Patterico's Pontifications

4/6/2009

TARP Follies: Monsters vs. Aliens edition

Filed under: General — Karl @ 6:44 am



[Posted by Karl]

Elizabeth Warren, chair of the Congressional Oversight Panel for the Troubled Asset Relief Program, reportedly plans to call for the removal of top executives from Citigroup, AIG and other TARP fund recipients — and for shareholders in those institutions to be “wiped out.”

Treasury Secretary Timmy Geithner seemed open to the idea of axing bailee execs during his turn on CBS’s Face the Nation yesterday.

In one sense, following Pres. Obama’s intervention with General Motors, this attitude is not surprising:

In any business-government partnership, Obama himself expects to play the dominant role.

“He’s realizing, ‘Hey, the economy’s mine now, and I better do it my way,’” said the official. “So the administration is collaring people and letting them know who’s in charge. The days of saying, ‘It’s not our economy’ have come to an end.”

An Obama administration official said the president’s hard-nosed approach will continue.

Indeed, Obama’s sitdown with bank CEOs — including his opposition to the return of TARP funds by the big banks — has people like Stuart Varney asking whether Obama’s real agenda is gaining control of the financial system to advance his political agenda.  Obama certainly would be in a position to advance the agenda of his old ACORN pals under this scenario.

On the other hand, the Geithner scheme provides that unregulated hedge funds and private equity firms will “bail out” regulated institutions, which will enrich people like George Soros and former Countrywide execs, assuming they are not outbid by the likes of Citigroup and Bank of America, who are aggressively buying up the shaky mortgages that are supposedly at the heart of the problem.  Major banks may even use TARP funds to buy large amounts of toxic assets from one another to inflate their books.  The Obama administration is engineering its new bailout initiatives to allow beneficiaries to avoid restrictions imposed by Congress, including limits on lavish executive pay.  Large shareholders in these firms, such as Obama pal Warren Buffett, actually have been the primary (perhaps only) significant beneficiaries of the TARP.  All of which suggests that the TARP recipients think there is enough benefit to them to stay under the TARP.

People like Glenn Greenwald may be up in arms over the Washington-Wall Street “oligarchy,” but these competing storylines suggest the question of the moment is which side has the upper hand: Monsters or Aliens?  I am pretty sure the answer is not Taxpayers.

___

Update: The bank stress tests currently underway are “a complete sham,” says former senior bank regulator and S&L prosecutor William Black.  Go Monsters! Or is it Aliens?

–Karl

69 Responses to “TARP Follies: Monsters vs. Aliens edition”

  1. Of course, nothing is being done about the moral hazard problem. I still think this began with the Mexican bailout in the Clinton Administration.

    Mike K (2cf494)

  2. As soon as word leaked out about Obama actually refusing to accept the TARP funds, the game was up. IOW, screw the taxpayers, we’re taking over.

    Dmac (49b16c)

  3. ‘We’ may not be making the right tactical decision (for instance, in limiting the pay package for those whose help is needed) but given that ‘we’ have bailed these firms out, there’s nothing conceptually wrong with imposing our will (salary limits, forcing out CEOs) on these firms (how different is this from the Solomon amendment which puts conditions on colleges getting federal funds, a provision much applauded by those on the right?).

    And but for ‘our’ help, these firms would likely have failed, I have no problem with wiping out shareholder equity, there is no basis for shareholders benefiting because we came to their rescue*.

    Both of these steps would be appropriate regardless of the political party in charge. You just don’t trust Obama and where he is going with all this.

    * full disclosure: I’m betting the government won’t in fact wipe out shareholder equity.

    steve sturm (369bc6)

  4. Both of these steps would be appropriate regardless of the political party in charge.

    Baloney.

    They are totally inappropriate at any time, at any place.

    EW1(SG) (e27928)

  5. They are totally inappropriate at any time, at any place.

    So shareholders of an all but bankrupt firm deserve the benefit if someone comes to their rescue? Does this mean GM and Chrysler shareholders reap the benefits from their respective bailouts?

    steve sturm (369bc6)

  6. Shareholders are capitalists, therefore they will be screwed. Bondholders, on the other hand, while also capitalists, are too big to screw and besides they give political contributions.

    I have been agnostic about firing the GM CEO. That would happen in bankruptcy. My concern is that this is all being manipulated by people who have no background in the auto business. They are Democrat donors and labor lawyers. And most exciting of all, climate specialists ! What do you think that portends for the Obamamobile ?

    The idea, I fear, is to force gas prices to $10 a gallon and then force us to buy “green” cars that run like a Lada.

