Take GMAC Down

The big news, really, is that GMAC needs $11.5 billion (and will need $4 billion more if it takes on Chrylser financing).  Can you think of anyone who would loan GMAC $11.50 right now, not to mention $11.5 billion?  Who should they even ask?  Well, I can think of one guy.  Can you guess?

OK, him too, but I’m not allowed to blog about Tim Geithner anymore, am I?  Keep guessing.

Getting warmer, but who knows if he’ll be able to stay awake long enough to count out the money (which, yes, he might have on hand). 

You don’t even know who that is, do you?  It’s OK; you’re not alone.  Hint: It’s Gary Locke.  He’s the Commerce Secretary.

Give up?  The auto task force guy with the power of the purse on this one might actually be this guy:

That’s Steven Rattner, the Car Czar.  Not really sure why he’s so far in the back during this Shame on You Chrysler Lenders speech, since he’s apparently the guy who fired Rick Wagoner at G.M. and heavily rumored to be the guy who told Chrysler’s non-complying creditors the White House would destroy them if they didn’t cooperate.  (He’s also, according to that first link, the guy who’s eyeing Tim Geithner’s parking space at Treasury — or at least was before his own possible scandal popped up).  Rattner is also the guy who will be poring over G.M.’s you-have-60-days-to-get-it-together filing, which is due at the end of this month.

Also due 30 days from now (June 8, to be precise)?  A plan from each of the banks listed above that needs to raise capital about how, exactly, those banks plan to raise that needed capital by November. I’m guessing GMAC’s plan can be summed up in two words: Government bailout.

So my thought is this: How can GMAC make any kind of plan without including the viability of GM (and Chrsyler, for which it might be taking up sales financing for) in its plan?  And if it includes those pieces of the puzzle, doesn’t that make Rattner the point man?

This seems like a good thing. Rattner’s the one who spear-headed the Chrysler effort, which ended, you may remember, with not much government concession to bondholders.  Rattner has shown that he’s willing to see a car company fail.  It can’t be that hard for GMAC to imagine that he wouldn’t mind watching a car company’s finance wing fail, too.

And though Treasury has said that they will support GMAC as needed, I’d guess that’s a reassurance meant more for its counterparties than for GMAC itself.  This is a bank that probably needs to go into receivership.  It’s a bank that, as Floyd Norris writes, “concluded, disastrously, that a good way to offset possible losses on auto loans was to get into mortgage lending.”  Going forward, what are the prospects for GMAC to revive?

I’m not convinced that a GMAC failure would be the same systemic threat that a failure of Citi or BoA might be.  First, I don’t think it would send a confidence shock through the system if GMAC went down — in fact, I think it’s more shocking that it’s being allowed to stand.

Second, GMAC does provide financing for dealerships to buy new inventory, and then provides financing for customers to buy that inventory — but if a contraction in that particular market is going to happen anyway (and it certainly seems it will, as part of Chrysler’s bankruptcy deal will include dealership closings), why not just hand GMAC off to the FDIC now?  Why not call this bank, and all of its attached pieces, a failure?

If anyone’s going to have a come-to-Jesus meeting with this bank, Steven Rattner seems like the guy to do it.  He’s probably got the clearest picture of GM’s predicament right now, and I hope that qualifies him to deal with their semi-detached financing arm, too.

Stress Testes of Steel

I cannot explain how much I love that headline, and how hard I’m going to work to make it relevant.  So the stress test results [.pdf] came out yesterday, and revealed that, while none of the banks are currently considered insolvent, several of them could go that way if the government’s “more adverse” scenario of unemployment hitting 10.3% comes to pass.  So they’re asking 11 bank-holding companies to raise capital to meet their preferred “cushion” level.  Here’s the summary of who needs what, in billions, as per the Wall Street Journal’s colorful front page:

Bank of America: $33.9
Wells Fargo: $13.7
Citigroup: $5.5
GMAC: $11.5
Regions Financial: $2.5
SunTrust: $2.2
KeyCorp: $1.8
Fifth Third: $1.1
PNC Financia: $l .6
Morgan Stanley: $1.8
J.P. Morgan Chase, BB&T, Capital One, US Bancorp, MetLife, Goldman Sachs, Bank of NY Mellon, American Express, and State Street: $0
Having six months to raise new, private capital: Priceless.

