Treasury Secretary Timothy Geithner revealed the new “Financial Stability Plan” on February 10, 2009. It’s thick with “why we need it” and thin on “exactly what it is.” He told Congress that he would open a website to disclose where all the bailout money was going. When asked if he would reveal where the first $350 billion went, he was a little vague on the details.
Senator Grassley (R-IA) asked him at the confirmation hearings about the Maiden Lane LLCs and the money he passed out to private, non-regulated companies. His written response then was “Confidentiality around the specific characteristics and performance of individual loans in the portfolio is maintained in order to allow the asset manager the flexibility to manage the assets in a way that maximizes the value of portfolio and mitigates risk of loss to the taxpayer.” In other words, he wouldn’t say. When asked “What specific additional disclosure would you support?” Tim’s response was “If confirmed, I look forward to working with you and with Chairman Bernanke on ways to respond to your suggestions and concerns.” Variations on the “If confirmed, I look forward to working on it” answer was cut and pasted into his 102 page written responses 104 times, or more than once per page.
Back in 2008 when the big bailout bucks were being passed around, we (and Congress) were led to believe that this was all being done to fix problems in housing and mortgage markets. Speaker of the House Nancy Pelosi (D-CA) said this in her speech on the floor before the vote: “We’re putting up $700 billion; we want the American people to get some of the upside. …[we] insisted that we would have forbearance on foreclosure. If we’re now going to own that [mortgage-backed securities] paper, that we would then have forbearance to help responsible homeowners stay in their home.” Three million homes went into foreclosure last year.
Speaker Pelosi went on to tell us that the bill would include “an end to the golden parachutes and a review and reform of the compensation for CEOs.” Excuse my cynicism but Tim Geithner took a $500,000 walk-away bonus when he left the Federal Reserve Bank of New York, the maximum earnings allowed under President Obama’s suggested compensation cap; but that was on top of his $400,000 salary which would put him over the limit. Obama appointee Deputy Secretary of State Jacob Lew took home just under $1.1 million last year as a managing director at Citi Alternative Investments, a unit of Citigroup, which so far took $45 billion in bailout money.
So, let’s add this up. Tim hides $330 billion from us while he’s at the Fed, refuses to tell Congress who it went to, refuses to tell Congress who Paulson gave the money to, and takes more than his share of compensation.
Now he wants us to believe that Treasury can “require all Financial Stability Plan recipients to participate in foreclosure mitigation plans.” Fool me once, shame on you. Fool me twice, shame on me. I, personally, don’t believe a word of it. And neither should you. It’s all baloney, bogus, phantom. They are paying lip service to the American taxpayers so you won’t send those faxes to Congress or throw shoes at the new President. They are passing the money to the same Democratic big wigs that paid for their election campaigns – just as they did in the past to the Republicans. Tim is shoveling more money to the same private companies that he previously sent freshly-printed Federal Reserve notes. Now he can also pass out Congressionally-approved money. While Congress struggled with spending $800 billion to directly stimulate economic activity in the US, Tim thumbed his nose at them by presenting a plan to spread around more than $2.5 trillion that won’t require their approval. That’s the way it is and I think it would be a very bad idea to stop him.
Yes, you read that right. I said it would be a bad idea to stop. I’m a fan of NASCAR racing. When a driver begins to lose control of the car and is sailing head first into a concrete wall at 190 miles per hour there is only one way to save it – stand on the gas. Your every instinct is to hit the brakes, to stop the car before you slam into the wall. But if you hit the brakes you’ll lose traction and control. By pressing down on the gas, you put power to the wheels which (hopefully) are still in contact with the track – with traction comes control and you can steer away from the wall. Oh, but it isn’t easy! Every cell in your monkey-cousin brain will scream: “Slam on the brakes!”
So, it’s like the economy is heading for the wall. And Tim has decided to hit the gas – another $100 billion for the banks, $1 trillion for private capital to put in junk bonds, $1 trillion for private investors to spend on junk loans, $600 billion for Fannie and Freddie’s debt – yet only $50 billion to reduce mortgage payments for “middle class homes” in foreclosure.
But even if we avoid hitting the wall, that doesn’t mean we don’t need to change the course. For years I have argued we need to fix the race track and improve the aerodynamics of the cars so they won’t head into the wall in the first place. I would insist that broker dealers have to deliver what they sell. I would prohibit the sale of derivatives in excess of the underlying assets. But that’s technical stuff, like requiring roof flaps in NASCAR (little flaps that come up when the car spins backwards to keep it from going airborne). It would prevent the really bad wrecks, but then no one would tune in on Sunday if there weren’t any wrecks, right?
Enjoy the show as Tim tries to keep from crashing into the wall. But don’t be fooled that he is fixing anything. Even if he pulls the economy out this time, the track is still broken and the cars are still not aerodynamically sound. They’ll wreck it again – as they did in 1981 (inflation so high that Treasury bonds paid 19%), in 1987 (October stock market crash of 23% was worst of all time), in 1991 (junk bond collapse and credit crunch) and in 2000 (the dot.com bust).
This will keep happening until we take the time to understand the real causes and put in real solutions. The solution is not now and has never been to throw money at it. This is the “junkie cousin” approach that Amy Poehler (Saturday Night Live) compared to the Original Bailout package: “It’s like you lend $100 to your junkie cousin to pay his rent. And when you run into him at the racetrack next week, you lend him another $50.”
At what point do you “get it” that your cousin is gambling away the money you lent him for the rent, that this is not really helping your cousin to kick junk? The solution is not throwing money around but accounting for all the money already out there (including the stocks, bonds and derivatives). It’s not more regulation, it’s enforcing rules that are already on the books. Real solutions take real work. I’m not hopeful that the US government and markets are willing to do the work. So, I’ll make sure I’m wearing a helmet with my seat-belt buckled for the next crash, say just around 2017.
Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.