James Pethokoukis

Politics and policy from inside Washington

TARP and the 2010 election

Sep 22, 2009 17:40 UTC

The following quote is from a Democrat, Rep. Peter DeFazio, but I would not be surprised to hear a lot of GOPers say a similar thing on the campaign trail (via The Hill):

The view of the Larry Summers crowd down at the White House that has the president’s ear is, ‘What a tremendous success — everyone at Goldman Sachs is getting a $700,000 bonus this year, so it’s working,’ ” said Rep. Peter DeFazio (D-Ore.), a consistent critic of the Wall Street bailouts. “If your total focus in life is enriching a few people on Wall Street and protecting their assets, it’s working. If your focus is jobs for Americans and their assets, this whole thing has been a disaster.


Would be curious to see how he voted, or if he even read it, as he was passing it into law…

This kind of political posturing is why there can never be any real debate in America, because it’s not what politicians think, it’s what they think they can win on.

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Did Romney flip-flop on TARP?

Sep 21, 2009 14:43 UTC

OK, here is what the front runner (at least according to the online betting markets) for the 2012 GOP nomination said at the Value Voters summit over the weekend:

When government is trying to take over health care, buying car companies, bailing out banks, and giving half the White House staff the title of czar – we have every good reason to be alarmed and to speak our mind!

Now that does sounds like a repudiation of TARP. And here is what Mitt Romney told me in March:

The TARP program, while not transparent and not having been used as wisely it should have been, was nevertheless necessary to keep banks from collapsing in a cascade of failures. You cannot have a free economy and free market if there is not a financial system. … The TARP program was designed to keep the financial system going, to keep money circulating in the economy, without which the entire economy stops and you would really have an economic collapse.

Now that does sound like an endorsement of TARP.  If Romney liked it then and doesn’t like it now for policy reasons, I think that is OK. But if that is the case, he should explain is reasoning and change of mind.

Of course, the cynical explanation is that Romney now realizes that among many conservative GOPers, endorsement of TARP is almost a disqualifier for the 2012 nomination. So he is trying to muddy his support a bit. Probably the best way to approach it is to say that while TARP was better than doing nothing, there were better alternatives — asset auctions, debt swaps — that should have been planned for after Bear Stearns and executed. In any event, his criticism of TARP is fairly mild here — though it certainly does raise the issue of serial flip-floppery.


“When you think of Mitt Romney, you think of someone who is steady, focused and competent.”

I approve of that comment.

As for flip-flopping, this sounds like a case of headline-baiting. Are you a journalist or a seller of headlines?

Thanks for the contrast, however. In both cases, Mitt showed his intelligence and ability to communicate economic intricacies other candidates (and the President) can’t.

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Two cheers for Goldman Sachs

Jul 20, 2009 20:18 UTC

The PR folks working for Big Oil have to be breathing a sigh of relief these days. All the populist outrage that is usually spewed at the Exxons and Halliburtons of the world is being  redirected at Goldman Sachs — and its gleaming, glittering $2.7 billion second-quarter profit amid the wreckage of the American financial system.

The specific charge is that Goldman is supposedly making big profits via risky trading activities financed, in effect, by Uncle Sam.  Two pieces of evidence here: First, Goldman’s Value-at-Risk measure, a much-debated way of calculating daily losses, has  been steadily increasing.

Second, Goldman is benefiting from several government interventions and programs — such as the guarantee of its debt, an ability to tap the Fed’s discount window and its implicit too-big-to-fail status — that give it access to supercheap capital (thus the snarky nicknames “Government Sachs” and “Goldie Mac”).

To those who hate Goldman as a symbol for modern capitalism, that evidence is merely a current reaffirmation that the firm is a “great vampire squid wrapped around the face of humanity,” as a recent Rolling Stone article put it.

Rather than an example of succubus capitalism, a more reasoned and clear-headed analysis would see Goldman’s government-enabled success as a market distortion caused by an unprecedented government intervention into the private economy.

