Tag: TARP

Tim Geithner: The Forrest Gump of World Finance

One almost feels sorry for Treasury Secretary Tim Geithner.

He’s a punchline in his own country because he oversees the IRS even though he conveniently forgot to declare $80,000 of income (and managed to get away with punishment that wouldn’t even qualify as a slap on the wrist).

Now he’s becoming a a bit of a joke in Europe. Earlier this month, a wide range of European policy makers basically told the Treasury Secretary to take a long walk off a short pier when he tried to offer advice on Europe’s fiscal crisis.

And the latest development is that the German Finance Minister basically said Geithner was “stupid” for a new bailout scheme. Here’s an excerpt from the UK-based Daily Telegraph.

Germany and America were on a collision course on Tuesday night over the handling of Europe’s debt crisis after Berlin savaged plans to boost the EU rescue fund as a “stupid idea” and told the White House to sort out its own mess before giving gratuitous advice to others.German finance minister Wolfgang Schauble said it would be a folly to boost the EU’s bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.”I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense,” he said.

All that’s missing in the story is Geithner channeling his inner Forrest Gump and responding that “Stupid is as stupid does.”

…at birth?
Separated…

This little spat reminds me of the old saying that there is no honor among thieves. Geithner wants to do the wrong thing. The German government wants to do the wrong thing. And every other European government wants to do the wrong thing. They’re merely squabbling over the best way of picking German pockets to subsidize the collapsing welfare states of Southern Europe.

But that’s actually not accurate. German politicians don’t really want to give money to the Greeks and Portuguese.

The real story of the bailouts is that politicians from rich nations are trying to indirectly protect their banks, which - as shown in this chart - are in financial trouble because they foolishly thought lending money to reckless welfare states was a risk-free exercise.

Europe’s political class claims that bailouts are necessary to prevent a repeat of the 2008 financial crisis, but this is nonsense - much as American politicians were lying (or bamboozled) when they supported TARP.

It is a relatively simple matter for a government to put a bank in receivership, hold all depositors harmless, and then sell off the assets. Or to subsidize the takeover of an insolvent institution. This is what America did during the savings & loan bailouts 20 years ago. Heck, it’s also what happened with IndyMac and WaMu during the recent financial crisis. And it’s what the Swedish government basically did in the early 1990s when that nation had a financial crisis.

But politicians don’t like this “FDIC-resolution” approach because it means wiping out shareholders, bondholders, and senior management of institutions that made bad economic choices. And that would mean reducing moral hazard rather than increasing it. And it would mean stiff-arming campaign contributors and protecting the interests of taxpayers.

Heaven forbid those things happen. After all, as Bastiat told us, “Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.”

A Successful IPO Does Not a Justifiable Bailout Make

There seems to be a lot of confusion about the meaning of GM’s IPO today.  A common narrative in today’s media is that GM’s return to the stock market affirms the wisdom of the auto bailout.  Some tougher customers in the media insist on a higher threshold being met—that taxpayers get back the entirety of their $50 billion investment in GM—before declaring “mission accomplished.” And then there are the rabid partisans who—in their seething animosity toward the Obama administration—reach conclusions devoid of logic and rich only in conspiratorial-mindedness.  For example, yesterday I was contacted by a media outlet vetting this conclusion: “The IPO is evidence of the failure of the bailout because taxpayers were excluded from buying shares at the IPO price and, therefore, denied the opportunity to get their money back.”  Huh?

All of those analyses are wrong.  Let me dispense with the last one first, as it simply betrays a gross misunderstanding of how taxpayers are on the hook.  By divesting of GM (i.e., selling its shares), the government is beginning to make the taxpayer whole.  But just as there were no checks written directly from taxpayers to GM, there will be no checks written to taxpayers, as the Treasury liquidates the public’s share of GM.  Whether main street Americans could participate in the IPO has nothing to do with making the taxpayer whole.  And, by the way, IPOs typically limit sales of shares at the initial price to a chosen few.  So let’s just shelve the canned indignation on this claim.  It’s a distraction.

Here’s the real issue.  Today’s IPO is nothing more than testament to the fact that the government threw GM a lifeline, enabling the company to expunge most of its debts and firm up its balance sheet on terms more favorable than a normal bankruptcy process would have yielded.  That enabled GM to partake of the cyclically growing U.S. auto market in 2010 and turn a profit through the first three quarters.  So what?  Did anyone really think that a chosen company so coddled and insulated from market realities couldn’t turn a short-run profit?  Yes, even GM, under those favorable conditions should have been expected to turn a profit this year.

