The embattled CIT Group, a century-old commercial lender to thousands of small and medium-sized businesses, filed for Chapter 11 bankruptcy Sunday. It’s the fifth-largest bankruptcy in US history.
CIT’s so-called “pre-packaged” bankruptcy plan reportedly allows its creditors to ultimately own the company and would give most bondholders 70 percent of what they were owed. But all existing common and preferred stock will likely be canceled. That’s an enormous blow to the US government, which invested $2.3 billion of taxpayer money in CIT last December through the Troubled Asset Relief Program.
CIT also reached a separate agreement with Goldman Sachs Friday to change the terms of a financial rescue package it had received from Goldman in June of this year. Prior to that announcement, Goldman Sachs was poised to collect $1 billion when CIT filed for bankruptcy, this according to a report last month in the Financial Times.
Robert Johnson talking:
The economy, employment, small business is still being hurt. The “too big to fail” syndrome, which applies to the largest banks, doesn’t apply. You don’t have that much political power in the smaller institutions, so they’re allowed to go bankrupt. I think that, how we say, is a dreadful statement about where we are, but it is where we are. And those smaller institutions provide a tremendous amount of employment, growth and innovation for the economy.
CIT Group was a lender to small businesses, small and medium-sized businesses, non-financial businesses throughout the country. Citigroup, of which their bank is called Citibank, is one of the two or three largest banks in the United States, and they’re intertwined in all kinds of derivatives, proprietary trading, as well as commercial business, retail business, real estate lending, credit card business. So they’re very different animals.
Citigroup was very weak in back in February and March, when Secretary Geithner of the Treasury and Lawrence Summers decided to forbear, meaning feed them what I’ll call an intravenous drip of capital. They’ve been limping along. Their stock recovered a little bit when people realized they weren’t going to be shut down. But the question is, even with these usurious large credit card interest rates, can they earn their way back to health, given what a deep ditch they were in? And it’s not clear that they can. Gretchen Morgenson wrote about this yesterday in the New York Times.
in the United States, one of the reasons we had the bubble and the crisis was because we have a broken political system, where campaign money, lobbying influence of the financial sector is enormous, and it created bad regulations, bad laws. I’m going back into the Reagan period, Bush the senior, particularly the Clinton era. We’ve made a mess, and now we come back from a crisis where the population knows darn well what a mess we’ve made. But the problem is, at this point, the people in power, the moneyed interests are still in power. And a large portion of these reforms are either cosmetic or designed by the industry and quite ineffective.
In the health insurance debate, it appears to me that each of the moneyed interests—pharmaceuticals, physicians’ groups, insurance companies—are being honored in full, and citizens, such as the ones that wanted single payer, are arrested when they are not invited but try to work their way into Senate Finance Committee hearings.
In the realm of finance, a group that I’m affiliated with called Americans for Financial Reform, which is consumers, labor unions and others, 200 groups, had to kind of protest and express rage to Congressman Frank in order to get me added to the scroll when they had eight industry groups. The dysfunction I’m talking about—you mentioned Melissa Bean—she cut off my opening statement.
About sixteen hours before the hearing I was called to testify before the House committee. And I had heard from a friend that I was going to be called, because AFR, Americans for Financial Reform, said the committee has agreed that you can testify. I used to work with Pete Domenici on the Republican side, so I had sort of a bipartisan credential, and apparently the Republicans approved of my appearance, as well as the Democrats. So I told them I can’t do the written statement before the hearing.
I’ve got to read a 187-page bill, come down there. “I’m not going to have anything expert to say in a short timeframe, but within a week ago I’ll get you the testimony.” I spoke, and during my verbal testimony, Melissa Bean cut me off. And I asked her to continue, and she said to sum it up. And I said, “I’ll put my statement and my interpretations of your bill in the record.” But I said, “There are people other than industry groups that should be heard. And in particular, taxpayers and working people in this country should have a voice, because they’ve been paying the bills.”
We’re talking about a Democratic-led Congress, a Democratic-led committee. Barney Frank, who was considered one of the most progressive members of the Democratic Party in Congress. Why is it that Robert Johnson was forced in at the last minute? It sounds a little like the whole single-payer representative controversy.
When President Obama had his healthcare summit, 120 people, none of them represented single payer, until there was an outcry, and Conyers, Congress member Conyers, got invited.
Why are they just having pro-industry representatives for starters?
