Tales of a Former Treasury Secretary

On this anniversary of the Fall of Lehman, I’d like to take a moment to discuss one of the big “villains” of that era: Mr. Hank “King Henry” Paulson, the former treasury secretary.  About a week ago, I stayed up late to devour Todd Purdham’s lengthy, three-years-in-the-making piece on Paulson, which I recommend. Of the Current Events must-reads on my list this fall, Hank Paulson’s memoir of the crisis probably makes the top ten. I’m really (really!) not an ongoing Treasury Secretary Stalker, I promise (and not just because it’s a condition of my parole). Instead, I want to read Paulson’s book because I find him to be a compelling character in our recent national drama: For better and worse, he’s simultaneously the man who said in mid-2008 that the system was strong and everyone was handling things just fine and the man who only weeks later went down on one knee to beg Nancy Pelosi to pass the bank bailout.  He’s the man who was — it seems — very much driving the bus when Lehman went under it.

But he’s not that simple.  At times he seems like a Democrat trapped in Republican cabinetry: He’s rumored to have willed the entirety of his fortune, upon his death, to nature conservation, because “saving the environment is a ‘race against time, the ultimate global issue.'” While working for Goldman Sachs in Illinois, he and his wife lived in a farmhouse that had, at one point, four named raccoons running freely through it, along with Paulson’s pet snakes, flying squirrels, mice, dogs, cats and turtles. He names Nancy Pelosi and Barney Frank as his favorite congresspeople in the Purdham interview. He is the author of the bank bailout and about the first advocate for cash infusions into banks — also known in GOP circles as socialism — that we saw last year.

He’s also the guy who engineered some rather shady deals while in the Bush administration, deals (like the AIG bailout) that have benefited Goldman Sachs, his old company, and deals (like the failure of Lehman Brothers) that seem to have been botched as much through neglect and disorganization as malevolent intent.  While at Goldman, he pushed for and benefited from the rule changes in the 1990s and early 2000s that contributed to the current crisis.  And he still seems to believe that he wouldn’t do much differently, given the chance.

In short, I do not know what to make of Henry Paulson. I do not believe Purdham’s claim that history will figure this out; I think, perhaps, that questions about the character and make-up of a man, any man, but particularly a distant, celebrity figure like Paulson, are often unanswerable, because they require a level of objectivity people just cannot achieve. I would like to believe that Hank Paulson was a villain, but I am increasingly aware that it’s just not that simple. He, like even those I hate the most, was usually doing what he thought was best. He was usually doing the best that he could, and if that is his failing, well, it’s really the failing of the man who hired him.

Just as I don’t know what to make of Paulson, neither, it seems, does Todd Purdham, even after three years of semi-regular meetings with the man who had the nation’s ATM card in his pocket. Purdham’s piece is a wonderful example of post-event journalism, the kind of thing for which Bob Woodward is pretty famous. Purdham essentially traded continuing access for a guarantee not to print anything as it happened. This is a bit of a Faustian bargain — a journalist trades away the opportunity to report on news as it happens for better long-term access to the source. The idea is that seeing someone more regularly, and talking to them over the longer term, often provides a more accurate picture — with that much-lauded journalistic ideal, context — of the man in the center of the storm. Beyond which, of course, there are dozens of other journos covering the day-to-day. 

It took me a while, but I think this bargain was worth it, even with how ultimately unsurprising the long piece on Paulson is. Was Paulson more candid with Purdham than he’s been in other interviews? Sure.  Purdham’s promise to keep things off the record until they couldn’t change the immediate course of things most likely did elicit commentary that will help future journalists and historians clarify what exactly happened last year. 

But there’s a price for all of that, and reading something like Purdham’s piece so quickly after the fact, the cost seems particularly clear. If, a year ago, Henry Paulson had come out and said, Pelosi is right, the Republicans are wrong, and I’m being obstructed from adequately doing my job by the ideological bent at the White House, he could have changed the course of our current national crisis. At the very least, he could have changed the tone of the conversation about it, instead of letting it become an even deeper, more entrenched partisan battle. A member of the Bush cabinet speaking out about the Bush madness — and speaking out clearly, in a language of numbers, from the strength of his Goldman Sachs, friend-of-the-street credentials — would have meant something in September 2008. Hearing it a year later is interesting, but has less effect.

