Congress. Add in the .25% short-term interest rate aavailable to the banks, and the $ billions in guaranteed loans, and we see a huge taxpayer subsidy. Instead of a $52 million return to the Fed in ’09 (less than 3%), the Fed will take massive losses inthe years ahead. Rather than asking for TARP, Paulson, Bernanke, and Geithner should have asked Congress for broadened FDIC receivership authority. If you could read a balance sheet, you would have seen that Bear Stearn’s shareholders and bondholders could have covered Bear’s insolvency. Lehman would have had an orderly takedown, Merrill Lynch would have quietly and deservedly disappeared, and the Fed would have a managable balance sheet.

  17. Hey! a very substantive comment: in spite of all the references given through other articles, it’s not Charles de Gaulle who said “les cimetières sont remplis de gens indispensables” (you got the English translation) but Georges Clémenceau, the so-called “Tiger”, prime minister of France at the end of World War I.
    Sorry for this very economical remark…
    By the way, great your analysis!
    Amicalement, from a French eco prof.

  18. Who said, “The economy is too important to be left to the bankers.” I think that was Clemenceau too.

  19. Simon,

    you are running circles around these inarticulate mindless buffoons. congrats to you in using this book as a talking forum to underline in bold how outrageous these bankers have become.

    here’s a suggestion: challenge Geithner, Bernanke, or Summer (or Obama for that matter) to a public debate on these very issues. you would stuff them.

  20. The steps taken to “fix the banking system” certainly need to assure the public that their interests have been addressed and their future economic security will be protected. But that’s not enough. The public is looking for accountability, and until they see blame laid at the feet of those responsible for the current mess and punishment meted out that reflects the degree of damage done to ordinary citizens’ lives, no amount of promise “never to let this happen again” will be sufficient. Punishment could come in the form of confiscatory tax rates on the money made by CEO’s and traders whose actions led to their institutions’ insolvency had bailouts not been granted, massive firings at the top echelons of these institutions, or perp walks, trials and jail time for the executives – it makes no difference. The public has paid massively for the bankers’ “mistakes” and will continue paying for years to come.

    One of my clients told me yesterday, “I’m 62 years old. My husband (an architect) was laid off eight months ago. Our 401K and other investments we relied on for our retirement have been decimated. Our savings account at the bank is earning about 1% interest. And now our tax dollars are going to be used to pay to keep the worst of the banks afloat and the fat cat bankers are still enjoying their bonuses and gold-plated bidets. Thank God our house is paid for.” This woman, like most other regular folks I speak to every day, is furious. Her frame of mind has advanced from shock to anger to fury since September of 2008 when Hank Paulson announced to the nation that our entire economy was on the verge of collapse and the taxpayers would have to pay out hundreds of billions of dollars to save it. As the Main Street economy has worsened but no one has been held accountable – in fact bank profits are rising and billions are paid in “bonuses” – calls for regulation and protection are rising, but calls for vengeance on those responsible are also growing louder. It’s ugly out here.

    The Obama administration and the whiz kids he has in charge of economic policy are going to reap the blame for inaction. Most people understand this administration is not responsible for pain caused by the economic meltdown, but they also understand that some of the offenders are now in Obama’s inner circle, the bankers are still being pampered and no one in this administration is holding anyone accountable for causing that pain.

  21. I pretty much agree. But just as you point out the failing of government, I would point out the dog that didn’t bark – shareholders.
    At some point I have had to examine my own understanding of how the free market works in theory, and how the free market works in fact. Many of the bankers have confessed that they did not understand what was happening or exotic financial instruments. You know, I could not known what was going on for a tenth of the salary ;)
    How is it that the market prices incompetence so highly? How there is no consequence from boards and shareholders regarding CEO’s who are venal, stupid, or stupid and venal?

  22. It is most interesting just how the Federal Reserve Banks financed the trashing of their balance sheets. They bought these mortgage backed securities in the standard way of increasing the reserve deposit account of the member banks and others holding a reserve deposit account with no real way to actually pay for the MBS’s bought except by shipping out over $1 trillion of currency.

    These MBS’s were shipped to the FRB’s and bought outright for a mostly unusable credit that historically rarely exceeded a total of around $10 bn.

    Looking at the transaction it may only be realistically settled by selling back the MBS’s for the value at which they were purchased .

