Extracts from
Chapter 17 of Killing the Host, “Wall Street Takes Control and Blocks Debt Writedowns”: Obama’s
Moves post-GFC
“What voters
wanted in the U.S. 2008 presidential election was a change away from
multi-billion dollar gifts to Wall Street and the Cheney-Bush foreign military
adventures. Barack Obama presented himself as the “hope and change” candidate.
In an atmosphere shaped largely by public anger at the bailouts, he and other
Democrats spoke of writing down mortgages for underwater homeowners, rolling
back bank salaries and bonuses, and re-empowering the regulatory agencies that
the Reagan, Bush and Clinton administrations had gutted. Congress had not
written any of this into its TARP legislation or pressured government agencies
to limit how banks could spend the giveaways they received. The hope was that
this would change with a strong voter mandate that gave Democrats control of
the House of Representatives and Senate as well as the presidency. The
political path was open to enact far-reaching reforms.
Obama quickly slammed the door shut. Although having run on a populist platform,
his role was to deliver his Democratic Party’s liberal constituency of urban
labor, racial and ethnic minorities, environmentalists and anti-war advocates
to his campaign contributors. Over the past half-century the Democratic Party’s
strategy has been to create a menu of promises in two columns. Column A
reflects the hopes and changes that voters want. That is the platform on which
the Democrats ran. Column B represents what the party’s major contributors and
lobbyists want. Obama won the election by verbalizing the hopes of the 99
Percent, but did in practice what his campaign backers from the One Percent
wanted. His language was populist, his policies oligarchic and aimed to prevent
change.
Adept at applying this about-face with grace and a smile, Obama named former
investment banker Rahm Emanuel his chief of staff to stifle the party’s left
wing, and appointed Clinton’s old Rubinomics gang to key policy positions,
headed by Larry Summers as chief economic advisor, and Geithner at Treasury to
block bank regulation or debt writedowns. Instead of responding to public
aspirations to appoint regulators of Wall Street, the top administrative
bureaucracy was drawn largely from Goldman Sachs and Citigroup, excluding
anybody as truly regulatory as the Bush administration’s Sheila Bair or Neil
Barofsky.
Post-2008 economic policy became that of the campaign contributors who
comprised the Wall Street financed Democratic Leadership Council under Clinton.
The continuity runs from the Clinton to Obama administrations via the economic
policy of Summers and Jack Lew, another Rubin colleague. At the Justice
Department, Eric Holder and Lanny Breuer blocked prosecution of bankers and
pulled funding from FBI or Securities and Exchange Commission investigators of
financial and corporate fraud.
Obama’s naming of a Wall Street-approved cabinet showed his intention
to block the reforms that most voters backed and expected, headed by debt
relief. What voters got after 2008 was financialized “deep state” concentrating
more wealth in Wall Street’s hands; no follow-through on Obama’s airy talk of
raising the minimum-wage; and a drive to reduce the federal budget deficit at
the expense of Social Security and other New Deal economic programs instead of
public spending to fuel recovery.
Assigning financial policy to Geithner to
block debt relief
Obama left
economic policy to the Treasury, assigning Secretary Geithner the pro-bank role
that Rubin had executed under Bill Clinton. Geithner already had served Wall
Street as President of the New York Federal Reserve, whose website describes
its “core mission” as being in part to “supervise and regulate financial
institutions in the Second District” centered in New York City. Geithner
promised his Congressional questioners at his March 2009 confirmation hearings
that he had refused to perform his designated task: “First of all, I’ve never
been a regulator … I’m not a regulator.”
What then was his job? Sheila
Bair and Neil Barofsky have described his actions to circumvent public
regulations, first at the New York Federal Reserve and then as Treasury
Secretary, lying outrageously to defend Citigroup. Citigroup’s chairman Robert
Rubin had sponsored Geithner to head the New York Fed, and had bene grooming
him to become Citigroup’s CEO as George W. Bush’s administration was ending.
But rumor has it that Geithner was asked to defer his “descent from heaven” into
Wall Street’s high salary world in order to become Treasury Secretary and
protect the banks (especially Citigroup) from what were feared to be
Congressional pressures to regulate it more in the public interest.
Geithner quickly set to work crafting an even more bank-friendly policy
than his predecessor Paulson had done. Under Geithner’s direction bailout
funding was made unconditional rather than subject to regulatory tightening. No
firing of management, or even a cutback in salaries and bonuses. No cleanup in
shady mortgage practices. (The MERS (Mortgage Electronic Registration Systems)
scandal unfolded with zero government protection of homeowners against false
bank documentation of just who owned the mortgages and how much was owed.)
Just how remarkable a feat this subversion of regulatory cleanup was is
reflected in thef act that by April 2009, TARP Inspector General Barofsky had “opened
twenty criminal fraud investigations into the $700 billion program” and its “cash
for trash” dumping of junk mortgages on the Fed and Treasury. An early report “sharply
criticized the government for failing to hold financial institutions
accountable” for the money they were given.
[…]
Geithner’s undercutting of TARP showed that despite protests from
Congress and the public, Wall Street could still get away with theft. Refusing
to enforce reforms, Geithner became bolder as he saw his actions backed by
President Obama, Chief of Staff Emanuel and Democratic congressional leaders.
Former IMF economist Simon Johnson observed that troubled banks usually “are ‘cleaned
up’ as a condition of official assistance, either by being forced to make
management changes or being forced to deal with their bad assets. (This was the
approach favored by Ms. Bair when she was at the F.D.I.C … The idea that there
was no alternative to Mr Geithner’s approach simply does not hold water.)’”