I’d apply that to most of the post-mortems I’m seeing today about Lehman, as well. Understanding what happened after the fact is nice, but I don’t think we’re yet so far away that we can understand things.

Speed Bump: Supreme Court Puts Hold on Chrysler/Fiat Merger

It seems the marriage of Fiat and Chrysler has hit a speed bump (NYT):

Justice Ruth Bader Ginsburg, who handles emergency matters arising from the United States Appeals Court for the Second Circuit, issued a stay of the sale, preventing Chrysler and Fiat from completing the transaction immediately.

There’s a slim possibility this could become a serious roadblock to the merger, which was set to conclude at 4 p.m. today after the Second Circuit denied the stay and allowed the expedited path to merger to proceed.  Now, instead, there could be a delay of weeks, as Ginsburg and possibly the full Court decide what to do.

The arguments being made by the pension funds — the Indiana State Teachers’ Retirement Fund, the Indiana State Pension Trust, and the Indiana Major Moves Construction Fund — are pretty interesting and could have wide-ranging consequences, should Ginsburg choose to pass the issue up to the full Court.  The mostly likely argument to get them anywhere, as the Wall Street Journal’s law blog summarizes, is that they’ve had their constitutional rights violated by this deal, because junior creditors were privileged over senior lenders in Treasury’s deal.  The funds might have standing to argue that, but will need to prove existing, specific harm.

The trickier charge, and the one that makes me more uneasy, is this:

The United States Department of the Treasury (“Treasury”), purporting to  utilize powers conferred upon it by the Troubled Asset Relief Program (“TARP”) established under the Emergency Economic Stabilization Act of 2008, 12 U.S.C. 5201 (“EESA”), will have been permitted to structure and finance the reorganization of Chrysler without any judicial review of its authority to do so (the Bankruptcy Court incorrectly disposed of the issues by deciding that Appellants lacked standing);

Full text of the Pensioners’ Application is here, in PDF.  I’m not uneasy because I think that’s a bad charge — rather, it certainly seems like it’s true.  TARP hasn’t undergone any significant judicial review, and it seems like, if challenged, the authority of Treasury and the Fed to intervene in rescuing companies like G.M. and Chrysler, particularly when their decisions have involved the kind of leverage that comes close to outright threats, could crumble.  Beyond that, my faith in the lawyers at Treasury in particular is pretty thin, so I’m not sure I believe that they drew this up in an unassailable way.

I don’t think the Constitution prohibits the government from intervening in business in the U.S.  But I can certainly see how the current methods, which have at times felt slap-dash, might be unraveled by the Court.  Is that for the better?  I don’t know.  I don’t completely buy anymore the argument that Chrysler needs to be turned around in 30 days to survive, though I do believe that its workers will suffer more and harder for each day that the merger is delayed.

I’m actually hoping Eric Holder will have to issue a statement about this.  In fact, I find myself suddenly wishing that Holder was part of that Auto Task Force surrounding the president last week.

Friends Don’t Let Friends Drive Toxic Assets

The Legacy Loans program, a sizable chunk of the Geithner Plan, is dead, reports the New York Times.  The FDIC has “called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets.”

I’ve used my car before to explain this program, so maybe I can use it to explain the death.  In this scenario, the role of the Bad Bank is played by me; the Toxic Asset is my car; and Tim Geithner and Sheila Bair, Treasury Secretary and FDIC chair respectively, play themselves. 

^{By CatKaoe}

Remember, if you will, that in our last scenario, my accountant, Tim, had offered to partner with his friend Sheila to offer potential buyers of my car a pretty sweet deal: Sheila would loan 80 percent of the money to any potential buyer, and Tim would invest up to half of the remaining cost of the purchase, which meant someone could buy my car for about 10 percent of its auction price.  That would give me extra money to spend in the economy (hooray!).  It would also allow the dealer that bought my lemon the chance to fix it up and hold onto it until the market for bad cars goes back up.  Win-win, with the possibility of Tim and Sheila taking a big hit (taxpayer lose).

