May 01

Pragmatist or Opportunist?

Obama-RomneyEssentially the voters in 2012 will have a very simple choice to make, whether to elect a political pragmatist or a political opportunist. On the one side is President Barack Obama, who by all accounts holds very few, if any, ideological convictions. In fairness, he does lean just left of center, but rather than having a belief system rooted in progressive ideals, it appears that his belief system has been fashioned by his personal experiences and educational training alone. He is a no nonsense analytical thinker. He looks plainly at a situation and determines what can be accomplished. He then moves further away from his original position expecting that his opponents will do likewise, and embraces a series of compromises until some agreement is reached, however distant from his original position. While this jumping-off point normally lends itself to practical common sense solutions, it has failed to hold true in his case. However polarized the other side, he is determined to come away with something. Mitt Romney on the other hand also appears to lack any foundational ideology, while leaning marginally right. His early political career appears to have been fashioned by his experience at the feet of his father, the one time chief of American Motors and Governor of Michigan. His father is widely regarded as a right-leaning moderate. He has spent much of his adult life surrounded by business elites, and will advocate on their behalf so long as in doing so he treads upon the path of least resistance. He too seeks out practical solutions to the problem at hand, but he allows the political winds rather than any firmly held position to determine what is in fact practical. So, the question is whether it is better to elect an individual who refuses to bend when the longer term practical political consequences may be deleterious, or someone who will bend facilely.

Looking at some examples from Obama’s first term we can see the limits of political pragmatism and general rigidity. The most glaring example is his reaction to the financial crisis. His policy decisions following inauguration through today are generally accepted by his progressive base, as well as most rank and file Democrats, as being far too friendly to Wall Street and the financial sector generally. Much time and effort has been spent ensuring the solvency of the banking sector, while little or no help has been offered to those most affected by the crisis. Experts have opined that it is precisely the President’s pragmatic rigidity that has contributed to his failure to move toward a more progressive fair approach in addressing the depression. Interestingly, while disappointed, neither the Democratic base or independents have been willing to take Obama to task over his  continued willingness to assist Wall Street. Even while Obama has been reported to have a great degree of contempt for Wall Street and apparently views the fruits of its labor generally valueless, he has bent over backwards to help it. Even when pushed by the public and Congress to pass some sort of financial reform package, the result was an impotent regulatory regime in the name of Dodd-Frank, and facially attractive but only marginally  protective credit card and other consumer protection reforms. Yet Wall Street still views him with extreme and venomous derision. Continue reading

Apr 19

Could the Banks Fail Anyway?

Brian Moynihan

Bank of America CEO Brian Moynihan

Unless you just recently returned from a four-year vacation on the moon or have been trapped in a Massey Energy coal mine, you are aware that the American taxpayers have provided tens of trillions of dollars in direct bailout money and near zero-percent loans to the largest banks operating in the United States since 2008. While specific banks appear to have emerged from living for free in the American People’s pool house quite profitable and have regained their footing, several large banks remain on the verge of–or are currently operating in–insolvency.

Moody’s rating agency recently put nearly each of the large banks in the United States as well as several international banking behemoths on its watch list for a potential downgrade. Bank of America for example, reported first quarter revenues this year nearly $1.4 billion less than last year’s first quarter revenues of $2 billion. The primary reason for the decreased profitability is a  new rule that prevents the bank from reporting junk loans as performing loans.

Moody’s Investors Service has announced a review of 17 banks and securities firms with global capital markets operations. Underpinning this review is Moody’s view that these firms face challenges that are not fully captured in their current ratings. Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms.

The New York Times ran an earlier story on this development at the large banking conglomerates in late May. In the report, the Times also uncovered a major concern for the large banks: The largest mutual fund players may seek to renegotiate contracts with certain banks or walk away from the relationship entirely in search of more financial stable partners. Without these trading contracts with the mutual fund companies, further stress with beset the overall profitability of the banks.

Nearly four years after the largest financial institutions in the world were bailed out by the American and European taxpayers, the very same banks are hat in hand demanding more assistance. Perhaps most importantly, the sheer magnitude of the bailouts and loans fail to capture the entirety of the destruction supervened upon the people. Budget cuts and ensuing layoffs, unemployment, trillions in lost home value and investment value, higher education and public school cuts, public park closures, unanticipated bankruptcies, infrastructure funding cuts, public health and assistance cuts, just to name a few. This entire adventure illustrates precisely why it is bad policy to allow any industry group to blackmail a government into action. It never ends, and eventually the crook comes banging at the door for more, and more, until policymakers are forced to act responsibly, as they should have from the very beginning. It is at this point that the industry is forced to take its medicine. It is time for the Obama administration to follow through on its first failed attempt to break up one or more of these large banking leeches and sell off the parts to smaller community banks rather than to continue to throw good money after bad. Maybe this time Timmy Geithner and company will do as their told. Or maybe we’ll continue down the same failed path.