Let me highlight the surprises:

• Wells Fargo needs quite a bit of funding to be adequately cushioned against any further decline in the economy.  The predictions for Wells are already being called overly optimistic by some, because Wells — like several of the passing institutions — is heavily invested in real estate that may go further south than the government’s prediction.  
• Capital One is not on the needy list — let’s hope credit card defaults don’t surpass the government’s more adverse scenario numbers (18-20% losses).
• The Citi number seems low — until you realize that they need to raise $5.5 billion IN ADDITION to the $45 billion from the government that they just converted to common stock and the $3.4 billion it just sold Nikko for.  So put them down for $50 billion and change.
• GMAC suuuuucks.  I’ve got another post on that one coming later, though.

So, what do you do, the day after the government tells everyone that you aren’t sufficiently capitalized to survive a 1.4 percent rise in unemployment?  If you’re Wells Fargo and Morgan Stanley, well, you use that encouraging news to raise $7.5 billion each today:

In the capital-raising exercises, Wells Fargo sold $7.5 billion of common stock; regulators had ruled it needs to fill a capital hole of $13.7 billion.

Morgan Stanley raised $8 billion by selling $4 billion in common stock and $4 billion in bonds. It increased the total amount it raised compared with its initial plans by $3 billion because of strong investor demand, it said. Regulators had declared that the investment bank needed to raise money to fill a $1.8 billion hole.

Here’s my question — who bought those public offerings?  Friends of Bernie Madoff?  The Morgan Stanley results show that 45% of their expected loan losses are in Commercial Real Estate Loans, a category in which we aren’t even close to the bottom of the market — but their overall.  They did, however, manage to raise $6.5 billion last quarter, and their overall exposure to bad parts of the market is much slimmer than most.

But how bad did people think this was going to be that the news that Wells Fargo’s adverse-case-scenario losses will be $89.6 billion made Wall Street happy?  Shares were up 3.4 today (13.8 percent) on the news.  What?

I’m glad that there’s private capital to be found to shore up these banks, because it does mean that less government money will be needed.  But the sheer, amazing balls of these guys, to use a report of “it’s not as bad as we thought!” to raise billions of dollars — it certainly reminds us that nothing’s really changed on Wall Street in terms of risky behavior.

New York Fed Chair Stephen Friedman Resigns: About Time

The chairman of the board of the Federal Reserve of New York, Stephen Friedman, resigned today — a resignation doubtlessly timed to coincide with the much bigger news of the day, the release of the stress test results.  (I’ll get back to those in a bit).  Though he had earlier announced his intention to resign at the end of the year, he moved the date up as criticisms of his overlapping role at the Fed and on the board of Goldman Sachs have mounted.

The Wall Street Journal ran an A-1 story this week that started thus:

The Federal Reserve Bank of New York shaped Washington’s response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.

During that time, the New York Fed’s chairman, Stephen Friedman, sat on Goldman’s board and had a large holding in Goldman stock, which because of Goldman’s new status as a bank holding company was a violation of Federal Reserve policy.

The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They’ve since risen $1.7 million in value.

Mr. Friedman also was overseeing the search for a new president of the New York Fed, an officer who has a critical role in setting monetary policy at the Federal Reserve. The choice was a former Goldman executive.

The WSJ has been putting up new pieces every day as criticism of Friedman’s moves has mounted.  He’s not a bad target.  He’s purchased more than 50,000 new shares in Goldman since the bank came under Fed regulation last fall, and never mentioned any of those purchases to the NYFed.  His claims that he saw “no conflict whatsoever in owning shares” is at best self-deluding and more likely disingenuous.  Whether or not Friedman was involved in day-to-day decision making at the Fed — and his spear-heading of the search for a new president certainly makes him seem very involved — as a Class C director, appointed to represent the public, holding shares in any bank or bank holding company seems like a dangerous contradiction.

