In late January of this year, Treasury Secretary Tim Geithner sat in front of the House Committee on Oversight & Government Reform to answer questions about his decision making process regarding, overall, the American taxpayers bailout of AIG in the fall of 2008.
The big piece in the questioning involved the recent revelation that in the wake of the economic crisis, the Federal Reserve paid 100 cents on every dollar to not only save AIG from collapsing, but to help AIG’s counterparties as well, including “Goldman Sachs, Bank of America, Merril Lynch, Citigroup, Societe Generale, Deutsche Bank and others.” (http://www.thenation.com/doc/20100208/kaufmann)
Why was this necessary? Why didn’t the Federal Reserve negotiate with the banks to push through a discounted cost for the taxpayers of America? “And what was his role in the decision not to disclose to the public-which owned 80 percent of AIG at the time-the names of the banks and the payments they received, as AIG was prepared to do before the Federal Reserve Bank of New York (FRBNY) run by Geithner advised them not to?”
According to Paul Wiseman of USAToday, “Geithner said that making the banks absorb losses would have put AIG in default and made a financial panic worse.” But, if the taxpayers are on the hook for the irresponsible financial practices of various institutions, including credit default swaps, shouldn’t the banks “absorb” some degree of losses? By paying AIG counterparties 100 cents on the dollar, hasn’t a moral hazard been created?
Tim Geithner, at the time of the immediate crisis, was president of the Federal Reserve Bank of New York, but upon his nomination as treasury secretary, he recused himself from duties involving monetary matters he was, beforehand, very much tied to. Curiously, he delegated the AIG case, passing the buck on to the FRBNY’s vice president. “Apparently, decision-making over tens of billions of dollars of taxpayer money wasn’t deemed a top-level priority by him or his predecessor, former Treasury Secretary Henry Paulson, who also testified. In fact, Congresswoman Marcy Kaptur discovered through her questions that no formal recusal agreement outlining Geithner’s new responsibilities (or lack thereof) was ever executed.” (http://www.thenation.com/doc/20100208/kaufmann)
Giethner argued that credit rating agencies were dooming AIG, even after billions were funneled from taxpayer coffers to AIG’s bottom line. He asserted that “a downgrade would require AIG to pay out tens of billions of dollars more in collateral payments to the banks on the credit default swaps (insurance on the bad assets)-money that it didn’t have and that Geithner maintained would force the company to collapse,” according to Greg Kaufmann of The Nation magazine. Former Treasury Secretary Henry Paulson foreboded that unemployment would have been over 25 percent.
Regardless of what might have been, was the manner in which the bailout was put forth at any rate economically efficient for the American taxpayer? In April of 2009, several months before the Geithner-AIG controversy came to light, Chris Hedges pointed out the following in his column on TruthDig.com, “Resist or Become Serfs”:
“There are a handful of former executives who have conceded that the bailouts are a waste. American International Group Inc.’s (AIG) former chairman, Maurice R. Greenberg, told the House Oversight and Government Reform Committee on Thursday that the effort to prop up the firm with $170 billion has “failed.” He said the company should be restructured. AIG, he said, would have been better off filing for Chapter 11 bankruptcy protection instead of seeking government help. “
On a positive note, despite the original lack of accountability in regards to how congress handed billions of taxpayer dollars over to irresponsible financial institutions that play the game of ‘casino capitalism’ with, essentially, no strings attached, in mid-January of this year, the Obama administration announced a proposal for a levy tax on banks for the troubling cost to taxpayers that bailed out a number of failing institutions in late 2008. According to the HuffingtonPost.com:
“The proposed 0.15 percent tax on the liabilities of large financial institutions would apply only to those companies with assets of more than $50 billion – a group estimated at about 50. Administration officials estimate that 60 percent of the revenue would come from the 10 biggest ones.”
Strangely, the tax would even apply to banks that didn’t receive and/or need taxpayer assistance, but I’d argue that the obvious unfairness might be a tool to dissuade other large banks from exercising the same risky practices that got the banks, and as a result, the taxpayers in a lot of trouble. Democratic Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee, was quoted in saying “I think it is entirely reasonable to say that the industry that, A, caused these problems more than any other and, B, benefited from the activity, should be contributing.”
As is to be expected, the notorious notion that a tax-like that which was proposed by the Obama administration-on the banks would ultimately be passed on to consumers, has entered the discussion. But, if the banks had any desire for efficiency, they might go the route that was suggested by the Obama administration: to pull from the excessive pool of executive compensation to pay for the tax, instead of passing even more costs on to consumers. In the words of President Obama, “If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers.”
Even more pragmatic would be for the American government to rescind its repeal of the Glass-Steagall Act, which was replaced by the Gramm-Leach-Bliley Act in 1999. The Glass-Steagall Act was passed in 1933 to essentially forbid the merging of investment banks with commercial banks. In December of last year, Sen. Maria Cantwell (D-Wash.), & Sen. John McCain (R-Ariz.) co-sponsored a bill that would reinstate the Glass-Steagall Act as a response to the humongous contraction that found its footing in 2008.
The reason that the reinstatement of the Glass Steagall Act would serve the American economy so well is directly linked the to activities it would, once again, regulate for the purpose of mitigating its pervasiveness; mainly, Wall Street speculation.
In early December of 2009, Rep. Peter DeFazio, D-Oregon, put forth a proposal to tax Wall Street speculation entitled the “Let Wall Street Pay for the Restoration of Main Street Act.”
According to Robert Weissman (Multinational Monitor, Public Citizen, and so on, and so on…), writing in TheHill.com, “A speculation tax has at least three distinct benefits. First, it can slow the churning of stocks and financial instruments on Wall Street. Too much of Wall Street’s business is based on lightening trades to capture very small margins. This business contributes little or no social value-it does little to advance the efficient allocation of capital that is Wall Street’s purported social contribution.”
The second benefit would be the obvious tax revenues, which Rep. DeFazio feels should be used to target the deficit and create jobs.
And third, “the speculation tax would be extremely progressive. It is self-evident that it is the richest Americans who trade stocks the most. The richest 1 percent of Americans own about 40 percent of the stocks; the top 10 percent own about 80 percent. There is no question about the administrability of a speculation tax. The Securities and Exchange Commission is presently funded by a micro tax on stock trades.”
Speaking of The Securities and Exchange Commission, just this past Friday, April 16, 2010, the S.E.C. accused the financial giant, Goldman Sachs, of creating and selling “a mortgage investment that was secretly intended to fail.” According to the NY Times, “The focus of the S.E.C. case, an investment vehicle called Abacus 2007-AC1, was one of 25 such vehicles that Goldman created so the bank and some of its clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.”
Given the wide array of Wall Street games that contribute nothing to the economy, aside from careers in an industry that has become expensive for American taxpayers, and dishonesty in a political playing field that purports to honor the free market while being propped up by the same socialism it condemns, economic efficiency is more than just a supply and demand paradigm. Economic efficiency now relies on accountability; accountability in government, and accountability in the industries that the government oversees. If we are to accept the “too big to fail” premise, we will once again endure the wrath of what that very phrase means. But if we are to address it for the purpose of protecting the interests of all citizens, and not Wall Street “fat cats” that are colluding to make a quick profit, our government is, in effect, exercising economic efficiency.