    I periodically do a study on this little gambit to compare the outstanding reserve deposit values to the same values included as cash and equivalents on bank balance shhets. I last did this for the Balance sheet of March 15, 2010 compared to March 15, 2007. FRB member banks held $12 bn of the $22 bn of outstanding FRB reserve deposit liability at March 15, 2007. As of March 15, 2010 FRB member banks were owed $1,099 bn of reserve deposits out of a total liability of $1,191 bn.

    Now compare the cash and equivalent balances of member banks on the same date . On march 15, 2007 the banks had Cash and Equivalents of $301 bn including FRB reserve deposits of $10 bn. On March 15, 2010 bank Cash and Equivalents totaled $1,346 bn including $1,099 bn of FRB reserve deposits.

    A quick look at FRB equity shows even a 5 % loss of value in selling the MBS’s back to the member banks would wipe out the equity of the central banks of the United States. The only leeway here is that the current year profits of the FRB’s before interest on the currency issued would add another 2 percent loss at most depending on the time of year.

    The FRB’s bought MBS’s guaranteed by Fannie and Freddie. Obviously, the FRB’s can hold these MBS’s with the full guarantee of the MBS’s for default by the Treasury via Fannie and Freddie.

    The FRB’s need do nothing to be made whole and do not really pay for the MBS’s either unless the member banks desire currency.

    Now for fun do a series of accounting entries assuming the banks took currency to settle their reserve deposit balances . On the FRB Books. On the bank books. On the books of people who are lent the currency and what they do with the currency. Then follow the trail of the currency wending it’s way back to the FRB’s less what currency went to the mattresses. Just for fun here. Suddenly, you get a pay envelope instead of direct deposit.

  23. Mike Konczal responds on Ezra Klein’s blog here: http://voices.washingtonpost.com/ezra-klein/2010/04/thoughts_and_a_response_to_kru.html

    He characterizes J&K’s position correctly.

  24. i trade the markets everyday. i can tell you for a fact that the banks are using their bailout money to speculate in the markets and drive stocks and other speculative assets higher. its the only way they can make money. very dangerous b/c not based on economic reality, just speculation, and when they decide to pull the plug, you’re dead.

  25. Simon,

    i agree with a previous poster. the real problem is the Fed. cut the head off the hydra and the big bank problem will be irrelevant.

  26. Brad Thrasher

    Absent criminal proceedings for fraud there can be no reform.

    The nine common law elements of fraud are:

    1. a representation of an existing fact;
    2. its materiality;
    3. its falsity;
    4. the speaker’s knowledge of its falsity;
    5. the speaker’s intent that it shall be acted upon by the plaintiff;
    6. plaintiff’s ignorance of its falsity;
    7. plaintiff’s reliance on the truth of the representation;
    8. plaintiff’s right to rely upon it; and
    9. consequent damages suffered by plaintiff.

    From AIG executives who committed insurance fraud to bank executives who committed financial fraud, all nine elements are present.

    Instead of putting them in jail where they rightfully and properly belong, we bailed them out and paid them bonuses.

    And now you want me to believe we can change some rules so that it never happens again? LMAO@u. How freakin’ Pollyanna can you get?

  27. Brad Thrasher

    Let this massive fraud go unpunished and the next thing you people will advocate is bonus payments for child molesters and serial killers.

  28. I think it’s an extreme over-simplification, insulting to the reader, and borderline dishonest for Paul Krugman to frame this highly complex issue into just 2 camps. I think Mr. Krugman better get his wife back into the editor’s seat or think a little more before he whips these posts up.

    I generally respect Mr. Krugman, but—COME ON!!!

  29. Still out of my league, but still waiting and simple answers. Oh wait maybe there are not simple answers!

    Still I have to ask, were not the things that the powers that were took to overcome the economic crisis a matter of two administrations one of which had no official power?

    Suppose the hour after being sworn in Obama had nationalized the banks, come on now suppose reality not what you think may have happened even if one person would have been nice?

    Remember simple answers.

  30. Herb Abrams

    Not that I disagree with the idea of break up the biggest banks or we may try to day the worst offenders.

    Were those the banks or the ‘people/smoke and shell game innovators’ who made the most money creating ways to drag the banks down sooner than likely would have happened anyhow.

    And I just love the take all your money out of the banks blither. Right and put it in the savings and loans.