Now, it’s true that Friedman wasn’t initially in conflict with Fed policy — only when Goldman became a bank-holding company, instead of an investment bank, did he come into explicit conflict with the rules, and at that point the NYFed lawyers sought a waiver.  In January, they concluded he hadn’t broken any internal rules — and even in the statement released by the NYFed, the general counsel says “these purchases did not violate any Federal Reserve statute, rule or policy.”

Which makes it seem all the more important that those statutes, rules, and policies get changed. 

Though Friedman showed some terrible judgment here, the other villain of this story is whoever in the Washington, D.C. Fed offices decided to grant the waiver that allowed Friedman to continue in his conflicting role.  The defense that the NYFed has mustered so far for keeping Friedman around is that his leadership was necessary because the NYFed was already functioning without a president, after Tim Geithner became the Treasury nominee in November.  If that was true — if Friedman was so valuable to the company — then the company should have worked harder to convince Friedman to sell of his shares and resign from Goldman.  Instead, they chose to grant a waiver to a rule that, really, is a pretty reasonable rule, one that’s built to arm against exactly the kinds of conflicted decisions that seem to have been made here.

The WSJ reports that many of the other 11 regional Fed banks already have or are supportive of changing and clarifying the rules.  I hope that’s true.  Until then, it falls upon the Wall Street Journals of the world to find this stuff out and push for change — and we may be destined to see the resolution of the problem coming, as it did in this case, too late.

A Hot Wheels Primer to Chrysler Bankruptcy Day

Remember Hot Wheels?  I used to have a few, many of which I raced and then crashed off the roof of my Barbie dream house.  They were great, simple toys, and they were even better because they were such exact replicas of the real versions that there was a certain satisfaction in playing with them.  It made me feel like I really understood cars.  I didn’t, of course, but it did offer some insight into the basics: for instance, don’t drive a car off the roof.

I think Hot Wheels cars can be useful again for getting a surface understanding of the Chrysler deal.  Specifically, the Dodge Viper:

It glitters!  Ah, the good old days.

Anyway.  As you may remember, today (April 30) is the deadline for Chrysler to return to the government with a viable restructuring plan.  If it does, it gets a cookie — in the form of about $8 billion in additional government financing to see it through.  If the plan is unsatisfactory, Chrysler heads to bankruptcy.

The good news from this week and weekend is that Chrysler managed to get a Treasury-approved deal worked out with the United Auto Workers.  The New York Times reports that members approved on Wednesday “a complex deal that changes work rules, cuts benefits and gives the union a 55 percent stake in Chrysler as partial funding for its retiree health care trust.”  A deal with Fiat is expected to be signed, well, right now, or by tomorrow, that will offer Fiat a 20 percent stake up front, with management control, and a possible expansion to 35 percent equity going forward.  Welcome to the new Chrysler:

But though the UAW has agreed to this deal, and Fiat seems on the verge of agreement, the whole thing is being held up by Chrysler’s lenders.  I wrote about this earlier, when the Wall Street Journal reported that J.P. Morgan Chase was leading the charge not to forgive any of Chrysler’s debt.  Well, now it turns out that JPMC and the other three largest lenders to Chrysler have agreed to take a significant cut in what they’re owed.  Here’s what’s currently outstanding to lenders at Chrysler:

That’s a total of $6.9 billion.  The Treasury Department has worked out a deal where the lenders — all 46 of them — would get $2.25 billion, cash, in exchange for relieving Chrysler of its debt.  That means the four biggest debt-holders would see a $1.5 billion return on their $4.8: a total loss of $3.3 billion.  The other lenders would see $350 million on their owed $1.1 billion — a total loss of $750 million.

And yet it is these smaller lenders that are holding up the process, not the four big banks.  Why?  As the Wall Street Journal and Felix Salmon tell it, the big banks bought Chrysler debt at full price, back in the day (I do not know what day); the smaller lenders, including hedge funds, bought the debt at a huge discount, once it became much riskier that Chrysler wouldn’t be able to pay up.  If Chrysler goes into bankruptcy, they stand at the front of the line to get money back — and they might stand to make a profit, whereas the big banks are going to lose something either way.

It’s these smaller lenders, the hedge fund folks, who are currently torpedoing the talks.  You might wonder, as I did, why this even matters — if the four biggest lenders are on board, isn’t it enough to have their votes?

