Sunday, October 06, 2013

Obama and the bank bailouts of 2009

"My administration is the only thing between you and the pitchforks." - Obama to bank CEOs in a private White House meeting, April 2009

Eamon Javers reported on that meeting in Inside Obama's bank CEOs meeting Politico 04/03/09:

There were signs from the outset that this was a business event, not a social gathering. At each place around the table sat a single glass of water. No ice. For those who finished their glass, no refills were offered. There was no group photograph taken of the CEOs with the president, which typically happens at ceremonial White House gatherings but not at serious strategy sessions.

"The only way they could have sent a more Spartan message is if they had served bread along with the water,” says a person who attended the meeting. "The signal from Obama’s body language and demeanor was, 'I'm the president, and you're not.'"

Lindsey Ellerson picked up on the story in Obama to Bankers: I’m Standing 'Between You and the Pitchforks’ ABC News The Note 04/03/2009:

The CEOs might have guessed they were in for a rough go of it. They found themselves gathered at a table with nothing more than a single glass of water at each seat. No food, no other beverages, no ice — no refills, even. During the meeting, JP Morgan Chase CEO Jamie Dimon jokingly presented Treasury Secretary Tim Geithner with a fake check for $25 billion, the amount of money the bank got from the Troubled Asset Relief Program. Geithner didn’t take it. Joked Bank of America CEO Ken Lewis later, "I’m not going to suck up to Geithner and [NEC Director Larry] Summers like the other CEOs here have." After the meeting last Friday, one bank CEO told ABC News, "There were differences of opinion. I wouldn't say it was contentious, but we weren’t all sitting around the table singing ‘Kumbaya’ either."

The folklore process and lazy journalism has turned the Obama quote as provided by hedge fund advisor Liaquat Ahamed of the Brookings Institute in "Rethinking Barack Obama" Bloomberg Businessweek 09/16-22/2013 issue into, "I am all that stands between you and the pitchforks." (The online version is titled Obama's Wall Street Bank Rescue Stabilized Economy at a Political Cost 09/12/2013; the online version omits the quotation marks that appear on that sentence in the print edition.)

Ahamad's article is interesting in its strange conclusions from Obama's record with Big Finance.

Ahamed describes the early debates in the Obama Administration between, on one side, "the more radical policy" of putting borderline large banks as insolvent and "take over some banks and restructure them." That is the normal process for dealing with bankrupt banks, which routinely takes place all the time, though normally with far smaller banks than Bank of American or Citibank. The other side he defines like this:

The alternative view, embraced by Timothy Geithner, who was intimately involved in crafting the Bush bailouts, was that the U.S. banking system was in the throes of a gigantic, but essentially irrational, investor panic. Taking over banks and making an example of bankers would exacerbate an already fragile situation by spooking investors. The central imperative instead should be to restore confidence and reassure suppliers of capital by continuing to support the system.
The latter, of course, famously won out. The stockholders of bailed-out banks didn't take losses. In general, the management was not removed, though Ken Lewis was reportedly pushed out of Bank of America's CEO position under federal pressure. The prosecutions that have taken place under Eric Holder's Justice Department have rarely if even been connected to the massive fraud and misconduct that brought about the crash of mortgage-related securities that played such a large role in taking down the world economy in 2007-8.

Ahamed concludes from this choice: "While Republicans often try to depict Obama as a radical, hes actually pragmatic and non-ideological." This is conventional-wisdom speak for: Obama was willing to disappoint or infuriate his own base to protect the big banks, showing that he's one of the proverbial grown-up. Crassly tilting to the big banks and letting them off the hood for incredibly destructive misconduct is, according to Ahamed, "pragmatic and non-ideological." Following the straightforward, long-established procedure for dealing with banks that are financial under water would be "radical," in Ahamed's view of the world.

His final two paragraphs are less coherent. The final one says:

Ultimately, the presidents decision to allow bankers to get off lightly has to be understood in the context of his other ambitions, especially health-care reform. Unlike Franklin D. Roosevelt, who took office in the Great Depressions fourth year, Obama became president in the downturns early stages. He recognized he had to jettison other goals if he could not stave off an economic collapse. To do so, he had to save the financial system. Unfortunately it also meant saving bankers from the consequence of their folly and mismanagement.
The last sentence makes since, though it's clear that Ahamed doesn't find it terribly regrettable that major bankers were saved "from the consequence of their folly and mismanagement."

This reminds me of this memorable moment from Meet the Press last month when Barney Frank actually questioned the high salaries of Wall Street bankers in light of their whining, which flummoxed CNBC hack Maria Bartiromo and Bush Treasury Secretary Henry Paulson:

David Gregory like a loyal servant of the One Percent quickly switches the topic to the framing that Paulson had suggested. (I would note that in the beginning of that segment, Frank is greatly exaggerating the end of too-big-to-fail for the banks.)

But Ahamed's argument is incoherent. How Roosevelt coming to office much further into the Great Depression than Obama did during the Lesser has anything to do with what he could have accomplished isn't at all clear. And even the choice that Ahamed describes wasn't between "to save the financial system" or not to save it. It was between bailing out the failed big banks with essentially no strings attached when it came to exorbitant pay packages or even to bank misconduct, much less holding them legally accountable for their enormously consequential misdeeds.

The second-to-last paragraph is also odd in the context in which he uses it:

That success came at a high political price. In any panic, financial markets almost always overreact on the way down, requiring policymakers to correspondingly overreach in the level of support they provide. When all the measures eventually kicked in during the spring of 2009, they came to be seen as far too generous. That year, Wall Street came back from the dead, made spectacular profits, and rewarded itself with hefty bonuses. Allowing the bankers to profit so egregiously from the bailout weakened trust in government, compounded public cynicism, and fueled populist movements on the right and the left. [my emphasis]
The emphasized sentence is really the core of Ahamed's argument. He buys the fanciful ideological argument that the financial system wasn't in such terrible shape, and that a straightforward bailout without reorganization was the best solution in early 2009.

But the suggestion is that there was some kind of historical inevitability about this outcome. Yet, if the actual policy "weakened trust in government, compounded public cynicism, and fueled populist movements on the right and the left," it seems pretty obvious that some of those could have been avoided by a bankruptcy/reorganization process that didn't show such obvious subservience to Wall Street and avoided those "hefty bonuses" that the failed management that had just been bailed out by the taxpayers were paid.

But Ahamed provides the conventional wisdom's view. When Democrats pander to the One Percent, angering their own voting base and incurring political damage by doing so, they are acting as responsible grown-ups displaying "political courage." It's the role that neoliberal ideology assigns to center-left parties: persuading their working-class and poor constituencies to swallow deregulation, falling wages, fewer and less effective government services, job-destroying "free trade" treaties, and crass generosity with public funds for big business like that displayed in the 2009 bank bailouts.

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