    Where all my cash was by the way. AND SURPRISE what I had supposedly American companies via mutual funds still crashed too.

  31. sounds like you’re a lawyer. if so, why the heck isn’t a big d*ck swinging law firm taking a swing for the fences and suing BB, Geithner or Paulson for crimes against the people. there has to be some creative law minds out there not afraid of the banks.

  32. i can pretty much assure you we’re headed for a double dip recession once the big banks liquidity pumps get shut off enough for them to go short the stock mkt.

    despite that virtual world, reality tells me loud and clear that Obamacare guarantees recession. i’m a physician and every one of my colleagues are battening down the hatches given our imposed 21% pay cut. think about it, the only thing the gubmint has done is guarantee more funds being sucked out of the private economy via lower physician fees and higher health expense premiums. we are in fact small businesses who hire large numbers of people. well, no more hiring for me, no more equipment purchases, no more raises, just cancelled my country club membership, will send my kids to public vs. private university, cut down on vacations, less meals out, overall austerity measures en masse. will charge for every form i’m asked to fill out ($35 per DMV form, disability insurance requests, etc, etc). will start billing for tele calls, refill requests on weekends, etc. Less time per patient visit and oh yes, i have not and will not take Medicaid patients (the program those 35 million uninsureds are being thrown into). and if the gubmint tries to tell me i HAVE to see these patients, then i quit or will find some way around it. just wait.

  33. What weight does a swinging Nobel have anymore? Remember they gave one to Gore and Obama.

  34. But let us please remember, the Fed is not a public institution, more like the bank of all banks.

    Of course, that is not to say they won’t stick it to the taxpayer in the end.

  35. Here’s how tough authorities were on the big banks.

    In 2009, according to consolidated BHC reports at the Fed, employee compensation at the top 6 BHCs was $142B.

  36. Oh my gosh, you told ‘em. Quiting the country club, wow. Maybe you can get a ride with Rush when he leaves the country. Or maybe you can emigarate to Canada and practice there. Oops, my mistake, that won’t work.

  37. Medicare is the biggest fiscal nut gubmint has. Healthcare is a huge part of our economy. think about how many docs u know. lots. most of us are small business owners with employees. how much will 21% pay cuts take out of the economy? huge.

    no one will feel sorry for me as a physician. we’re all so high paid right? how about $480 for a cataract surgery with plenty of examples of multi million dollar lawsuit awards for botched surgeries? whats the return on that over a career? would u rather be a banker or physician? spent most of my life in the very best schools in this country until age 33 and now as a retinal/cataract surgeon i’ve seen pay cuts every yr since entering practice in 1993. i guess i’m supposed to be in it just for the privilege of “helping” people right? i have news for all of you; the incentives no longer line up, and yes, finances DO matter. especially when you’re expected to obtain more education than ANY other profession in this country.

  38. I am largely in agreement with Simon Johnsons comments but one has to realize the consequences of the actions proposed. Resoving Continental Illinois is different than resoving a Behemoth like Citibank. It would mean a really vast expansion of the Central Government and the potentially running of socialized banks for years to come. This may very well have been the best course but one that much of the economic establishment would not have found palatable. Contrary to myth the US Central Government is weak not strong and extremely subject to the whims of large amalgamations of property. One saw this in health care which was remarkable for its passage but the most conservative and expensive version was passed. One sees this in defense contracting where useless weapons systems like the ABM are developed despite their lack of utility. Or the needless wars fought by the US. The lack of strong climate change legislation.

    It hehoves the US to reform how its legislative branch functions in particular the undemocratic senate designed to block useful legislation. Democracy is not a panecea but plutocracy which we have now is not more enlightened.

  39. just to be clear. i don’t blame the patients, i don’t even blame the insurance companies that have raped and pillaged physicians mercilously and whom i despise more than Satan himself; i place the blame squarely on the Federal Reserve itself. the Head of the Hydra; the money enabler, the master counterfeiter, the determiner of the cost of money, the inflationist, the mothers milk tit for banks. if it was destroyed we would all be so much better off.

  40. Bill Gilwood

    Amazing or to be Expected?

  41. Bill Gilwood

    Yes, that’s one of the reasons I came here today, to ask you the same thing. Could you answer Krugman point-by-point?