But what’s happened since this initial offer is that I, holder of the toxic car, have fallen back in love with it.  That burning oil smell — it’s the scent of nostalgia, of summers spent on hot tar highways.  The scratches and dents merely make the car more hip, like a worn pair of jeans.  I’m starting to think I could convert it to bio-diesel.  In short, I’m no longer willing to sell for anything less than the original $1,000 I thought it was worth.  I am not willing to put it up for auction, as Tim said I had to do.

Now, maybe I’m being honest about that.  Maybe I really do think the car’s gonna make it.  But maybe I don’t want to put the car up for auction because last month, I applied for a new apartment, and as part of my credit check I listed the car as an asset when I did that — an asset worth $1,000.  Now, I don’t want to put the car up for auction, because it will become clear pretty quickly that the car is only worth $700, and I could lose my apartment. 

Or maybe I don’t want to sell the car because I no longer need to sell it.  The market’s getting a little better, I’m feeling more flush, and I think I can afford to pay to maintain it until the time comes when it will be worth what I’m willing to sell it for.  It will be vintage soon, you know?

Now, Tim and Sheila — Tim in particular — have an interest in making sure I’m telling the truth about my motivation.  Because if I’m not selling because selling will make me look insolvent, well — that means I’m already insolvent.  If I’m not selling because I’m ready to spend, spend, spend anyway, then that means the market is improving, and the healing has begun (and quick, Tim says, let’s get some posters printed about that one, and make sure we send one to Paul Krugman).

Ezra Klein outlined both of these reasons as why the banks might not be willing to jump into the Geithner plan.  Kevin Drum at Mother Jones says it’s probably the insolvency problem, and that’s really, really bad, because it means that not only did the Geithner plan not solve the banks’ problems, but the banks are being allowed — and maybe, post-stress test, encouraged — to live on in denial that will eventually come back to bite us all.

To extend the metaphor: there exists a danger to the community if I continue to drive around a broken car while swearing that really, it’s fine.  Not only am I not spending as much as I could be, since I’m constantly worried about my toxic asset, but I might be actively making the whole community less safe by showing them that it’s cool to keep broken cars.

I think there’s also a third option, here.  Banks might be deluding themselves; they might be healthy enough to afford hanging onto their loans; and they might actually be afraid to deal with the government.  Several banks, post-stress test, raised a bunch of capital in advance of leaving TARP.  If they get re-entangled with the Geithner Plan now, they’ll also get pulled back into the shady land of government regulation over compensation.

In short: am I unwilling to sell the car because I still love it, because I still need it, or because you’re not the boss of me, Tim Geithner?

It could be all three (and none of these are particularly good reasons, really).  But whatever it is, I hope there’s a plan B.  I hope Tim and Sheila and Ben Bernanke have a better idea of what to do next than just what Sheila Bair said they’re going to do, which is wait and see if the PPIP might be needed later.  That’s only an OK plan if the assets don’t get worse — and I am not at all encouraged by our jobless rates, the rise in foreclosure and bankruptcy claims, and the continued need of companies with terrible mortgages on their books (yesterday GMAC got another $7.5 billion).

At some point, Friends Don’t Let Friends Drive Toxic Assets.  Apparently the banks still want to keep the keys — but at some point, Tim, Sheila, or Ben might have to step up and say, no way, man.  The PPIP was the gentlest possible way of doing that, so I’m sorry to see it die.

^{By wireheadinc / CC license}

The Ultimate Beat Sweetener: The 31 Year Old “Dismantling G.M.”

The New York Times had a piece up over the weekend about Brian Deese, a 31-year-old law school student (on break, apparently) who according to their headline is “in charge of dismantling G.M.”

This story caught on, as just about any section-front story from the NYT seems likely to do.  I’ve seen it linked copiously (and I’ve done it myself), and it’s currently the top e-mailed and blogged story in the business section at NYTimes.com.

But here’s my question: Can they prove their headline?

