Revisionist History

Probably most of you have already read David Cho’s Washington Post article on how the Big Four banks (a) have gotten bigger through the crisis, (b) have increased market share (“now issue one of every two mortgages and about two of every three credit cards”), (c) are using their market clout to increase fees (while small banks are lowering fees), and (d) enjoy lower funding costs because of the nearly-explicit government guarantee.

I just want to comment on this statement by Tim Geithner: “The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy.” (Emphasis added.)

Um, no.

There were all those nuts saying that Treasury should have taken over the banks. This would have allowed the imposition of haircuts on creditors and limited moral hazard. There was also the less controversial option of making real, lasting constraints on banking practices a condition of the bailouts; the conditions that were imposed were peripheral and timed to evaporate when the TARP money was paid back. As a result, now Geithner has to bargain with Congress and an increasingly confident industry to get his regulatory reform.

It’s also important to differentiate between September 16-October 14, when you could give the government the benefit of the doubt because of the intense panic and uncertainty caused by the collapse of Lehman, and November-February (when the follow-on bailouts of Citigroup and Bank of America took place), when the government was able to choose among a range of options.

Saving the economy was a good thing. Doing it a particular way was a choice.

That said, I’m glad that Geithner says that undoing this situation is “the dominant public policy imperative motivating reform.”

By James Kwak

52 thoughts on “Revisionist History

  1. “the dominant public policy imperative motivating reform.”

    If only governmental officials and politicians words carried their true meaning and were not merely pacifying rhetoric than those would be significant words. But, does anyone really think that in, say 5 years time, the banking and finance landscape will change in any way other than for THEIR benefit?

    Due to this financial crisis I have ended up having money at BOA – from accts and CD’s I had at Countrywide. And also, at Chase – from accts at WaMu which took over my original deposits at Bank United which were moved to BU because my previous bank had been taken over twice and the service became worse and more costly with each take over. I am waiting on CD’s to mature to begin exiting the TBTF’s. Where do I go though? Mattress? Bank of Lower Podunk? With over 400 banks on the FDIC list of troubled banks at a minimum, local banks seem suspect as well.

    American banking is a mess…and I don’t trust the government to admit that it is a mess (as in, it is insolvent), or that they will change it in any manner that favors the customer.

  2. I believe that anger at the way the bailouts was handled–that is no penalties on those that created the problems–has threatened the administrations efforts in healthcare. People do not trust that powerful interests will simply not get their way, just like Wall Street. Frankly, I think given all the evidence, that this is a rational position. Who is to say that with healthcare “reform” that it will not primarily serve the interests of the plutocrats who have so much sway over Congress and the executive branch?

  3. i’m confused. you seem to be saying that it was possible for the treasury to impose constraints on the banks as a condition of receiving TARP money. you’re saying that the treasury could have even taken over the banks or imposed haircuts on creditors etc.

    i am assuming that you think the treasury could have done this unilaterally, without legislative changes. (legislative changes would have taken a long time to get through, and would have been subtle to get right.)

    i don’t think they would have been able to legally do this, but let’s say you’re right, they could have.

    in that case, the legal framework already exists for them to impose such constraints. so explain again: why we need legislative reform?

    (what i am actually saying: you can’t have it both ways. you can’t say both ‘we need legislative reform to allow the treasury to do X’ and ‘the treasury should have done X during the crisis’. these are logically inconsistent positions. either the legal framework exists or it does not.)

  4. Just on a personal level, it’s insulting to receive notices from now-profitable banks of big APR increases on credit cards, just before new rules take effect to outlaw increases on existing balances.

    I start to wonder whether they’re trying to push customers into default because they own credit default swaps on such assets, a phenomenon that’s been seen with corporate bankruptcies. (Creditors have been unwilling to work with companies facing bankruptcy, since they own CDSs on their debt.)

  5. “There were all those nuts saying that Treasury should have taken over the banks. This would have allowed the imposition of haircuts on creditors and limited moral hazard.”

    The nuts view above is disingenuous and idiotically dogmatic.