  42. Jerry, you’re doing excellent work here. The Obama administration has engaged in a policy of systematically moving toxic assets off the books of private financial institutions. The Obama administration claimed the additional liquidity (according to your figures here $1,191 bn, the total amount of reserve deposits guaranteed as a liability of the Federal Reserve, as of March 15, 2010) is/was necessary to get credit flowing again in the real economy. From day one the Obama administration’s whole story has been “credit blockages,” are preventing a recovery. I’m here to tell you this is absurd. Such claims demonstrate a complete lack of understanding of the way our modern banking system operates and an utter failure to learn from the past experiences of Japan. Banks do not lend out reserves. The Federal Reserve could supply ten zillion dollars of additional reserves to the banks and it would make hardly any difference at all. The experience of the past two years in the U.S. and in the U.K., as well as the experiences of Japan ten years ago should make this clear. The problem with the economy is a lack of demand for funds to be invested in. Using unorthodox monetary policy to try and create this demand is not only a waste of resources, but a waste of time.

  43. Hillbilly Darrell

    It’s a free for all. There no longer are rules. The game is rigged. You’re a fool if you play (unless you are a U.S. 13).

    Specifically, there are no longer rules for the 13 U.S. bankers and/or their repective banks. Everybody else on the planet to include the 300,000,000 + Americans, and all other emerging market (read non-US 13) banks and players on the planet are still expected and demanded to operate under the confines of the strict brutal capitalist “old” rules.

    Larry Summers’ quote above from 2000 was very telling, and illustrates my point. Allow me to offer my translation:

    “[I]t is certain that a healthy financial system cannot be built on the expectation of bailouts”. Larry Summers’….lecture was mostly about “emerging markets” and how they get into repeated financial crises…..

    What Summers is really saying is that emerging markets and their banks (any party on the planet other than the U.S. 13 bankers and their repective banks) should be held to the “tough love” “dog eat dog” “old” rules of capitalism and should not be bailed out (especially when bailing them out would detrimentally effect vested interests of the U.S. 13 and their respective banks). IE, a “healthy financial system” can not be built IF any party OTHER THAN the U.S. 13 gets bailed out and/or has the reasonable expectation that it could or would be bailed out.

    This 2000 statement, of course, was made well before any of the U.S. 13 needed bailouts. At the time, the closest and most recent group of idiot bankers that had needed bailouts were the pedestrian S+L yahoos from the 1980’s, and these morons weren’t “real” bankers at “real” banks anyway….

    Summers’ is NOT hypocritical, illogical, nor inconsistent IF you look at his statement, and his subsequent actions and statements, through the lens of his paradigm. Summers’ paradigm, like those of Geithner, Paulson, Bernanke, et al is that THE U.S. 13 IS THE “HEALTHY FINANCIAL SYSTEM”. If one starts from this premise, bailouts of any other party other than one or more of the U.S. 13 don’t benefit the U.S. 13, which after all collectively manifest the “healthy financial system”, and therefore should be prevented, based on public policy grounds and moral hazard, if for no other reason.

    Likewise, “bailouts” of the U.S. 13 and their respective banks aren’t actually bailouts, these actions are more accurately described as measures to protect and preserve the “health of the financial system, which of course IS the same exact thing as the health of the U.S. 13 and their respective banks, because the U.S. 13 and their banks ARE the “healthy financial system”….

    I hope this helps.

  44. Jerry,

    I want to explore two statements you made a little further:

    “Looking at the transaction (the purchase of MBS from private banks by the Fed) it may only be realistically settled by selling back the MBS’s for the value at which they were purchased…”

    and:

    “A quick look at FRB equity shows even a 5% loss of value in selling the MBS’s back to the member banks would wipe out the equity of the central banks of the United States…”

    I’m not sure, but I don’t believe the Federal Reserve Banks could ever find themselves in a position where they were unable to settle their accounts. The Federal Reserve could always issue additional currency to cover any losses. Some people may claim this will be inflationary, but the relationship between Federal Reserve Board member bank reserve balances and inflation is tenuous at best. Furthermore, I’m not convinced that taxes will have to be raised at some point in the future to “pay for,” these purchases because again, the Federal Reserve has the ability to create additional currency as need be. What I think the Obama administration is planning to do is have Fannie, Freddie, and other GSE’s purchase as many toxic mortgages as possible and then continuously roll over any losses. In the mean time the real economy will continue to chug along in its depressed state.