The story includes a quote from Steven Rattner, “one of the leaders of President Obama’s automotive task force,” about Deese’s grad-school beard.  It has a quote from Larry Summers about his intelligence.  It cites “several people who were present for the debate” as saying that Deese spoke out against liquidation for Chrysler, and says he wrote a very persuasive memo about the bad that Chapter 7 could cause.  But the only one who seems to say that Deese was ever the guy in charge of the taskforce is Deese.  In fact, the White House doesn’t list Deese as a member of the Auto Task Force at all.  He’s listed as an economic adviser to the president at the White House Web site, but there’s no more formal designation that I can find.  So to say he’s running it is a pretty substantial leap.

And the Times seems to get that, but much further down in its story:

Every time Mr. Deese ran the numbers on G.M. and Chrysler, he came back with the now-obvious conclusion that neither was a viable business, and that their plans to revive themselves did not address the erosion of their revenues. But it took the support of Mr. Rattner and Ron Bloom, senior advisers to the task force charged with restructuring the automobile industry, to help turn Mr. Deese’s positions into policy.

Normally, I kind of enjoy mindless profiles of major Washington players — they’re what Matthew Yglesias calls beat-sweeteners, pieces journalists write both to inform the public and to make their own jobs easier.  But this one seems particularly damaging, as it implies that the administration is leaving some very big decisions in the hands of a guy whose total automotive industry experience is apparently sleeping in the parking lot of a G.M. plant on his way to volunteer for the Obama campaign.

I’m wondering whether I could get a few friendly quotes dropped into the paper and turn myself into the point girl on, say, Health Care or NASA or something.  Who wants to try?

The New G.M.: A Green G.M.?

So, G.M. is going into bankruptcy, and the government’s going to own a big slice. Yep.  Please raise your hand if you’re surprised.  OK, seeing no hands up, let’s move on to what’s really interesting here: who exactly is going to be running G.M.

I think the answer lies in the video above.  No, not just in the president’s remarks, where he says that he won’t be making the decisions — in the people who are in attendance at the remarks.  Namely, in his auto task force.

So who are all these people standing with him?  Well, from left to right, I spot:

Christina Romer, Chair of the Council of Economic Advisers
Stephen Chu, Secretary of Energy
Hilda Solis, Secretary of Labor
Barack Obama — what’s that guy do?
Gary Locke, Secretary of Commerce
Ray LaHood, Secretary of Transportation and Natty Handkerchiefs
Peter Orszag, OMB Director

Next row:
Austan Goolsbee, member of the Council of Economic Advisers
Larry Summers, director of the National Economic Council
Carol Browner, assistant to the president for Energy and Climate Change
The Mayor from Spin City Jared Bernstein, Economic Adviser to VP Joe Biden

Back row:
Ron Bloom, senior adviser at Treasury
Gene Sperling, counselor to Geithner and member of the CEA
Ed Montgomery, Director of Recovery for Auto Communities and Workers
Steven Rattner, who I believe to be the Car Czar and possibly also the Worst Tie Picker in history

Not pictured: Tim Geithner, who’s in China, and about six other second-tier members of the auto task force, including the 31 year old that the New York Times seems to think is running this show, Brian Deese.  I guess there’s only so many people you can fit in the Grand Foyer.

Image means a lot in Washington.  Obama may be saying, today, that the government is going to keep its nose out of the new G.M., but we’re still a few months away from that new entity, and everyone standing behind him will have a say in what it looks like.

So what I’m most interested in here is that two people — Chu and Browner — are present from the energy/environment side.  The way the administration has tied the success of the automotive industry to the cause of the environment is kind of fascinating.  Chrysler is being pushed toward smaller, more eco-friendly models, and now it seems inevitable that G.M. will be pushed that way, too.  These people — this task force — is built to do exactly that.

In case you’re wondering, as I did, who President Bush brought out with him when he announced the auto bailout, here’s the answer:

Bush stood alone and couched his discussion of the loans in almost completely business terms.  He made no mention of the companies changing to fuel efficient models or of any goal to achieve energy independence, as Obama did in his speech.

I kind of like the new crowd.

Should Treasury Bail Out Califonia?

This may come as quite the shocker, but California has bigger problems right now than its wayward Miss USA contestant.  The treasurer of the State of California has asked U.S. Treasury Secretary Tim Geithner to use TARP to guarantee the state’s debts.