But at what cost?  That answer—even the question—seems to be elusive in the public discussion of the IPO.  The cost was not only $50 billion—the amount diverted to GM in the first place.  Nor was it that $50 billion minus the proceeds raised in today’s IPO (and minus the proceeds raised later when the government divests entirely of GM – it will still hold 33% of GM after today).  In other words, making taxpayers whole does not absolve the Bush and Obama administration’s for the auto intervention.  Recouping the $50 billion only gets us partially out of the hole.  (And I’m not even sure who “us” includes because the costs are so far reaching.)

Yes, GM is making sales and accounting for market share, but only at the expense of the other automakers.  Had GM been forced to severely atrophy or liquidate, the other automakers would have had greater revenues, more market share, and probably higher profits).  They would have been able to attract GM’s best engineers and line workers.  They would have more money to invest in R&D and to lead the industry into the future.  Instead, by keeping GM in the mix, some of those industry resources remain misallocated in a company that the evolutionary market process would have made smaller or extinct. 

The auto industry wasn’t rescued with the GM bailout.  GM was “rescued.”  By rescuing GM, the government overrode market forces, and there are significant costs to assign for that.  Witness the stagnant economy with 9.6 percent unemployment.  Is it not plausible that businesses are sitting on their cash and not investing or hiring because of the fear inspired by the government interventions starting with the bank and auto bailouts?  It’s more than plausible.  The regime uncertainty that persists to this day was spawned by the GM bailout and other interventions.

What about the weakening of the rule of law?  Doesn’t the diversion of TARP funds by the Bush administration, in circumvention of congress’s wishes and in contravention of the language of the law, represent a cost?  How about the property right of preferred bondholders who were forced to take pennies on their investment dollars under the Obama bankruptcy plan?  Any costs there?  What about U.S. moral authority to dissuade other goverments from meddling in their markets or indulging industrial policy?  That may be costly to U.S. enterprises.  And with the government still holding a third of GM, its hard to swallow the idea that public interest will be the driver of policies affecting the auto industry.  And that suggests even more costs.

But don’t mistake this blog post for an anti-IPO rant.  I’m in favor of the IPO.  It couldn’t have happened sooner.  But I suspect the investment bankers, the administration, and the other members of GM’s Board of Directors reckoned that, with the hype over the new Chevy Volt and the recent newsleak of GM’s $43 billion in unorthodox tax deferrments on the balance sheet, now was the perfect time to go public.

Republican Hypocrisy Watch

Last week I urged readers to be on the lookout for Republicans seeking to exclude farm subsidies from any cuts they plan to make to federal spending. And it seems the first example of “smaller government for thee, but not for me” has been provided by incoming congresswoman Vicki Hartzler, who campaigned on a Tea Party-ish platform and defeated long-time congressman Ike Skelton (in Missouri’s 4th congressional district).

Ms. Hartzler calls Margaret Thatcher her role model because she “took principled stands.” (As, indeed, she often did.) Ms. Hartzler also says economic issues – cutting government spending, complete repeal of the health care bill – are her main concern. But read the fine-print in this article from the St. Louis Beacon:

Hartzler says cutting spending is a top personal priority; she wants to roll back non-discretionary funding levels to 2008 levels, before the economic stimulus and TARP programs. …

The congresswoman-elect would exempt some of the federal budget’s high-cost categories – including Social Security, Medicare and the Pentagon budget – from cutbacks. But she would not exempt agricultural subsidies,* another major area of federal spending popular in rural areas such as west-central Missouri’s Fourth District. Among the many farms to receive such subsidies is the 1,700-acre Hartzler farm, which – according to the Environmental Working Group’s “Farm Subsidy Database” – received about $774,000 in federal payments (mainly commodity subsidies for corn, soybeans and wheat) from 1995 through 2009.

“Everything should be on the table,” she says. While she says some agriculture programs represent a “national defense issue” because they help guarantee that “we have a safety net to make sure we have food security in our country,” Hartzler adds: “Should we continue the CRP [Conservation Reserve] program, where you pay farmers to not plant ground and set it aside for awhile? I’m not sure. The time for that may be over.” [emphasis added]

Let’s be clear about what Ms. Hartzler is talking about here. Those “some” agricultural programs she says should be guaranteed on “national defense” grounds (see below) are what we commonly think about as “farm subsidies” – payments to farmers to produce certain commodities, whether those payments are funded by taxpayers or consumersThey encourage overproduction and thus alienate our trade partners, complicate efforts to make global trade freer, harm poor farmers abroad and damage America’s reputation in the process. They cost us billions of dollars a year.

