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Turn a Harsh Light Onto the Banks

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Posted on Feb 23, 2009

By Eugene Robinson

    It’s reaching the point where desperate measures—brutal honesty and complete transparency—may be the only way to bring the economy out of its kamikaze dive. If so, this won’t be pretty.

    A certain amount of legerdemain is designed into the financial system and makes everyone richer. But those we trusted with the world’s money are being shown to have acted with such cupidity, irresponsibility and incompetence that a consensus seems to be forming around the cautionary words of George W. Bush, our greatest unintentional aphorist: “Fool me once, shame on—shame on you. Fool me—you can’t get fooled again.” 

    This week, the Obama administration is set to begin its “stress tests” of major U.S. banks to gauge their fundamental health. Officials clearly want to avoid nationalization of behemoths such as Citigroup or Bank of America—a drastic step that would probably be gussied up with a nice euphemism, such as “temporary receivership.” But the market, in driving the banks’ stock prices remorselessly downward, is betting that some kind of takeover is inevitable.

    What credibility will officials have if they report that the banks still have a pulse? It’s unfair that President Obama’s team should be tainted by the sins of the past, but the recent record of federal regulators is one of abject failure. Bernard Madoff, investigators now say, scarfed up what he calculates as $50 billion of investors’ money and seems to have purchased no investments at all for at least the past 13 years. Allen Stanford took in something like $8 billion, and authorities can’t find the certificates of deposit he was supposed to have bought. If alleged scams of this magnitude were possible in broad daylight, under the government’s nose, what other outrages remain to be stumbled across?

    This is not to suggest that the banks played a simple game of take the money and run. It’s to state what is now obvious—that they had a decade-long toga party, safeguarding our money with the diligence and sobriety of the fraternity brothers in “Animal House.”

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    What’s missing now from the whole system is trust, and trust can’t be re-established until we know how bad things really are. It’s understandable that Treasury Secretary Timothy Geithner and the rest of Obama’s economic team would be wary of full disclosure, but at this point I don’t think they have much choice. If they don’t give us a full, unbowdlerized report on what they find in their stress tests—computer runs of how the banks would hold up under various economic scenarios—suspicions will remain.

    Nobody who has a choice is going to pour capital into banks that are thought perhaps to be “zombies,” with more “toxic” red ink than legitimate assets on their balance sheets. One way or another, the government is going to have to pony up—and there’s an argument for making a clean break with the past, through nationalization or whatever it’s ultimately called.

    Some financial-sector stocks perked up Monday on reports that the Treasury Department was “open” to a proposal from Citigroup to effectively take more ownership of the bank but stop short of full nationalization. It’s understandable that investors would be heartened by the prospect that the money they already have in Citigroup wouldn’t be completely wiped out by a government takeover. But I think my reaction is closer to that of the average citizen: What standing does Citigroup have to propose anything?

    Shouldn’t the executives of Citigroup, Bank of America and much of the rest of the nation’s financial establishment just say they’re sorry, sit down in the corner and shut up? Taxpayers have already spent hundreds of billions of dollars bailing out Wall Street, not to mention the trillions more we’ve put at risk in various kinds of backstop guarantees. Sincere apologies and expressions of gratitude would be nice to hear. “Have we got a deal for you” is pushing it.

    Having to take over one or more of the big banks is the last thing the new administration needs on its already full plate, and I understand why Obama and his advisers will do anything they can to avoid taking that step. They can’t avoid revealing how bad things really are, though. They might as well go ahead and “let in daylight upon magic,” because the illusion is long gone.
   
    Eugene Robinson’s e-mail address is eugenerobinson(at)washpost.com.
   
    © 2009, Washington Post Writers Group


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By Gary Rosenblum, February 25, 2009 at 7:19 pm Link to this comment
(Unregistered commenter)

The solution is for the Federal government to take TARP money, and any other money it ws going to put into existing banks, and stop giving it to any banks. Period.  It must instead create a fresh new “First National Bank.”  This bank will have 100% capitalization with zero bad loans.  It will have a perfect balance sheet, and it can then start to lend money to responsible people and businesses and students directly.  No executive pay, and no bonuses.  Just government employees providing money to those that fill out honest viable credit aps.  Stocked with laid off employees from the other banks.  Filling empty office space in Main streets everywhere.  Accountability, and direct injection of Federal cash into the economy. No rip off artist middleman.  Let it even take deposits at adecent interest rate to increase savings and provide free checking for low income people who are ripped off by payday check cashers. 