Well, apparently the proceedings here are more like the Senate than the House: Rhode Island gets the same number of votes as California.  The guy who holds $1 million in Chrysler debt has the same say as the guy holding $1 billion.  That’s not just some weird fairness decision — it’s apparently because the Obama administration is worried about legal challenges to the deal if everyone doesn’t agree.

So, where does that put Chrysler today?  I’m guessing it puts Steve Rattner, the Car Czar, locked into a small room with crappy coffee and at least eight very unhappy bankers, until midnight eastern time.  And if they can’t work out a deal, what will Chrysler look like?

Oh, OK, nothing quite so dramatic, probably.  Strangely, the Obama administration is of two minds on this one.  At his press conference, the president said he’s “hopeful” that Chrysler could go through a “very quick type of bankruptcy.”  But The Wall Street Journal reports Treasury is singing a different tune:

Treasury officials remain concerned that a Chapter 11 filing could lead to a loss of control of the car maker’s future. Some Chrysler creditors could argue in court that the company is worth more to them in liquidation than they are granted in the Treasury’s deal, which offers the creditors about 29 cents on the dollar in cash. Some of the creditors have signaled they are prepared to fight the matter in court.

Whether this is going to end that badly or not, we might not know for a while.  But whether that direction is likely… well, that we should hear within the next twenty hours.

Beep, beep.

Gov’t for Grown-ups: I have Federal Reservations for 3

I’ve neglected this series for a long time.  Not for very good reasons — it can mostly be summed up by “writer’s block,” having to do with a precipitous drop in my ability to write about Congress in an informative manner instead of one laced with profanity.  So I’m back, and I’m refocusing my attention, at least for now, on institutions, instead of political positions.  If I’m going to want to burn something down, better it be an entire building constructed from marble than a man in a suit.

So, let’s talk The Fed.

This is going to be a long talk, so I’m breaking it into three tasty pieces: A Brief History of U.S. Banking (1790-1930ish); The Federal Reserve, from Depression to Inflation (1930ish to 1980ish); and The Post-Modern Fed (1980ish to current) — if the TALF is still alive by then.

There will be a one-week guacamole intermission between posts.  Guacamole making and consumption is also encouraged while reading — if you need to step away, I’ll still be here.  Take your time.

A Brief History of U.S. Banking.

At the same time America became a country, it was also, in the great American tradition, broke.  A debate ensued about what to do — pay off the debts incurred by states before they were even states?  Say “screw it” and move on?  It was hard to decide what to do — individual states, and sometimes even individual cities and banks, were using different notes to denote debts, so it was hard to say what was even owed.

Enter Alexander Hamilton.  I should at this point again disclose a fascination and admiration for Hamilton, the father of the U.S. banking system and probably a total jerk to hang out with.  In 1791, Hamilton, the first Secretary of the Treasury, convinced Congress to create the First Bank of the United States, arguing in part that a strong financial institution would benefit everyone by making the nation itself stronger and more certain to survive:

[A]n attentive consideration of the tendency of an institution immediately connected with the national government which will interweave itself into the monied interest of every state, which will by its notes insinuate itself into every branch of industry and will affect the interests of all classes of the community, ought to produce strong prepossessions in its favor in all who consider the firm establishment of the national government as necessary to the safety & happiness of the country, and who at the same time believe that it stands in need of additional props.

This was a hard argument to make to a country skeptical of any broad central grant of power.  Yet Hamilton, who also established the U.S. Mint, managed to win a 20-year guarantee for the First Bank.  Sadly, it outlived him, then lost its own duel with Congress — by one vote, the bank wasn’t renewed in 1811.

Yet by 1816, the U.S. was hungry for some central, organizing force to look over banks, bankers, and monetary policy.  So the Second Bank of the U.S. came to life.  You probably know how this story ends, but let’s let the White House history of President Andrew Jackson tell it:

The greatest party battle centered around the Second Bank of the United
States, a private corporation but virtually a Government-sponsored monopoly. When Jackson appeared hostile toward it, the Bank threw its power against him.

