“Saving” Banks
Henry Blodget, going to battle on behalf of Wall Street’s welfare bonus babies, says:
The really distressing part is what this tax will do to the corporations that we now own and are supposedly trying to save.
(Remember? That’s the reason we bailed Citigroup, AIG, GM, and the rest of them out–to save them. Because we convinced ourselves that civilization would end if we didn’t.)
I think this hits upon a critical ambiguity in the bailout scenario. I, for one, don’t think that “saving” the too-big-to-fail financial institutions is or was among the legitimate purposes of our financial policy. The idea is—or at least ought to be—that we’re trying to prevent them from failing in a way that causes everyone else’s business to go under. When we let Lehman Brothers go down, it’s not as if that was a sad day for Lehman Brothers but everyone else just hummed along fine. It caused problems for everyone who did business with Lehman and problems for everyone whose business was deemed to resemble Lehman, and then lesser problems for everyone who did business with every firm whose business was deemed to resemble Lehman. That turned out to be a wider-than-expected swathe of harm and it brought down a money market fund. That, in turn, threatened the stability of all money market funds, which was threatening the viability of all kinds of companies’ ability to smooth cash flow and make payroll.
Post-Lehman, a determination was made not to have that happen again. Which meant preventing firms from going under. But it doesn’t mean “saving” Bank of America or Citi or AIG in the sense that the goal is that fifteen years from now Bank of America is still this giant firm with richly compensated executives. What we need to do is take these firms into receivership of some kind, pay off their obligations, spin off elements that are capable of running profitably as smaller entities, and attempt to resell their “toxic assets” for however much they turn out to be worth when the economy is growing again. That wouldn’t “save” Citi, it would kill Citi while saving people to whom Citi owes money.
But this is a genuine ambiguity running through the system. A substantial swathe of policy elites, starting with Hank Paulson and Ben Bernanke and George Bush and now evidently including Timothy Geithner and Larry Summers and Barack Obama really do seem to think that saving the firms is the key. That the world as it existed in the years 1996 to 2006 represents some kind of ideal of economic activity, and that they job is to put humpty-dumpty back together again. And it’s true that if you’re doing that, seriously curtailing pay at the bailed-out firms is counterproductive. But since that’s not what we ought to be trying to do, I see being counterproductive as a virtue. If you want to get rich quick, don’t go work for a government-subsidized zombie bank. Go start your own business, go work for a well-managed mid-sized bank and help them grow and prosper.
16 Responses to ““Saving” Banks”
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March 20th, 2009 at 9:55 am
I’ll shamelessly self-promote here… but my argument is that we need to look at outcomes rather than a specific process. We need a functioning banking system, and now it is clear that because of inherent conflicts in the current plan, it won’t fly. So, we need to think about a plan B, which I think is going to need to revolve around some sort of New Banks model.
March 20th, 2009 at 10:09 am
This misses the point. The point is that the people currently running the banks don’t have (a) vital expertise and (b) competing good employment options, such that they need to be lavishly compensated. They should be paid, given the state of their firms, the bare minimum to keep the bare minimum of them in place. Given the line of work they’re in, that is much less than they’re currently being paid.
AIG is the most galling example. The CDSs required specialized expertise to be written, but they’re written, and since the government has (stupidly) decided to honor the counterparties’ claims 100%, AIG provides no actual expertise. The entire division could be terminated without any problem whatsoever.
March 20th, 2009 at 10:17 am
“I, for one, don’t think that “saving” the too-big-to-fail financial institutions is or was among the legitimate purposes of our financial policy.”
The systemic risk posed by “too-big-to-fail” banks alone argues for their being broken up into smaller entities. But the Fed wants to preserve the system whereby it sits at the apex of a banking cartel dominated by relatively few major players. It’s easier to run a cartel when it consists of a few dominant players who function as “gate keepers” for the Fed’s liquidity flows.
March 20th, 2009 at 10:32 am
No way will that House bill be passed, anyway. According to what Blodgett postscripted on his site, it does actually tax all household income over 250K of any employee of these companies at 90%.
Hell, I don’t support that.
I’m totally okay with going specifically after AIG’s employees who are getting bonuses over 250K. But all income, for all employees, for all companies that the US is bailing out? Wow, that’s a big difference.
March 20th, 2009 at 10:32 am
Meh. Neither Blodgett or MY mention Goldman Sachs, our present & future Dark Overlords.
March 20th, 2009 at 10:41 am
There is no good case that I can see for being overly restrictive in compensation for people in those elements. And yet rarely do I see people being discriminating on these issues–they just lump everyone in these firms together
Yup.
I’m totally okay with going specifically after AIG’s employees who are getting bonuses over 250K. But all income, for all employees, for all companies that the US is bailing out? Wow, that’s a big difference.
Not really, although I understand your intuition. Most people in financial firms will have base salaries in the low six figures with much larger “bonuses” on top. Not all of the bonus is performance related, though — it’s structured this way out of tradition more than anything else.
