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Banks, Bailouts & the Obama Plan
President Barack Obama, accompanied by, from left, Economic Adviser Christina Romer, Treasury Secretary Timothy Geithner, and Economic Adviser Lawrence Summers, walks from the Oval Office to the South Lawn of the White House in Washington, Wednesday, March 18, 2009, to make remarks on AIG, prior to departing for a trip to California. (AP)

President Barack Obama, accompanied by, from left, Economic Adviser Christina Romer, Treasury Secretary Timothy Geithner, and Economic Adviser Lawrence Summers, walks from the Oval Office to the South Lawn of the White House on March 18, 2009, to make remarks on AIG. (AP)

Treasury Secretary Timothy Geithner is standing up today with his latest announcement on how to mop up the ocean of bad debt, toxic assets, at the heart of the current financial crisis.

He’s standing up, of course, into a storm. Geithner says he needs private capital in with public billions to make right the banking and finance mess. Critics are already saying he would reward and restart the same game that got us into this mess. Supporters say, let’s give it a chance.

We’re in uncharted territory here.

This hour, On Point: We’re unpacking the Obama plan for America’s bad banks.

You can join the conversation. Is this it? The way out of the mess in American banking and finance?

Guests:

We’re joined in our studio by Robert Kuttner, co-founder and co-editor of The American Prospect, distinguished senior fellow at the think tank Demos, and a columnist for The Boston Globe. He’s author of “Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency” and “The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity.”

Also with us in our studio is Jeffrey Frankel, professor of capital formation and growth at Harvard University’s Kennedy School of Government and director of the program in international finance and macroeconomics at the National Bureau of Economic Research. He served on the Council of Economic Advisers in the Clinton Administration.

And joining us from Park City, Utah, is Steven Kaplan, professor of entrepreneurship and finance at the University of Chicago Business School.

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  • Lilya Lopekha

    Why in the World, Obama did not include in his Administration, people who should have been included:
    Howard Dean, Ralph Nader, Cynthia McKinney

    I think the only answer is: Rahm Emanuel

    Emanuel was the key why so many Connected Elite, who were quiet and very happy during the last eight Bush years, ended up calling all the shots about the economy.

  • http://n/a Adam S.

    I’d like to hear a more detailed discussion of Mark-to-Market accounting practices. Back in the old Enron story, it was used manipulatively in their scheme to inflate their books. Now it is coming under fire for undermining the banks’ books. What’s the story and what is it’s future?

  • Scott in Iowa City

    They need to do the opposite of what Clinton did: ask Brooksley Born for advice.

    http://en.wikipedia.org/wiki/Brooksley_E._Born

  • ruth

    I am appalled by how our Congress is doing a great job of derailing the confidence of corporations that they will be safe in dealing with the Government.

    They are like kids who don’t do their homework and then respond to getting an ‘F’ by beating up their next door neighbor.

    What they are doing is Illegal, appalling and Obama should have stopped the Retroactive Tax bill before it went to vote. It shows a certain lack of leadership.

  • Lilya Lopekha

    There is no need to spend our money
    There is no need for “Bailout”

    All they have to do is to implement this:
    http://www.HumanGenome.org/stopBleedingAsap.htm <<<<<
    (Can anybody find anything wrong with this plan?

    Give it about 1-2 weeks, and the economic lift from the bottom (justice based) will be so huge, everything will be fine.

    Yes, less than 1% of the people who have bet on Mortgage market will be complaining, but they will be happy with the rise of the all markets at Zero cost the the Treasury.

  • http://janggolan.blogspot.com teg

    From one armchair economist to some others: Wouldn’t it be simpler to just postpone further fair-market-valuing of these assets? How about 10 Myths About Financial Derivatives by Thomas F. Siems,–is this valid?

  • Mike

    To the caller who says this is a betrayal of the election because it is too close to the Paulson plan: Obama supported the Paulson plan, more enthusiastically in fact than his opponent. If you voted for Obama, you voted for the Paulson plan, Geithner, etc., etc.

  • Tim Gallagher

    Given the circumstances, the Obama administration can do no right. The current plan is an attempt to leverage what is left of TARP funding — that’s it. The political will does not exist from either party for more bailout funds. The media has had an absolute field day inciting a populist backlash, so the public remains in the dark on how important it is to revitalize the financial sector. It has to be done, it’s expensive. Obama is trying to do more with what little public financing is left.

  • Lilya Lopekha

    Geithner’s Plan is so good; he should announce it in Las Vegas where Gamblers always go to.

    Great opportunity for Goldman Sachs and Hedge Funds, again and again, to make money.

    Tails: The same guys will Win big.
    Heads: We will lose more; much more.

    What a great plan!!!