    When Leman failed, the credit market, the life blood of the global economy was frozen. The suggestion from “those nuts” will only exacerbate the problem. No bank will make new loan if it is not confident that it will be repaid. Furthermore, banks will have to choose between preserving capital and fight for survival (avoid government take over) vs making more lending. The choice for the banks is obvious and so is the consequences for the world.

    At the deepest point during the crisis, the issue was no longer about the bad loans that were already on the books. The toxic assets were SUNK COST! The real issue is about the NEW LOANS not being made! The real issue is the further deterioration of the economy and the unemployment of millions in the US and around the world!

    Today, more than 80% of the global economy has turn the corner as measure by GDP growth. However, had we done as those nut suggested, we would still be living in Great Depression 2.

    This stuff is obvious and the evidents are over whelming. Unfortunately, the nuts are blinded idiologs.

  6. They have saved TBTF, but the bank profits are still being manufactured through slight of hand and lending to fuel speculation, and the reports of Fed and Treasury victory may be quite premature. Unless they find a way to accelerate lending to consumers already under water, Bernanke and Geitner have achieved nothing but a 1930 style dead cat bounce in the stock market.

  7. This is a good point. What I can’t wrap my hands around is who specifically in Congress is advocating for anything less than radical regulatory reform. As in the healthcare debate, it helps when one party (or any sort of identifiable group of people) is clearly not being constructive. Opinions are more properly formed when the public can see which side of an issue their elected representatives are on.

    I’ve read Simon Johnson’s posts about the Fed chairman being opposed to setting up an external Consumer Financial Protection Agency, but even that’s probably for a number of reasons, and it doesn’t explain why anyone else would oppose more broad-reaching regulatory measures…

    Can someone point me to a link?

  8. Alan: I would go further. I love the innovations the big banks have made. I love being called a ‘guest’ at my local banking ‘store’ rather than a customer of a branch. It makes me forget the rate increases, credit line cuts, and fifty pages of fine print legal wording that unilaterally alters my account whenever the bank wants to bail to its trading position.

    And let’s not forget all that terrific asset allocation into derivatives of derivatives of securitized sub-prime mortgages. I love that too. It helped all the small businesses in my area thrive. All this financial efficiency is hard to deal with. My particular favorite innovation is the sovereign CDS on US risk. Wonderful. It warms my heart to think that some poor behemoth bank will be paid off when the US defaults … paid off that is by some other bank that the US just bailed out.

    Ah well.

    Sometimes I wonder whether Geithner inhabits the same planet I do. Maybe on his planet the word ‘reform’ has a different meaning?

  9. Jack: I think the stock market managed to achieve its own dead cat bounce. No one seriously thought the world was suddenly sunny again did they? I mean except from traders who benefit from short term bounces.

  10. If the banks were too big to fail before and now they are bigger, isn’t it time to break them up? They are starting to look like monopoly.

  11. They are oligopolies that are state backed. They should be a quasi-nonprofit and exist solely for the benfit of the whole.

  12. ‘History may judge that they destroyed the economy in order to save it. ”

    More like “they destroyed the economy in order to save the existing financial system”.

  13. Indeed — I’m earning 3% on my C.U. checking account, get 1-2% cash back on my C.U. VISA, and immediate phone approval on my car loans — I would never consider banking at a Bank!

  14. I’m not giving up on Geithner just yet. I call him “terribly thorough Tim.” He’s been a regulator for quite a while, and he may have lost his patience. Some say he’s bought and sold. Maybe so. Maybe he’s going to make some serious enemies with his regulatory reform. Now, that would be a good thing.

    Volker seems to have survived with honor.

  15. I switched from BofA to my locally headquartered Credit Union and couldn’t be happier. No hidden fees & great personal service.

  16. Well, looks like Tim will fit in nicely and have a long career in Washington. He still has the boyish looks and can lie so easily. I bet he could sell roof shingles or offer to blacktop a new driveway for grandma (Tim will say “ganma” to make it more folksy) now.

