Normally I’m too cynical to get pissed off when I read the news. But reading about how Wall Street’s looting local taxpayers made me so furious I’ve been stewing over how we let ourselves get so screwed. What would’ve happened if Obama had cut a tougher deal right at the start?
Take the bailout of AIG. In a scathing report, Neil M. Barofsky, special inspector general for the Troubled Asset Relief Program, recently charged that the Fed “refused to use its considerable leverage” and instead paid 100 cents on the dollar to AIG’s trading partners. It was in stark contrast to how Obama’s crew handled the banks during the Chrysler bailout (WSJ via Epicurious Dealmaker):
President Barack Obama’s auto task force heard a blunt message early this spring from J.P. Morgan Chase & Co., the largest lender to Chrysler LLC. In any deal to remake the troubled auto maker, Chrysler would have to repay its lenders all $6.9 billion it owed.
“And not a penny less,” said James B. Lee Jr., vice chairman at the bank, in a call to auto task-force boss Steven Rattner on March 29.
The next day, Mr. Obama called the banker’s bluff. The president stepped before a podium to announce that Chrysler could face a disorderly bankruptcy or even liquidation. His meaning was clear: If that happened, the lenders would get nowhere near $6.9 billion.
A few hours later, Mr. Lee called Mr. Rattner back. “We need to talk,” he said.
The banker’s about-face was a vivid example of the government’s tightening grip on a humbled financial industry. Pulling a trick from the hedge-fund playbook, the government used its leverage as the sole willing lender to Chrysler, either in bankruptcy court or out, to extract deep concessions from some of the country’s biggest banks.
Could we have done the same with AIG? Economics of Content says no — leverage doesn’t mean squat if you aren’t willing to use it.
This is also why the Fed paid Goldman and the other counterparties 100 cents on the dollar to terminate their CDS contracts with AIG, which [a Bloomberg article] portrays as some sort of gift to the banks. But the Bloomberg article also relies on the Immaculate Negotiation argument — how, exactly, was the Fed supposed to get the counterparties to agree to take a haircut? The Fed had just demonstrated to the entire world that it wasn’t willing to let AIG file for Chapter 11.
It’s an argument a lot of folks — including Geithner — have used to defend the Fed’s depending-on-the-kindness-of-strangers negotiating strategy.
But if threatening to let AIG fail wasn’t credible, the Fed had plenty of other leverage at its disposal. With Chrysler’s lenders, says investment banker & blogger Epicurious Dealmaker, the government
simply did what any hedge fund driven by fiduciary duty and self interest would have done if it held the reins: it dictated the terms it wanted to see, and it told the creditors to pound sand if they didn’t like it.
What if they’d done the same with AIG? They could’ve brought all the parties to the table and said:
I have also been authorized to inform you that we are fully aware of the legal rights and fiduciary duties which constrain each of you to do what you think is best for your firms and your stakeholders. Under normal circumstances, we would be entirely supportive of these obligations. However, these are not normal times. Furthermore, and because these are not normal times, I would like to inform you that the government of the United States of America will take an extremely dim view of any individual or institution which chooses to pursue simply its own interest and its own duties without regard for the consequences to the broad economy, this country, and indeed the entire world. This government has a fiduciary duty too, gentlemen, and I am afraid that it trumps yours….
Counterparties: [Angry murmurs, outbursts, shock and outrage, etc.]
TED: Gentlemen, gentlemen, please. Let me continue. I am not finished….
And before we get to brass tacks, gentlemen, allow me to make a personal observation. I have known and admired many of you for many years, and I personally respect the power and dignity of each of your individual institutions.
But I am not your friend today. I am not your fucking friend. As far as you are concerned, you should view me as the Angel of Fucking Death. Because the time has come for each of you to do what is right for the greater good. It is time to think about survival, gentlemen—your own and that of your institutions—both now and in the future. For let me assure you that the decisions you make in this room today will be remembered. They will be remembered, gentlemen, as long as there is a United States of America. And if, God willing, we all come through this terrible crisis to a safer and more stable world, those people who helped us get there will be remembered. And, perhaps more importantly, those people and institutions in this room which did not help us, which put their own narrow personal and corporate interests before the interests of this nation and its people, will be remembered as well.
And let me tell you something, gentlemen, banker to banker: you do not want to be on that list. That list will be a world of pain.
Normally you don’t want the government to use its power in such a brazen way — it’s too dangerous. But when we’re saving Wall Street from a meltdown that they’d helped create by fighting for & then taking advantage of rules that let them rake in insanely large profits while driving the economy over the cliff? In that case, different rules apply. Think of it as tough love.
Because the alternative is not just that we get screwed today. If Wall Street walks away fat and happy, we will get screwed far, far worse next time. The lesson they’ll rightly take away is that they can do whatever they want and we will always bail them out.