  • http://www.soundstepsrhythm.com Bob Werme

    The private multi-national corporate business financial capitalist industrialists think the public money is money that was stolen from them in the first place (taxes), and they’ve wanted it back for a long time. It appears to me that Geithner, just like Paulson, is their ticket to getting what they want.

  • http://janggolan.blogspot.com teg

    This is the key to Geitner’s program: “The goal is to restart the market for these legacy securities, which will allow banks and other financial institutions to free up economic capital and stimulate the extension of new credit. The resulting process of price discovery should also reduce the uncertainty surrounding financial institutions holding these securities, potentially enabling them to raise new private capital.”

  • jeffe

    This is the largest rip off if the American tax payer in our history. In some ways it’s an economic coup d’ état by wall street, the final power grab by these captains of finance.

  • jeffe

    This is the largest rip off of the American tax payer in our history. In some ways it’s an economic coup d’ état by wall street, the final power grab by these captains of finance.

    Sorry for the typo…

  • Courtney Palmbush

    The way this whole thing is unfolding seems completely backwards to me. Why are we bailing out banks, and a supporting a system that has failed? Why not, as some have suggested, forgive student loans and free up a whole strata of society who are educated and have tried to do the right thing to stimulate the economy?

  • jeffe

    Thank you OnPoint for having Robert Kuttner on, for me he is one of the voices of reason and rationality and I wish Obama was listening to people like him instead of Summers, who is part of the problem.

    Forgiving student loans, well that’s a nice idea that will never happen. However, I think they should be reorganized like the home loans and then the government should offer low interest loans up to 90% of tuition or more depending on the students financial status. The student loan industry is also a huge ponzi scheme.

  • Lilya Lopekha

    Let us get rid of Larry Summer, Timothy Giethner, Christina Romer, Mary Shapiro (SEC)

    Unfortunately, the moment Obama gave the keys of all appointments to Rahm Emanuel, Obama lost control of “Yes We Can”.

    Let’s get rid of Rahm Emanuel (the New Dick Cheney), the Mr. Backroom Operator. Essentially Emanuel is the core reason why we cannot turn this Sinking Ship around.

  • Lilya Lopekha

    More on Mary Shapiro. Another Rahm Emanuel appointee.

    The New head of the SEC, Mary Schapiro, is responsible for the Madoff fraud. Mary Shapiro has been the CEO of the NASD and FINRA for the last 13 Years. It is those two regulatory firms to oversee all broker dealers to make sure investors are not being swindled. THIRTEEN YEARS! If she had been doing her job instead of sitting on the Board of Kraft and Duke Energy maybe some of the people who lost their life savings would have been spared. SHE SHOULD BE THE NEXT TO GO. BTW she will receive between $5-$25 Million from Finra on her exit (what did Obama say about “shameful bonuses”) she also made millions sitting on boards and as CEO of Finra. In the SEC filings against Madoff the SEC said; [T]he SEC has alleged that Madoff and the broker-dealer, operated a Ponzi scheme, and violated the federal securities laws. They have shut down the broker-dealer because of this alleged fraud. The SEC has also alleged, quoting from their court papers in support of an injunction – “[t]hrough the investment adviser services of BMIS [Madoff's broker-dealer] Madoff has conducted a ponzi-scheme, whereby he has false [sic] represented to investors that returns were being earned on
    their accounts at BMIS…”

    That alleged conduct is directly under FINRA’s jurisdiction. FINRA is the primary regulator for the broker-dealer. FINRA is responsible for oversight of its account statements, which the SEC alleges were fraudulent. FINRA is also responsible for reviewing the firm’s financial statements. If the customer account statements were fraudulent, the firm’s financials were fraudulent, since they incorporate financial information from the customer accounts. In order to produce fraudulent account statements, the firm’s back office and clearing operations had fraudulent information.

    SHE IS NOW RUNNING THE SEC!!!!!

  • LinP

    Read Paul Krugman’s “Financial Policy Despair” in today’s NYT. http://www.nytimes.com/2009/03/23/opinion/23krugman.html?ref=opinion This man–Nobel proze winner–has had no voice, as far as I can tell, in the administration. Why in the hell not?????

    Never wanted Geithner or Summers in the administration, and this plan bears out my worst fears. There’s nothing more to add to what Kuttner said.

    And Jeffe, amen to the student loan Ponzi notion. What an immoral, unfair racket that is, which hamstrings our young citizens potentially for the rest of their lives.

