Will Obama get tough on banks?: The Swamp

Posted February 11, 2009 9:01 AM

by Frank James

Simon Johnson, the Massachusetts Institute of Technology economist whose Baseline Scenario blog is one of the best-read on economics, asks a key question regarding Treasury Secretary Timothy Geithner's plan to revive the credit markets. Does it adequately crack down on bankers who helped create the financial mess? The answer right now is who knows?

An excerpt:

When you cut through the technical details and the marketing distractions, sorting out the US banking fiasco comes down to one, and only one, question. How tough are you willing to be on the people who control the country's large banks?

One option is to be gentle with them and adopt only ideas that they pre-approve. This route involves complicated schemes to purchase, lend against, or otherwise "wash" toxic assets out of the banks using taxpayer subsidies. This will be expensive (for the taxpayer), messy politically, and - most likely - will not work, in the sense of restoring the banking system to something close to its normal mode of functioning; check with Hank Paulson for details.

Alternatively, you can be tough and take steps towards really assessing which banks are insolvent when you use market prices to value their assets. These banks can be taken over in a scaled-up FDIC-type procedure (no golden parachutes!), and controlling stakes in fully recapitalized banks can be sold off immediately to new private owners. The new private owners can handle, under proper anti-trust supervision, the break up the banks. This approach will be cheaper for the taxpayer (but nothing is free at this stage), easier to explain to the electorate and their representatives, and it will work - this is in fact the standard prescription because it always works. But it will not make powerful bankers happy.

So which way is the Obama Administration heading? We honestly don't yet know; the signals are mixed.

If the Obama Administration wants to keep the hearts and minds of American voters, its best course would be to administer the type of harsh justice to bankers which Johnson spells out.

That would make a lot of people angry on Wall Street, including some Democrats who have been strong supporters of the Democratic Party generally and President Obama specifically.

But it would not only prove popular with the vast majority of the electorate, it would also create a higher likelihood that injecting more money into the nation's banks would actually be effective since, as Johnson says, banks would be forced to reveal their true financial situations.

It's the lack of transparency now between lending institutions that has contributed hugely to the frozen credit markets.

Comments

Probable go easy after Congres Porked up the stimulus Bill.

Posted by: Inky | February 11, 2009 9:27 AM

Obama get tough on banks?
Doubtful.
He's not supporting Leahy's call for a South African style Truth and Reconciliation commission.
BUT WE CAN ASK HIM TO.

He's letting corporations who (they're people--the corporations) kidnapped Americans get off scott free.
http://aclu.org/safefree/torture/38695prs20090209.html

Posted by: JOIN THE ACLU--TELL OBAMA YOU KNOW THE CONSTITUTION IF HE DOESN'T | February 11, 2009 9:32 AM

If he does not get tuff on bad banks, he risks some serious revolt from general America. This is how uprisings and rebellions get started.

Posted by: Xcellentform | February 11, 2009 9:55 AM

I read what seems like a pretty well thought out plan for banks that are holding ( but not telling anyone) the infamous toxic assets...

Seems like a win-win taxpayers get actual ownership of banks, instead of nationalizing them...since they (we) are buying them anyway..

Toxic assets get out of the mix until there is a market for them...

And the banks that have been mismanaged get new leadership and new board of directors...

http://online.wsj.com/article/SB123431465155370931.html

Posted by: heartburn | February 11, 2009 12:02 PM

heartburn....Don't you think it would be better to have the banks renegtiate the toxic mortgages? Bank still get income from mortgages....banks don't need to sell at auction for 30% of value.......people get to keep their homes......just asking...

Posted by: bill r. | February 11, 2009 12:12 PM

I do - and I think that is part of the Kessler plan... toxic assets held while new management, board(s) of director and oversight is introduced to the sytem... normal credit markets can start working again and then the bad loans can be reintroduced by the banks with full disclosure to the market..

Posted by: heartburn | February 11, 2009 1:34 PM

heartburn....I think we missed the boat on the renegotiating idea. The way I understand it......the notes have been bundled and sold so many times.....they have a really hard time figuring who holds the notes anymore. This is also causing problems when they try to foreclose...many now stay in that home and demand to see the note which can be hard to produce. I will read that Kessler plan and give it some thought.

Posted by: bill r. | February 11, 2009 2:13 PM

"....the notes have been bundled and sold so many times.....they have a really hard time figuring who holds the notes anymore. This is also causing problems when they try to foreclose...many now stay in that home and demand to see the note which can be hard to produce. "

Bill R,
It just gets weirder and weirder.

Posted by: C.Morris✈ | February 11, 2009 3:48 PM

Bill R,
It just gets weirder and weirder.

C.Mo......It's as if idiots have run the banks for the last several years. 1st they abandon good lending practices...then when the poop hits the wall....they think foreclosing is the best way to go instead of negotiating a better deal for all.

Posted by: bill r. | February 11, 2009 4:31 PM

Got to get tough on those bankers and their entitlement mentality, always looking for handouts, looking for someone to clean up their mess.

Posted by: mort | February 11, 2009 4:33 PM