My interpretation of this is that we have a lot of people in the House of Representatives in the Democratic Party who believe that the banks are strong enough they can block anything in derivatives legislation that they don’t like. Number two, we have a situation where, in 2006 and 2008, many traditional Republican districts went Democratic. Now the Democrats are in a place where, with roughly ten percent or more unemployment, they’re going to have to go up for reelection, and they see this as a way to build their war chest for their reelection campaign.
What I was trying to say is that Ground Zero, the San Andreas Fault of our financial system, where it blew up last time, was in the intersection between “too big to fail” firms and over-the-counter derivatives and that these derivatives need to be put on exchanges, because they’re too complex, and when they’re combined with the “too big to fail” firms, which have a 95 percent market share in OTC derivatives, five banks, that it can create a situation, like we were talking about moments ago, where Citibank could not be restructured. The spider web of positions in derivatives is so complex and so entangled that it deters policy officials from being able to put them through restructuring, because they’re afraid of what kind of spin-offs and consequences will happen.
I spoke about the credit default swap market and the illusion of safety that those credit default swap contracts created when they’re unregulated, because everybody thought AIG was going to be able to pay the bill, but they weren’t, and then the taxpayer got to provide that capital.
If you study the Federal Election Commission data, like at the opensecrets.org, you’ll see that she has very, very large contributions from the financial sector.
Chair Barney Frank was not there at the hearing, so when Congresswoman Bean was in the chair, he was not in the room. He’s in a difficult situation, because we have a structurally dysfunctional money politics system. But when you have to measure and give him a final score, he’s not getting it done.
Actually Barney Frank have to make much stronger acknowledgment to the industry and to the American people that this crisis that cost us tremendous amounts of money could happen again, and we need to repair these structural fault lines.
He is answering to the leadership of the Democratic Party—Nancy Pelosi, Rahm Emanuel, the White House.
They’ve told me that my testimony will be in the printed records, which, some day will come back from the government printers, along with all the other testimony transcript and what have you, and that the questions that people could ask you as a follow-on will be added to that. But the verbal testimony was not printed as a transcript, and my written testimony was not what you might call “linked to” on the website, which the eight industry group members—actually, it was seven industry group members and one professor who had a pro-industry perspective on the day when I listened to him. They were all live-linked to the website. And my testimony, I guess it’s on the Roosevelt Institute website, if people would like to see it.
many people felt the crisis that we experienced in 2007 and ’08 was the collapse of a multi-year bubble. But the response, which I’ll call forbearance, by government’s big expansion of the Fed money supply, interest rates cut to zero, and so forth, rather than being directed to productive investment for the non-financial economy, things that would make your and my livelihood better, is being poured into financial speculation. And what we’re seeing is a simultaneous rise of emerging markets and stock markets and bank stocks as if we’re reinflating the bubble.
And it’s all being financed with dollars provided by the Fed at very low interest rates, approximately zero. And what people are seeing also is the foreign exchange value of the dollar is weakening, because they’re financing with dollars and, say, buying things in Europe or buying things in Asia. What Roubini fears is this is all synchronized, this reinflation of the bubble, and when something happens, like a conflict in the Middle East that scares people, they become more risk averse. The entire world can collapse in a synchronized manner together.
It would look like the crisis again, but probably even broader, in the sense that the major markets in the core, meaning the United States and the UK, in particular, melted down last time and then, with a lag, dragged everyone else down. This time, all the peripheral markets, all the developing countries, emerging markets and the core markets would come down at the same time. I think it would be, in light of the fragileness, in light of the pain we’ve experienced, in light of the high unemployment, a very, very severely disruptive act and experience.
The process is distorted so it does not represent all voices. And most of the silence happens by omission, who’s not asked. I was given a window, but when I used that window to say things that were uncomfortable for the people that were raising money and trying to serve the industry, they reacted defensively and, I think, unfortunately.
Discussion with Robert Johnson
Robert Johnson, former economist at the Senate Banking Committee and the Senate Budget Committee. He’s now the director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute and serves on the United Nations Commission of Experts on Finance and International Monetary Reform.
He was the only non-industry expert invited to speak at the House Financial Services Committee panel on reform of the derivatives market. But his testimony was cut short after five minutes by Congresswoman Melissa Bean. Nearly a month later, his full testimony is still not on the committee’s website along with the statements of the other pro-industry panelists.
– from democracynow.org