California faces a budget shortfall of $13 billion next year.  There’s a state constitutional amendment that says California must always balance its budget, and the state got into a DEFCON-1 fight this year because no one will raise taxes.  Bill Lockyer, the California Treasurer, predicted that the state will be out of money by July, and will have to “delay” paying what’s owed to “school districts, counties, social service providers, vendors,” and other State-dependent agencies.  Lockyer predicts this will force some school districts into bankruptcy.  So, like any financially struggling institution that is too big to fail, they have turned to the federal government.

Lockyer’s request is particularly clever, almost Citibank-like.  He proposes the following: California needs to borrow in order to make up for the shortfall.  It wants to borrow by issuing Tax and Revenue Anticipation Notes (TRANS), which are what they sound like: they sell $X billion in these notes, saying, hey, look, we’re anticipting tax revenue down the road, and we’ll pay you back when this hits.  So investors (banks) buy the notes, expecting that they’ll get paid back what they put in plus interest.  But, as with any investment, there’s a risk involved.  If California defaults, then the banks that they issue the bonds through are left holding the $X billion bag.  They would still be required to pay the bonds off — California isn’t going to file for bankruptcy protection, after all — but no bank wants to take the chance that it will be left holding a multi-billion dollar outstanding debt.  California’s credit rating is the lowest of all 50 states.

So Lockyer has asked Treasury to guarantee California’s borrowing.  If California defaults, he wants Treasury to say, we will step in and buy their debt from you, the banks.  This way, the banks feel confident that they’re going to get paid no matter what, and California will be able to borrow more easily because Treasury has just made them a sure-fire investment.

If this sounds familiar, it’s because it is very, very close to what the intention of the TARP is: Treasury guarantees bad assets, so that banks are more willing to loan money.  Lockyer — and California — are right to say that this is the point of TARP.

Lockyer also argues — again, correctly — that the overall goal of TARP and all its acronymish brethren is to improve financial security and stability in the market overall.  A default by California, or even a major stall in its payments to state agencies, wouldn’t exactly help the nation’s economy.  Please imagine the unequaled BAD of schools staying closed, fire stations shutting down during fire season, mental health centers shuttering, and everyone who works in those places sitting at home, not spending any money.

Now, I’d expect yelling from the right about this.  The governors who have declined (or tried to decline) stimulus spending have all done so standing on the soap box of States’ Rights, which would seem to imply that they believe each state should have to stand on its own.  If California should default, here, then residents of faraway states would end up paying for their debt, at least immediately.  California would still eventually have to pay the government back, but the big outlay necessary to pay off its bank debts would be more money coming out of Treasury and less money that could go toward… well, toward the original goal of the TARP, shoring up banks.

Yet this seems to me a better way to spend that money, or at least a more urgent need.  If California, which is something like the world’s sixth largest economy, has to undertake IMF-levels of austerity in its budget, the impact on the national economy would be dramatic.  This wouldn’t be wilting green shoots: this would be like setting the green shoots on fire and then putting them out by pouring concrete on top.  Hate on Cali all you want, but as it goes, so goes 13 percent of national GDP.

I suddenly feel a need to buy an avocado.  Short of a similar massive national sentiment, the TARP bailout sounds reasonable.  I hope Geithner writes a positive reply to the letter — and soon.

Whirling Derivative Dervishes: Treasury Takes on the CDS Market

Also in the news yesterday (underneath the photo-release reversal madness, which I think Glenn Greenwald has pretty much covered) was the Obama administration’s proposal to press for regulation of Credit Derivatives [emphasis added]:

The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.

The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.

The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them. 

I know, not nearly as sexy as the legal intricacies of a fight against FOIA, but still important.  (Believe me, I tried for at least five minutes to think of a way to attach Paris Hilton’s picture to this, too, but I’ve got nothing).  This is a dry topic, and if I didn’t know Americans so well, I’d say the boring tedium of it all was one of the reasons no one took this up a couple of years ago when it might have actually made a difference.  Oh, wait, it turns out I do know Americans that well.  Anyway, now that the financial world is falling apart, suddenly everyone’s concerned about the “shadow banking industry,” so we might see some real change, since voluntary national alcoholism doesn’t seem like a passable strategy to get through the days.  Like Andrew Leonard says, it is a bit like “closing the barn door after the derivatives escaped,” but there are still plenty of derivatives in the barn that could use some supervision.