  45. Brad Thrasher

    No idoc, I’m not a lawyer just a lowly law and motion, writing and research clerk.

    To any big d#ck swingin’ or even teeny wienie law firms looking to represent investors who are victims of fraud, I can and will work on a lien the file basis. My particular passion is economic bias in the system.

    Maybe the best answer to your question idoc is that in cases such as these the best strategy is that the civil action follows the criminal prosecution.

    What the heck, we’re not prosecuting Bush, Cheney, Rumsfeld for war crimes.

    Even the Vatican is claiming Pope Benedict has “head of state immunity” against any and all allegations of aiding and abetting child molesters.

    Maybe we must learn to accept that according to Obama, Holder and others some people are just above or beyond the reach of the law.

  46. Thanks, NKlein. If you give effect to excluding the effects of reserve deposits from the cash and equivalent totals in the combined bank balance sheets put out by the Fed, the banks had Cash & Equivalents on March 15, 2007 of $291 bn and $247 bn on March 15, 2010.

    All that happened by the Federal Reserve actions of buying mortgage backed securities from a balance sheet perspective was to reclassify $1,099 bn of Fannie, Freddie and Ginnie guaranteed mortgages to cash and equivalents . Nothing more. A head fake to replace the hurried Central Bank Liquidity swaps that actually increased member bank reserve deposits at the Fed in the fall of 2008. These started to come due in the early months of 2009 about the time that Bernanke announced the purchase of mortgage backed securities.

    Now, whar is not known is how much of the acquired mortgage backed securities held by the banks were subject to mark to market rules. These sales to the FRB were outright sales. Hence, any reserves marking down assets sold by the banks to the FRB’s were free to be “released” for other uses. That is, free to increase net income or be used agaonst other assets suffering market losses.

    If the assets sold to the FRB’s had an aggregate loss reserve of 10 %, that freed up potentially $100 bn to increase reported profits of all the banks.

    Another thing, this analysis is easily applied to just the FRBNY. The freed up loss reserves to New York district member banks was awesome. There are not that many total banks in the New York District and the district is utterly dominated by the top NY banks. The same is true of the runner up districts, namely Richmond and Atlanta.

    This exercise by the Fed was required to do a head fake to stop the panic and it worked.

    These people saw almost nothing coming and when it hit they were vacant minded bureaucrats in my view. To their credit, Bernanke, Geithner and Paulson smartened up. But not fast enough.

  47. Brad Thrasher

    I’ve posted this before Hillbilly Darrell but you seem like a newbie and I think you’ll appreciate it.

    Enter a bank with a gun, rob it and you will do at least 5 years in a federal penitentiary.

    Enter a bank through a computer terminal, rob it and you will get a job as a security consultant.

    Own a bank and rob everybody and you get a bailout and a bonus.

  48. I am replying to NKlein’s post next down here.

    Absolutely, the FRB’s may always settle with currency. Settling though would nearly double the recent total liability for currency outstanding. That would create a very interesting political problem. Settlement would vastly exceed stocks of unissued currency. The number of bills would probably exceed many bank vault physical capacities.

    But, then the banks have a problem. A vault full of cash they cannot put out given the state of electronic banking today. If the banks physically lent the money it would be deposited by the debtor. His bank would put it back to their Federal Reserve Bank and increase their reserve deposit balances.

    Certainly some would stick. But currency payment of financial obligations is long in the past. The Federal Reserve System was designed for the world of 1914. To effectively put out as much funds as are now held by the banks in a reserve account deposit at the fed requires creation of electronic funds on the same basis as currency.

    The Federal Reserve System is an anachronism and has been for a generation. Traditional value total FOMC operations are peanuts compared to today. In 2007 the member banks had $10 bn deposited at the FRB’s. FOMC ops had been conducted with that kind of balances from 1914 to the fall of 2008. Today, the deposited balances exceed $1 trillion. FOMC ops of 2007 and before were in a different universe.

    The easiest way to cure the MBS balance sheet effect is to send them back to the banks where they can be booked as permanent investments. A bookkeeping entry along with some armored trucks.

    The best grift is so simple that the complication minded mark is unable to see the simplicity. Someone was a genius grifter inside the Fed or the Treasury.

  49. To quote the Bernanke-Geithner Doctrine: “Too many Americans are suffering from the loss of their jobs and homes. We will continue force-feeding uncountable shiploads of money and free credit to the very richest, most profitable, and most powerful institutions in the world until someday enough trickles down to actually help these unfortunate people.”