Let the other bank guys compete with that business model.

Guess what folks, Ronald Reagan and his can’t trust the government, only the free market can accomplish anything era ios utterly and completely over, proved decisively wrong and fraudulent. It is time for the “First National Bank.”

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By Louise, February 25, 2009 at 7:55 am Link to this comment

So, if we save the Giants from themselves, the money will flow, credit will follow and jobs will be created. But as a hedge against maybe not, we have the stimulus to jump-start the process. Don’t misunderstand. I think the stimulus package was essential. And no matter how saving the Giants plays out, will start things moving. What I want to know, I guess everyone wants to know, is what’s the best way to save the giants? And there’s still one reality the gurus need to address. I think it’s called ignorance.

As Senator Jim Bunning (R) put it to Chairman Bernanke yesterday, “The American people do not believe you, or anyone sitting here. Those loans were supposed to go to healthy banks, how come they didn’t? Who approaved the amounts of the money? Who made the decisions to target failing banks with capital infusion?”

To which Bernanke answered,  “The Treasury.” And that would be Bush’s Secretary of the Treasury, Paulson.

Amazing. Where have all the “right” minds been for low these many months? Brownie points for Bunning for remembering why his constituents are angry. We wont mention he cant remember where his party was when the Giant was growing.

I think we need a committee of explanation. A group of knowledgeble people who know how to speak the common language in a way that makes understanding hard to avoid. A committee empowered to walk alongside members of Congress and explain as they go. A committee empowered to walk at the elbow of the FED and the Treasury, and translate as action occurs.

Yesterday morning, Bernanke made it clear there will be transparency. Good for those who understand all this, but not necessarily for those who cant. Which would be most of us and many of the Senators present for yesterdays unfolding drama. Transparency is seeing through. For those who know what they should see when they see through, that’s good. For everyone else, it only means we’ll see through to what we cant understand anyway.

Yesterday, Bernanke, explaining how the double credit billing cycle works said, “I’m not sure I understand how it works, so maybe it needs to be done away with!” And in my simple mind that sums it all up! Do away with the practice of these big firms creating financial “models” nobody can understand! In other words, throw away the old policies of Greenspan!

Of course we’re angry, so we demand those “too big to fail” institutions close their doors! Chopping pieces off the giants, trying to keep the body alive, may keep the doors open, but maybe picking up those pieces will leave us owning the whole giant anyway. So maybe the wrong question is being asked. Maybe the question should be which action will bring the best result? Slowly acquiring piece by piece, or risk panic followed by collapse, and just take over the whole Giant in one fell swope!

Given the publics general ignorance, we may want to avoid panic.

Meanwhile the new hot button word is nationalization. Seen as a bad thing, most fail to note everytime FDIC steps in, takes over and resells a bank, it’s a process of nationalization. It happens all the time. But we’re told the 19 or 20 Giants who’ve engaged in a “decade-long toga party” are too big to fail! OK, lets wittle them down to a manageable size. Then prevent the monster from ever re-growing by re-instituting REGULATION that gets done! To me, taking a percentage ownership, injecting public money as capital and acquiring prevered stock in exchange, then selling off that stock to private entities looks a lot like wittling away at a slower form of nationalization.

Maybe the devil is in the details, and if we try hard, we can find detail in yesterdays testimony. Like the revelation that the FED has no power to close these banks! Does the treasury? And like the assurance that at the end of the FED/Treasury action, a lot of those bad banks will be gone.

Oh happy day!  Lets speed up that process!

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By thekidde, February 25, 2009 at 7:52 am Link to this comment
(Unregistered commenter)

What a great bunch of comments.  Particularly the one about revolution.  Unless Obama and the Dems get it right, and quick, I’m afraid all hell is going to break loose in this country.

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By Shift, February 24, 2009 at 9:26 pm Link to this comment

America will topple from too much wealth at the top.  Obama is adding more.  I wonder what it sounds like when a nation falls.