It turns out, though, there was somebody pushing for this exact strategy five years ago.  Wait, did you say five years ago?  I did, self, I did.  Who was this forward-thinker?

Waaait a second.  Where’s his Darth Vader mask?

In 2004, Tim Geithner gave a speech¹ on “Hedge Funds and Their Implications for the Financial System,” in which he discussed, briefly, the need for credit derivatives to be traded more openly, and with some system of regulation.  Later that year, he convened the heads of the banks and got them to volunteer to update their tracking systems and get things onto a standardized computer system, instead of everyone running their own haphazard (think: sticky notes) show.  But the actual regulation of derivatives never went any further than that, whether because Geithner lacked the power, the resources, the guts, the inclination, the kickback, the conspiracy, or the political savvy or support (please remember who was running Treasury back then) to see that it did.

So, unlike PPIP and TARP and TALF and WTF (yes I made that last one up), this is a plan that someone’s thought about for more than a week or two.  Consider this Revenge of the Government Servants.  The plan for regulating derivatives is… well, I won’t risk putting you to sleep, but it’s been in the works for a while — we heard shades of it mentioned during Geithner’s earlier Congressional testimony — and it would consist, essentially, in rolling back big slices of the Commodities Modernization Act of 2000, which was adopted under the Clinton administration and, oh yeah, as both Andrew Leonard and the New York Times point out, with the full approval of one Larry Summers.

^{“Stop trying to help, Larry! Seriously!”}

It would push for most “derivative instruments” to be traded openly, so that investors and regulators could actually get a look at the ways companies hedge themselves against risk.  And it would also require certain capital reserves to be on hand before banks could trade these things — so an insolvent, constantly-borrowing-to-survive guy like Bear Stearns would have some trouble here. 

Openness?  What?  Accountability?  On Wall Street?  Surely you jest.

Well, a little bit, I do, because one of the agencies likely to be charged with overisght responsibilities is the Securities and Exchange Commission.  If you haven’t read TPM’s overview of the scathing GAO report on the SEC, well, that’s ten minutes of appalled laughter and stomach-sinking dread that you really owe yourself.  The SEC is pretty much a dead agency.  Giving it new things to do will only help if the President and Congress have plans to staff it up — and they’d better not be sending Summers over there.  SEC restructuring or, honestly, replacement is the biggest missing piece in this plan.

But overall, this is good news.  Yes, it comes too late, and yes, it’s probably not a perfect plan, but it’s complex with some pleasantly optimistic overtones and just a hint of bitter, bitter regulatory nuttyness.  Vintage government-label work, here.  I’ll drink to it.

^{1 Should you ever have trouble sleeping, I really, truly recommend perusal of the New York Fed’s speech archive, btw.  Skip the lively speeches by the other guys — Dudley’s “May You Live in Interesting Times” is just no match for the somnia-inducing Geithner tome, “The Economic Dynamics of Global Integ...”  Wha?  What?  Oh, sorry, nodded off.}

Trust Fund, Baby: Paris Hilton and Social Security

Today, the Obama administration’s official Bearers of Bad News, fresh off the fun of Swine Flu and Stress Tests, announced that Social Security will deplete its trust fund by 2037, four years earlier than expected.  Scarier than that, in 2017 — just eight years from now — Medicare’s hospital insurance trust fund will run out of money.  That’s the fund that pays for inpatient hospital services, home health, skilled nursing facilities, and hospice care for those over 65.  So, not anything millions of seniors depend on or anything.

^{Glenn Francis/PacificProDigital.com}

Government trust funds are the same as “regular” trust funds.  They represent a surplus of income from one party that’s designed to support the life of another party.  So, either great-grandpa struck it rich in the hotel business, in which case you start drawing down your ~$30 million trust fund at 18, or great-grandpa paid payroll taxes every month, in which case a trust fund built from that contribution lets Social Security and Medicare provide services after age 65.