    “Just make the check out to Timothy Geithner, and I’ll go get the supplies and be back in a jiffy.” Tim says with those boy scout eyes.

    Give him 2 more years and he’ll throw in a couple cliches to make it more believable like “It was politically imperative that………..”

  17. “Saving the economy was a good thing.”

    What’s been done has been salvific, has it? I’d say that’s very much up-in-the-air at the moment. And if, in fact, it has, for whom was it saved? That one’s a lot less up-in-air, eh.

    “That said, I’m glad that Geithner says that undoing this situation is ‘the dominant public policy imperative motivating reform.'”

    And when I think of anyone’s being grateful for anything that has or might proceed from Geithner’s mouth except, perhaps, for a resignation, I’m reminded of Josef Stalin’s thoughts on the matter. “Gratitude is a sickness suffered by dogs’, he said. I know of no possible way to embellish such an assessment.

  18. I forgot to mention James, I don’t read that rag (that’s the kindest terminology I could come up with) called the Washington Post since they fired Dan Froomkin for having the gall to tell the truth. That’s right folks, Dan Froomkin told the truth about Bush and Cheney and was fired by the Washington Post for saying it. The Washington Post doesn’t practice true journalism anymore, and if James and Simon were wise they would vacate that “publication” ASAP.

  19. More like they preserved the existing financial system by destroying the economy in order to better enslave you.

  20. Aw, Yakkis, nobody ever gets in trouble in Washington for connecting lobbyists and politicians. That’s what lobbyists and politicians are there for, to be connected. Who’s going to put heat on someone that wants to find campaign cash for filth like, Steny Hoyer, or John Bonior, for example. How egregiously hypocritical that would be, eh? Why increasingly over the last three or four decades, its with campaign cash behind them that most important policy decisions have been formulated. Bill Black – I think its Bill Black – has written a book on the history of this chicanery, essentially how its been that these criminals have stolen the peoples’ democracy over that time. And you can absolutely bet your bottom dollar that all the elections in the world will never change this set-up one iota. For that, it will take mass demonstrations and the general strike, something along the lines of the Solidarity protests in Poland in the 1980s. Actually we’re facing something very similar to what the Polish people faced at that time, a dictatorship given to torture and the supression of the people’s legitimate voice among other things. Naw, lobbyist and their cash and American politicians go together like vanilla ice cream and chocolate syrup.

  21. Well, I can only speak for myself, but anytime I see a link to a Washington Post article now, I think “the content of their newspaper is explicitly for sale.”

  22. I think I can have it both ways.

    1. One bailout channel was emergency Fed lending. The Fed, like any lender, can impose whatever covenants it wants on borrowers that borrow from it. The same goes for Treasury; it is quite normal when someone buys a big chunk of preferred stock for the stock purchase agreement to include conditions on the behavior of the company issuing the stock.

    2. However, even though the Fed and Treasury had this power, that does not mean that there is no need for legislation to reform the system. The above is clearly last-resort kind of stuff. It would be nice, for example, to have a CFPA that could prevent some of the predatory lending on the front end.

  23. > The Fed, like any lender, can impose whatever
    > covenants it wants on borrowers that borrow from it.

    And how often in the past has the Fed ever done anything like that? Given the Fed’s penchant for secrecy .. it’s difficult to believe that this kind of information is available in the public domain.

  24. > There were all those nuts saying that Treasury
    > should have taken over the banks

    Nouriel Roubini was one of those “nuts” calling for the government’s takeover of the banks.

  25. Shh! Yakkis! Don’t you know we serfs must know our place? Just keep quiet and give 85% of your labor to the master landlords. If the rest of the rabble hears you they might revolt! Be thankful for the 15% they let you keep!

  26. Oh yes, the Washington Post. Why they’re the regime’s most detestable propaganda rag, always right in the middle of the sewage, and of late popularizing torture, a real American Der Sturmer. And you’re right, the whore that owns the thing was recently selling access through the vehicle of private parties, I believe. One day, filth of this kind will be doing forced labor.

