Socialism is a dangerous word in America. This kid of spin happened when Stuart Ewen writes about in the Social History of Spin. Now they’re trying to frighten people from the notion that the people who pay the money somehow are dangerous, meaning the taxpayers can’t operate banks. In fact, the same people operate the banks. The only thing that would change is the taxpayers would become the citizens who are providing the bailout, rather than the existing stockholders who made the mess.
Government have to separate banks into a handful of categories. Those that are fine, leave them alone. Those that have to be shut down, shut them down immediately. Those in the middle, some who need assistance but could be shut down, something like Washington Mutual was. Or something that’s a behemoth like Citibank probably needs massive assistance, the stockholders wiped out, large portions of the management fired, or at least fired and rehired, and then continue to operate the bank and eventually sell it off.
Wall Street made a complete mess of the economy. I spoke here a year ago about how it had overleveraged itself or borrowed itself beyond its risk. In the process of overleveraged itself or borrowed itself beyond its risk, Wall Street paid a lot of people a lot of money, not just in cash. The cash component of most Wall Street executives is actually very, very small. Hank Paulson, the Treasury Secretary who was involved in creating the beginnings of this bailout, only made only $600,000 in cash before he leapt into the Treasury Secretary slot from Goldman, but he made $33 million worth of options and shares and other types of compensation. So the idea of the cap is helping a sort of public outcry, but it’s not necessarily changing the risk nature of the people on Wall Street who have made all the money and created all of this mess.
We have to understand how the mess was created. And to go a little bit off of what Robert was saying, currently the administration still has no idea, if they are stress testing now, what was created to create this crisis. And it was a lot of assets and a lot of packaging and a lot of borrowing and a lot of fees that made a lot of people have record profit years in 2006 and 2007, and record bonus years at that time, for securities that then completely collapsed. So you shouldn’t have a bonus structure that creates the ability to take out short-term cash and leave a long-term mess. And so, if you’re going to have any kind of compensation cap, that has to be a part of it, and that will create a better need to understand how the mess was created, how these assets actually took down an entire global economy.
is there a right way to nationalize banks and a wrong way?
It is wrong to set up a bad bank, transfer assets at mystery prices behind the veil of secrecy, and milk the taxpayers. The right way is to zero out the current equity; examine the bank thoroughly, see what it needs to continue to operate; inject capital; change the incentives of executives ongoing; recapitalize the bank; and then potentially someday sell it and form a bad bank after the bank has been nationalized, not before. Bad bank is then conducting auctions to sell off the bad assets. That has to be done under very bright floodlights, so that people can understand who’s buying what and at what price from the taxpayer.
The book Other People’s Money, was about these banks were taking deposits to leverage into all these arcane securities that the regulators either ignored or didn’t understand and, to this day don’t understand the actual securities that they’re talking about taking on. That was the problem then.
Marcy Kaptur is the longest-serving Democratic woman member of Congress. The Ohio Congress member had a very simple solution: she encouraged, from the floor of the House, people to simply squat, stay in the house that’s about to be foreclosed. She said the mortgages were made, then bundled into securities, then sold and resold repeatedly by the very Wall Street banks that are now benefiting from TARP, the Troubled Asset Relief Program. The banks foreclosing on families very often can’t locate the actual loan note that binds the homeowner to the bad loan. “Produce the note,” Kaptur said. She recommends those facing foreclosure demands on the banks say, “Produce the note.”
That’s an innovative strategy. What we need, is the change in money to politics in Washington, because these sensible ideas, which are analogous to bankruptcy, 9/11, a new start—avoiding foreclosure by renegotiating mortgages has been opposed by community banks. It’s been opposed by the entire banking industry, because they like to maintain their leverage. On the other hand, the devastation of neighborhoods, the destruction of property, all these things make the costs not a zero-sum game, and it’s quite surprising to me that we haven’t done more, when even conservative economists like Martin Feldstein are advocating widespread foreclosure. Now, he wants to subsidize the banks to do it, but everybody sees the need for it. And Marcy Kaptur’s idea is very creative.
Discussion: Nomi Prins, Robert Johnson and Amy Goodman
Nomi Prins, former investment banker turned journalist. She used to run the European analytics group at Bear Stearns and is now a senior fellow at Demos. She is the author of two books: Other People’s Money: The Corporate Mugging of America and Jacked: How Conservatives Are Picking Your Pocket. Her upcoming book is called It Takes a Pillage.
Robert Johnson, former chief economist of the Senate Banking Committee and a former managing director at Soros Fund Management. His latest article is Nationalize Failing Banks? Think Twice.
– from democracynow