    The biggest lie ever sold is that capitalism is an economic system rather than a political system.

  50. Thanks for the clarification JerryJ. I’m going to think about what you wrote here for a while

  51. “The passing of the Federal Reserve Act was largely a response to prior financial panics and bank runs, the most severe of which being the Panic of 1907.”

  52. Brad Thrasher

    idoc, regarding your comment about million dollar malpractice settlements and skyrocketing malpractice insurance rates; numerous studies indicate that when a medical doctor merely makes a personal apology that settlement demands and amounts are reduced significantly.

    It is possible to make an apology without accepting liability or admitting any wrongdoing. Sadly, far to many of your colleagues are adamantly unwilling and far too full of themselves to say, “I’m sorry.”

    Just wanted to pass that along. I hope you do too.

  53. Amen, Doc. Your patients are basically bled before you ever see them.

  54. The Panic of 1907 was orchestrated by the central banking cartel to resurrect their central bank in the US.

  55. All this talk about paying back TARP is a total red-herring. TARP was never about anything other than regulatory forbearance. That is, allowing the big banks to continue operating with lower capital reserve ratios than mandated by the law. Now that TARP funds have been “paid back,” the only thing that has changed is that depositors have been convinced to shift from one asset class (FDIC insured deposits) to another (equity investments in the banks that have “paid back,” their TARP funds). This has virtually no effect (other than liquidity preferences) on the broader economy. Warren Mosler has an excellent article entitled “The Unspoken Macro of the Citi-Bank Saga,” explaining this in more detail here:

    http://www.benzinga.com/205455/the-unspoken-macro-of-the-citibank-saga

    I highly recommend it.

  56. That post above was in reply to abell_ia, not JerryJ.

  57. This might help. Here would be the bookkeeping journal entries on the FRB’s and the banks to record the effect of shipping every mortgage backed security owned by the FRB’s back to the people they bought them from on the same basis as purchased. That is, present balances due from the debtors plus accrued interest. By armored truck, of course. Based on the March 15, 2010 Fed Consolidated Balance Sheets.

    FRB’s.

    Deposits, depositary institutions . Debit $1,066 bn
    Mortgage Backed Securities Owned Credit $1,066 bn

    On the banks.

    Mortgage Backed Securities Owned Debit $1,066bn
    Deposits Federeral Reserve Banks Credit $ 1,066 bn

    These securities were bought at balances due plus accrued interest and sold back the same way.

    Just armored trucks and Journal Entries. That is how they got on the FRB books and return them the same way.

    Since they are guaranteed by Fannie Freddie and Ginnie they are always carriable at cost as investments. Fannie and Freddie have an open multiyear credit line from the Treasury.

    In short, good as gold unless the United States Government itself collapses.

    After giving effect to shipping every mortgage backed security back to the banks the basks would still have deposit funds due them of $52 bn.

    Would the member banks dare refuse? It would be very amusing to watch the result if they did.

  58. Gee. Sorry about the country club.

  59. what a sad state of affairs. i for one though believe that my IQ is as high or higher than these Wall St punks and i think everyday about how i, on an individual basis, and we, as a society, can break free of these vampire squids. they just happen to be better connected than i am but i think in the end I/we will prevail.

  60. Robin Thomas

    Bond girl I’m with you; it really IS astonishing that TG is still there.
    I’ll tell you one thing for sure…if this administration doesn’t do something to rein in the bankers and their Wall St. cohorts, the resultant cynicism that is already in place will grow beyond anything that the government will be able to contain.

  61. i know it sounds snotty but for me its really no biggy having grown up lower middle class 3 blocks away from the epicenter of the subprime crisis in Detroit.

    but just think about it; me a successful surgeon in a wealthy community giving up the country club. i shouldn’t feel this way but the fact is i do b/c i foresee very bad things for healthcares future.

    you in fact should be scared as patients when physicians have to worry about themselves and not their patients.

  62. “The biggest and most dangerous elements of Wall Street have taken over Washington.”

    Exactly. And Timmy-the-tax-cheat Geithner is their inside man.

    That Obama supported Timmy and supports him to this day is one reason I will NEVER vote for Obama again. If that means I don’t vote for a Pres. candidate, so be it.

