Editore"s Note
Tilting at Windmills

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November 26, 2008
By: Hilzoy

Throw The Bums Out

In a sign that the End Times are upon us, I actually agree with a WSJ Opinion column:

"Another Sunday night, another ad hoc bank rescue rooted in no discernible principle. U.S. taxpayers, who invested $25 billion in Citigroup last month, will now pour in another $20 billion in exchange for preferred shares paying an 8% dividend. (...)

What is missing is a statement that at least some American bankers still have the freedom to fail, an essential ingredient if we hope to restore functioning capital markets. Not a single one of Citigroup's senior managers and directors will be let go as a condition of taxpayer assistance that now totals close to $350 billion. (...)

"Citi never sleeps," says the bank's advertising slogan. But its directors apparently do. While CEO Vikram Pandit can argue that many of Citi's problems were created before he arrived in 2007, most board members have no such excuse. Former Treasury Secretary Robert Rubin has served on the Citi board for a decade. For much of that time he was chairman of the executive committee, collecting tens of millions to massage the Beltway crowd, though apparently not for asking tough questions about risk management.

The writers at the Deal Journal blog remind us of one particularly egregious massaging, when Mr. Rubin tried to use political muscle to prop up Enron, a valued Citi client. Mr. Rubin asked a Treasury official to lean on credit-rating agencies to maintain a more positive rating than Enron deserved. What signal will President-elect Barack Obama send if his Administration, populated with Mr. Rubin's protégés, allows this uberfixer to continue flying hither and yon on the corporate jet while taxpayers foot the bill?

Chairman Sir Win Bischoff has held senior positions at Citi since 2000. Six other directors have served for more than 10 years -- including former CIA Director John Deutch, Time Warner Chairman Richard Parsons, foundation executive Franklin Thomas, former AT&T CEO C. Michael Armstrong, Alcoa Chairman Alain Belda, and former Chevron Chairman Kenneth Derr.

When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly say they deserve to remain on the board?"

I have no idea. The same goes for a lot of senior management. If some particular division of Citi has done well over the past few years, I can see letting the management of that division stay on. But the people who either ran Citi into the ground or were asleep at the wheel need to go. That should be the condition of a bailout: if you turn out to need public assistance, you lose your job. No golden parachutes either.

As I've said before: we absolutely need to make sure that the people who run these banks do not conclude from our unwillingness to let them take down the entire financial system that it's OK to run these risks. The best way I can think of to do that is to make sure that they, personally, pay.

I don't think I'm saying this out of vengeance. At least, I'm trying not to. I just do not want a system in which private individuals get the rewards of excessive risk-taking and taxpayers pay the price when it all goes wrong; and I do not know how else to avoid one.

Hilzoy 12:09 AM Permalink | Trackbacks | Comments (28)

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Comments

What if this were the plan?

Posted by: TBpne on November 26, 2008 at 12:27 AM | PERMALINK

For me, personally, Monday was the day the entire economic debacle turned into a financial version of Dr. Strangelove. I also think the events of Monday -- including the Citigroup handout and the announcement that the Fed is guaranteeing or making available TRILLIONS OF DOLLARS -- demonstrate that there is simply no answer to what's happening.

What I mean is, it doesn't really matter what anyone does, in the same way that when Katrina hit New Orleans it really didn't matter what people did on that day. You couldn't bail the city out fast enough, and there wasn't any place to put the water even if you could. You couldn't shore up the floodwalls because the winds were blowing a hundred miles plus. By the same token, they can throw billions or trillions at this problem and it's not going to stop the storm from wrecking any damn thing it wants to wreck. Which is probably why all the banks are suddenly acting like looters....

Prediction: it's not going to be long before Bank of America gets sick. And when that happens, we're finally going to be at the beginning of the end.

