Geithner's Very Bad Bank Plan Socks Us for $1.5 Trillion and Won't Even Work

[Joanne98]

By Robert L. Borosage, Huffington Post
Posted on February 13, 2009, Printed on February 13, 2009
http://www.alternet.org/story/126862/

The Obama administration has made its first serious misstep. No, it wasn't the wooing of ingrate Republicans, or the dining with clueless reactionary pundits. It is much more significant. Faced with the failure of the Paulson-Bernanke banking bailout, the Obama administration has decided to double down. The new plan, described in broad outline by Treasury Secretary Tim Geithner on Tuesday, antes up another $1.5 trillion or more to keep the banks afloat. But it won't convince many that they are seaworthy.

The plan isn't likely to get the administration where it needs to go for two simple reasons. It is wrong about where we are starting from. And it is wrong about where we're going to. If you don't know where you are and don't know where you are going, it is very hard to get there.

The plan won't admit where we are: the major banks in the US are insolvent. They aren't addled by a temporary fever. They are broke. If they actually marked their toxic paper to the market price - where there is one - their losses would wipe out their capital, even including the billions kicked in by the government in the first round. Clearly, the Obama administration - like the Bush administration before it - hasn't accepted that reality.

The plan won't get us where we need to go: we need to restructure - and downsize - our financial sector. Its baroque excesses - billions in bonuses, golden parachutes, million dollar office renovations, $35,000 "commodes on legs," $50 million private jets, legions of employees - were constructed atop a housing bubble that finally burst. Now the banks and financial houses must be downsized, chastened, and regulated. As President Obama stated, "the party is over." But the administration's plan envisions a restoration, not a restructuring. We don't want to go there even if we could afford it.

Martin Wolf, the lead economics writer for the establishment Financial Times, notes that the plan was constrained by three assumptions: no nationalization, no losses for bondholders, no new money from the Congress.

No nationalization rules out the way the US normally deals with insolvent banks. The FDIC takes them over, replaces the management; the depositors are reassured, the shareholders take their losses to write off the bad debts. Then the FDIC restructures the bank, merges it or sells it back to private investors. It arranges an orderly and seemly burial. Without doing this with banks that are "too big to fail," the administration is left paying tribute to zombie banks that consume taxpayers' money while doing little if any productive banking.

No losses for bondholders means that taxpayers pick up the bill. With an insolvent bank, shareholders lose their investment. That's how the market works. If that isn't enough to cover the losses, then creditors take what is called "a haircut." A portion of the loan they made to the bank is written off or turned into equity (stock). But with neither the shareholders nor the creditors taking the hit, only taxpayers are left.

http://www.alternet.org/workplace/126862/geithner's_very_bad_bank_plan_socks_us_for_$1.5_trillion_and_won't_even_work/

And we could talk about this except the spoiled brat Republicans won't shut their lying mouths!

[PurityOfEssence]

1. My fears exactly

This is not a time for middling corporatism; this is a time for drastic correction.

We look politically powerful now, but if this Administration charts a consistently ultramoderate course, it will take heat from right and left and not succeed. Like the economy, political corrections can be very quick and severe, and if this extreme prudence fails, it can potentially be seen as a repudiation of government, regardless of the obvious fact that private enterprise really caused this mess. That could set populism back in a serious way, and cast an unfair bad light on the good things that this administration is doing like labor protection.

I want these guys to succeed, but they're so deeply, deeply beholden to the corporatists and the very same people who caused this. Hell, some of them ARE those people. Salvaging the system seems to be more important than reform. It can't all be lack of imagination; much of it is obvious culpability.

So much of the rapturous love of Obama has been based on the belief that his maneuvering and careful avoidance of contentious issues, along with outright conservative cuddling was just a clever set-up, and that he was deliberately deceiving them. Well, I hope that's correct, because he pretty much HAS to stand fast and go pretty hard left now to make sure the system works. Take over the insolvent banks; the banks themselves cannot be trusted to soberly analyze their predicament, nor can they be trusted to tell the damned truth even if they CAN find it. If Geithner's stress test is for real, that's great; the question is what they do should an institution fail the analysis.

I remember my grandfather, a civil engineer, muttering about the stupidity of repeatedly patching old streets, when starting all over made more fiscal sense; I guess we're all hearing the voices of the past ringing in our ears with common-sensical echoes these days. These people got EXACTLY what they wanted, and it FAILED abysmally precisely because they got their way; their sense and honesty should be beyond just suspect at this point, but yet they're still right there in the wheelhouse.

Deee-pressing.