  63. The fact that Timmy-the-tax-cheat is still around lays squarely on Obama’s shoulders.

    I will NEVER vote for Obama again. He is either gullible and ignorant about financial and economic matters, or he is a collaborator with the Kleptocrats. In either case, he has proven himself to be an enemy of mainstreet and decency.

  64. I also recommend reviewing Nomi Prins’ numbers:

    http://www.nomiprins.com/bailout.html

    In her Feb 2010 report, she lists $10.4 TRILLION as the total bailout so far. Her reports break it out.

    * About Nomi Prins: “Before becoming a journalist, Nomi worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London.”

  65. btraven, I agree 100%. Never never again. they should all croak.

  66. Brad Thrasher

    Oh you sweet innocents, “if this administration doesn’t do something to rein in the bankers and their Wall St. cohorts…”

    According MSNBC’s Dylan Ratigan the Fed & Treasury have already pumped $24 trillion dollars into the banks minus the lunch money they tossed at the automakers.

    Dodd’s financial reform and those measures advocated by Paul Volker and Simon Johnson doesn’t even amount to a stern finger wag.

  67. Paul Krugman writes “The answer, I’d argue, is to update and extend old-fashioned bank regulation.”

    He is correct but what he, and most with him, including Simon, have so blithely ignored is that old-fashioned bank regulation never even dreamt about discriminating in favor of what was perceived as low risk, by means of lower capital requirements for which was already benefitted from being perceived as having a lower risk… like putting on an additional layer of sugar to satisfy the desires of those who already suffer from too much from having a sweet tooth

  68. Nobel Prize winners carrying an agenda are indeed dangerous.

    But so are also most of those Monday morning quarterback experts who although they should have spoken out in time never uttered a word of warning on the upcoming crisis, and now shout their lungs out so that no one notices their past silence.

  69. NKlein 1553 “That is, allowing the big banks to continue operating with lower capital reserve ratios than mandated by the law.”

    Wrong! You probably mean “allowing the big banks to continue with the low capital ratios allowed by the law”

  70. But sometimes one gets the feeling of being in a nudist camp when some of the children calling out “The Emperor has no clothes” are just as naked.

  71. Gerry Chasin

    My exact sentiments. I favor the latter view.

  72. Robin Thomas wrote: “Bond girl I’m with you; it really IS astonishing that TG is still there.”

    Early career

    “Geithner worked for Kissinger Associates in Washington for three years and then joined the International Affairs division of the U.S. Treasury Department in 1988. He went on to serve as an attaché at the Embassy of the United States in Tokyo. He was deputy assistant secretary for international monetary and financial policy (1995–1996), senior deputy assistant secretary for international affairs (1996–1997), assistant secretary for international affairs (1997–1998).[6]

    He was Under Secretary of the Treasury for International Affairs (1998–2001) under Treasury Secretaries Robert Rubin and Lawrence Summers.[6] Summers was his mentor,[11][12] but other sources call him a Rubin protégé.[12][13][14]

    In 2002 he left the Treasury to join the Council on Foreign Relations as a Senior Fellow in the International Economics department.[15] He was director of the Policy Development and Review Department (2001–2003) at the International Monetary Fund.[6]

    In October 2003 at age 42,[16] he was named president of the Federal Reserve Bank of New York.[17] His salary in 2007 was $398,200.[18] Once at the New York Fed, he became Vice Chairman of the Federal Open Market Committee component. In 2006, he also became a member of the Washington-based financial advisory body, the Group of Thirty.[19] In May 2007 he worked to reduce the capital required to run a bank.[16] In November he rejected Sanford Weill’s offer to take over as Citigroup’s chief executive.”

    http://en.wikipedia.org/wiki/Timothy_Geithner

  73. Michael Khor

    Obviously, this is nepotism and croyism capitalism adopted by the policy makers. The same people had criticized other countries during the Asian Financial Crisis in 1998. However, they are now same approach and argue that if they did not adopt croyism the whole world will collapse. Any social event that did happen can be argued that it will happen. Who on earth could prove that wrong?

    Nevertheless, whatever the current policy-makers do have a prolong impact and influence in the life of American people, especially, the younger generation.

    Bravo to what Simon Johnson has been doing for the Country.

  74. Michael Khor

    Correction:1)However, they are now adopting the same
    2)Any social event that did not
    happen can….