    The leftist rhetoric about right wing revolution agitation is preparation to squelch any protests, like the tea parties which are being mocked on the left right now.

    MIke K (2cf494)

  7. Hey, maybe we can get Congress to pass a bill of attainder to grab Warren’s scratch, huh?

    mojo (8096f2)

  8. Steve Sturm, there’s nothing wrong with government takeovers of businesses and firing business executives and wiping out shareholder equities.

    Unless you look at that Constitution thingie, then there’s everything wrong with it.

    John Hitchcock (fb941d)

  9. “Ah, excuse me Ma’am, one more question” in the best Lt. Columbo voice, why is it a good idea to liquidate the shareholders, whose investments are
    like tied into pension plans and the like. I know it’s a rhetorical question, but the avowed purpose
    for the TARP was to restore financial stability in these firms, not to wreck it.

    narciso (4e0dda)

  10. narciso,

    Warren wants the UnBailout! Declicious, delovely…

    Karl (f07e38)

  11. narcisco: there’s a difference between the ‘company’ and its shareholders (as well as its creditors, suppliers, employees and the communities in which it operates) – and the their interests are often at odds with one another. Wiping out existing equity and replacing it with new equity, while a kick in the groin for existing shareholders, doesn’t affect the underlying profitability or stability of the company. And often, decisions that protect the interests of shareholders and employees often end up screwing the company (as in the case of the Detroit automakers).

    And John: given that a whole lot of people would flunk a test on the Constitution and most of them wouldn’t care if they did, just how far you think you’re going to go with your Constitutional objections? Obama’s support may be fading a bit, but it is because he hasn’t cured cancer yet, not because he’s – per your view – trampling on the Constitution.

    steve sturm (369bc6)

  12. You know Steve, that may be true, none of the other promises to fiscal soundness have proven
    out, but I’ll take the line about the voter in 1964, concerned Goldwater was going to take his
    TV, one says no it’s the TVA, he said I’m not taking any chances. Skepticism is a good watchword in these circumstances.

    narciso (4e0dda)

  13. Steve, per Congressman Crockett’s view. And since when is it alright to violate an oath to uphold the Constitution just because the populace is ignorant of the Constitution’s contents?

    John Hitchcock (fb941d)

  14. So capitalism will surely die by hyperStagflation.

    Bernake has said the Fed will buy upto $1 trillion in US debt but has spent nothing. We are hoping to sell $2.5 trillion this year alone where 70% of China’s foreign holdings amount to $2 trillion US debt.

    Now the hedge funds will actually go through with spending on bad loans because of the O’s guarantee? Aren’t hedges by definition contrarian?

    Meanwhile, the foreclosures run to completion. In my neck of the woods a rash of jumbo-loaned properties have surged onto the market.

    gary gulrud (360e2c)

  15. Wiping out existing equity and replacing it with new equity, while a kick in the groin for existing shareholders, doesn’t affect the underlying profitability or stability of the company

    Please detail how this model works, and include objective sources to back them up. Objective sources should include economists on both sides of the ledger, as well as examples of actual companies going through this process and emerging successfully.

    Dmac (49b16c)

  16. Seems the Government as authorized by our laws is allowed to legislate and regulate, however loans should be left to the bankers. If my representative, Mike Thompson had any skills, he would not be in Congress. I doubt he could get a job as a loan officer. Sh*t, the MFer even signed a stimulus bill without reading it. When is someone going to sue to take this stuff to the Supreme Court? I care not the reason, I do not want my tax dollars going to support GM, AIG or anyother private or public enterprize. Period. It is illegal.

    Zelsdorf Ragshaft III (e461c0)

  17. So capitalism will surely die by hyperStagflation.

    There are some new words being coined in these tumultuous times. How about the one I read a few weeks ago…inflationary deflation? Huh? I know what they meant, but c’mon. I’ll not quibble over this one, however, but would the inverse be ‘hypoStagflation’?

    As for the prognosis of death for Mr. Capitalism, let’s wait for the tests to come back. The deflation is a healthy sign his excess risky behaviors are abating, and his brain cells seem to be functioning in a more rational manner despite the quacks who are prescribing more of what put him into this fiscal psychosis. I’m none too confident that these intravenous tubes pumping ever more diluted dollars into his weakened system is the brightest of ideas considering that’s what got him into this hospital bed. The old hair of the dog strategy isn’t all that successful when dealing with toxic debt syndrome.

    allan (ca61cc)

  18. …while sitting in his unused office a few blocks from the WH, Paul Volcker weeps.

    Dmac (49b16c)

  19. (how different is this from the Solomon amendment which puts conditions on colleges getting federal funds, a provision much applauded by those on the right?).

