Commonwealth Commonsense

Et Tu, BusinessWeek

CJR outlines how even BusinessWeek thinks Obama is looking a little weak in the knees.

When BusinessWeek thinks you’re not tough enough on business, well, you need a spine check.

Pay Caps for Corporate Executives

This doesn’t make sense.

Treasury Secretary Timothy Geithner says the Obama administration doesn't want to place caps on executives' pay — even though it believes excessive compensation led to risk-taking that contributed to the financial crisis.

OK, excessive pay packages costs taxpayers billions but the Obama administration is getting weak-kneed.  So they want to pass the buck.

Geithner said the administration will seek legislation that will permit shareholders to vote on executive pay packages, but the results would not be binding on boards of directors.

So we’re going to pass legislation with no teeth in it.  But there is at least a kernel of a new idea that might help.

Geithner said the shareholder measures, as well as legislation to keep corporate compensation committees independent from boards of directors, will reinforce pay guidelines that the administration released Wednesday.

What does independent from boards of directors mean?  Who will select them, compensate them?

Finally, this brief article ends with this contradiction.

Those principles encourage corporate boards to adopt pay packages that reward long-term performance rather than short-term gains.

I thought the boards of directors wouldn’t be involved in pay packages.  WTF?

Socialism

Now the GOP is planning to have a meeting of the Republican National Committee to officially brand Democrats as “Democratic Socialists.”  I guess that’s going to replace “Democrat Party” as a common epithet.  I’m sure it will get under some Democrats’ skin, but on the whole, I think it will further marginalize the GOPer Party (rhymes with doper).  It makes them look petty in the absence of any substance.  But then who am I to say, heh?

Meanwhile, Steve Pearlstein of The Washington Post, hits it out of the park in describing the frustration of community bankers, who feel they are being punished for the sins of their larger brethren, a socialistic spreading of the pain.

The prudent bankers are right to be angry about having to pay for the recklessness of their competitors. What they conveniently overlook, however, is that their complaints are virtually identical to those being made by their credit card customers who have never missed a payment but are being hit with high interest rates because of the reckless borrowing of others.

After all, if it is unfair for prudent banks to be punished for the sins of reckless lenders, why is it any less unfair for prudent consumers to be punished for the sins of reckless borrowers?

We are now knee-deep in the metaphysics of risk pooling, which, as it turns out, is what both insurance and credit cards are all about.

Amen.

Why Elizabeth Warren is My Hero; Geithner Not So Much

Treasury Secretary Tim Geithner gave a dismal performance this morning before the TARP Oversight Panel.  The chairwoman, Elizabeth Warren, asked the first question, which as I said this morning, was right on.  Geithner gave an answer that is sure to make Joe Six-Pack throw beer cans at the TV.  It was the kind of non-response that more than obfuscates the truth; it crystallizes for the listener that the inference of Warren’s question is obviously true:  The banks are getting a better deal than the American manufacturing worker.

I was never comfortable with Geithner as the architect of this economic recovery, and while he has improved his public performances in that he no longer looks like a deer in the headlights, he now just looks shifty.

Geithner Before TARP Oversight Committee

Elizabeth Warren, the Harvard professor chairing the TARP oversight committee is now conducting hearing with Treasury Secretary Tim Geithner.  You can see it on CNBC.  She’s been profiled in a couple of places.  Here’s one. 

She’s a bit dorky but homes in on the critical point.  Her first question to Geithner:  Why was the auto industry held to harsh standards while the banks got very different treatment, and does Geithner think the banks were better managed?

The phone rang and I missed most of his answer, but I heard enough of it that it seemed to come down to “the banks are too big to fail.”

Obama Picks Another Fox to Guard the Hen House

President Obama has named Herbert Allison to head the bailout program.

Allison has known [Treasury Secretary Tim] Geithner for years and served on an advisory council for the Federal Reserve Bank of New York when Geithner was its president.

Allison spent most of his career as an investment banker at Merrill Lynch before becoming president of the Wall Street company in 1997. After losing out on the firm's top job in 1999, he became national finance chairman for Sen. John McCain's (R-Ariz.) first presidential campaign. He was chief executive of TIAA-CREF from 2002 to 2008.

Oh boy.

What Do the French Got That We Don’t? Balls!

Say what you will about the French, their workers have the balls ours don’t.