  27. Re “nuts”:

    I distinctly remember Simon on an NPR interview saying that it was a reasonable, straightforward option for the federal government to take over poorly capitalized banks. In fact, it was often what the IMF urged small, financially troubled nations to do.

    Is Simon a nut?

  28. Anyone who reads this blog regularly knows James Kwak in this context is using the word nut in an very affectionate way. If James would allow me to be so bold to say………….

  29. Kind of like administering too much radiation and chemotherapy to a cancer patient, and then not providing for a lasting program to enhance chances of long term remission. The radiation and chemo went okay, but the program to enhance chances of a full recovery appear shaky, and the plans to limit the effect of the carcinogen seem to be widely ignored. Now that we have succeeded in getting on the other side of the major catastrophe, what are we doing to reform the system to promote a more widely distributed and transparent financial industry. Nothing that I can see. And, I can’t give Geithner any credence on his congency yet, since his sincerity is substantially in question.

  30. The “existing financial system” is the bane of humanity and must be dismantled. The dismantling can come about in an orderly way through legal remedies, and leadership having the courage to admit and recognize the extreme abuses, criminality, heartless and wanton greed and profiteering, – or there are other more …unpleasant options. Either way, the financial system as it stands today is a grotesque evil that favors thefew at the brutal expense of themany. Until this dynamic is changed and changed dramatically – the friction and the roiling antagonism will lead inevitably to real horrorshow consequences. Tomany have been abused, abandoned, and brutalized by tofew, and this evil dynamic must change – or there will be blood, chaos, upheaval, and revolution. We’re at the cusp of this reality now, and the formally rich American society as it inculcates it’s coming deprivation and devastating losses will react in ways unknown unknown and unless and until there is real change, and a real sharing of wealth between thefew and themany, and real accountablity and the rule of law once more – the inevitable collapse and chaos is certain. Europe recognized this inevitability in the 1800’s and established societies that were by many measurements “socialist” providing backstops and safetynets for it’s less fortunate citizens, and they prospered. Not because of any moral leaning, though there is a moral issue involved, – but because the simple math proves that a society that abondons and shits upon it’s poor and middleclass children is certainly DOOMED to fail and join the long and bloody legacy of empires fallen into ruin and rubble caused by the abuse and tyranny of the predatorclass.

  31. Excuse me for saying this, but there is still no convincing evidence that the economy has been “saved”.

    Tell that to the over 13% of people in foreclosure (on prime mortgages now). Tell that to the 16.8% of people who are unemployed or underemployed. Etc.

    It has not been “saved” because Tim Geithner says it has.

    When you look at the world through the lens of Big Finance like Geithner does, even if you are critical of it as on this blog, you have a very distorted view of reality.

    Please stop perpetuating the idea that the Real Economy = Big Finance.

    Or maybe the hoi polloi — the little people — really don’t count.

    And even if we have a short-term comeback based mostly on government stimulus, what guarantees exist that any growth we might see is sustainable? The answer? Nothing guarantees it.

    Some people have called what we are about to see the “recoveryless” recovery. That’s about right.

  32. I think what your missing – both here and elsewhere, is something I saw this AM burried in a comment on David Broder’s column in the Washington Post. Bear with me here, I’m going to try to weave some ideas on a single cup of Joe.

    Broder was writing about how “tragic” it is that Atty. General Holder is now looking into prosecuting the CIA operatives who committed torture. Broder said that, for the investigations to be effective, you have to take them all the way to the top, but what good would it do the nation to see Mr. Cheney in the dock?

    A commentor answered that this was just another symptom of the political entitlement felt in certain socio-economic sectors since Nixon resigned. As the commentor put it, once Nixon got away with it (what with being pardoned and all), lots of folks began to believe they could do what he did, and worse, and get away with it.

    How does this apply here? Simple really – there is STILL no moral hazard for banks to take huge short-term profits at the overall expense of the long-term economic health of the U.S. (and the world). By bailing the banks and other financial institutions out with few preconditions, Treasury and the Fed sent a clear signal that they were willing to underwrite private risk taking with public dollars, thus obviating the moral hazard. While Treasury may now want to build more moral hazard in to the regulatory system, the consolidated, financially stronger banks won’t allow it. Just like Republicans post-Nixon, the banks post-Paulson believe they got away with something, and so feel free to do that something, and worse somethings, again in the future.