    There’s a huge difference. The Solomon Amendment didn’t call for the replacement of college deans, faculty, or boards of regents.

    Steverino (69d941)

  20. Yes, steve, that would surely be a boost to market confidence – shafting existing shareholders in favor of “new” shareholders.

    But what happens when the “new” shareholders realize that they may become the “old” shareholders at the whim of a government bureaucrat?

    No thank you.

    Dr. K (eca563)

  21. And but for ‘our’ help, these firms would likely have failed, I have no problem with wiping out shareholder equity, there is no basis for shareholders benefiting because we came to their rescue.

    Steve, if you don’t have a problem with shareholders losing equity on their investments, would you be willing to allow homeowners to lose equity on their homes to avoid spending taxpayer money on mortgage bailouts and refinancing?

    Another Chris (2d8013)

  22. AC: most definitely, they should definitely take a hit, there’s no real difference between someone investing in a publicly held company or investing in a house.

    Steverino: per the joke, once you agree that the guy paying the bills gets to call the shots, all you’re doing is arguing around the edges, there is little substantive difference between using the power of the purse to demand the ROTC gets access, demand that a college not show an R-rated film or limit pay and replace a CEO.

    steve sturm (369bc6)

  23. Steve Sturm: You have just shown a strong reason the founders’ restrictions on government money usage was so wise.

    John Hitchcock (fb941d)

  24. I also wrote a post on my blog saying the feds should not be putting any taxpayer money into colleges in any fashion.

    John Hitchcock (fb941d)

  25. what restrictions? there doesn’t seem to be any.

    steve sturm (369bc6)

  26. Still waiting for that list of examples…

    Dmac (49b16c)

  27. I showed you where to find them, steve. I gave you a link to Congressman Crockett’s statement on my blog. And from there, you can go to the entire 19th century story. You can also find a link to the Constitution there. And the Declaration of Independence.

    John Hitchcock (fb941d)

  28. It looks to me that the Obama administration is abandoning its attempts to stabilize the financial industry and is now engaging in a scorched earth campaign against the industry to try to shore up their popularity among the masses.

    Look to the recession being extended another 6 months to a year by demogoguery like this.

    SPQR (72771e)

  29. You must destroy it in order to save it, SPQR. Simple basic logic.

    JD (28c647)

  30. Is that the local Nazi administrator knocking on the door?

    kazooskibum (a4dd38)

  31. john: you’re missing my (sad) joke, that since the courts haven’t ruled Obama out of bounds then what he is doing must be Constitutional. how many divisions you got to back up your assertion that Obama is wrong?

    steve sturm (369bc6)

  32. Steverino: per the joke, once you agree that the guy paying the bills gets to call the shots, all you’re doing is arguing around the edges, there is little substantive difference between using the power of the purse to demand the ROTC gets access, demand that a college not show an R-rated film or limit pay and replace a CEO

    You’re employing a fallacious argument, and you don’t even realize it.

    Steverino (69d941)

  33. “But what happens when the “new” shareholders realize that they may become the “old” shareholders at the whim of a government bureaucrat?”

    well, presumably Dr K they join you at the barricades.

    “Monsters or Aliens? I am pretty sure the answer is not Taxpayers.”
    Unfortunately, too true.

    EdWood (c2268a)

  34. I’m sure Elizabeth Warren understands that some of the shareholders are the companies’ employees who received their 401K matching in company stock. Wipe them out indeed. What a jerk. Dangerous jerk

    Lily (029c82)

  35. I fear we may eventually become Zimbabwe. And this combined with the cut in our defenses just announced makes me say that the Obama presidency is a disaster of biblical proportions for this country.

    bio mom (a1e126)

  36. Bio mom: I’m not sure what you meant by “[B]iblical proportions” but I believe the statement is quite possibly accurate. As a Christian who believes the Tribulation is as real as WWII, I have had that concern since Nov08.

    John Hitchcock (fb941d)

  37. I wonder what the union honchos who oversee the CALPERS retirement fund think of the their support for the election of Duh-1 now?
    The future and current retirement of thousands of public employees in CA are directly tied to investments in American Corporations through stock and bond investments by CALPERS. What political repercussions will there be when the Administration wipes out all of that equity and value? Is the Administration prepared to assume the responsibility to write those retirement checks, and pay for those medical plans?
    Unintended consequences are always a bitch!

    AD - RtR/OS (37be1b)

  38. AC: most definitely, they should definitely take a hit, there’s no real difference between someone investing in a publicly held company or investing in a house.

    Just wanted to clear that up. I’m sure there are some out there that wouldn’t have a problem with the former occurring, but would be adamantly opposed to the latter.

