http://www.huffingtonpost.com/william-k-black/the-audacity-of-dopes_b_165637.html
The Audacity of Dopes
February 11, 2009
by William K. Black
We are being played for chumps. The Bush and Obama plans could only have
been designed by failed bankers -- for their principal beneficiaries are
failed bankers. We already know enough to confirm that the Bush
administration made us the "fool" in the market by massively overpaying
for assets. The Obama administration is about to compound that scandal
with a "guarantee" program. The bankers that caused the crisis designed
both programs. The senior officers at big bank aren't very good lenders,
but they are expert in maximizing their compensation.
Worse, Mr. Geithner, the senior public official who, with former
Treasury Secretary Paulson, designed the failed Bush plan is the
architect of the disastrous Obama plan. Indeed, as the New York Times
has just revealed, it should be called the Geithner plan. He overcame
intense opposition within the Obama administration and designed a plan
that is even worse than the failed Bush program. Geithner's gifts to the
bankers that caused the crisis include: a unnecessary taxpayer bailout
of "risk capital," a massive coverup of their banks' insolvency, gutting
the proposed limits on executive compensation, and devising a
"guarantee" mechanism designed to hide the expenses of the unprincipled
bailouts from the American public. Remember, executive compensation is
not "merely" a fairness issue. Executive compensation and the
compensation systems used for appraisers, accountants, and rating
agencies were designed, and served, to create the perverse incentives
and ethical rot that caused the ongoing financial crises by producing a
"Gresham's dynamic" in which fraudulent and abusive lending and
accounting practices drove good practices out of the marketplace.
Here's the amazing part -- the bankers are so arrogant that they bragged
to a sympathetic CNBC commentator they are playing us:
"What a delicious irony this is--last week, just as President Obama
was publicly bashing the stupidity of the banks ... his economic team
[was] privately begging for input from Wall Street. The administration
was conducting around-the-clock discussions and interviews with senior
Wall Street executives, including many from the same firms he was
theoretically appalled with, about how to fix the lingering financial
crisis. "
There are proven ways to resolve the crisis that are far cheaper and
more effective because they don't subsidize bankers and "risk capital."
We know how to resolve failed banks. The Federal Deposit Insurance
Corporation (FDIC) can place even the largest banks in "pass through"
receiverships on Friday at the close of business and reopen them as "New
Federal" bank Monday morning with minimal disruption to customers and
creditors and retain "going concern" value. This is how the Reagan
administration resolved failed S&Ls during the debacle.
The FDIC appoints a senior manager to ensure that "New Federal" is run
prudently. There is plenty of unemployed banking talent available.
Hundreds of good bankers lost their jobs during the financial bubble
because they refused to make bad loans. Research has shown that its
sister agency, FSLIC, appointed receivership managers that greatly
reduced losses during the S&L debacle. Leaving the managers in charge of
failed banks that they led into insolvency is suicidal. The new senior
leader is picked based on expertise in prudent lending and integrity. If
we want failed banks to return promptly to making prudent loans and help
lead an economic recovery an S&L style "New Federal" is the best
possible device. The existing managers have terrible incentives -- to
cover up existing losses and to make bad or even fraudulent loans that
produce the greatest (fictional) accounting income and to "live large"
through bonuses and perks. (The Obama compensation limits are political
cover. The bankers have designed the "guarantee" plan to ensure that the
compensation limits will be illusory.)
The FDIC managers have the correct incentives to finally produce an
honest evaluation of which assets are toxic and how much they are worth.
This transparency is essential if we are to end this crisis. Under the
Bush and Obama plans we retain the existing managers that have
overwhelming incentives to cover up the losses. The bankers have
designed the guarantee plan to encourage banks to continue to cover up
their toxic assets and not recognize their losses. These cover-ups make
a financial crisis last longer and increase the taxpayers' costs.
The FDIC managers preserve the going concern value by making prudent
loans and get the "New Federal" in shape to be acquired. By providing
reliable information about the toxic assets the managers reduce
acquisition risks, which expands the number of bidders and reduces the
financial assistance required to aid the acquisition.
"New Federal" receiverships dramatically reduce cash needs. Most costs
are deferred until the New Federals are sold.
Pass through receiverships save the taxpayers money and prevent perverse
managerial incentives because they do not subsidize "risk capital" when
banks are insolvent. Common and preferred stock and subordinated debt in
banks are "risk capital." Their holders are supposed to receive nothing
if a bank becomes insolvent, but the Bush and Obama plans reward them.
There is no need to do this. Subsidizing risk capital and maintaining
the failed managers at insolvent banks creates the worst possible
incentives. It will cause future crises. It will delay the recovery from
the ongoing crises. It robs the U.S. taxpayers and primarily benefits
the wealthy -- many of them non-U.S. citizens. The contract they made
was that they would get nothing if the bank failed. It has failed, and
they are often complicit in those failures. The bankers have convinced
the Bush and Obama administrations that the taxpayers should be looted
to bail out risk capital. We should stop listening to the folks that
caused the crisis and have interests hostile to our interests. Let's
stop them from using us as chumps.
---
William K. Black, Associate Professor of Economics and Law, University
of Missouri - Kansas City. He held senior regulatory positions during
the S&L debacle and is the author of "The Best Way to Rob a Bank is to
Own One" (2005)
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