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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

Category: Bailout
October 16, 2012 at 10:45 AM

The corruption of the executive class

Vikram Pandit became chief executive of Citigroup in December 2007, after the giant bank bought his hedge fund, Old Lane LLC, for $165 million. He was hand-picked by interim Chairman Robert Rubin to replace the failed Charles “One Buck Chuck” Prince, nicknamed for the trajectory of the bank’s stock under his highly compensated tenure. If things are starting to sound familiar…

Rubin, of course, was Bill Clinton’s Treasury Secretary, who pushed hard for banking deregulation, including the 1999 repeal of Glass-Steagall. Rubin came out of Goldman Sachs (where he was a high-flier along with another guy at large, Jon Corzine of the failed MF Global). Rubin was very tight with Sandy Weill, who, along with Jamie Dimon, now in charge of JPMorgan Chase, built Citi into a giant “financial services” conglomerate, breaching the walls between commercial and investment banking even before full deregulation. You remember Sandy: The banker/stock hyper for Enron.

Along with Goldman, Citi was most responsible for the subprime bubble and collapse, along with the dodgy derivatives schemes that nearly brought down the world financial system. This was nothing new. As Simon Johnson of MIT wrote, “Citibank (and its successors) has been at the center of every major episode of irresponsible exuberance since the 1970s and essentially failed — i.e., became insolvent by any reasonable definition and had to be saved — at least four times in the past 30 years (1982, 1989-91, 1998, and 2008-09).”


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September 27, 2012 at 9:59 AM

Sheila Bair gets revenge; we still lost WaMu

Sheila Bair, head of the Federal Deposit Insurance Corp. during the financial crisis, has a new book out, Bull By the Horns. I haven’t read it, but early reports have it especially twisting the shiv into Tim Geithner, president of the New York Fed under Bush and Treasury Secretary under Obama. Geithner “looked like a scared little boy” at a 2009 press conference laying out the stress tests. Also, he was way, way too close to Citigroup.

Bush Treasury Secretary Hank Paulson gets some score settling as well: Among other things, for pulling a “bait-and-switch” on taxpayers for claiming that TARP wouldn’t allow funds to be used for mortgage-loan modifications. She slams the Obama administration’s 2009 initiative to help struggling homeowners as little more than a public-relations stunt. She gets some revenge for, in her view, being shut out of the Paulson-Bernanke-Geithner boy’s club. Who wouldn’t want to see this bunch taken down?

The Naked Capitalism blog offers up more about the book, and it’s tempting to see Bair as the truth teller who wanted to stop the big banks but was foiled. Meanwhile, Felix Salmon of Reuters pushes back against some of Bair’s charges.


Comments | More in Bailout, Banking, Washington Mutual

September 14, 2012 at 10:05 AM

Vote: Are you better off than 4 years ago?

This is the question that Ronald Reagan used to devastating effect against Jimmy Carter in 1980, when inflation was nearly 14 percent and interest rates were around 21 percent. This time, the question is not so simple, as the New York Times pointed out. Ezra Klein of the Washington Post considers it a dumb campaign question.

Four years ago, the world financial system was headed into meltdown. Actions by the Bush and Obama administrations, as well as the Federal Reserve, prevented a new great depression. The Obama stimulus also worked to keep the collapse from being much worse. The remains of the safety net and the FDIC, put in place beginning with the New Deal, prevented financial ruin for many millions.

On the other hand, saving the banks didn’t bring financial reform. The banksters got away with it. The 30-year slide of the middle class has continued even as the plutocracy has gained even more political power. The Military-Industrial Complex and national security state are even more entrenched. For all this, the Republican Party has nominated a feckless character who has supported any position to “close the deal” and this week showed himself profoundly unprepared for the presidency (his “Lehman moment”).

So I’ll try to keep the poll simple. And you have the comments section to vent your spleen and say how I don’t know Econ 101. Constructive comments would be welcome, too.

Are you personally better off now than 4 years ago

Read on for the best links of the week and the haiku:


Comments | More in ALEC corporate support, Bailout, Banking, Campaign 2012, Politics and the economy

June 13, 2012 at 9:50 AM

Jamie Dimon and ‘Old Testament’ justice

Testimony before the Muppets of the Senate Banking Committee by JPMorgan Chase Chairman and Chief Executive Jamie Dimon has taken a break for lunch. It’s a chance to take stock. First, some givens. The “banks own the place,” as Sen. Dick Durbin famously said (too-big-to-exist bank stocks are rallying). ProPublica details the cozy relationship here. Second, Dimon is smart, smooth, persuasive and, when he wants to be, charismatic. He gets what he wants (e.g., Washington Mutual).

Apparently, Dimon’s defense of the $2-billion-plus trading loss is that “Basel made them do it.” Basel being the international banking regulations that were set to make banks do a more rigorous assessment of their assets and setting aside capital to protect against trouble. Dimon said before the glazed eyes of the Muppet-senators:

In December 2011, as part of a firm-wide effort in anticipation of new Basel capital requirements, we instructed (Chief Investment Office) to reduce risk-weighted assets and associated risk. To achieve this in the synthetic credit portfolio, the CIO could have simply reduced its existing positions; instead, starting in mid-January, it embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones. This strategy, however, ended up creating a portfolio that was larger and ultimately resulted in even more complex and hard-to-manage risks. This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks. As a result, we have let a lot of people down, and we are sorry for it.