Clay and Webster, who had acted as attorneys for the Bank, led the fight for its recharter in Congress. “The bank,” Jackson told Martin Van Buren, “is trying to kill me, but I will kill it!” Jackson, in vetoing the recharter bill, charged the Bank with undue economic privilege.

So, back to no bank.  Ho-hum.  The U.S. muddled on with no national currency until the National Banking Act of 1863 essentially black-mailed people into adopting national notes, by a) creating them and then b) establishing a tax on state-issued notes, but not federal notes, which were backed by treasury securities.  Yes, yes, they had securities back then, too.  People still traded in state-based notes, because people are irrational, but the spread of national currency gained some footing.

Yet this “national banking system” had its own snags [.pdf]:

Under this system, “country banks” were required to hold reserves at larger banks as well as in the form of cash. ”Reserve city banks” were required to hold reserves in cash and as deposits in “central reserve city banks.” Central reserve city banks were required to hold their reserves in cash. The Treasury Department altered reserve levels by adding or draining funds that it kept on deposit at central reserve city banks. The large city banks were unable to respond adequately to seasonal and cyclical variations in the cash and credit requirements of the economy. The years were marked by periodic financial crises that were resolved primarily through emergency actions of private bankers.

Those “bankers” we led by J.P. Morgan, who was kind enough to bail out the system in 1893 when panic ensued.  In 1907, he did it again — and public opinion, long opposed to the very idea of a central bank, suddenly swung more decisively toward desirous.

But hey, this is government — why rush into anything?  Congress, being Congress, appointed a commission to look into the best way to tackle the banking problem.  Meanwhile, William Jennings Bryan stormed the country cheering for the Silver Standard (and was immortalized as the Cowardly Lion in “The Wizard of Oz” for his efforts).  Finally, President Wilson leaned on Congressman Carter Glass to get something done, and in 1913 the Glass-Willis bill, known as the Federal Reserve Act, birthed the modern Fed, a bouncing several-million-dollars baby.  It established:

• Twelve regional bank districts
• That all national banks had to buy into the Fed at a rate of six percent of the bank’s current capital stock, in exchange for voting rights
• That should the Fed not have sufficient money through bank and personal buy-ins, the Treasury Department would buy in.
• The Federal Reserve Board’s power to examine “accounts, books, and affairs” of member banks
• Individual regional boards’ power to set Discount Rates — the interest rates at which banks could borrow from the Fed.
• The Federal Reserve as the “lender of last resort,” where banks could turn when they faced a panic.
• The Federal Reserve as the primary issuer of Federal Reserve Notes — what we now know as “dollars.”  A sample from the first run, Series 1914, is seen above, starring Grover Cleaveland.

The four big provisions that came out of the Fed’s charter were “to
provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”

Ta-Da!  A Central Bank at last.  The actual responsibilities of the bank, other than to provide stability to the system, were somewhat undefined for the next two decades, however.  The bank dabbled in the 1920s with some Open Market interventions, but with little success — though aware of the speculation bubble of the late 20s, it did little (and some might argue it could do little) to stop it; it did even less to alleviate the stress on banks as the downturn turned into a full-blown Depression.  In fact, the Reserve Board and the governors raised some rates in the early 30s and wanted to raise rates further, through a sell-off of treasury securities, even as things got bad again in 1932.

Which takes us to the fall of the first Fed system, with the introduction of Franklin D. Roosevelt’s financial policies and politics.  But if you’ve made it this far, I’d guess you’re as ready for a guacamole break as I am.  So we’ll pick up here next time — though in the interim, if things are unclear above, throw me questions in the comments.  I’m trying to compress many sources into one long explanation, so I may have made things blurrier — and I’m happy to help clarify, as I can. Likewise, if I’ve skipped something vital — well, you’ll tell me, right?

Till next time, then.

Small Wonder: A Terrible Day for Tim Geithner

Felix Salmon had a nice post today suggesting that major U.S. banks holding Chrysler’s debt are willing to let the company go into bankruptcy instead of taking a haircut on their debt in part because there’s no real way the public could think less of them.  Being the automatic villain gives one a certain freedom to be horrible, and J.P. Morgan Chase and friends certainly find themselves there.

What this made me wonder is, at what point will Tim Geithner hit the so-hated-he-can-do-whatever stage?