  • Paul Cislo

    I have a suggestion regarding the bank bail out. Identify banks that did not give out risky loans and did not buy and sell questionable derivatives. These banks will smaller, less capitalized, local banks. The government should invest capital in these banks so that they will have enough capital to provide loans to business and individuals, temporarily solving the equity problems in the market. At that point, the larger banks that made poor decisions and currently hold toxic assets can be allowed to collapse. This plan will be low risk from a political stance because the financial support in the form of tax payers money will be given to banks that behaved properly (and do not typically hand out huge bonuses). This plan also has the added benefit of providing a disincentive with respect to risky behavior (e.g. setting up high risk loans and creating and trading high risk derivatives).

    I would like to hear opinions about this suggestion here or on future on-point discussions.

  • mike

    why dont people understand that corporations and the ubbur rich, really could care less about the rest of america,as long as there losses are cushin. and 5 billion to the swiss bank who paid out over 300milion to the us government for helping tax evaders. Also AIG filed a law suit against the government using government money for 300 million.quitely of course.

    Now there trying to get the obama adminstration to not sign the bill that congress passed or water it down.

    Along with blaming all this on the poor and regulators, yet if u bleed a department of workers, and create unregulated insurance, with no collateral aside. heavy leaverage banks, and if u have not seen the cramer and jon shewart interview, hendge funds and short selling to reap large rewards while your 401 and pensions tank.

    hench market shot up when banks made a profit last week, even know it was because AIG paid out to the dollar to citi, goldman, ubs, swiss bank, some french banks, along with citi, bank of american raising interest rates to 25 to 30 percent yet getting case at .025 percent.

    As we speak the government is trying to get hendge funds involved with saving use. with all the reward going to them if sucessful and all risk to use if not.

    And these corporations have done everything in there power not to pay more and to recieve even more than what there got while blaming us and telling use there the only ones who can help.

    break this banks, insurance, auto, corporations and any other that is too big to fail or can hold the country by the neck.

    dont believe the hipe these corporate crooks tell u.

  • Lilya Lopekha

    Hedge Funds Love This Plan.

    There is enough Free Money for Wall Streets.

    More Money for Goldman; more money for Bonuses.

    For the real solution that WILL work
    http://www.HumanGenome.org/stopBleedingAsap.htm
    and it costs us Zero Dollars.

  • mike

    well teg,

    working with dev, options, i surly hope people dont listen to Thomas F. Siems. as even when we did them it was complicated and often had to speak to many different people to make sure they were correct.As the whole reason to use them were to hopefully make sore quick cash since most the time the people on the other end did not know what was really going on. if worst came to worst we could expire them to only loss what we started our bet with.

    Also merrly got sued over there dev’s by mass, and new york for not informing its investors how much risk they had.

  • http://news.bbc.co.uk/1/hi/world/middle_east/7847753.stm Frederic C.

    Lilya Lopekha,

    Why is the link you supplied named as it is?

    The homepage shows a low-power image of a plant with no link into the website. That image alone is the only thing that is remotely related to genomics.

    The link you provided brings me to a list of declarative and imperative sentences without reference to facts used to develop the statements.

    Thanks

  • David

    Wow, all the big economic brains across the spectrum think the plan stinks.

    The market loves it.

    Time will tell, but one has to think that Geithner and Summers must indeed be operating in an echo chamber.

  • jeffe

    As far as I’m concerned the government is in contempt of the people. They do not represent us. They represent the bankers, the speculators and wall street.

    The bankers hold us, the working stiff in contempt, they hate us we are nothing more than shills in their shell game. Geithner and Summers are part of this group, we are taking the risk, we are taking all the risk and the banks are making all the money and getting all the money.

    Listen to Max Keiser on the BBC he has some interesting things to say on this.
    http://www.maxkeiser.com

  • Christopher

    I hear everyone complaining about what the Obama administration wants to do or is going to do. I have not heard a single good idea come out of any ones mouth, especially the people who are prepared to go on the air and complain. So tell us what would you do?

  • Lon C Ponschock

    Why do guests talking about this seem to be having a fit of hysterics while they are on the air?

    I criticize not what is said but the hyper presentation of those like Jeffrey Frankel who are either so uncomfortable with the subject or so unprepared to address it in a calm manner that it does nothing except to excite the morning drive traffic when the program is broadcast.

    This is absolutely on point. It’s about radio.

    I turned the program off after about fifteen minutes on the audio stream.

  • Jack

    Obama’s change is worse than what came before.

    In addition to student loans, let’s forgive all debt in the US; can you imagine what the economy would do then, how much relief people would feel? It would be a fresh start. Real change, like what was promised but too soon forgotten.

    We should forgive third world debt as well!

  • Lilya Lopekha

    To …. by Frederic C.,

    http://www.HumanGenome.org/stopBleedingAsap.htm

    It is just an outline/suggestion of a solution that we haven’t heard from any one of the talking heads and/or guests on this show. Only Elisabeth Warren of Harvard slightly talks about this injustice. She finally started to use the word “scam” for the Mortgage Crisis.