Comments | More in Bailout, Banking, JPMorgan Chase

June 4, 2012 at 9:34 AM

The bullish fed to BofA shareholders in Merrill deal

Here’s a fresh reminder of the Obama’s administration’s failure to enforce the rule of law when it came to the big banks and Wall Street. The New York Times today reports that Bank of America management knew losses from acquiring Merrill Lynch would be astronomical — and they failed to disclose this to shareholders who voted for the deal:

Days before Bank of America shareholders approved the bank’s $50 billion purchase of Merrill Lynch in December 2008, top bank executives were advised that losses at the investment firm would most likely hammer the combined companies’ earnings in the years to come. But shareholders were not told about the looming losses, which would prompt a second taxpayer bailout of $20 billion, leaving them instead to rely on rosier projections from the bank that the deal would make money relatively soon after it was completed.

The only reason we know this now is that it has emerged in a civil suit. Attorney General Eric Holder, a high-powered corporate lawyer, and regulators have displayed little curiosity about this and other questionable deals (read Washington Mutual/JPMorgan Chase) handed out during the Great Panic.


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May 22, 2012 at 10:20 AM

Peak Fool: Facebook and JPMorgan

The business news while I was gone was dominated by two big stories: JPMorgan’s loss of $2 billion ($5 billion? $6 billion?) in an exotic derivatives bet gone wrong, and the much-hyped IPO of Facebook, which quickly spiraled into disaster. Here’s what they have in common: The mania for unearned riches from foolish behavior. As with peak oil, just because we reached Peak Fool in the housing bubble, it doesn’t mean we’re out of foolishness. It will just be more costly, whether for JPMorgan shareholders and depositors (and potentially U.S. taxpayers) or those who bought Facebook stock hoping to make a killing.

Facebook is a nice toy for reconnecting with schoolmates or stalking old girlfriends or boyfriends, and Mark Zuckerberg sure looks cute in the now mandatory adolescent uniform of business, but does any sane person believe this is a company that could justify a market cap of nearly $100 billion? It could only do so in a casino economy where idle capital — and the savings of average investors looking for unearned riches — can be sucked in quickly before reality intervenes. Only the insiders and sharpies get rich.

Sure, the initial public offering was botched in many ways. But ultimately, this isn’t 1999.


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April 26, 2012 at 9:30 AM

Geithner in Portlandia, still not getting it

Treasury Secretary Tim Geithner came to the Northwest Wednesday to deliver a speech to the Portland City Club. (Fortunately, he didn’t mention Washington wine). Apparently during the Q&A, he made this remark reported by Reuters: “You can’t legislate away stupidity and risk-taking and greed and recklessness. What you can do is make sure when it happens it does not cause too much damage and to do that you have to make sure you have good rules against fraud and abuse, better protections and you force banks to hold more capital against their risk.”

Herein lies the great divide over the behavior that led to the great crash. On the one side are the financial elites, feeling quite persecuted and inadequately appreciated, who essentially say, “Stuff happens.” Geithner has bought into this from the get-go. On the other are people without hundreds of millions in lobbying money, who rightly believe this was the result of widespread criminality by the toffs.

And they got away with it. No major kingpin has been prosecuted or been forced to give back the obscene compensation he received as a direct incentive for ginning up the bubble. The too-big-to-fail banks are bigger than ever.


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March 27, 2012 at 11:20 AM

Professor Bernanke leaves a few holes in his lecture

Federal Reserve Chairman Ben Bernanke gave his third lecture on the functioning of the central bank today, this time focusing on the great panic of 2008 and the measures taken to avoid another great depression. If you’ve watched, you see Bernanke is very comfortable in the classroom (perhaps wishes he were back there), but today his voice was a little shakier. And no wonder. This was the worst financial crisis of our lifetimes (we hope) and the Fed’s actions, often frantic improvisation, were highly controversial.

He offered a fine layman’s survey. A walk down nightmare memory lane: Bear Stearns, Lehman Brothers, AIG, Washington Mutual. Too much private debt, banks’ inability to monitor risks, exotic instruments such as credit-default swaps. Poor regulatory oversight, “not enough attention to forcing banks to manage risks,” not enough attention paid by regulators to the financial system as a whole. Fannie Mae and Freddie Mac permitted to operate without adequate capital to cover losses, a danger known for a decade. The freeze-up of short-term credit, a modern bank run. When money market funds “broke the buck.” And AIG, which provided credit insurance for Wall Street’s mortgage-backed-securities house of cards. Said Bernanke, “The Failure of AIG would have been the end. We would not be able to control the crisis.”

But they did and we avoided the worst. I’ve heard from very intelligent readers who argue the mess should have been allowed to collapse. Maybe they’re right. But the results would have hurt average folks and the poor far worse than the bankers. Bernanke, our foremost scholar of the Great Depression, got it halfway right. (You can download the slideshow that accompanied the talk here.)


Comments | More in Bailout, Banking, Fannie Mae and Freddie Mac, Federal Reserve

March 22, 2012 at 9:47 AM

Did W. save the economy from total collapse?

With the economy mending, Republican challenger Mitt Romney has shaken up his etch a sketch and come up with this, “I keep hearing the president say that he’s responsible for keeping America from going into a Great Depression,” Romney said. “No, no, no. That was President George W. Bush and [then-Treasury Secretary] Hank Paulson.”

It’s not entirely untrue. Accounts of the great panic in the fall of 2008 show a largely detached Bush, although he warned, “If money isn’t loosened up, this sucker could go down,” referring to Congress’ initial rejection of the $700 billion bank bailout. Paulson, then New York Fed President Tim Geithner and Federal Reserve Chairman Ben “Whatever it Takes” Bernanke, desperately improvising, were really the key players in averting total collapse.

GOP presidential candidate John McCain froze in the headlights. Barack Obama was supportive of the measures taken that fall and continued them into his presidency. He added a stimulus which, although too small, also helped avoid another great depression. But what’s striking is the continuity between administrations.


Comments | More in Bailout, Banking, Great Recession

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