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Obama Financial Team to Taxpayers: You'll Get Nothing, and Like It

There's nothing that prevents the public from getting their fair share of any future bank profits appropriate to the high risk investment they are being forced to make.
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As a business person, Warren Buffet quite rightly wanted something for his money when he bought up failed banks that couldn't get help anywhere else. In fact, he wanted a lot. He expected to have the ability to make sure the same executives weren't pulling down the same salaries for making the same mistakes, and that the business plan changed. It was pretty basic, a bedrock principle of capitalism, the ability to exercise control and enjoy the profits appropriate to one's share of ownership.

According to Rebecca Christie at Bloomberg, American taxpayers are about to buy ourselves some failed banks, but we can't get what Warren Buffet gets because nobody wants to mention the "n" word, nationalization:

One part of that strategy will be addressing the toxic assets that are clogging lenders' balance sheets and preventing them from expanding credit, people familiar with the matter said last week. Likely approaches include a government-run bad bank to buy and hold some of the securities, and insurance of other assets that remain on banks' books.

As Dean Baker says, "many, if not most, of our banks are in fact bankrupt... the scope of the toxic asset 'problem' has reached $2 trillion... this sum vastly exceeds the capital of the banking system."

But our money somehow isn't as good as Warren Buffet's -- if we step in and save the day, all we get for it is crap:

[T]he Obama administration is looking to hand taxpayer dollars to the banks through a variety of complex mechanisms. The main reason for using complex mechanisms (rather than simply seizing bankrupt institutions) seems to be to conceal the fact that we are handing taxpayer dollars to bank shareholders and the wealthy executives who run them.

Paul Krugman calls it "lemon socialism": "taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right." Or as Joseph Stiglitz says, it's "trash for cash."

It's almost inconceivable that anyone would try to sell this as a good deal for taxpayers, but that's where we are.


"We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system," says Timothy Geithner, the Treasury secretary -- as he prepares to put taxpayers on the hook for that system's immense losses.

Meanwhile, a Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama's top economic adviser, "think governments make poor bank managers" -- as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.

And this prejudice in favor of private control, even when the government is putting up all the money, seems to be warping the administration's response to the financial crisis.

So Ronald Reagan tells us that government is the "problem," and George Bush proves it's true by running the country into the ground. What that really means is that you should never put people in charge of something who philosophically don't believe that it's possible to do their jobs well. It doesn't mean we should be making irrational business deals out of a commitment to the failed ideologies of people who, you know, failed.

Rep. Jim Cooper bragged to the Wall Street Journal that if his "fiscally conservative" Blue Dog Democrats "we were to ally with the Republicans, we could swing any vote in the House of Representatives." He's right. They were able to force President Obama's budget director Peter Orszag to write them a letter pledging to accept "pay-as-you-go budgeting" for everything other than "non-emergency spending" as the price for voting for the stimulus bill.

If eight more Blue Dogs had crossed over and voted against the bill, it would have failed.

But Blue Dog commitment to "fiscal conservatism" is usually some phony exercises in "centrism" where they get concessions for K-Street lobbyists and let just enough Blue Dogs vote for passage so those allowed off leash can deliver self-righteous lectures in sonorous tones about "fiscal responsibility." It's time Cooper and the Blue Dogs demonstrate their commitment to "pay-as-you-go" principles and really pay for this bill, instead of just pretending to.

Here's a suggestion from analyst Dirk van Dijk, CFA, who manages the investment research department for Zacks:

The next tranche of the TARP could easily, at current prices, be sufficient for the taxpayers to become 50% owners of all the major banks in the country. The existing shareholders would be severely diluted, but the banks would be better capitalized and in the position to lend again.

The government would also then be in a position to stop the obscenely high salaries and bonuses that are paid out up and down Wall Street. This would also help firm up the capital position of the banks. Common dividends would also be eliminated for several years. A few years from now when the economy has recovered, the Treasury could sell off the bank stock and use the proceeds to pay down some of the ballooning federal debt.

If the banks that Warren Buffet invests in make money, Warren Buffet makes money. He gets to be richer and his shareholders get to be richer. If our banks get richer, we don't get to have the schools and green energy and healthcare and mass transit that the profits could (and should) pay for -- that goes to fois gras and Cristal and Gulf Stream jets for the bankers who created this mess.

As someone who did my time in business school, there is no business principle I'm aware of that justifies throwing trillions of dollars in cash into an open pit and lighting in on fire. Even if you want to argue that the government should not be in the business of directly running banks and that the current management structure should remain intact, there's nothing that prevents the public from getting their fair share of any future bank profits appropriate to the high risk investment they are being forced to make.

The Blue Dogs claim a commitment to fiscal responsibility, and boast that they control the House. If Jim Cooper and the Blue Dogs want the public to get their fair share of bank profits in exchange for their votes, it will happen.

Jane Hamsher blogs at

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