New Rise of Executive Pay at Banks Exposes the Folly of Bush & Obama Handling of Financial Crisis
Yesterday the New York Times ran a story reporting that executive pay at the nation’s largest banks is again approaching pre-financial crisis levels. This is simply a signal that management teams in New York, Charlotte and elsewhere in banking headquarters are pursuing a business as usual approach to what many believe is the beginning of the end to the recession.
Krugman’s column today further adds to the case he’s been making all along during this financial crisis – Wall Street’s emperors have no clothes and taxpayers are footing the bill to rebuild their wardrobe.
So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.
Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?
Here’s what I think is most disturbing about recent financial history and the Bush and Obama Administrations’ policies:
The Daily Graphic: The Geithner Plan (PPIP) Explained
The Financial Times has a great, interactive graphic that explains the latest Geithner scheme for bailing out U.S. banks. Click the image below to go view it:
Transcript: Treasury Secy Tim Geithner on Meet the Press, March 29
(Source: Meet the Press)
MR. GREGORY: … But first, here live is Treasury Secretary Timothy Geithner.
Welcome to MEET THE PRESS.
SEC’Y GEITHNER: Thank you, David. Good to be here.
MR. GREGORY: Thank you. I want to start with some basic terms here. Can you explain as simply as you can why increasing bank lending is so important to the economy?
SEC’Y GEITHNER: Absolutely, David. Economies require banks because they require credit. Credit is like the blood, it’s like the oxygen of any economy. And for us to get the economy growing again, we need to make sure there’s going to be credit available to businesses and families across the country so that businesses can meet payroll, so that they can expand, so that families can put their kids through college, can borrow to finance purchase of a car or a new house. That’s, that’s why financial systems matter, and there is now way to get this economy back on track unless we have a financial system that’s working with the recovery rather than against recovery.
Transcript: Tim Geithner on This Week with George Stephanopolous – March 29
(Source: ABC News This Week)
[*] STEPHANOPOULOS: Good morning and welcome to “This Week.”
(BEGIN VIDEO CLIP)
PRESIDENT BARACK OBAMA: We put in place a comprehensive strategy designed to attack this crisis on all fronts.
(END VIDEO CLIP)
STEPHANOPOULOS: Our headliner this morning, the man behind Obama’s plan.
Video: Geithner Responds to Criticism by Krugman, Others About Taxpayer ‘Cash for Trash’
Let Them Fail …
Below is from a Newsweek piece of Treasury Secretary Timothy Geithner, who seems to be hitting his stride. I’m not a fan of Geithner or Larry Summers being so key to getting us out of the current mess and into a better, more fair economy. Summers is one of the reasons we’re where we are today and Geithner is a product of Wall Street. Every plan the government has come up with has lots for Wall Street, nothing for taxpayers and absolutely no accountability so far for how are money has been spent by the banks and brokerages. In the following passage, Geithner makes his case against those like Paul Krugman who make this case with more weight and eloquence than I ever will.
Their argument – the case made by the politicians who are bought and paid for by the AIGs of the world – is that these institutions cannot fail. Either they’re too big or too interconnected. What’s obvious is that in their size and counterparty risk, they are a menace to society. Let them fail.
From Newsweek:
Out of view of the cameras, Geithner prides himself on proceeding methodically—the markets be damned. He’s dismissive of critics who rail against the more controversial aspects of his plan for a public-private partnership creating government-backed “funds”—which by this summer are supposed to conduct an auction for bad assets. Among those critics is columnist Paul Krugman, who says the plan is another rich giveaway to Wall Street that won’t make banks more solvent. Geithner scoffs at their proposed alternative, what he calls “preemptive nationalization of the big institutions,” saying his critics have no idea what they’re talking about. One big problem, Geithner says, is that the government doesn’t have the resources to do more now, not with political outrage so high. And Washington cannot just take over banks that are not technically insolvent yet. “We would end up killing the institutions and having the government assume right away all those basic losses … There’s no feasible way we could get in and out quickly.”
The Toxic Asset Plan: Treasury Announces “Public-Private” Scheme to Deal With Banks’ Problems
From the New York Times:
The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well. At least two Republican senators have called for his resignation. And on Sunday, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, told Fox News that “if he keeps going down this road, I think that he won’t last long.” Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.
From Reuters:
While Treasury, in company with private investors, will put up initial financing, the Federal Deposit Insurance Corp and the Federal Reserve will be tapped to offer further financing.
Under one component of the plan, Treasury will provide up to 80 percent of the initial capital, which would go alongside investment by private funds. The FDIC would then offer debt financing for up to six times the pooled amount.
A separate component will have the Federal Reserve widen the financing it now provides under its new Term Asset-Backed Securities Loan Facility, or TALF. That $200 billion program, will be bumped up to $1 trillion and will begin accepting older mortgage-related and other securities as loan collateral.
From the Wall Street Journal:
The coordinated effort of the Treasury, Federal Reserve and Federal Deposit Insurance Corp. will attempt to address the issue of “legacy” real-estate-related assets that Treasury Secretary Timothy Geithner said is reducing banks’ willingness to take risks and to lend money to consumers.
“This will help banks clean up their balance sheets and make it easier for them to raise private capital,” Mr. Geithner said.
The plan calls for the federal government to work with private investors to try to restart the market for the troubled mortgage loans and securities, which in turn officials hope improves the financial condition of banks that have received billions in capital injections from the government already. The federal government will pair as much as $100 billion with private capital to generate $500 billion in purchasing power to buy the assets, and Mr. Geithner told reporters the plan could reach $1 trillion in size over time.
Text: Treasury Fact Sheet on PPIP – The Trillion Dollar Plan to Take Banks Off the Hook
The Financial Stability Plan – Progress So Far: Over the past six weeks, the Treasury Department has implemented a series of initiatives as part of its Financial Stability Plan that – alongside the American Recovery and Reinvestment Act – lay the foundations for economic recovery:
- Efforts to Improve Affordability for Responsible Homeowners: Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows. This past month, the 30% increase in mortgage refinancing demonstrated that working families are benefiting from the savings due to these lower rates.
- Consumer and Business Lending Initiative to Unlock Frozen Credit Markets: Treasury and the Federal Reserve are expanding the TALF in conjunction with the Federal Reserve to jumpstart the secondary markets that support consumer and business lending. Last week, Treasury announced its plans to purchase up to $15 billion in securities backed by Small Business Administration loans.
- Capital Assistance Program: Treasury has also launched a new capital program, including a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now – making it less likely that a more serious downturn will occur.