March 20th, 2009 at 11:11 am
MY – congratulations!
“A substantial swathe of policy elites, starting with Hank Paulson and Ben Bernanke and George Bush and now evidently including Timothy Geithner and Larry Summers and Barack Obama really do seem to think that saving the firms is the key. That the world as it existed in the years 1996 to 2006 represents some kind of ideal of economic activity, and that they job is to put humpty-dumpty back together again.”
You have finally stumbled on the false assumption that is driving a wrong headed bailout, and that we are going to be paying for for years. In terms of cost, it is like we just fought two Iraq wars in the last six months.
You should read Tim Duy, who has been writing about this all along.
The financial sector is not coming back. It will shrink a lot, much too much to expect payback for the huge amount of money that has flowed to it from the government. You put yourself on a hook when you loan money (or, what is the equivalent, take the bad assets ‘temporarily’ from) an entity that will never make the money it owes. You can either try to get that money back, in which case the entity fails, or you can write it off.
A tax funded bank would, obviously, been a much, much better way to address the real crisis of November, 2008, which was the drying up of credit. And the financial giants would have gone into receivership, and the wealthiest 1 percent in this country, as well as others around the world, would have taken the biggest hit of their lives.
Instead, of course, an utterly corrupt program has arranged things for the worst of all possible worlds – credit has dried up for small and large businesses and the financial giants are simply money sucks attached to the Fed and Treasury. But some good things – from the perspective of the wealthy – do happen when you give two trillion dollars to the financial industry – surprisingly little unemployment, for instance, there, as you pointed out in a post last week. Is that fun or what? The situation that this nostalgia disguised as a policy leads to is this: we have ‘bad’ industries like construction, full of uneducated guys who really should be manipulating little cardboard signs begging for cash by the roadside – losers, in CNBCs phrase – we have 4 million dollar retention bonuses, on the other side, to AIG employees, presumably on the idea that the whole casino is going to arise from the ashes any day now.
The disconnect with reality is total. Meanwhile, global manufacturing – which could have used that money – is going through the worst period since the end of WWII. That’s not good. In fact, we will suffer much more from that than we will suffer from the shrinking of the financial sector. Concentrating all our attention on that sector has been the signal disastrous policy of the last year, and it crosses party lines because, well, the elites of both parties are much, much closer to the financial sector than to any other. They love it. They’ve wallowed in it so long they can’t believe the party’s over.
March 20th, 2009 at 11:25 am
“Instead, of course, an utterly corrupt program has arranged things for the worst of all possible worlds – credit has dried up for small and large businesses and the financial giants are simply money sucks attached to the Fed and Treasury.”
D.C. pols are shoveling our $$$ as fast as they can into America’s least productive, failed enterprises – banks, Fannie/Freddie, auto companies, etc. What a fucking disaster. Obama and his team either don’t know better, or just don’t care.
March 20th, 2009 at 2:32 pm
I don’t think the idea that Treasury can take over these large financial conglomerates is true. Obama is proposing legislation to give Treasury the power to do so. Why would he do that if he already had the legal authority? I don’t think they want to admit their impotence and cause a crisis in confidence. But, at this point, don’t you think Obama would have nationalized Citi if he could? The argument against this is that Geithner (and maybe even Summers and Obama!) are moles inserted by a secret Wall Street cabal to pump money into these banks (even if their organized failure would help out their competitors). But using Occam’s Razor, the simplest answer is that they cannot nationalize the the likes of Citi.
It is possible Bush/Paulson could have nationalized when they had the chance and didn’t want to for reasons only they know. But that administration routinely worked outside the law.
So, Matt, unless you can prove, against the statements of the current President, that the Feds could take over Citi, can you drop that part? You have excellent posts on the topic, but some of your “if onlys” are advocating for an illegal gov’t policy. Maybe if people stopped asserting this mythical power to nationalize, they could turn their energy on Congress to actually give Treasury that option.
March 20th, 2009 at 3:35 pm
When Matt says ’spin off’ he must mean shut down. Or is the thought that competent folks there won’t want to get paid, because the rest of the business is dead?
Matt endorses cutting off nose to spite face, because face really annoyed him as an undergrad.
Matt also apparently hasn’t given much thought to Bernanke’s view on this at all. Engage with it before you disagree with it.
March 20th, 2009 at 6:07 pm
I first heard the word zombies applied to banks (with exactly the meaning and implication of this post and the Douglas Holtz-Eakin argument below) ascribed to one George Bush (you know which George Bush — H.W.). Now I assume he didn’t actually come up with the analogy and he may not even have used the word in the discussion but he sure as hell got his press flak (Fred Barnes IIRC) to claim he had used it.
Didn’t bury the zombies though. Still he was rather firmer on the principle than his son or, so far, Barack Obama.
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