She is, on the other hand, open to cutting farm programs that at least pretend to have environmental benefits. I’m not commenting here on the validity of those sorts of ”public goods” claims, and of course I am not conceding that the federal government should be involved in them. But I think most reasonable  people would agree that they are less economically damaging than traditional farm subsidies.  In other words, in the hierarchy of damage, and therefore in the hierarchy of what should be cut first, I would put farm subsidies ahead of the CRP. And I fail, in any event, to see how anyone calling themselves a fiscal conservative can promote the idea of excluding a priori that which we commonly think of as “farm subsidies.”

[Also, can we please abandon once and for all this nonsense idea that we need farm subsidies to have food security? Appeals to “national defense” are disingenuous and cynical. They are also belied (rather obviously) by the fact that we see abundant supplies of fruit, vegetables and other horticultural goods even though those products attract no subsidies directly. The best way to ensure a food security is to ensure open markets, so food can flow from where it is abundant to where it is scarce. Self-sufficiency is a misguided policy, as the experience of North Korea can attest.]

So, in summary, when Ms. Hartzler says “everything should be on the table”, she basically means “not much, and certainly nothing that might harm powerful special interests that I care about.” I lost count of the number of Republican politicians being interviewed during the campaign and on election night talking about the need for “across-the-board cuts to discretionary spending” as their fiscal plan. Most if not all of them emphasized that so-called mandatory spending (which includes some farm subsidies) would be exempt from their cuts. I’m sorry, but I cannot take seriously the “fiscal conservative” credentials of any politician who adopts such a line.

*It appears, judging from the quote below, that she would indeed exempt farm subsidies from cuts, even if other farm programs would be on the chopping block. I’m going to assume here the reporter was using the term “farm subsidies” in an imprecise manner.

What Gets You Most Upset about the TARP Bailout, the Lying, the Corruption, or the Economic Damage?

As an economist, I should probably be most agitated about the economic consequences of TARP, such as moral hazard and capital malinvestment. But when I read stories about how political insiders (both in government and on Wall Street) manipulate the system for personal advantage, I get even more upset.

Yes, TARP was economically misguided. But the bailout also was fundamentally corrupt, featuring special favors for the well-heeled. I don’t like it when lower-income people use the political system to take money from upper-income people, but it is downright nauseating and disgusting when upper-income people use the coercive power of government to steal money from lower-income people.

Now, to add insult to injury, we’re being fed an unsavory gruel of deception as the political class tries to cover its tracks. Here’s a story from Bloomberg about the Treasury Department’s refusal to obey the law and comply with a FOIA request. A Bloomberg reporter wanted to know about an insider deal to put taxpayers on the line to guarantee a bunch of Citigroup-held securities, but the government thinks that people don’t have a right to know how their money is being funneled to politically-powerful and well-connected insiders.

The late Bloomberg News reporter Mark Pittman asked the U.S. Treasury in January 2009 to identify $301 billion of securities owned by Citigroup Inc. that the government had agreed to guarantee. He made the request on the grounds that taxpayers ought to know how their money was being used. More than 20 months later, after saying at least five times that a response was imminent, Treasury officials responded with 560 pages of printed-out e-mails – none of which Pittman requested. They were so heavily redacted that most of what’s left are everyday messages such as “Did you just try to call me?” and “Monday will be a busy day!” None of the documents answers Pittman’s request for “records sufficient to show the names of the relevant securities” or the dates and terms of the guarantees.

Here’s another reprehensible example. The Treasury Department, for all intents and purposes, prevaricated when it recently claimed that the AIG bailout would cost “only” $5 billion. This has triggered some pushback from Capitol Hill GOPers, as reported by the New York Times, but it is highly unlikely that anyone will suffer any consequences for this deception. To paraphrase Glenn Reynolds, “laws, honesty, and integrity, like taxes, are for the little people.”

The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program. …“The American people have a right for full and complete disclosure about their investment in A.I.G.,” Mr. Barofsky said, “and the U.S. government has an obligation, when they’re describing potential losses, to give complete information.” …“If a private company filed information with the government that was just as misleading and disingenuous as what Treasury has done here, you’d better believe there would be calls for an investigation from the S.E.C. and others,” said Representative Darrell Issa, the senior Republican on the House Committee on Oversight and Government Reform. He called the Treasury’s October report on A.I.G. “blatant manipulation.” Senator Charles E. Grassley of Iowa, the senior Republican on the Finance Committee, said he thought “administration officials are trying so hard to put a positive spin on program losses that they played fast and loose with the numbers.” He said it reminded him of “misleading” claims that General Motors had paid back its rescue loans with interest ahead of schedule.

