No Credit-New Yorker

Timothy Geithner's financial plan is working--and making him very unpopular.

John Cassidy

15 March 2010

During the past 10 months, US banks have raised more than 140 billion from investors and increased their reserves to cover unforeseen losses.

• Virtually all of the big banks (Bank of America, Wells Fargo, Goldman) have paid back the money borrowed from taxpayers.
• Treasury Department estimates the ultimate cost of the financial bailout to be 117 billion and much of it related to propping up GM and Chrysler, which is less than it cost taxpayers during the Savings and Loan implosion from the early 90s.
• When Obama came to office, Bush administration had already committed 230 billion dollars of taxpayer moneys to big banks, which Giethner as head of the NY Federal Reserve bank helped to enact.

American Recovery and Reinvestment Act of 2009 - 787 billion stimulus program

• Tax Cuts.
• New Spending Projects.
• Financial aid to states and individuals affected by the recession

Fed would purchase one trillion dollars worth of Treasury Bonds and mortgage securities--a move designed to bring down long-term interest rates, particularly for mortgages

Financial Stability Plan

• Public / Private investors would buy toxic assets and troubled loans from the banks.
• If the new funds did well, the private investors would share equally, if it went bad, the government would assume most of the losses.
• In the end banks were reluctant to sell their assets because they would have to admit a loss

Bank Stress Test - Government performed scenarios to see if banks could withstand severe recession.

• Undercapitalized banks would have to issue more stocks to investors or accept more government funding and more government control.
• The point was to bolster a bank's finances rather than nationalize them.

Richard Bove (Analyst at Rochdale Security)

• Calculated that US banks now have more capital as a percentage of assets in any year since 1935

Signs of Recovery

• Between March 9th and May 7th, when the results of the stress test were announced, the Dow rose by almost 2000 points
• Decline of house prices slowed.
• Fed began buying mortgage bonds.
• Congress started to disburse stimulus funds.

Larry Summers

Today with all of the major financial institutions having a market cap of more than 100 billion dollars and the economy growing again, the judgement not to nationalize, but to put an enormous emphasis on raising private capital looks to have been effective.

The Bonus and The Windfall Tax

• Last December, Geithner refused to follow the British government in advocating a windfall tax on bank bonuses because the Treasury Department advised him that the AIG bonuses couldn't be abrogated without breaking the law.
• An alternative bank tax was proposed in which big banks that expanded their balance sheet would pay more--this ended up raising more money than the windfall tax.

Financial crises have a way of revealing aspects of our economic system that otherwise would remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms receive from the Fed, and the fact that vast profits from JPMorgan and Goldman depend in part on an implicit guarantee from the tax payer.

Why do policy makers screw up financial crises?

They screw up because the politics is horrible and that deters action. They are slow and late and tentative and weak because they are scared to death of the politics.