And to the extent that such fat profits would not exist without government and taxpayer backing, what should be government’s response to the distortion? New regulations to limit trading activities, perhaps, or a bailout tax paid by Goldman and other TBTF firms (We’re looking at you, JPMorgan.)

Then again, maybe what’s necessary is to remove the distortion. This is all so reminiscent of the constant worrying by good-government types about the influence of lobbyists and campaign cash on the political process. The usual suggested remedy is limits on political donations, whether in the form of cash or cash-in-kind such as independently produced political advertisements.

Of course, lobbying government is a rational response when government can tax, spend, regulate and subsidize this or that business activity to the tune of trillions of dollars every year. (Now there’s your vampire squid.)

So why not try an alternative response: Shrink government largess and power, thus reducing the need and incentive to influence it with campaign cash.

Goldman plays the lobbying game. During the 2008 campaign, the company (via its political action committee and employees) donated just under $1 million to the Obama campaign and just under a quarter of a million to the McCain campaign. And right now, it is unapologetically playing the bailout game, too.

It’s also worth keeping in mind that to some extent Team Obama wants banks to play the game, to take advantage of  government financing (as well as the Fed’s zero interest rate policy) to earn their way out of trouble and avoid nationalization or further direct federal financial aid needing congressional approval

Of course, if Goldman is out of the woods and acting more like a hedge fund than a bank, then perhaps it should be stripped of bank status and cut off from all government aid, as Charlie Gasparino of CNBC has suggested.

Yet even then, Goldman will still benefit from the implied TBTF guarantee. So one possible solution is to end that market distortion by preventing financial institutions from getting big enough to need rescue. Even better would be to end market expectations of government rescue, though that doesn’t seem likely under the current administration, which has embraced the TBTF policy by advocating the creation of a systemic risk regulator to monitor such firms.

Yet even then, Goldman, thanks to its huge role on Wall Street and Washington, is likely to be a popular target for populists across the political spectrum. What academic Bernard Lewis has said of the West also seems true of Goldman: “It is not possible to be rich, strong, and successful and be loved by those who are none of these things.”

Oh, and if Goldman is capable of generating bubbles, as the Rolling Stone article suggests, it might want to gin one up in oil and get people agitated about Big Oil again.


I would be interested in hearing the specifics of what exactly the government created market distortion Goldman is profiting from and why Goldman is unique in their ability to profit from it.

Would America have collapsed without TARP?

Jul 16, 2009 15:21 UTC

A fascinating exchange just occur ed during Hank Paulson’s testimony on Capitol Hill about the Bank of America-Merrill Lynch merger. (Paulson admitted in his testimony that he more or less threatened Ken Lewis with dismissal if Lewis scuttled the deal late last year.)

Rep. Kanjorski, a Pennsylvania Democrat, pushed Paulson hard to clearly state what would have happened to the nation’s financial system and to America without the TARP. Kanjorski related a incident where another Treasury official had told that a “return to the 16th century” was an optimistic scenario.

Paulson wouldn’t take the bait, though he did say that unemployment would be far worse than the numbers we are talking about today. And he also related a cryptic conversation with German officials where it seemed that they were hinting Germany would dissolve back into East and West Germany. Or something like that. ( Paulson and Bernanke did brief congressional leaders last fall and told them the financial system would shut down.)

Oh, and another Dem on the panel, Stephen Lynch of Massachusetts, said Paulson knew all along that TARP would involve capital injections rather than the purchase of toxic assets. Basically he called Paulson a liar.

TARP repayment: Letting banks ‘slither’ away?

Jun 10, 2009 16:50 UTC

This gem from author and former investment banker William Cohan (via PBS NewsHour):

But I think we do need to restructure the entire architecture of the financial system while we have the opportunity. And letting these banks get out of the TARP and slither away from the grasp of the government at just the moment when we need to restructure the banking system is not wise.

Me: Does Cohan realize there are plenty of Treasury Department openings? Circulate that CV!