I mean, this has been a totally sucky week to be Geithner.  Consider he went into the weekend with Paul Krugman’s “it’s gonna get so much worse” column and Rachel Maddow having invited the “Hey Paul Krugman” singer onto her show (for the 5 people who hadn’t already heard him sing, “Timothy Geithner, he’s like some little weasel,” via the Internet).  Yesterday, he had the hey-guys, cut-your-budgets Cabinet meeting (check out the body language here, too — that’s Geithner slumped next to Biden).  At this point, I’m not sure the man could buy friends (though I have no doubt at least one commenter will say he’s tried).  Just take the last 24 hours:

• The Special Inspector General issued his report, which initially made news for saying that, contrary to the Secretary’s earlier assertions, firms who wanted to participate on either side of the Public-Private Investment Partnerships would be subject to compensation limits.
• Then it made news because, at The Economist, that sounds like the end of the PPIP.
• Then it made news because there are already 20 fraud cases being investigated.
• Then Felix Salmon pointed out that, within the report, there’s open speculation that it could encourage out-right criminal organization money-laundering schemes.
• The IMF also released its Global Financial Stability Report today, and said that bank losses are over $4 trillion, with more than half of that originating in the U.S.  Oh, and we’re going to need substantial additional investment to recapitalize banks, and may need to nationalize some at least temporarily.  And soon.
• All of this before the real fun started: Geithner testified before Elizabeth Warren’s Congressional Oversight Panel.  You may remember her as the woman who made Jon Stewart feel better last week, or the one who released the highly critical — and commendable, at that — report on the Treasury’s plans so far.  Wanna guess how that meeting went down?  Let Andrew Leonard summarize:

The pattern is now sufficiently well established to be definitive. The treasury secretary appears before a congressional committee, and is asked tough, detailed questions by members of both parties. He invariably compliments and thanks the questioner for a “thoughtful” and “important” question, and then proceeds to answer in vague generalities, rarely committing himself to specifics.

I’ve watched or pored over the transcripts of almost all of Geithner’s testimony before Congress, and it’s getting harder and harder to make a case in defense of his brief tenure. Tuesday’s hearing, before the Congressional Oversight Panel empowered by Congress to watch over the TARP program, ranks as one of his least satisfying performances so far. 

(I would say it was sort of like watching the robot from Small Wonder face off with Minerva McGonagall from Harry Potter — you start off rooting for both sides, but by the end, you just want McGonagall to put the robot out of her repetitve, wide-eyed misery).

• The stock market did rally a bit over Geithner’s assertion that “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”  That sounds like great news, until you realize he never said that (he skipped those pages, somewhat dramatically, in his testimony).
• Also, even if he had said that, it was meaningless and earned, again, bafflement and concern (and use of the word “ominous” in the first paragraph) from Paul Krugman.
• Finally, The Wall Street Journal ran an interview with Geithner (“Geithner Weighs Bank Repayments“) where he said he’s considering whether to let banks repay their TARP debt early or not.
• Finance blogger Nemo and a reader point out that, no, he can’t do that — he has to let banks pay the money back whenever they want to.  Strike… what? 56 or so? for Geithner.

It’s those last two points that bring us to the importance of the villain question.  The two banks currently talking about repayment are Goldman Sachs and J.P. Morgan Chase.  Paying back TARP funds would free these two from compensation limits — present and looming — and also make them look strong and solvent.  JPMC CEO Jamie Dimon has called TARP assistance a “scarlet letter,” and he’s looking to shed it as quickly as possible.  This would possibly inspire further investment in these banks and certainly encourage concentration of power into their hands.

Which is partly why the Treasury Department isn’t keen on just letting them repay so quickly.  Banks shedding TARP funds could make other banks want to jump ship — banks whose life-vests aren’t properly inflated.  So you could see Bank of America trying to pay back TARP, and either failing after payback, or failing to payback at all — and either way looking so weak as to inspire (who thought it was possible) less confidence than even now.  Which would, of course, benefit those who do survive the leap — probably a big part of the JPMC/Goldman dream right now.