  33. “.. threatened ..”

    I agree. The anger from Main Street over bailouts provided the fuel for the healthcare plan (which had its own problems) backlash.

  34. I can quite see your point. If we don’t tell them, they won’t realize they are homeless/unemployed/bankrupt/losing their savings/losing their health/losing everything they worked for, and even if they do realize this, they will think they are the only one in the world with this problem. Good plan!

  35. Geithner we did “…what we had to do..”

    Let me see if I have this correct:

    1. Geithner was head of the New York Fed.
    2. The Fed Act of 1913 was set up to ensure the
    financial stability of banks.
    3. The Fed Board of Governors has twelve members;
    five are Fed regional bank presidents. Local banks
    which are members of their regional Fed bank, own
    stock in the Fed regional bank, and receive a 6%
    annual dividend.
    4 “…Fed decisions do not have to be ratified by
    the President or anyone else in the executive
    or legislative branch of government..”
    5. The Fed has unlimited funds to support the
    financial stability of banks.
    6. The Fed failed to identify, never mind prevent, the
    greatest financial crisis since the great
    depression. In fact, it was Fed policy to “turn a
    blind eye” to developing excesses, preferring
    instead to cleanup after a financial system crash.
    7. The Fed woke up one morning and realized the
    financial system was about to collapse.

    Was the Fed worried? Sure they were anxious, and
    some had sleepless nights; but its not like the Fed
    was going to lose their job or a bed to sleep in.

    The Fed has a blank check, and after all its just
    money – taxpayer money .Besides,the crisis allows
    the Fed to demonstrate its considerable technical
    skills in financial markets, and who knows you may
    even be hailed as a “savior”.

    So what is a Fed guy to do in this situation?. You
    spend the taxpayer money , and try to put the sorry
    episode behind you as quickly as possible. Besides,
    congress gave you the power , and all of your
    colleagues – Paulson,Bernanke,Geithner,bank presidents
    ,European Central Bankers, are telling you this is
    the best course of action.

    It is like Geithner says -you do what you gotta do.
    Next crisis around, you will do whats right. Did you
    notice that we never seem to get around to doing
    whats right- just whats expedient.

  36. But “who” created “what” problems anyway? Fannie and Freddie went insolvent last September. Is the problem that they went insolvent or that they had political connections to coerce taxpayer funds from Congress? Absent the bailout, was insolvency even a problem? Creditors make terrible investments and lose their money – is that a problem for anyone other than the creditor? If it was insolvency, was it management’s fault, or the fault of the regulator who was browbeaten for many years by Congress, who in turn were taking large campaign contributions from Fannie/Freddie executives? Or was it mortgage holders with debts to service who stopped doing so?

  37. I don’t understand how you can say that Nixon “got away with it.” In the sense that he didn’t go to prison, yes. But this was a man who lived for power. This was a man whose whole sense of identity revolved around power. And he was ousted from the Presidency that he had struggled so long to win. I think the impact of that on his “soul” must have been far more profound than any prison term could have been.

  38. I have banked with a non-profit credit union for over 20 years. Best rates on checking, credit cards. Is non-profit banking in our future? Is non-profit banking our salvation to this financial mess?

  39. fwm,

    I’m not sure when it is in anyone’s experience with Geithner that they realize that he is simply the most loathsome maggot. I suspect its when they sense that he doesn’t look at a questioner straight on. Add to that foreknowledge of his tax escapades and the impression is almost certainly clinched.

    Now that it’s beginning to seem clear that there will be a second downleg to this crisis, one accompanied by increasing unemployment, bankrupcies, credit card defaults, foreclosures and one commercial real estate horror show or bank failure after another, look for public discontent eventually to blossom into large scale protest demonstrations and strikes. Its then that a frog like Geithner will need to concern himself with alibies rather than sophistry.

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