Why Obama won’t axe his economic advisers
The following is a guest post by Joshua Spivak, a research fellow at the Hugh L. Carey Center for Government Reform at Wagner College and a lawyer. The opinions expressed are his own. Trying to draw some direct implications between the country’s economic doldrums and the Obama administration, House Minority Leader John Boehner called for the firing of the administration’s economic team, including Treasury Secretary Timothy Geithner.
Boehner may just be looking to score some easy political points, but he is following in a grand tradition. With nearly every electoral or polling downturn, a president is faced with calls to remove cabinet members and other senior advisors.
Fortunately for Geithner, and for the other cabinet members, Obama certainly knows firing members of his team most likely wont help his or his party’s cause. Cabinet members, who serve as the face for a host of political decisions, are lighting rods for attacks. By calling for their removal, political opponents are able to claim that the president is unable to properly choose or manage his subordinates, and is therefore not qualified for the job.
As past presidents have seen, there is little benefit to having the cabinet member removed. All this action does is open the President, and his party, to criticism for blatant political opportunism and disloyalty for not taking a needed action before an election.
Instead, presidents tend to wait until just after an election to remove Cabinet members. George W. Bush took such action with the canning of his first Secretary of Treasury Paul O’Neill in 2002, just after the midterm elections. Lyndon Johnson took a more indirect route to removing his embattled defense secretary. Johnson got Robert McNamara appointed head of the World Bank, an appointment the relieved McNamara found out about in the morning newspaper.
But Obama should look at one recent example, and one possible counterexample, to see the impact a firing will have for a president. Both sagas starred a president named Bush.
from Commentaries:
Regulators are opaque, too
So much for more transparency in the financial system.
It's hard for regulators to demand greater transparency from Wall Street banks when they can't even live up to their own standard of greater disclosure. A case in point is the Treasury Department's press release touting its decision to permit "10 of the largest U.S. financial institutions" to begin repaying $68 billion in federal bailout money. The only trouble is Treasury doesn't name any of the banks that can begin repaying money to the Troubled Asset Relief Program.
Treasury, it appears, has left it up to each of the "10 of the largest U.S. financial institutions" to make their own announcements about their intentions to repay the TARP. And some, like Morgan Stanley, didn't waste anytime putting out a PR trumpeting its plan to repay $10 billion in TARP money.
Now it's not like this list of banks is any big secret. For weeks now, it's been well-known that Goldman Sachs, JPMorgan Chase, American Express, Bank of New York Mellon--to name a few--were itching to repay the bailout money.
But this is a question of government accountability. If Treasury has made a decision to allow banks to repay TARP, it should tell us which banks it has given the all clear to. Why should it be left up to the banks to tell us? After all, isn't it the taxpayers' money that's being passed around here.
Nor should Treasury officials pass on the names of the banks in so-called "background'' sessions with favorite reporters. The best government is one that is run in the open--not in some closed-door Washington, D.C. conference room.
This refusal on Treasury to do something as simple as print the names of the "10 of the largest U.S. financial institutions" is similar to the same kind of arrogance the NY Fed displayed during the early days of the goverment's bailout of American International Group. The NY Fed, if you recall, refused to provide a list of the banks it was buying rotting CDOs from, in order to retire some $70 billion in credit default swaps that AIG had written on those securities backed by subprime mortgages.
One rule for banks, another for autos
– James Saft is a Reuters columnist. The opinions expressed are his own –
There is one law, it appears, for failing U.S. automakers but sadly quite another for similarly failing banks.
The Obama administration has decided to play hardball with auto firms; rejecting recovery plans from General Motors and Chrysler LLC (GM.N) and warning they could be thrown into bankruptcy. Chrysler, which is controlled by Cerberus Capital Management CBS.UL, has 30 days to complete an alliance with Italy’s Fiat SpA (FIA.MI) or face losing its government funding. GM chief executive Rick Wagoner is out at government request, as will be most of his board of directors in coming months.
This is painful and risky but probably for the best; the auto industry has far too much capacity and both firms have blundered repeatedly, avoiding making hard decisions to improve their competitiveness and products. In short, this is what is supposed to happen in capitalism when you fail.
It is also a huge contrast to what is being done for U.S. banks, where management has generally remained entrenched and where Treasury Secretary Geithner and his predecessor have thrown cheap money and other subsidies at doubtful banks in ever more complicated forms. Most recently, going as far as cutting hedge funds and other investors into the deal under the public private partnership in order to create the illusion of a return to market forces.
If the U.S. administration thinks the auto tough love will make them look like they are taking a hard line with highly compensated executives, they could not be more wrong. If anything it will increase the perception of the divide between how Main Street and Wall Street are treated when they come begging at the public trough.
To be fair, the case against the automakers is pretty airtight. Even given a recovery, which is by no means a sure thing, they may not be viable. The best counterargument, that bankruptcy causes rolling failures among suppliers and that consumers will shun automakers which are in bankruptcy. Those possibilities are hard to measure, and even if true, probably not enough to justify keeping the two on life support for what could be an indefinite period.
Talk about euphemisms: “toxic” assets.
There is nothing toxic about “nothing”, because these “assets” are empty, void, worthless.
But “toxic” sounds nicer.
The Banks themselves are dealing with “nothing” with each other, selling good old “snake oil”.
Geithner’s naked subsidy redefines toxic
– James Saft is a Reuters columnist. The opinions expressed are his own
Treasury Secretary Geithner is all but admitting that U.S. banks are suffering not from market failure but self-inflicted collateral damage.
