Howard Rich's Blog

April 13, 2009

Federal Government won’t let go…

Today The Washington Times ran an editorial that points out the government’s unwillingness to relinguish their control on banks that were forced to take tarp funds, by refusing to allow the banks to repay the money.

Editorial: The roach motel

Government bailout funds are the roach motel for financial institutions – they check in, but they can’t check out.

Banks that were forced to take bailout money are running into political obstacles that prevent them from repaying it. The White House is unwilling to give up the additional control over the banks – the ability to make operational decisions, fire executives and dictate pay scales – that the bailout funds allow. All this has happened as the Congressional Budget Office has raised the estimated cost of the Troubled Asset Relief Program to taxpayers by almost $200 billion to a total bill of $356 billion.

In many cases, this government dependency is not the fault of the banks because many were being run responsibly. According to Fox News judicial analyst and New Jersey Superior Court Judge Andrew P. Napolitano, banks with no financial problems were forced to sell stock to the government or face the threat of costly and harassing public audits. This happened to banks that had “no bad debt, no credit default swaps, no liquidity problems, and no subprime loans” and didn’t want or need any government funds. Judge Napolitano called the government actions what they are: “classic extortion.”

On March 27, in a meeting at the White House, President Obama claimed a little rough stuff is necessary because his administration “is the only thing between [the bankers] and the pitchforks,” Politico reported. In other words, if the president hadn’t quasi-nationalized the banks, mobs would be stringing up financiers from lampposts. Bankers had gone to the president to make their case that regulations on salaries would prevent them from retaining and hiring the best workers. In the meeting, one bank chief executive officer (who has remained anonymous) attempted to explain the obvious: “These are complicated companies. We’re competing for talent on an international market.” Mr. Obama told the bankers to get over it and then made his quip about pitchforks.

The president, however, bears much of the responsibility for bringing out the pitchforks. He has argued that only muscular government regulations can rein in “an ethic of greed, corner cutting, insider dealing, things that have always threatened the long-term stability of our economic system.” He repeatedly has blamed corporate executives for the lion’s share of what is wrong with the country. Mr. Obama has never allowed that government regulations either forced or encouraged banks to make risky loans and that regulations thus had a major role in causing this crisis.

Massive problems were created by the government’s policy – however well-meaning – to increase homeownership among those who couldn’t afford property. The Federal Reserve threatened banks with fines and other penalties if they didn’t give loans to borrowers without down payments or incomes. Freddie Mac and Fannie Mae were blameworthy for encouraging risky loans through subsidies and mislabeling risky loans they securitized. Yet Mr. Obama prefers to see it as all stemming from the greed of men in pinstripes.

With Mr. Obama’s focus on regulating financial-institution salaries, it is ironic that his top economic adviser, Lawrence H. Summers, was paid $5.2 million last year in compensation from one of those dreaded hedge funds, D.E. Shaw Group. He received this impressive sum for working only one day a week. Mr. Summers also was paid hundreds of thousands of dollars in speaking fees from financial institutions that are accepting bailout funds, including such firms as Citigroup Inc. and Goldman Sachs Group Inc. Overall, he received $2.7 million in speaking fees.

The president doesn’t seem to be bothered that Mr. Summers got large payments from the very financial institutions that Mr. Obama now castigates for salaries that supposedly are too large. Neither does there seem to be any concern about a conflict of interest even though Mr. Summers was making this money last year while simultaneously advising Mr. Obama on economic policy. Surely buying access to Mr. Summers could have been seen as a way of getting access to Mr. Obama. This doesn’t say much for Mr. Obama’s vaunted ethical standards.

The catalog of sins being compiled during this financial crisis would make a Third World plutocrat blush. The relationship between government and business is increasingly incestuous; bureaucrats with little or no private-sector experience are running banks and other companies; former industry executives-cum-government-officials are making decisions affecting their recent employers; ethics rules that apply to the private sector are irrelevant to the president’s advisers; and a blind eye is turned toward government extortion. All this has an awful resemblance to the way banana republics are run.

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