In fact, the only reason that a firm wouldn’t leave TARP right now is a desire NOT to piss off the U.S. Treasury Department.  It’s in their individual interests to run, even while it might be in the interest of the entire system for them to stay a while.  So let me ask you this: Is Tim Geithner someone you’d want mad at you?  Does a real villain lurk somewhere within the Small Wonder facade, just waiting for the day when it no longer matters what Wall Street thinks — and if so, was today that day?  Does he have enough power, inside or out of the Treasury, to make things more uncomfortable for these banks than they already are?

My guess?  If there’s pressure to be brought to bear, it will have to be done by the President — and if that’s the case, Geithner’s days at the grown-up table are going to be limited.

New Treasury Plan: This Ain’t Yo’ Momma’s TARP

Treasury officials are considering a new plan, the New York Times reports, to help banks recapitalize: they’d convert their current loans into common stock in the bank, which would translate to actual equity and, perhaps, the accompanying power that comes with being a shareholder.  This would include some power to decide who stays on the board and, yes, would probably be a big step toward nationalization — all without having to ask Congress for any additional money.

The problem is that, for at least some of these banks, we’d be converting not just loans, as the Times leads with, but preferred stock into common stock.  One stock for another? Paul Krugman was quick to call the plan baffling, and he came up with this analogy:

Here’s how I think about it: you started a business with a bunch of borrowed money, but of course had to put some of your own money in. Now, actually some of the money you put in was borrowed from your mother, but the original lenders don’t care about that, since they have prior claim.

Eventually you run into some business difficulties, and your creditworthiness is in doubt — which in turn is making it hard for you to do business. What you need is evidence of ability to repay the money you already owe.

So does it help if your mother converts her loan into a share of the business? Not really, because she won’t get repaid anyway unless all your other creditors get paid first. So the terms of her agreement with you don’t affect their prospects of payment.

And in this case, the TARP is your mother.

OK.  But I think it actually would help me, as a business, survive — and would certainly increase the confidence lenders had in me — if my mother happened to have a GDP of $14 trillion when she became an official part-owner of my business.

No?

If that seems too cute by far, Felix Salmon likes the new plan, too, and says it in actual econo-speak.  I’ll try and translate, but he’s speaking pretty plain English, too (this is me suggesting you scoot over and read him; he’s very good).  Essentially, whether you like the new suggestion or not depends on how you looked at the original preferred stock plan.  If, like Krugman, you considered preferred stock to come with equity, then this plan makes very little sense — it’s a swap of what we have for what we have, only with increased risk of losing everything.  But Salmon makes the argument that preferred shares didn’t automatically confer ownership in the same way that common stock does, which seems to be generally true of preferred stock.  Preferred stockholders are exactly that — preferred — in the case of bankruptcy.  They (usually) get their money back just after bondholders, and certainly always before common stock holders.  In exchange, preferred stock usually doesn’t come with voting rights, and isn’t usually as profitable in the long term as common stock.

The glass-half-empty way to look at this is that, if any of the nation’s 19 largest banks go under, we’re trading stock that would have guaranteed us at least some of our money back for stock where we could very well and easily lose everything.

Glass half full?  We’re trading stock that gave us no say-so for stock that lets us start cleaning house, at least in a few places, and if we really get the house cleaned, we have a better chance of turning a profit.

I’ll just be over here drinking the rest of the glass.  Now that TARP is my mother, I assume my inheritance is going to be huge.

Dear Public Officials: Stop Being Dumb

I’ve been reading a microecon textbook recently, because I am admittedly in over my head every time serious discussions of the topic come up.  Recently, they’ve come up every day.  Since I wax on publicly about economic policy from time to time, I figured I literally needed to do my homework.  (You can do my homework, too — MIT offers free online course materials for a number of their econ classes).  I also read a couple of economics blogs every day, just to see what the people whose econ homework is decades behind them are saying, and I follow this up with the aforementioned dose of the Wall Street Journal.  I present this information not to show that I’m uniquely or even adequately qualified to be talking about this, but to give anyone who reads this an idea of where I’m coming from when I say this:

Some of our public officials are massive idiots.