    Here are the numbers:
    It is estimated that there has been about 1.2 million reported mortgage fraud cases during the last 5 years.
    The number of people who were convicted: Less than 50
    The amount of money given back to the victims: $0

    This is the problem. It is a matter of justice. If we cannot correct/reverse this, it is is going to happen again. Look at S&L crisis; which was very similar to this. Everybody got away with murder and it created addiction to free money.

  • jon

    Grassly should not apologize, his comment did not go far enough.
    we should be tougher on these criminals/traitors.

  • Jake

    Hey,

    Did anyone understand Kaplan’s proposal for a solution? He talked about a Chapter 11 or 12 “plus” that would turn something into equity. Can anyone explain that?

  • Lilya Lopekha

    Jeffrey Frankel:

    No wonder he is on the wrong side of the issues and defending Timothy Geithner.

    He is connected with David Romer (Christina Romer’s husband). And they are all connected with American Enterprise Institute.

    We just cannot get rid of the these Connected People and Academics who love to talk about gambling with OUR MONEY. Everytime, they touch via a takeover or bail out, we are getting screwed more and more and more.

    Let’s Shut Up these conected people who have conflict of interest in our wallets (or empty pockets).

    Get Rid Of Geithner!!!!!!!!!!

  • jeffe

    Get Rid Of Geithner!!!!!!!!!!

    I agree with you however all politics is about being connected is it not? FDR was about as connected as you could get.

    If Geithner goes he will replaced by another connected insider.

    One thing that I have noticed is that this crisis has exposed the system and we can all see how it’s all about the money. Wall street is calling the shots. We, the people until we decide to revolt in some form or another will always be on the outside. The only difference now is that a huge amount of the general population is angry and if this new plan works, which it might, a lot of rich people will get richer and if it does not, well we the tax payers lose. Once people figure this out Obama is in trouble. Wall street needs to be told they can’t have it all anymore and that they have make some sacrifices.

    The other thing that needs to be done now is that AIG has to be broken up. Insurance companies should not be allowed to be in the banking industry or in investing. Banks should be banks, and investment firms should invest. These three entities have converged and the result is the current disaster that we all find ourselves in. Time to reset this mess.

  • jeffe

    Please read “Obama’s Toxic Advisers”by Robert Sheer.
    As far as I’m concerned this is the nail in the coffin for me and Obama, he has turned over our economy to the very people who wrote the laws that made this mess and are all insiders. I’m not sure who I will vote for in 2012 but as of today it will not be Obama. (I was a huge supporter of Obama and to say I am disappointed is putting mildly.
    Please stop with it’s only been three months since he took office. That does not fly in this situation. It’s the people he is appointing that is the problem.)

    http://www.thenation.com/doc/20090406/scheer?rel=hp_picks

  • Diego Mamani

    Let’s see an example. “Bank” has a mortgage-backed security (MBS) with original par (nominal) value of $100. In 2008 Bank “marked-to-market” and now values the MBS at $95 in its books. But we all know that this MBS is worth a lot less, maybe less than $60, but Bank won’t acknowledge reality.

    In 2009 we have the new Treasury plan, whereby “Peter” buys this MBS, for say, $90. That’s because the bank won’t take anything less. If it did, Bank would be shown to be insolvent and would be out of business.

    Peter puts only $6 out of pocket. Uncle Sam puts another $6, and the remainder $78 is a nonrecourse loan from Uncle Sam to Peter. (Total, $90).

    Then Peter turns around and sells the MBS to his pal “Paul” for $48. Paul pays $48 b/c he thinks the MBS is actually worth $58 as justified by what the homeowners will actually pay in monthly mortgage payments.

    Peter’s $6 investment is wiped out. So is the govt’s $6. And the $48 Peter gets from Paul goes to pay back the govt loan of $78. So now, Peter lost $6 but Uncle Sam lost $36 ($84-$48).

    Since Peter and Paul are buddies (co-conspirators), the latter can compensate Peter. Say, Paul gives Peter his $6 plus another $2 for his troubles. Paul pays $48 for something worth $58, but because he gave $8 to Peter, his profit is only $2. And the banks get fully $90 for paper that is worth actually $58.

    Summary:
    Peter puts in $6, makes $2 profit
    Paul puts in $48, makes $2 profit
    U.S. puts in $84, makes a $36 LOSS
    Bank had paper that was really worth $58 but got $90 for it, makes a $32 profit

    Yes, this is wholesale looting of the US Treasury. Us taxpayers foot the bill and will pay for it in a combination of higher inflation and higher taxes.

ONPOINT
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