P.S. Allow me to preempt some emails from people who will argue that TARP was a necessary evil. Even for those who think the financial system had to be recapitalized, there was no need to bail out specific companies. The government could have taken the approach used during the S&L bailout about 20 years ago, which was to shut down the insolvent institutions. Depositors were bailed out, often by using taxpayer money to bribe a solvent institution to take over the failed savings & loan, but management and shareholders were wiped out, thus  preventing at least one form of moral hazard.

A Fannie Mae for Intrastructure?

Like President Bush before him, Obama has a knack for taking the worst ideas of his opponents and making them his own.  It is truly bipartisanship in the worst of ways (think Sarbanes-Oxley, the TARP or No Child Left Behind).  The newest example is the President’s proposed “infrastructure bank.”  A bill along those lines was introduced a few years ago by then Senator Hagel, although the idea is far from new.

First, let’s get out of the way the myth that we have been “under-funding” intrastructure.  Take the largest, and usually most popular, piece:  transportation.  Over the last decade, transportation spending at all levels of government has increased over 70 percent.  One can debate if that money has been spent wisely, but there’s no doubt we’ve been spending an ever-increasing amount on infrastructure - so there goes one rationale for an infrastructure bank.

The real rationale for an infrastructure bank is to transfer the risk of default away from investors, bankers and local/state governments onto the federal taxpayer, but to do so in such a manner that the taxpayer has no idea what they are on the hook for.

If there are truly great projects out there that will pay their own way, then they should have no trouble getting private funding.

Of course, we will be told that the bank will charge an interest rate sufficient to cover losses and that the taxpayer won’t be on the hook.  Again, if it is charging an appropriate rate, then why does the bank need to be chartered (and backed) by the taxpayer?  We’ve heard this story before…with Social Security, flood insurance, FHA, Fannie/Freddie…the list goes on, that all of these programs would pay their own way and never cost the taxpayer a dime.  If there are truly outstanding infrastructure needs, then appropriate the money and pay for them.  An infrastructure bank is just another way to allow Wall Street to line its pockets while leaving the risk with the taxpayer.  If bankers aren’t willing to actually take the risks, then why exactly do we need them?

Is the Obama Mortgage Foreclosure Plan Legal?

While considerable attention has rightly focused on the failure of President Obama’s various mortgage foreclosure plans to actually lower the rate of foreclosures, few have bothered to even ask whether the plan is allowable under the TARP statute.

Alex Pollock at AEI first raised this issue during testimony before the Congressional Oversight Panel.  Alex’s point is that TARP only allows the modification of mortgages that are actually acquired by the government.  Recall the original purpose of the TARP was to buy “troubled assets.”  In managing those assets, Congress required the executive branch to come up with a plan to assist the borrowers behind those troubled assets.

Apparently unlike the Treasury department, I believe we should go back to the language of the statute in determining what it allows and doesn’t allow.  Section 110(b)(1) is quite clear:  “to the extent that the Federal property manager holds, owns, or controls mortgages, mortgage backed securities…” Nowhere else in TARP is there any other ability to establish a mortgage modification program.  In using TARP funds to pay for modifications of loans not owned by the federal government, the Obama administration is acting far outside of its legal authority under TARP.

Many, including myself, have criticized the TARP as a massive delegation of spending power from Congress to the Treasury Department.  Such delegation is, in my mind, clearly unconstitutional.  However, even within such a broad delegation, there are parameters in which Treasury must act.  Treating TARP as simply a large pot of money to spend however Treasury chooses is nothing short of illegal.

New Obama Mortgage Plan: A Backdoor Bank Bailout

Today President Obama announced an expansion and modification of his Home Affordable Modification Program (HAMP).  While one can debate the merits of incentives to keep unemployed families in their homes while they search for jobs — I personally believe this will more often than not keep those families tied to weak labor markets — what should be beyond debate is the various bailouts to mortgage lenders contained in the program’s fine print.

Several of the largest mortgage lenders, including some that have already received huge bailouts, carry hundreds of billions worth of second mortgages on their books.  As home prices have nationally declined by almost 30 percent, these second mortgages are worthless in the case of a foreclosure.  Second mortgages are usually wiped out completely during a foreclosure if the price has decreased more than 20 percent.  Yet the Obama solution is now to pay off 6 cents on the dollar for those junior liens.  While 6 cents doesn’t sound like a lot, it is a whole lot more than zero, which is what the banks would receive otherwise.  Given that the largest lenders are carrying over $500 billion in second mortgages that may need to be written down, we are looking at tens of billions of taxpayer dollars again being funneled to the very banks behind the mortgage crisis.

If that bailout isn’t enough, the new plan increases payments to lenders to not foreclose, all at the expense of the taxpayer.  While TARP was passed under Bush’s watch, and he rightly deserves blame for it, Obama continues these bailouts in the name of avoiding a much needed correction in our housing market.

Pages