There are two glaring examples of this right now.  Rachel Maddow has nicely covered the idiocy of Republican Senator Burr (from North Carolina), and here’s a nice one-minute round up (full disclosure: put together by the Democratic Senatorial Campaign Committee) of what he did:

Maddow also nicely, and with a heavy dose of snark, described what’s so troubling about this incident on her show:

OK.  First of all, she can‘t just go in and talk to a teller?

Second of all, the FDIC insures your freaking deposit, Senator Genius.  Third of all, you think it‘s worth making a “run on the bank” anyway because of what you‘ve learned in Washington about what‘s going on in the financial sector but you don‘t tell your constituents.  You instead just use that information you‘ve got because of your position as a senator to protect your own family?

And fourth, what kind of a genius admits to having done this and suggesting a “run on the banks” in public?  What kind of a genius?  A genius named United States senator from North Carolina Richard Burr, that‘s who.  If you‘ve never heard of him, it‘s probably because he‘s vying with the likes of Senators Barrasso and Crapo to be the most anonymous member of the United States Senate.

Well, he was.  Now he’s a little better known, thanks in part to an angry response he sent to Maddow that she tore apart on air later in the week.  (She also described Burr’s actions in much less snark-tastic terms during last Friday’s show).

So we have a Senator who thinks bank runs are a prudent, All-American response to a financial disaster.  Excellent.  Who can top that?

How about a Detroit City Councilman who decided to walk away from his dream home this week — not because he was about to be foreclosed on, but because he was underwater in his mortgage?  City Council member and probably mayoral candidate Kwame Kenyatta (a Democrat) and his wife, a former city commissioner, saw their home value fall from $225,000 to $100,000 this year, and faced a $1,000 increase on their $2,600 mortgage payments.  So they walked away in December and rented a condo instead:

Walking away from a mortgage isn’t illegal; the bank takes possession and tries to sell the house. But “it just puts more properties in foreclosures, and that’s the last thing we need right now. That’s just pulling the median sales price down,” said Karen Kage, who runs a real estate listing service in suburban Detroit.

In Detroit, the median sales price for a home is now a pathetic $5,800, down more than $66,000 from seven years ago. An estimated 16,000 foreclosed homes are on the market in the city of about 920,000 residents. Detroit also has one of the highest unemployment rates in the nation, at around 20 percent.

Kenyatta’s former neighborhood, North Rosedale Park, is unlike most of the rest of Detroit. Stately, well-kept brick homes line quiet, winding streets. It fights to hold off blight from surrounding northwest side neighborhoods.

Kenyatta’s former home is the ugly duckling on its block. Dead grass spreads gray across the lawn. Withered advertising circulars are strewn about the porch and the hedges.

I am sympathetic to the Kenyattas’ problem, particularly the upcoming mortgage-rate adjustment — but my sympathy lies more strongly with their neighbors.  “‘If I’m going to follow you, you need to be a leader,’ said Patricia Dixon, a former neighbor of Kenyatta’s. ‘You don’t show leadership by walking away from your home in the city of Detroit. You have vandalism where they find out the houses are vacant. You have people stealing fireplaces.'”

If you are going to be in government, you must be focused on and capable of real leadership.  Maybe Kenyatta and Burr both consider themselves leaders — maybe other people do, too.  But the direction both are leading people toward is a very dangerous, irresponsible direction.  Our financial system — and our financial recovery — hinges upon people doing the right things, on people doing things like leaving their money in the banks, paying their taxes, staying in their homes and making their payments, and generally contributing to an overall return to financial health that will require, at times, moves that seem against an indvidual’s short term interest — but which have long-term dividends to offer in the form of a functioning, expanding economy.

The financial issues facing us at every level — local, statewide, nationally, and internationally — are terribly complex.  Most of us, and I include these men, do not have the time to understand every aspect.  But if you’re going to take a job where you’ll be charged at some point with making decisions about these complex issues, you should at least be familiar enough to understand how your own actions figure into overall economic health.  (And if not — you should find a staff member, or an online course, or a nearby community college, to help you figure this stuff out, particularly if you’re being paid for it).

I hope, I truly hope, that both of these men made their decisions based simply on ignorance of the issues, and not upon some idea that it’s OK to put personal interests ahead of those of the public, but my suspicion runs in the other direction.