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By CJ, February 24, 2009 at 8:35 pm Link to this comment

No need to be concerned for prettiness, since no chance of transparency, much less honesty. When was ever either of those?

Obama is holding court just now, with jesters Pelosi, Reid, McConnell and Beohner; and of course Justices Thomas and Scalia, et assorted al. all in attendance. Not to forget media jesters.

Obama “understand[s] skepticism.” Well, that’s a relief! Pelosi appears just thrilled just behind the President. All are, as we know, terribly concerned, though it was bankers who did it—according to aforementioned. None of them played any role in—according to them—causing what happened. I don’t know, as they all look pretty fat and happy from here. None looking anything like the guy depicted in Mr. Fish’s art of last week or so.

I have no idea how it is we all can’t recall all of these people, send them off to get real jobs. Not that they’d qualify, and even if they did they’d not be able to find a job. I’ve no idea how it is that Americans actually vote for these egoists who are forever congratulating themselves on their good will toward…us? So they claim. Pity we can’t literally eat their words that signify nothing. (Do not be cynical. Who’s more cynical than royal court?)

Sorry, Eugene; that was very funny citation of Bush. I hadn’t laughed all day, and maybe he was onto something there with “you can’t get fooled again.” (Apparently, The Who was on his mind at the time he said that, which was not a bad thing. So Dub got crossed up; what of it? Who’s not?) (Chamber is wildly applauding usual stuff.)

I have no idea what a “stress test” could be, expect atop a treadmill.

Quite a number of people (all at court this evening) “[S]hould sit down in a corner and shut up.” Pending getting out of town before sundown.

Obama means well, no doubt, but he comes over as hopeless idealist. (No, at almost 60 I won’t commit to another year of school, thank you very much. I might be committed, however.)

The underlying problem, which is actually premise is never discussed. (Thanks, Barack, but I don’t need a “father” either. Been there, done that. I KNOW what he meant, but curious slip.)

There’s ongoing talk of all being Swedes (who aren’t Swedes they used to be, as they too have bought—so to speak—into “privatization”) and socialists now. For the moment, as socialist policy rescues capitalism again, pending return of long-silly idea that the only way to make an economy function is by means of monetary “incentive,” as though none would get out of bed to undertake any activity were it not for lure of dough, aka, promise of American Dream, which I believe Hoover characterized as chickens in pots and cars in garages. Not that we don’t all need those. We DO need those!

But it is just those minimal needs that courts continue to deny, as they take and take and take.

It’s no longer PR to speak as Ms. Antoinette did, “Let ‘em eat cake.” It’s now necessary (or not?) to claim that it’s possible both to have and to eat cake.

There will not be transparency, since incapacity for honesty. There will not be any taking of any responsibility on the part of court members. (Will they cut their own pay to, say, $25,000 per annum? Ride bicycles? Reside in apartments? Hell no.) They have no idea of reality as they insultingly pretend to tell of it, claim to empathize with it. Not Matthews, Olbermann and Maddow either. Not any at any other prop mouthpiece either.

Spectacle produced among marble columns and red drapery has concluded. Good luck to those not in attendance, ‘cept for K Street pals and those they represent.

“Responsibility,” my ass.  Monarch, aristocrats and jesters (including pundits), along with K-Street buds and bankers, all go to corner, sit down and shut up, at long last. How about socialism from this point forward? Known to work very well, if not so easily lucratively for the few.

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By drklassen, February 24, 2009 at 7:39 pm Link to this comment
(Unregistered commenter)

Nationalize them, fix the balance sheets, sell them back off.  But break them up first.  The mantra should alwasy be “too big to fail = too big to exist”.

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By P. T., February 24, 2009 at 7:34 pm Link to this comment

A rise in the stock market comes as bad news.  That indicates Wall Street is hopeful about getting into the taxpayers’ pockets.

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By Old Ed Of The Delta, February 24, 2009 at 2:10 pm Link to this comment

Bail Out Or Armageddon.

The whole banking system is controlled by a few conglomerates on a world wide basis. Like it or not this is the way it is.

The banks here in the USA are just too important to let fail. If the US government just backed out of any rescue plan and let nature take its course, the whole system would collapse.

Wall Street would be completely out of business and commerce as we know it would come to a halt. You would witness people jumping out of windows and committing suicide.

