More On Haircuts

John Nichols in the Nation has a good post about the recent government firing of GM CEO Wagoner.

Wagoner needed to go. He thought the only way to repair an industry he and his compatriots broke was to break unions, cut wages and shutter plants.

Despite the fact that the United Auto Workers union called more than 30 years ago for a retooling the industry to produce smaller, more fuel-efficient vehicles, despite the fact that union members have accepted deeper cuts in pay and benefits than their foreign counterparts, Wagoner kept trying to balance his books by discharging his most skilled employees and devastating communities in Wisconsin, Ohio, Michigan and other states.

As such, he was a lousy, visionless CEO.

If it took a shove from the Obama administrion to make Wagoner leap with his golden parachute, then more power to the president.

But when will this administration get as tough with Wall Street as it has with Main Street? Didn't they screw up in far more dramatic, and damaging, ways than did Rick Wagoner?

Will this president ever tell brokers and bankers that they are going to feel more pain than just the paper cuts from opening envelopes containing their bailout checks and bonuses?

This is the rub. It is fair to say that bailing out the banks is crucial lest the entire economy basically implode under the pressure from all of those ginormous gambling debts Wall Street racked up. That doesn't preclude the necessity of making those responsible for said gambling debts feel the financial and professional repercussions of their actions.

The Revolution Will Not Be Televised

Getting lost in the details of the financial meltdown can have the perverse effect of diffusing righteous anger directed toward those who set this entire destructive wave in motion.

Matt Taibbi delves back into those details and reminds us why we should be "mad as hell" and not take this lying down.

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

The conservative fantasy that everyone in the financial services sector, or anyone in the entire corporate world, for that matter, are rational actors who behave reasonably and cautiously has, at last, been utterly exposed as a grand lie. The only correct solution is to break the backs of these oversize, overly powerful giants and regulate the living shit out of them in future. Banks, brokerages, and insurance companies all made handsome profits prior to the frantic deregulation fetish of the late 1990s. Given how destructive their greed can be for the rest of us, strict regulation is the only rational response.

Paper Pitchforks

Class warfare is traditionally a top down affair. The recent outrage over the AIG bonuses has been pretty amusing - millionaire congresscritters bleating about how awful it is that masters of the universe at AIG's financial products division want to pay themselves fat gobs of cash after wrecking the world economy. Left out of their faux-populism is the fact they are complicit in the looting that has been conducted by the wealthy in our country for thirty years, and which was virulently accelerated in the 1990s.

And as much as I take perverse pleasure in watching CEOs squirm a bit, this "tax the bonuses back" is just stupid policy. Paul Krugman is on the case:

I’ll leave to others the question of who knew or should have known that the bonus firestorm was coming; but it’s part of a pattern. At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached.

More On Citi Shenanigans

From Jane Hamsher:

Citi held a private conference call on Wednesday, hosted by a lobbyist for the US Chamber of Commerce, to "build opposition to the Employee Free Choice Act" according to the Huffington Post's Sam Stein. During the call, Weinswig cited dubious research funded by an astroturf front group for the Chamber to make the claim that the bill's passage would increase the following year's unemployment rate by 1%. (In 2006 the OCED did an exhaustive analysis and concluded that there was no correlation between unionization and unemployment rates.)

Citi Uses Your Money To Wage War On...You!

Citicorp, on the heels of downgrading Walmart because EFCA might pass (though Walmart has remained profitable during the economic disaster, in which, btw, Citi has a central role), is using taxpayer bailout funds not only to stay afloat, but to run an aggressive and dishonest campaign against EFCA. The same analyst who performed the downgrade on Walmart stock leads the conference call.

Matt Yglesias tells the tale:

This, it seems, is capitalism. First you manage your business so catastrophically badly that your company not only becomes worthless, but that it threatens to destroy the livelihoods of billions of people around the planet. Second, you get the taxpayer to keep you in business. And third, you turn around and warn that higher wages for workers might destroy the world economy! As I’ve said before I don’t think we want congress meddling with the details of business decisions at major companies, even companies that are receiving taxpayer support. But there’s a fairly clear case to be made that firms on the public dole shouldn’t be engaged in lobbying or political activities.