    If someone is living in the house for the long-term, a temporary loss of equity isn’t a big deal unless one was planning on making immediate improvements to the home and needed the equity to make those improvements. The loss of equity is ultimately going to hurt more of the people who are just looking to flip the house.

    Another Chris (2d8013)

  39. This new PPIC program is designed to allow investors to purchase toxic bank assets using government money. Last week, Treasury admitted that the big banks may also be allowed to participate in this program … as buyers! Collectively, banks will be able to buy each others’ toxic assets for full price, using mostly government money. This plan cannot work.

    Wesson (c1f69b)

  40. Sure it can, Wesson. Teh One proposed it, so it must be brilliant.

    JD (b8d7fe)

  41. No one seems to be spending much time thinking about the customers of these companies. If I were them, I would be thinking about what my alternatives were, who needs to be involved in this much uncertainty. I’ll bet there isn’t much revenue from M&A deals right now, and no new ones coming in the door. If this drags on, there may not be much left to fight over. Mission accomplished.

    Aubrey (f4abf3)

  42. Steve has shown a disturbing tendency to offer no sources to back up his many claims – wonder why that is?

    Dmac (49b16c)

  43. Wesson, you don’t understand Obama proposes to make all the banks rich by trading hats.

    SPQR (72771e)

  44. Steve has shown a disturbing tendency to offer no sources to back up his many claims – wonder why that is?

    He also admitted in another thread that he supports lying and smearing his political opponents. I’d bet the two tendencies go hand-in-hand.

    Steverino (69d941)

  45. I’m just amused at how many bad analogies steve has to make in an effort to defend his losing arguments.

    Seriously though, a few months ago confidence was the big issue and getting TARP money was seen as the Good Housekeeping Seal of Approval. Now that banks have seen all the strings that come along with that government money and the fact that it hasn’t really gained them anything, many are saying let’s give it back, we didn’t need it in the first place. The Obama Administration is saying so so fast fellers, we have to finish our stress testing to make sure you’re solvent enough without the money or replace it with other capital before we let you give it back.

    As Clint Eastwood so succinctly put it in Heartbreak Ridge, it’s just a big clusterfuck.

    daleyrocks (5d22c0)

  46. Dmac: sorry if I didn’t jump right up and respond to your request, I didn’t realize you’d be so pissy about it. and pardon the bluntness, but who the f**k are you to dictate the terms by which I need to answer your question?

    now to the substance of your question, what do you think often happens with bankruptcy? existing shareholders get wiped out and creditors are converted into equity holders. how does this change the underlying fundamentals of the company? (in fact, relieving the company of the debt service improves the fundamentals). you can replace debt with equity, equity with debt and neither affects operational profits.

    steve sturm (3811cf)

  47. I don’t seem to recall Delta’s shares going to zero when it went into bankruptcy. I don’t seem to recall a new set of shares worth something being sold in the marketplace and the old shares remaining as valuable as confederate dollars. Maybe I missed it.

    John Hitchcock (fb941d)

  48. “how does this change the underlying fundamentals of the company? (in fact, relieving the company of the debt service improves the fundamentals).”

    steve – Keep going with that thought. Bankruptcy is better in the long run for the economy than keeping brain dead losing companies alive through government interference. A bunch of these banks should be allowed to fail or be merged out of existence, but the government doesn’t know shit about running or overseeing businesses. Look at how badly they screwed up Fannie Mae and Freddie Mac.

    daleyrocks (5d22c0)

  49. there is a whole spectrum of bankruptcy. some involve a profitable company needing to relieve itself of what it deems an oppressive debt load, others involve unprofitable companies needing to shed contracts and debt while others might involve a company needing breathing room while battling litigation (asbestos manufacturers, for example)… and the specifics determine how much of a bath equity holders take. A profitable company merely needing to restructure debt is going to emerge in decent shape as far as their shareholders are concerned. Delta wasn’t in anywhere near as much trouble as GM, so it isn’t odd that their shareholders didn’t get killed the way GM’s ought to be.

    steve sturm (3811cf)

  50. This weekend I saw Soros interviewed by the Money-Honey, who was not looking at all well, and he told me right out that ‘markets never right themselves and that the bailout was absolutely necessary. He must know something because since the bailout he has earned in the neighborhood of 1.1 billion. A very, very good crisis for him.

    Sigh.