When a trust fund runs out for a big government program, it’s the same as when it runs out for a spoiled rich kid.  You aren’t instantly broke or on the street, and 2037 will likely be the end of neither Social Security nor Paris Hilton.  Money will still come in, but expenditures will be limited to income and to what other people will loan out.  So Social Security will still be getting tax income when it runs out of trust fund money, but not enough to cover the number of people expected to be drawing SS in 2037, just as a sudden depletion of available trust fundery (estimated at between $1-$4 million a year) would probably reduce the benefits available in life to Paris Hilton. 

Ms. Hilton could probably make up for the lost income by living on her AmEx Black for a while, just like Medicare and Social Security could probably live on government debt for a while — but eventually everyone reaches a limit.  Membership has only so many priviledges.

The government has the same options that Paris Hilton does to treat a shortfall: Raise revenue or reduce benefits.  Here’s the finding of the Doomsday Club:

The Medicare Report shows that the HI Trust Fund could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134 percent increase in the payroll tax (from a rate of 2.9 percent to 6.78 percent), or an immediate 53 percent reduction in program outlays, or some combination of the two. Larger changes would be required to make the program solvent beyond the 75-year horizon.

[…]

Social Security could be brought into actuarial balance over the next 75 years with changes equivalent to an immediate 16 percent increase in the payroll tax (from a rate of 12.4 percent to 14.4 percent) or an immediate reduction in benefits of 13 percent or some combination of the two. Ensuring that the system remains solvent on a sustainable basis beyond the next 75 years would require larger changes because increasing longevity will result in people receiving benefits for ever longer periods of retirement.

A 53 percent cut in benefits for Medicare.  It’s much easier to say that Ms. Hilton should spend less at Hermès than it is to tell seniors that they should consider skipping six months’ worth of medications, or a necessary surgery or, you know, food.  So the government’s solution will be the same as Ms. Hilton’s, most likely: Raise revenue.  While it’d be nice if the government could make money simply by showing up at a club, right now the only way it’s going to get that money is through an increase on taxes.

Now, who is it that has to say yes to raising taxes?  Oh yeah: Congress.  If John Boehner’s late-April op-ed in the Washington Times is right, I’d say right now there’s about the same chance of a tax increase being passed by the Senate as there is of Paris Hilton being elected to the Senate.  Actually, her chances may be higher.  Stranger things have happened in California.

Really, this is an issue that has to go before Congress, and predictions are some kind of Medicare fix will hit the deck this year or next.  I can’t imagine anyone voting to cut Medicare benefits by half, but five years ago I couldn’t imagine anyone giving George W. Bush a second term.

So perhaps it’s time to look into a government reality show franchise, before all of our seniors are living very, very simple lives.

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.

Ten Banks Expected to “Fail” Stress Tests

It’s Stress Test Week!  (Again).  But this time, we’re talking results instead of just, you know, hey, guess what’s happening behind closed doors.  The nation’s 19 largest banks have all seen their results by now, and rumors have been flying since Monday about what, exactly, those results showed.  I thought I’d do a round-up of expectations now, and then come back tomorrow and see how the banks fared in reality.  I’ve waxed on about what the tests mean before.  And I’ve said my faith in Treasury rests largely on the results.  So here it is: judgment day.  Rumor has it, ten banks aren’t expected to pass (which is different than a bank failing outright, because if they don’t pass, they’re given time to raise capital).  Here’s the Top Ten:

Citibank is held by Citigroup.  It’s expected to need a major infusion of cash — talk is $10 billion.  Citi apparently appealed the government’s findings.  Just this week, it sold its Japanese finance company, Nikko Cordial, for about $3.4 billion (it bought Nikko in 2008 for around $18B) to raise some much-needed cash.  Citi is largely considered the bell-weather of this test, in that if it’s deemed to “pass,” the rest of the test should be considered a joke.
Current government investment in Citi: ~$45 billion (some in common stock).

Bank of America is the nation’s largest retail bank, as of last fall when it bought Merrill Lynch — and is also expected to be the bank in the most trouble, since last fall it — hey! — bought Merrill Lynch.  BoA is expected to need a whopping $33.9 billion in additional capital post-test.
Current TARP investment in BoA: ~$45 billion (unless you count the government’s asset guarantees in.  Then we’re talking 45 + $142 billion = $187 billion).