These fuckers ought to, as the kids say, "die in a fire". A really hot fucking gasoline-liberally-sprinkled-with-napalm fire. Nationalize them, all of them, and throw the bastards out. Let the shareholders eat it. Sell them off, bit by bit, making them small enough to fail next time around. This has to end.

Why Nationalize?

Paul Krugman gets right to it.

The benefits from nationalization come from (a) giving taxpayers a share of the upside rather than just a share of the downside, which is where we are now (b) ending the gaming of the system, even looting, that is encouraged by the current system of implicit guarantees (Simon Johnson has been very good on that) (c) making it politically and fiscally feasible to put in enough capital to revitalize the system. These advantages are there whatever you decide to do with junior bank debt.

And finally:

What’s clear, however, is that the current system, of implicit maybe-kinda guarantees on bank liabilities — call it wink-wink-nudge-nudge-say-no-more banking policy — is failing badly.

Let's Get Swedish On Their Ass!

Matthew Richardson and Nouriel Roubini make the case that nationalization is the only useful option left to us to rehabilitate the banking sector:

Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:

First, and this is by far the toughest step, determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it must determine which are solvent and which aren't in one fell swoop to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions. The equity-holders will be wiped out, and long-term debt-holders will have claims only after the depositors and other short-term creditors are paid off.

Third, once an institution is taken over, separate its assets into good and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.

The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.

Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.

The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms also would be instituted to reduce the chances of costly future crises.

The longer the delay, the higher the actual costs. Not to mention the entire collapse thing. Standing on some ridiculous notion of ideological purity at this late date is exactly equivalent to insanity.

Market Case For Nationalization

Hilzoy makes a market based case for the nationalization of banks that would otherwise vanish into insolvency without government intervention (entire post well worth the read):

In the case of the large banks, I assume that we do not want them to go bankrupt not because it would hurt their shareholders, but because their bankruptcy would have broader systemic effects that we find unacceptable. That's fine. But in figuring out what to do about that fact, we need to try to preserve the incentives that bankruptcy normally provides.

To my mind, this means that we should proceed as follows. First, figure out exactly what it is that makes letting these firms declare insolvency such a bad idea: what effects we are trying to avoid. Second, try to craft a policy that avoids this particular bad consequence, while leaving the other disincentives to go bankrupt (or to invest in firms that are at risk of bankruptcy) in place. Third, if we can't do that, try hard to create incentives that mimic the operation of the normal market incentives that our actions are preventing. (E.g., if we prevent banks from declaring insolvency, we need to provide some other disincentive to becoming insolvent, in order to avoid moral hazard.)

This is the main reason why I tend to favor nationalizing those banks that are insolvent, clearing up their balance sheets, recapitalizing them as needed, and sending them back into the private markets as soon as is prudent. I am not, in general, in favor of the government controlling individual banks. But in this case, if we don't want to let the large banks declare bankruptcy, we need to provide some serious disincentives to their managers, investors, and bondholders. (I exempt depositors since I think that they should be insured, given the systemic value of avoiding bank runs.)

Nationalization would accomplish that. It would wipe out the shareholders and holders of unsecured debt, which is what the market would have done if left to its own devices. It would allow us to replace the senior management at the banks, which would give them every incentive to avoid needing to be nationalized. We would need to own the banks in order to do what needs to be done, and to do it as quickly as possible. This would mimic the market by treating the government as an owner in those cases in which it is, in fact, putting up the money: anyone else who provided this sort of capital would get ownership, and making an exception for the government would make government money more attractive than private capital. This would, I think, be a bad thing.

Nationalization would, in short, accomplish what my market principles tell me we should do: specify exactly what the bad consequence is that we want to avoid, and craft a policy solution that avoids this particular bad thing while either leaving other market signals intact or (where this is impossible) mimicking them. It would also allow us to return to what I take to be the right state of affairs (in which banks are private, and privately funded, and the government regulates them) as quickly as possible. (If you don't like excessive government involvement in banking, it's not clear why you'd prefer a long, drawn-out period of heavy government involvement over a shorter period of outright nationalization.)

This isn't rocket science. Models exist which can provide a blueprint for how to proceed. The only limiting factors in all of this are political and ideological. Our current crop of politician's fear the word "nationalization" almost as much as they fear openly contested elections.