When news came out about the Wall Street bonuses in 2008 totaling about $18.4 billion, a funny thing happened. Before long people started rounding the figure up. But we weren’t rounding up to $18.5 billion, or even $19 billion, let alone down to $18 billion. Rather, we were rounding up to $20 billion. Those $20 billion in bonuses, we were shouting. How despicable!
Laughable really. We were rounding up $1.6 billion, like it was nothing! It speaks volumes about this bizarre moment in our financial history. A moment in which an ungodly $350 billion has been laid at the doorstep of the financial industry without any accountability or oversight (with an additional $350 billion close on its heels), and a mind-blowing $790 billion economic stimulus plan (trimmed down from $838 billion) is inching closer and closer to the President’s desk.
But lest we forget, last year the market for credits default swaps grew to be in excess of $60 trillion, making those dinky hundreds of billions in bail-out money look like drops in the bucket compared to the problems we face. Through Feb. 10, the government has made commitments of nearly $8.8 trillion and spent $2 trillion–this, at a time when the national debt is nearing $11 trillion.
It’s government’s Trillion Dollar Era, folks.
But are we responding to private excess with governmental excess?
Tuesday, after the Senate had finally reached a deal on the colossal stimulus, and not a moment sooner, the latest round of additional billions and trillions were announced. They came as part of the financial recovery plan trotted out by Treasury Secretary Geithner. The new proposal could tap as much as $2 trillion from the Treasury, private investors and the Federal Reserve, in addition to the $350 billion remaining in the Treasury’s TARP money, which will also be spent.
With a purported overarching goal of unfreezing the credit markets, the new plan has three parts: First, a Public Private Investment Fund, jointly run by the Treasury and the Federal Reserve. The already renowned "bad bank" will start with as much as $500 billion, and grow to $1 trillion. It will be funded by both private investors and tax payer dollars.
Second, additional capital infusions into banks using the $350 billion that’s remaining in TARP.
And third, an expanded loan program to help finance consumer loans, including student, car loans and credit card debt, that could reach $1 trillion.
Wall Street’s response to Geithner’s speech was pessimistic. The markets plunged, especially in the banking sector which investors apparently hoped would get more or that something would be different in Geithner’s plan. Bank of America was hit particularly hard after Geithner’s stand-up falling 11%, while Wells Fargo fell 6.5%.
The problem is that Geithner’s speech was devoid of specifics. There was a lot of broad outlining but not a lot of detail. And the manner in which Geithner spoke–closed posture, scripted, and otherwise ill-at-ease–didn’t inspire much confidence. In fact, it made me nervous. There was also a timing issue. Did they have to roll out this plan now? While every one’s still trying to wrap their heads around the President’s $838 billion stimulus package?
One thing was clear however: Under the plan, there will be trillions spent in addition to what’s already being spent. The question on every one’s mind is whether we’re throwing good money after bad. To be sure, much of the money will again be going straight to the banks and, other than the executive pay orders issued by the President last week, no additional oversight measures are yet in place.
In other words, there doesn’t appear to be much daylight between Secretary Paulson’s "plan" and Geithner’s. As reported by the Washington Post:
Many of the specific policies Geithner offered were tweaks, adjustments or continuations of Paulson’s strategy. And the more novel elements of the Geithner plan — the creation of an entity with public and private money to buy up bad assets from banks, a "stress test" of 20 or so of the nation’s largest banks, and $50 billion to prevent foreclosures — came with so few details about how they would work that it contributed to the very public anxiety and investor uncertainty that Geithner criticized.
This shouldn’t be terribly surprising. Geithner and Paulson were arm-in-arm during the initial government response in Fall 2006 and there’s no reason to believe they are not still. We should also be concerned with the notion of a "Public-Private" fund. Just what alliances with private corporations will this fund entail? Who from the private sector will be investing? Might one investor be Goldman Sachs, from which Geithner’s Chief of Staff, Mark Patterson, hails (along with his chum Hank Paulson), and who Geithner is himself rather cozy with, having been the mentee of at least a few former Goldman executives, including embattled former-Merrill CEO (and ex-Goldman Co-President) John Thain? Do we want corporate America contributing to the decision-making on our financial recovery? I suppose that at the rate we’re spending (i.e., borrowing) money we may not have a choice.
Remember the Saving & Loan scandal in the 1980s? S&L’s or "thrifts" emerged during the Civil War and were originally confined to taking savings deposits and making mortgage loans. They became highly regulated during the New Deal, but policies began to change at the tail end of the Carter Administration when interest rate caps were lifted and the federal government started providing more comprehensive insurance against losses. Still, by the time Carter left office 3,300 out of the 3,800 S&Ls operating in the United States were losing money.
Signed into law by Ronald Reagan in 1982, the Garn-St. Germain Depository Institutions Act deregulated S&L’s even further allowing them to make commercial loans, issue credit cards, and take ownership positions in the real estate and other projects to which they made loans. The Act also made it easier to get a federal charter and therefore an implicit government guarantee. Meanwhile, net worth requirements were made lax and rarely enforced. These deregulatory measures paved the way to excess and, in the late 1980s, S&L’s began to fall off, one by one. Soon it became clear that the entire S&L industry had evolved into a house-of-cards, resulting in the failure of 747 banks, an unprecedented financial catastrophe. The basic story line is not dissimilar from the story of our current financial meltdown. And in both instances government, having essentially caused the crisis at hand, stepped in to help clean up the mess.
What was the tax payer tab for bailing out of the S&L’s in the 1980s? $124.6 billion over the course of nearly a decade.
Those were the days.