Wells Fargo was considered in prime shape this fall when it bought out troubled Wachovia, and it took money from the TARP — but only under duress.  Now, despite the CEO’s protests that the stress tests are “asinine,” the bank is considered one of the most likely to be under pressure to raise new capital.  Warren Buffet, whose Berkshire Hathaway investment group owns shares of Wells Fargo (and US Bancorp, SunTrust, and BoA) and pushed for the Wachovia takeover, called Wells and US Bancorp “extremely strong banks” Monday.
Current TARP investment: ~$25 billion.

KeyCorp owns the Key Bank franchises.  It’s considered to be widely and heavily exposed in the commerical real-estate market, which is taking some significant hits as businesses suffer during the recession.  Analysts at several research/investment firms have said KeyCorp is quite likely to need to raise additional capital, and it has shown a loss in all of the last four quarters.
Current TARP investment: ~$2.5 billion

Regions Financial is in about the same boat as KeyCorp.  Oppenheimer analysts said late last month that they expected Regions to fail the stress tests and have to raise more capital.  Regions posted a 92% loss in the first quarter.  Holy mackeral.
Current TARP investment: ~$2.5 Billion

US Bancorp owns U.S. Bank, the sixth largest commercial bank in the country.  It’s not widely expected to need a big capital raise; it cut dividends earlier this year by 88 percent to maintain its capital cushion.  Its CEO also announced late last month that US Bancorp is ready to repay its TARP money as soon as possible.  The bank had a $529 million profit in the first quarter, down significantly from past years but a better showing than expected.
Current TARP investment: $6.6 billion

Fifth Third Bancorp is another regional bank expected to need additional capital.  It’s based in Florida, where the burst of the housing bubble is still taking down everything in its path.  Like Regions, were the government to convert its preferred shares to common shares, it would own a majority stake (54 percent) of Fifth Third.  One wonders if that’s enough ownership to induce a name change.
Current TARP investment: $3.4 billion

Like Fifth Third, Georgia-based SunTrust is a considered a regional bank likely to be told to get thee more capital, according to a report issued by Mogan Stanley last month.  Then again, Morgan Stanley though BoA fell into a “grey zone” and might not need new capital, so who knows. SunTrust wrote off $610 million in bad loans just in the first quarter this year, and apparently holds a big balance sheet of home mortgage loans in the Southeast.  Last week, a huge Georgia banker’s bank with similar ugly exposure became the fifth largest bank failure this year.  In January, analysts were already predicting SunTrust would need another $2 billion.  They went back for $1B from TARP, so at this point, I’d guess they’ll need at least $1B.
Current TARP investment: ~$5 billion.

PNC Financial Services Group posted a profit last quarter, mostly on the strength of its acquisition of National City — a move that some say gave the bank a needed capital boost.  Analysts at Keefe, Bruyette and Woods say PNC is likely to need more capital despite cutting dividend payments earlier this year.
Current TARP investment: ~$7.5 billion

And lucky number 10.  Capital One Financial Group is mentioned with some regularity as a bank expected to need additional capital.  Its exposure is largely in credit cards, and as unemployment rises (in the stress tests, it went over 10 percent) so do expected defaults on credit card payments. 
Current TARP exposure: $3.5 billion

Ten banks are expected to have “failed,” or, in the nicer terminology, to need to raise new capital so as to have a nice cushion in case of the economy continuing to decline.  The remaining nine banks are considered variably secure right now, though BB&T is mentioned in several articles as likely to be asked to raise capital, too, and I’m a little surprised that no one thinks GMAC is going to need any further funding.
Current BB&T TARP Investment: ~$3 billion

Current GMAC TARP Investment: $5 billion

The remaining banks (bank holding companies) are:

• J.P. Morgan Chase.  Current TARP Investment: $25 billion
• Goldman Sachs Group.  Current TARP Investment: $10 billion
• Morgan Stanley.  Current TARP Investment: $10 billion
• State Street Corp.  Current TARP Investment: $2 billion
• Bank of New York Mellon.  Current TARP Investment: $3 billion
• American Express Co.  Current TARP Investment: ~$3.4 billion
• MetLife.  No TARP Investment.

Well, so, let’s see what happens now.