    Dana (d08a3a)

  51. Ahh, so you over-reached then, steve?

    John Hitchcock (fb941d)

  52. over-reached? only if you were reading my earlier comment as a universal , all bankruptcies all the time. I was addressing GM (where replacing the equity does little to change the underlying fundamentals of GM, its profitability – or lack thereof – would only change to the extent interest payments were reduced. sorry for not making it clear (like the boy in Patterico’s earlier posts, I don’t consider how a listener interprets my comments)

    steve sturm (3811cf)

  53. There was no interpretation needed in your earlier statement. You made an unqualified statement of fact and got caught on it. You then had to backtrack. You over-reached.

    John Hitchcock (fb941d)

  54. The whole Obama program has become a sham with the posturing by Obama and Geitner. Its become obvious with their counter-productive chest-thumping and threats that they do not care if the financial system is strengthened. They’ll throw the entire US economy under the bus to protect their worthless hides.

    SPQR (26be8b)

  55. A sharp investor would buy up legacy American automobile make/model brands from these distressed companies. Find someone to put together decent designs, and start re-manufacturing them in the American South or maybe Mexico. You could re-launch cool cars like a retro-look muscle Cutlass 442. Create an electric sports car named Toronado. Wouldn’t an International SUV be pretty cool? How about borrowing technology from Tesla Motors and re-creating the Studebaker Avanti? There must be some latent equity in these brands.

    carlitos (c834bc)

  56. “There must be some latent equity in these brands.”

    carlitos – Get together with Nader and come up with an electric Corvair.

    daleyrocks (5d22c0)

  57. backtrack, clarify, tomato, tomato.

    yeah, you got me, put another notch in your keyboard, I failed to submit my wording to the copy desk before I hit the submit button to make sure I didn’t inadvertently paint too broad a picture, silly me for thinking that readers would read a comment about GM in the context of GM.

    steve sturm (369bc6)

  58. carlitos: there is equity in the brand name, although it is diminished by the perceived lack of quality in the cars GM, Ford and Chrysler have been producing. but you do hit on the key: whoever is making cars needs to make cars that people want to buy and do so at a cost level that allows them to make a profit at the price point customers are willing to pay. Shed the union contracts, dealer obligations, pension liabilities, the CAFE requirements and so on and the Detroit 3 would be nice companies. but since that isn’t going to happen, the only question is how much more taxpayer money gets poured down the drain before the public says no mas.

    steve sturm (369bc6)

  59. Carlitos – I had an Avanti growing up. Such a fun car.

    JD (1653ac)

  60. I’m excited for Geithner as he takes the reins of the economy for Barry. I heard he’s been working with Gore to convert the northern Alaskan slopes from the global warming oil drilling region it presently is to cornfields, with bounties of crops intended for the world’s starving masses.

    And in our own state of Iowa, we’re much further from the oceans so we’re being told to no longer grow corn and soybeans since the government railroads will be too busy to carry our grain to get to African children. Instead, we have been told to plant bananas.

    I’m sure it will all come out well, because as every good Democrat knows, it doesn’t matter what you do. What matters is what you intend.

    HatlessHessian (cca288)

  61. but who the f**k are you to dictate the terms by which I need to answer your question?

    now to the substance of your question

    Awww, Steve’s vewwy angry, how dare of anyone to ask him to back up his broad statements with something as problematic as facts? Which he failed to provide, which was a broad consensus from economists on whether his statement was indeed based on actual facts. However, he provided much in the way of conjecture and heresay, which in his world are kinds of facts.

    Dmac (49b16c)

  62. HatlessHessian, you are actually hitting on one of the biggest challenges we face in the decades to come. Food is going to be increasingly produced long distances from the populations who needs it. We have a couple of billion hungry people living near the equator, and we are creating incentives to convert food to fuel. Or telling Iowans, who can produce corn and soybeans more efficiently than anywhere else on the planet, to plant bananas. This is not a good strategy.

    carlitos (c834bc)

  63. “populations who need” or “population who needs”
    carlitos apparently needs coffee.

    carlitos (c834bc)

  64. Good point, Carlitos – and because of these misguided notions, water will be a huge battleground in the coming years. Many of the poorest countries already have scant natural water supplies, and no plan on how they’re going to serve their exploding populations. I’m actually with many of the conservation groups on this issue – from the Great Lakes to the Nile, the waste of fresh water resources is an ongoing tragedy. And don’t get me started on the current state of our oceans.

    Dmac (49b16c)

  65. Don’t worry DMac, The Africans can drink a nice, long speech full of words about hope and change.

    carlitos (c834bc)

  66. As long as they have fresh Arugula every day, they’ll be fine.

    Dmac (49b16c)

  67. Words of wisdom from the Old West:
    Whiskey’s for drinkin’,
    Water’s for fightin’ over!

    AD - RtR/OS (8d1dbc)

  68. I thought James Bond was all over the water problem.

    Karl (f82126)


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