The U.S. Treasury on Monday detailed an up to $1 trillion plan to buy up assets from banks in partnership with private investors, using financing bankrolled by the government, financing that is only secured by the value of the doubtful assets the fund buys.
One portion will be dedicated to buying complex securities from banks employing capital contributed by private investors and the government topped up with funds borrowed from the Federal Reserve. A second portion will buy older securities that are, or were, rated AAA, using, you guessed it, more non-recourse funding.
But most interesting of all is a plan to buy whole loans, dubbed “legacy loans”, from banks but this time the private-public subsidized vehicle will get its leverage courtesy of Federal Deposit Insurance Corporation-guaranteed debt.
Notice that the ground has shifted subtly and the government is now talking not just about “toxic” assets but “legacy” ones. A legacy asset is, more or less, everything real estate related now on bank balance sheets.
These loans are not marked to market they are held to maturity, so no blaming the market here. They are nothing more than doubtful loans in the process of going bad as the economy implodes and the real estate they are collateralized with drops in value.
If executive compensation limits would prevent these big institutions from participating, perhaps they don’t deserve taxpayer funds. I’m sure there are lots of community banks and lenders who would love to have access to those funds even with compensation limits.
What if the institution is too big to fail? Perhaps the market will find buyers for whatever is left over, and life would move on. Not everyone was irresponsible, so there will definitely be people with the capacity to pick up the pieces, and perhaps they deserve to be given a chance.
A show trial for AIG?
– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. —
Republicans and Democrats in Congress, along with President Obama and Treasury Secretary Geithner, have been raking AIG over the coals in hearings and speeches for paying employees bonuses totaling $165 million. But today’s Los Angeles Times reports that the Treasury Department specifically agreed to the bonuses in a 586-page agreement signed on November 25. The deal allows AIG to pay out bonuses for the 2009 year that equal bonuses paid for 2007.
It stands to reason that the contracts to pay bonuses would have been known to Treasury officials a half-year ago, when they reviewed AIG’s financial position before funneling $85 billion into the firm to prevent its collapse. Basic due-diligence scrutiny of the firm’s books would have revealed the contractual obligations to make bonus payments to retain talented staff. What is puzzling is why the administration pretends not to know.
According to documents from AIG, the bonuses are compensation owed to employees under Connecticut law. Under the Connecticut Wage Act, the company said, if the bonuses are not paid, AIG becomes liable for legal costs of employees who try to collect, as well as penalties that could equal twice the bonuses owed. AIG might also leave itself liable to shareholder suits.
Despite the show trial in Congress and the sense of public outrage, it would be unwise for the government to go back on the contracts and sue to recover the money, especially when they agreed to it in November. This could make America resemble Russia, where trumped-up charges are used to prosecute companies that fall out of favor with the ruling elite.
Members of Congress are also discussing emergency legislation to tax away part or all of the bonus. This would set a precedent—corrupting if not unlawful—of using the IRS and the tax code as weapons of the state to go after individuals whom the administration and Congress want to punish. Such sanctions might amount to ex post facto punishment, legislation that makes unlawful behavior that was lawful when it occurred. The Constitution prohibits such legislation. Even President Nixon, who had an enemies list, never dreamed of this.
The wave of public sentiment against the AIG bonuses presents the government with a choice. It can try to run companies that receive bailout funding in a way calculated to win public approval, micromanaging every detail. This is impossible, because the government cannot even manage its own federal agencies efficiently, with episodes of wasted resources surfacing regularly.
First AIG is to big to fail. The economic fallout we were told would be a disaster. Now we are told AIG has to be shut down for the same reason. The Secretary of the Treasury asked Congress to give him that very authority. Congress is likely to comply. It is clear no one in government knows what they’re doing. Or at least they are giving that impression. What is more disturbing is the steady usurpation of Congress’ Power to the Fed and the Executive branch. The parallels to Ancient Rome and her Senate are haunting.
Where is Cicero now?
Nationalization by autumn, bank on it
– James Saft is a Reuters columnist. The opinions expressed are his own –
Like it or not the United States will be forced to nationalize large swathes of its banking system by the time the leaves fall from the trees in Washington.
The tragedy is that we will have to wait that long and that the costs will mount.
The plan to rescue the banks, or, er, the people, as enunciated by Treasury Secretary Geithner, is no plan, only an apparent set of contradictory principles: an ideological one not to nationalize and a political one not to subsidize too obviously.
The plan will fail unless the administration comes out in favor of either subsidy or seizure of failing banks. Either the United States will be forced to nationalize when that becomes apparent or perhaps it is waiting until that failure makes nationalization more politically palatable.
In either event, it is a terrible mistake and the cost will only grow, both in direct terms for taxpayers and more broadly for the growing number of people with too little income to pay tax.
Geithner laid out a plan to apply stress tests to large banks and require those that do not pass either to raise capital (from whom exactly, I hear you ask) or to accept an injection of convertible securities from the government on terms that have not been defined. Banks that take government coin will have limits placed on their compensation and other actions.
I think you are wrong. What you miss is that the market in distressed or toxic assets will come to life and the values will start to rise. This happens if and when the number of foreclosures can be reduced and credit becomes available for those who wish to buy property. Once the real estate market hits bottom, distressed asset values rise, balance sheets firm up and the economy improves rapidly. By the end of this year, what we now call toxic or distressed assets may actually become desirable again and banks that own it attractive.
Fire the GOP in Congress. The conservatives broke America. They should go sit in the corner until 2050.