People would be without electricity, potable water, sewage disposal and transportation in many parts of the country. This could lead to communicable deceases that would put an unimaginable strain on our health systems. Public schools would be closed along with the judicial system as we know it.

Panic could sweep through the United States to the point one would need armed escorts to go shopping at the grocery store for the few items available at any price. 

The issue of bailing out the financial institutions and the corporations is just too dangerous to mishandle. These entities are TOO BIG to let fail! If we let even one system fail we run the risk of a financial cataclysmic domino effect and the chance of starvation, malnutrition and families sleeping on the streets.

Society will put up with any regime that brings some form of order that will enable the citizens the necessities of life even on a primitive basis.

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By Anarcissie, February 24, 2009 at 1:39 pm Link to this comment

Allan Gurfinkle:
’... The ‘free market’ solution would be to let the banks go bankrupt, and let their creditors take the losses.  That will not happen.’

The government could take over the banks, fire the top managers, pay off the depositors up to some reasonable limit, set up new banks to take over the loans (which could possibly be sold off at a later time), and stiff the stockholders.  The numerous bureaucratic jobs necessary to handle large proceedings of this type would help solve the employment problems of those recently laid off.   

Many investor types seem to think something like that is eventually going to happen, in spite of the bailouts and stimuli.  I think Mr. O will have to burn through his Clintonoid blockheads first, however.  I give that process about six months.

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By tropicgirl, February 24, 2009 at 12:46 pm Link to this comment

If you listen to the smart investment counselors there are TWO problems with taking over the banks.

1) We should take over only the healthy part of the bank, not the unhealthy parts.

2) When they are sold back (and there will be a long line of buyers waiting to buy and pilfer it again), THEY MUST ADHERE TO STRICTER LAWS.

This means the REPEAL of the 1999 bank de-regulation.

Unless they do this, they are all dancing clowns from Obama on down.

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By Marton, February 24, 2009 at 12:21 pm Link to this comment
(Unregistered commenter)

A lot of thinking inside of the capitalistic box.
The capitalism is about making profit. Capitalism is not about “free market” or “competition”. “Free Market ” used to force upon others the rules the capitalists like. See Opium war on China. Capitalism a system which is built upon greed.

Capitalism is a system where the banksters etc.are holding hostage the people. If something go wrong who will suffer first?

Capitalism is the system of informational terrorism: the advertisement. Likes it or not, the brainwashing forced upon you.

Capitalism makes profit from war: it is a system of imperialism.

.... etc .etc. And all these comes from the very nature of capitalism: profit and exploitation.

What capitalism could not be: democracy. Democracy means power of the people. The capitalism the interest of the banksters and corporations against the working class: think about offshoreing and outsourcing. In the end people can choose between the sames: who manipuletes more effectively.

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By lOst_sOuls_rembrd, February 24, 2009 at 12:10 pm Link to this comment

harsh lights?  geez I’d say let the shareholders eat the bad assets…......we’ll take over the bank…...just regular banks again not the conglomerates we have now…...

and then the most important thing is not to let the banks become privatized again so they can screw it up a second time!  It’s time for full disclosure and anything less is justification for….protesting! 

I feel there is a revolution brewing….......

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By Ribald, February 24, 2009 at 11:20 am Link to this comment
(Unregistered commenter)

I’ll second dmnalven’s remark. Brutal honesty and transparency are the bread and butter of the financial industry. In ordinary circumstances, banks thrive on the confidence of consumers and other lenders that their institutions are sound. Secrets in the financial sector are meant to obscure fraud, of which there has been plenty.

  The financial sector will remain in crisis unless the frauds are exposed and, ideally, prosecuted for their crimes. Recovery will still take time, but at least we can stop throwing money into a bottomless pit and get a handle on the problem.

  I imagine that such action will be the last resort, however, and by then it will be too late for rational crisis management. Oh well.