[W]hen managers at the U.S.-owned Caterpillar factory [in Grenoble, France] refused to negotiate under pressure, workers recalled, resentments that had built up during several years of increasingly sour labor relations suddenly boiled over. About 40 employees invaded the executive suite, locked five top bosses inside and said they would be released only after resuming talks on the strikers' demands.

…The latest detention took place Thursday, when workers facing layoffs at a printer plant near Strasbourg run by Faure et Machet, a Hewlett-Packard contractor, confined their bosses in a meeting room for about 12 hours and forced them to continue negotiating on a severance package. Previously, a 3M executive in Pithiviers was held overnight after announcing layoffs, as were the head of Sony France in Pontoux-sur-Ardour and three expatriate British bosses in a Scapa Group adhesive tape plant at Bellegarde-sur-Valserine.

Meanwhile, the UAW keeps asking Chrysler and GM, “How much more do you want us to cut our pay, Mr. Boss-man?  Beat me, beat me.”

The hostage-takings, a specifically French reaction to the worldwide crisis, have been denounced as illegal by President Nicolas Sarkozy. But they have been widely applauded among the French people -- and in some instances have brought results. Most of all, they have dramatized the extent to which, in France perhaps more than anywhere else, the perspective of class struggle remains lodged in many people's minds and shapes the way they view the economic crisis.

But we don’t have class struggle here, because the GOPers tell us that’s un-American.  The fact that upper 5% of Americans have seen their incomes soar while the middle class incomes have declined in the last 8 years, well, that’s because we haven’t given enough tax cuts to the rich so more crumbs can trickle down to the rest of us.

Beat me, beat me.

Analysis of Obama’s Speech Today

Here’s an interesting instant analysis of President Obama’s speech today on the economy.  While the speech helped clarify the president’s strategy, as Blodget points out, it may be the wrong strategy.

IMF Economist Says U.S. Needs to Rein In the “Too Big To Fail”

I’ve posted on several occasions (example here) on the question of why the Obama administration isn’t talking about regulations that prohibit companies from becoming systemic risks to the the nation’s economy.  We hear a lot about these institutions, which are invariably described as being “too big to fail.”  So why aren’t we preventing companies from becoming too big to fail in the future.

I was beginning to think that it was a stupid question as I don’t see news articles discussing this.

Well at least now I have someone more reputable than this poor blogger saying that’s exactly what we need to do.  Former International Monetary Fund Chief Economist Jim Bourg lays out in the May issue of The Atlantic how the economic crisis in American is not unlike those he sees in developing countries.  The prescriptions the IMF usually lays out can apply to the U.S.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

Bourg’s says the best way to fix the problem, expensive though it may be, is to nationalize the bad banks.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

So why isn’t the administration ensuring that no institution can ever again become too big to fail?

Bankers Over Carmakers

Calling the president “George W. Obama,” Margaret Carlson says the administration likes those who shower before work over those who shower afterwards.

With the announcement this week that Chrysler LLC and General Motors Corp. would be on 30- and 60-day timetables to fix themselves or risk bankruptcy, it was clearer than ever that the financial industry holds much more sway in the halls of power than do grease monkeys, even ones cleaned up at Harvard.

Treasury Secretary Timothy Geithner, unlike Henry Paulson, doesn’t hail from Wall Street, but he’s one more example of how titans of government swiftly come to sympathize with titans of finance. They slip in and out of each other’s worlds, promote each other to the top, and mystify their work to convince the uninitiated that no one else can do it.

They easily have their way with compromised regulators ready to look the other way as a small sliver of the population plays high-risk poker with other people’s money. This sliver then has its way again unwinding the damage caused. Huge sums are pocketed on both ends.

And what is really made from these transactions?  What is created that benefits society? 

This decision also shows Washington’s preference for those profiting from things you can’t see in which large sums of money pass through multiple hands, over those you can see.

…When GM goes into bankruptcy, as seems inevitable, and the relics of the dealer network are separated by hundreds of miles and we are all driving Kias, will coddling the bankers to the detriment of autos seem so wise? Detroit put the country on wheels, bankers put it on the skids, but the latter need never worry again about what will happen when they go too far. They know the music slows but never stops on Wall Street.

Which is the key point.  Someone please tell me how the Geithner banking bailout plan ensures the financial industry won’t do it again with some new financial instrument with which they play Russian roulette and lodge the bullet in the taxpayers brain?  Nothing I’ve seen so far ensures it won’t happen again.  New regulations are nice, whenever the administration gets around to detailing them, but so far the financial industry is getting a sweetheart deal.

The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.

We can only hope you can buy a Kia for $37.