Apr 17

AIG Illustrates Further Treasury Department Incompetence

Timothy GeithnerEvidence of further incompetence from Timothy Geithner and friends over at the Treasury Department surfaced recently in a report that uncovered a disturbing tax deal flowing from the 2008 $182 billion bailout of AIG and other companies. A tax loophole that under normal circumstances serves the important function of providing a corporation with a mechanism to reduce its tax burden following periods of significant loss was not closed to AIG following negotiations with the Treasury Department in 2008. In fact, the loophole was expanded through a special exemption. The tax mechanism referred to as a tax loss carryforward is part of the tax code at section 382 and it allows a corporation to essentially offset future profits with past net operating losses for a period of seven years in order to reduce its tax liability. Normally corporations that acquire other entities, or are acquired as in AIG’s case, are forbidden from claiming the tax loss carryfroward in order to disincentivise purchases or sales executed for the sole purpose of claiming another companies’ losses.

However, during the turbulent period following the bursting of the housing bubble, sub-prime mortgage debacle, and derivatives crash, Timmy Geithner hatched a plan to allow companies being asked, or asking, to take over troubled or failing companies an exception to an IRS rule amended in 1986 to specifically address the issue in controversy here. In AIG’s case, the exemption served to nullify the ownership change that took place when the United States government purchased a significant stake in the company. As such, AIG, which showed a near $20 billion profit in 2011, but will offset nearly 90% of its tax liability by writing down $17.7 billion.

“It’s an arcane and hard-to-follow way of disguising billion of dollars paid to firms that, for whatever reason, are politically favored,” says J. Mark Ramseyer, a Harvard law professor who wrote a paper on a similar tax treatment given to General Motors when it was taken over. “It’s one thing to announce through TARP that you’re going to give a firm a billion dollars. But if you issue a letter saying that the company can use a net operating loss that they would otherwise lose, that’s harder for people to follow,” he says, referring to the Troubled Asset Relief Program enacted in 2008 by the U.S. government to buy assets and equity from financial institutions to strengthen them. Besides AIG and GM, Citigroup, Fannie Mae, and Freddie Mac got tax breaks as part of their bailouts.

The Treasury Department argues that following nearly $200 billion in bailout cash, that AIG couldn’t make ends meet or attract capital, notwithstanding the obvious message that Treasury was sending to investors through the bailout: That AIG would not be permitted to fail. It is the height of arrogance to ask the American people to believe that attracting private capital would be difficult for a company guaranteed to remain viable by the United States Treasury Department. Yet Treasury continues its sell its pyramid scheme based primarily on the false idea that the entire world would have been eaten by dinosaurs if it did not funnel trillions of dollars to corporations.

“Allowing those companies to keep their NOLs made them stronger businesses, helped attract private capital and further stabilized the overall financial system,” Emily McMahon, the acting assistant secretary for tax policy, wrote in a Treasury blog post March 1. “It would have been counterproductive — and perhaps irresponsible to undermine the stability of those same institutions, at the height of the financial crisis, by imposing a tax code provision that was never intended to apply in this context,” she wrote.

Elizabeth Warren, architect of the Consumer Financial Protection Bureau (CFTC)–an agency many have high hopes will offer significant financial protections to the public–has called the AIG loophole a stealth bailout. It represents much more than that however. It represents more evidence that the Obama administration and the Treasury Department had and has in place a policy of providing any and every resource to corporations that caused the collapse of the world economy, while doing next to nothing to provide assistance to the public. Whether the efforts were conspiratorial in nature is irrelevant, as the ultimate effect is the same: The public retained its debts and losses, while the corporations were provided cash and loans to service their debts and a mechanism to further limit future liability through tax provisions not extended to the American people.

Perhaps lost in all of this is that as a result of this disturbing decisions at Treasury, that executives at AIG and other companies bailed out by the American taxpayer will receive larger bonuses, as their bonuses are tied to overall profitability. Less tax liability equals greater profits. While the Obama administration is fond of pointing out that many of the companies that were bailed our during the crisis have “paid the government back and have returned to profitability,” the bailout of AIG will ultimately cost the American people at least $22 billion. The President failed to remove Timothy Geithner after reports surfaced that he unabashedly failed to follow his directive to break up Citi. We have now learned that he cut private tax deals with AIG and other companies to guarantee limited tax liability for nearly a decade. President Obama’s retention of perhaps the most incompetent Treasury Secretary serving during my lifetime leads me to only one conclusion: That the President either tacitly or directly approved of his decisions.