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By Purple Girl, February 24, 2009 at 11:17 am Link to this comment

Send these CEO’s over to the countries who have conned too- but have a less forgiving and fair legal system. Stanford is a prime example of one who needs to stand trial for his crimes in a less Hospitable country- Let the Antiguans have him.
The CEO’s of these so called ‘american’ corps ahve being doing the same typeof ponzi schemes on their Foreign investors- Let the Chinese, or the Saudi’s prosecute them. We’ll even pick up the airfare and some of theprosections legal costs. But let them not be afforded the luxury of the American legal system or Imprisonment.
As for Nationaizing the Banks- Only IF these criminals will not live to see them sold back onto the market. I have no interest in US cleaning up the shit, only to turn around and hand them back a Revitalized banking system to fuck up again!
Bu tthose who should be facing the Highest of Criminal Cahrges are the Politicians (past & present) who re instituted the Very economic system the Revolutioanry war was waged to Free US from.Trickle Down is and has always been the economic stratedgy of Monarchies and dictatorships- it is in direct conflict to a Free Market and aDemocracy, Founded on the principle of ‘For the people & By the People’. Trickle Down was (is)nothing less than Economic Treason. It is the means to siphon off wealth from those who prodcue it theough ttheir labor and a means to hoard it against it’s equal and fair distribution. It’s name is clearly indictive of it’s adherence to a sociolgical stratifaction (caste system) If there is a group which denotes the ‘Down’ , then there is a group which donote the Up and are only required to provide a ‘Trickle’ of resources to those below.What kind of fucking Economy runs on that principle?The one we defeated 233 yrs ago and one that has caused the collapse of All empires throughout history! that’s not a ‘Flaw’ in logic, that’s forethought and MALICE!!

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By Eric L. Prentis, February 24, 2009 at 10:24 am Link to this comment

The government turning its preferred shares paying dividends to the treasury into common stock in zombie banks is a terrible idea, instead, let these failed institutions go bankrupt and then have the FDIC reorganize their operations, that is the only fair way to proceed.

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By tropicgirl, February 24, 2009 at 9:55 am Link to this comment

Gene, why don’t you and others just come out and say it? These banks took depositors money and gambled with it in high risk schemes and lost or stole it.  Investment banks engage in completely risky ventures and should NOT be allowed free access to depositor money. In 1999, under Clinton, the Glass-Steagall Act, was repealed after years of effort to do so. This opened up the floodgates of corruption.

The other thing that needs to be fixed before anything will change is the limits on pay for financial executives running banks into the ground. Its becoming obvious to the rest of us that the more the banks went into the red, the more the top executives raided it for their own fortunes. There was a correlation.

Limiting cash pay is not enough. Most of these executives made off with secured stocks and other assets which Obama’s public threats to limit pay completely ignores. This actually accelerated the crash of their own banks.

If the Obama people continue to fail at reform, or even to discuss real reform, then nothing will change.  If someone like me can see the obvious that means others smarter than me can see it better. My question to you, and I wish you had addressed this in your article: Is Obama and team just stupid, or are they actually part of the problem, protecting the criminals? Are we just forever to be held hostage by the mob turned “legit”? When will meaningful reform come, or will it?

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By dmnalven, February 24, 2009 at 9:18 am Link to this comment
(Unregistered commenter)

Since when are “brutal honesty and complete transparency” desperate measures?

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By Allan Gurfinkle, February 24, 2009 at 8:05 am Link to this comment
(Unregistered commenter)

I believe the plan is to ‘turn a harsh light onto the banks’, and then if it is possible to save them by buying their toxic assets and guaranteeing their un-payable obligations, that will be done.  If that is not possible the bank will be nationalized, and the government will acquire the toxic assets, and assume the banks un-payable obligations, and the bank will be rechartered without these hindrances.  So, its a heads we win, tails you lose proposition for the banks and their creditors.  The taxpayer is being set up to take a huge beating to bail out the banks and the hedge funds.

The ‘free market’ solution would be to let the banks go bankrupt, and let their creditors take the losses.  That will not happen.

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By Jim C, February 24, 2009 at 7:52 am Link to this comment

I’m begining to wonder exacty what Obama’s up to period . His cabinet picks have been abysmal , he seems to be reneging on pretty much everything . With few exceptions I have not been impressed .

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By Ed Harges, February 24, 2009 at 12:41 am Link to this comment

Agreed. Obama needs to do this now. If he waits six months, the Republicans will try to pin this on him. Better to reveal the fiasco for what it is, while nobody can pretend that it’s Obama’s fiasco.

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