More bank stress tests an unnecessary sequel

Jun 9, 2009 18:49 UTC

Elizabeth Warren, chair of the TARP oversight panel, must not be on the White House email list. Is she was, then surely she wouldn’t be recommending that the U.S. government rerun its controversial “stress tests” on the nation’s largest banks. Warren rightly notes that the current 9.4 percent unemployment rate already exceeds the test’s 2009 worst-case scenario of 8.9 percent and is bearing down hard on the 2010 worst-case rate of 10.3 percent. “We have not actually broken through the worst-case scenario, but let’s face it, the numbers are bad and they’re heading in the wrong direction,” she told the Joint Economic Committee of the U.S. Congress.

Yet the White House message team would have us believe that the jump in unemployment is actually not-so-terrible news since a) the jobless rate is a lagging economic indicator, and b) one reason the number rose so sharply last month was because more folks are getting off the couch and actively looking for work. If the labor force had stayed steady, the unemployment rate would have been 8.7 percent.

Of course, the U.S. economy is still hemorrhaging jobs — 345,000 last month — and many analysts think the bleeding will continue. The Federal Reserve Bank of San Francisco, for instance, forecasts unemployment near 11 percent next year. But it’s not as if Team Obama doesn’t know this. And when you factor in that certain awareness with its willingness to let banks replay $68 billion in bailout funds (“A sign of health of the financial system,” said Obama adviser Austan Goolsbee), it’s reasonable to conclude that the White House has run its own informal, updated stress tests and already calculated that the worst-than-expected economic conditions won’t force those institutions to return for more taxpayer dough. That is a scenario Obama is eager to avoid.

Yes, rising joblessness will mean more bad loans to individuals. And commercial mortgages don’t look so hot either. But the super-steep yield curve is great for bank earnings, as is the relaxation of mark-to-market rules. Moreover, the case for new stress tests is no less dodgy than the case for the original ones. Remember that when Treasury Secretary Timothy Geithner announced the tests back on Feb. 10, the Dow Jones industrials fell nearly 400 points as investors interpreted the move as a prelude to bank nationalization. Instead, they turned out to be a poorly executed exercise in investor relations to show Uncle Sam proactive in dealing with Wall Street. Pass-pass instead of pass-fail with many key financial details unavailable to the public. (“Show us the spreadsheets!,” said banking analyst Bert Ely of the lack of data granularity.) The market didn’t fully recoup its losses until early May.

Rerun the stress tests? That really would be heading in the wrong direction.


Let’s imagine how a modern writer-employee/news-boss meeting plays out at a typical major news organizational today.

Boss — you know, it would really be in the best interests of your career here if you took the view of our owners into account when you write your stories.
Writer-employee — Ahhhh… I understand completely (i.e. I need a steady income ’cause I’ve got all these bills and new news gigs aren’t a happening. Therefore, I’ve no choice but to toe the line and write to company line).

Could it be any less apparent what’s happening?

Reuters…you RUIN any credibility you once had when you do “hatchet” jobs such as this one.

Elizabeth Warren seems to be a singularly honest & competent person. As such, I imagine she’s a real burr in the side to many in the U.S. government.

Government in turn lets it corporate backers know it’s intent on who should be denigrated so as to remove them from public view. And thus…this pressure builds where character assassination is taking place.

SHAME on you Reuters for crumbling to the pressure.

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More stress tests for the banks?

Jun 9, 2009 14:40 UTC

The TARP oversight panel, led by medical bankruptcy alarmist Elizabeth Warren, thinks it’s about time to redo the strest tests. Just talked to banking guru Bert Ely about this. He had a number of objections including a) allowing the repayment of$68 billion TARP money probably means the government is already factoring in worsening economic conditions , b) it raises the possibility of reigniting investors anxiety, and c) it continues the politicization of the bank via government control. To what end? To keep the banks under the thumb of Uncle Sam and influence lending. If you control credit allocation, you control the economy.