Apr 16

You Love the Bailouts, Didn’t You Hear it on the News?

In an unsurprising yet detestable act of hubris, the Obama administration and its Treasury Department recently held yet another invitation only press briefing for select journalists. Apparently, the marching orders for the press this time around are to communicate to the public that the Bush and Obama reactions to the 2008 financial crisis, when compared to other industrialized nations, averted the cataclysmic disaster suffered by those with far less bold leadership. Assuming the standard is whether or not the United States did a better job of dealing with the financial crisis than say, Spain, then yes, we did a bang up job. If the standard is how we responded to the disaster when compared to say Canada, or Australia, two of the nations most economically and socially similar to the United States, then we butchered the response miserably.

Several journalists in attendance at the briefing were less than convinced that the Obama administration was offering anything new:

On Friday, the Treasury Department convened one of its semi-regular, invitation-only background press briefings for journalists. Senior Treasury officials spoke to us, answered our questions, and showed us a “deck,” which is annoying industry jargon for a Powerpoint presentation. “I just know this is going to be a fucking waste of time—another dog-and-pony show,” another journalist told me on our way into the meeting. The central message of the dog-and-pony show was that the US response to the 2008 financial collapse was pretty effective, especially when compared to how other countries reacted to different crises. The Powerpoint presentation used terms like “bank investment programs,” but what the Treasury gang was talking about was the highly unpopular financial bailouts (as opposed to the auto bailouts, which the Obama team views as a political winner).

This is more of the same old song and dance that the American People have been forced to choke down since 2008. The fable goes something like this: If Citibank or Bank of America were allowed to fail, and trillions of dollars were not directly given and loaned to large financial institutions and foreign investors, the United States economy would have been thrown into an apocalyptic tailspin that would have destroyed the world. The narrative included scare tactics that conflated a failure to funnel funds to the financial sector with the the problems facing Greece and Europe. Moreover, if interest rates were not kept at historically low levels–punishing savers, the elderly, and the middle class–banks would not lend and small businesses would fold in the hundreds of thousands. First, there is not one bit of evidence to back up these claims. Second, even if the claims have some merit, it does not excuse the wholesale disregarding of those most directly affected by the crisis: the people. Certainly something had to be done to stabilize the banking sector and the markets to avert further job losses. However, the contention that Europe suffered more significantly than the United States because it lacked bold leaders taking decisive action is specious at best. The reason Europe suffered to a greater degree was due to its centralized monetary policymaking which lacks a mechanism to tailor monetary policy for each individual member state. It had nothing to do with Timothy Geithner’s brilliance.

Politics is politics, so it would be naive to believe that the Obama administration is not playing to win the game. As such, these press spectacles are business as usual. It is also likely to bear fruit, as major media news outlets long for the “administration official” to agree to appear on its faux news programs, and bucking the administration’s talking points does not serve that end. However, unlike television news, we learned as schoolchildren that a hypothesis must be tested rather than assumed based upon conjecture. There is no evidence to support the notion that the the Bush and Obama administrations acted in such a way that averted the Four Horsemen’s arrival. Nor is there evidence to support the claim that the chosen course was the only means of stabilizing the economy.

Even assuming that the policy choices pursued by the current and past administrations averted a greater recession, it does not excuse the paralysis on jobs and housing. Germany for example has bolstered its recovery by pursuing practical jobs policies. Iceland has implemented a program under which it has forgiven household debt and mortgage debt acquired as part of the fraudulent run-up in housing prices. In the United States, the debts owed and employment problem are no different. Homeowners took on mortgages based upon what they believed to be the fair market value of the home. The value was fraudulent inflated, and therefore much different than a loan in which both parties act fairly and ethically. Politically, debt forgiveness is a win win. In the United States it would stimulate growth and job creation, as greater resources would be thrust into the economy as consumers are freed from the devastation of servicing mortgages, credit cards, and student loans currently absorbing the bulk of earned and Social Security income.

Sadly, debt forgiveness in nowhere on the radar in the United States. The ridiculously unique American belief that that contracts must be honored, even if based on fraud, places some blame for inaction at our own feet. However, the notion has not even be raised seriously by the President. Instead we continue to trudge along on a perfunctory path of half-measures and hope that the large banks will right their wrongs willingly. It is time for sound economic policy that forgives fraudulent debt and incentivises hiring. It is time for creative job training efforts between federal, state, and local colleges, vocational training centers, and employers. It is time for the banks to write-down mortgage debt and deal with customers fairly in return the gargantuan assistance provided by taxpayers. In short, it is time for as change.