Obama’s false promise to write down bad
mortgages
Nowhere was
Geithner’s unconditional support for the banks more blatant than in his
neutering of President Obama’s promise to reduce the debts of underwater
homeowners in the Home Affordable Mortgage Program (HAMP). When $50 billion in
TARP funds were committed in 2009 to help homeowners through HAMP, Obama
announced his intent “to help up to 4 million struggling families stay in their
homes through sustainable mortgage modifications. Hundreds of billions more
were still available and could have been used by the White House and the
Treasury Department to help support a massive reduction in mortgage debt.” In
fact, as Barofsky reports in his book Bailout,
“the conflicts of interest baked into the program would render it ineffective
unless principal reduction was made mandatory.”
Geithner pretended that “the losses that the banks might suffer on
their first and second mortgages could push them into insolvency, requiring yet
another round of TARP bailouts.” Instead, he insisted that lenders be
compensated for their losses on “liars’ loans.” Supported by Geithner, the
banks banded together against underwater homeowners. “The message was clear,”
Barofsky concludes: “No way, no how would Treasury require principal reduction,
even when Treasury’s analysis indicated it would be in the best interest of the
owner, investor or guarantor of the mortgage.” President Obama permitted
Geithner and the Treasury to block the HAMP, derailing hopes for a housing recovery
by leaving “it to the largely bank-owned mortgage servicers (and to Fannie and
Freddie) to determine if such relief would be implemented.” The effect was to
leave the economy debt-ridden rather than writing down mortgages.
A conflict of interest between banks and homeowners was inherent in the
HAMP program. In addition to their first mortgage, many homeowners had taken
out “equity loans” as a second, subordinated mortgage – that is, second in line
to be paid in case of default. Often the same bank held both mortgages. Because
first mortgages are the first in line to be repaid, “secondary” creditors bear
the loss if a debtors defaults – which is why these second mortgages almost
always bear a higher interest rate.
Banks used government subsidies to write down first mortgages (for
which the government reimbursed them!) so that they could enable homeowners to
continue paying their equity loans or other second mortgages in full, The banks
thus were able to collect on liars’ loans that were not subject to government
reimbursement, thanks to the fact that “the initial plan didn’t require the
banks to write down second liens they may have held – like home equity lines –
from borrowers whose original loans were modified.” [Gretchen Morgan]
To dilute public support for writing down underwater mortgages, bankers
and Geithner mounted a propaganda campaign to pit debtors against each other.
Their divide-and-conquer ploy was to characterize homeowners with negative
equity – but who still had enough income to afford to pay for their mortgages –
as free riders. It would have paid for such individuals to walk away and buy a
similar home at a lower price, leaving the banks holding the bad mortgage. But
bank lobbyists and the Treasury tried to goad the homeowners into staying
current on their payments, even when their mortgage debts were more than the
home was worth. Warning about the “moral hazard” of “irresponsible” mortgage
debtors getting a free ride, banks incited “responsible borrowers” to resent
debtors who were offered relief for mortgages larger than the market price
would cover.
Bair accused Geithner of using the “moral hazard” argument in a
one-sided way to buttress this double standard. “Saying that he didn’t want to
reward the behaviour of those who knowingly got in over their heads,” he had “no
such concern for the mega-banks.” Ultimately at issue, she concluded, was “whether
our financial system should be based on a paradigm of bailouts or on one of
accountability.”
Geithner’s opposition to debt writedowns shows that instead of seeking
to create a viable financial balance, the Treasury promoted a one-sided
financial grab by Wall Street, leaving the economy in a debt trap. Matters got
much worse when banks saw that the Geithner-Obama program enabled them to make
much more money by foreclosing (and running up fees and penalties) than by
writing down debts.
[…]
Obama’s smoothness in misleading voters
One of the
first books giving an intimate look inside the Obama Administration, Ron
Suskind’s Confidence Men, reported
that on March 27, just two months after taking office on January 20, 2009, the
new president invited the executives of thirteen leading Wall Street
institutions to the White House. After listening to their arguments for why
banks had to continue paying bonuses (ostensibly to get the best talent to
manage their money), Obama told them: “Be careful how you make those
statements, gentlemen. The public isn’t buying that.” He explained that only he
could provide them with the political shield needed to forestall public
pressure for reform, not to mention prosecution of financial fraud. “My administration
is the only thing between you and the pitchforks.”
One leading banker attending the meeting told Suskind: “The sense of
everyone after the meeting was relief. The president had us at a moment of real
vulnerability. At that point, he could have ordered us to do just about
anything and we would have rolled over. But he didn’t – he mostly wanted to
help us out, to quell the mob.” As Suskind summarizes the result, which would
shape the incoming administration’s policy: “Obama had them scared and ready to
do almost anything he said…. An hour later, they were upbeat, ready to fly home
and commence business as usual.”
Obama smoothly marketed his policies defending Wall Street in his
interview with Steve Kroft on CBS’s “60 Minutes,” broadcast on December
13,2009. Shedding crocodile tears over the fact that bankers have not shown “a
lot of shame” about their behaviour and outsized remuneration, the President
tried to gain sympathy by showing that he knew very well why voters “are mad at
the banks. Well, let’s see. You guys are drawing down $10, $20 million bonuses
after America went through the worst economic year that it’s gone through in decades,
and you guys caused the problem. And we’ve got 10% unemployment.”
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