Posted by: The Phantom on November 26, 2008 at 12:28 AM | PERMALINK

When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments [...] -- WSJ

Periodically, I go on book-buying sprees and one such spree is happening now; almost every day, the PO delivers another packet. Yesterday, viewing yet another such packet with a jaundiced eye, my husband remarked, sourly: "you certainly take the Treasury Secretary's dictum to heart; you must be spending a bomb on those books". My answer -- which he reluctantly accepted as being valid -- was "when I spend money on a book, I have a book to show for it. What do I have to show for the money the Treasury Secretary has "deveined" from my savings, to spend on Citi?"

Posted by: exlibra on November 26, 2008 at 12:32 AM | PERMALINK

It's not "a sign that the End Times are" nigh, it's a sign that the Obama administration is nigh.

The WSJ Opinion pages have shifted to criticizing administration policy, because they know that the new administration will do vaguely similar things, and they don't want the shift on January 20th to be too obvious.

Also, they aren't dumping on bankers in general, they are dumping on Robert Rubin. What's his sin ? Asleep at the wheel ? Shilled for Enron ? or that the Obama administration is full of his protegés ?

They can be very flexible at the WSJ opinion pages -- denounce the ability of arrogant rich jerks to influence politics in the case of George Soros, denounce influence peddling if the influence is access to Democrats, and denounce bankers so long as they are registered Democrats.

I mean Democratic bankers must be confused, that's why Goldman Sachs performs less well than ... uhm ... you know all those banks run by Republicans ... you know.

Posted by: Robert Waldmann on November 26, 2008 at 12:54 AM | PERMALINK

"we absolutely need to make sure ...."

Isn't the whole point of the quoted article that we have been making too much sure by partnering senior partner and government for a decade?


When the article said, "throw the bumsd out" the author was talking about the politicos who say "we have to make sure..."

Notice, Hilzoy or Pelosi never said " we have to allow some banks to fail" they all say, "we have to make sure..." Neither of them ever considered the possibility that this particular bank,or that particular investment house, or this particular pension fund or that particular government program should be allowed to fail, as the author implied. No, both Hilzoy and Pelosi start with the assumption that nobody fails as long as they go to government, wand get a "we have to make sure" of something or other.

That is exactly the problem. The economy is on strike because they cannot afford $150/barrel oil and cover the total costs of all the "make sures" that Hilzoy wants. But if we make all of Hilzoy's "sures" whole, then we will be paying the $150/barrel that we make sure everyone has some.


Posted by: MattYoung on November 26, 2008 at 12:54 AM | PERMALINK

Yep, that's Bob Rubin... with a tree of financial-genetic descent leading to Tim Geithner, Larry smmers and others.

Have fun with four years of Kool-Aid drinking.

Or, if you want to be a REAL liberal to elect someone who might support actual CHANGE, William Jefferson’s opponent in the Louisiana 2nd District runoff is !

Be a REAL progressive and show him a rew dollars of love.


Posted by: SocraticGadfly on November 26, 2008 at 1:03 AM | PERMALINK

"Hilzoy or Pelosi never said " we have to allow some banks to fail""

Actually, I have said this earlier. It just wasn't the subject of this particular post.

Posted by: hilzoy on November 26, 2008 at 1:06 AM | PERMALINK

Sorry, William Jefferson’s opponent in the Louisiana 2nd District runoff is Malik Rahim – an actual, real Green!

Posted by: SocraticGadfly on November 26, 2008 at 1:06 AM | PERMALINK

What if this were the plan?
-- TBpne on November 26, 2008 at 12:27 AM

Exactly. Looks to me like government circling the bathtub drain. Between untouchable Defense spending and these (enter new adjective bigger than massive) bailouts, what "discretionary" spending can one responsibly do? And how long before the Right starts crying to roll back entitlements, and funds for public education... oh, right...

I think this is the Right's wet dream come to life.

Posted by: beep52 on November 26, 2008 at 1:09 AM | PERMALINK

There is one sure way to claim the attention of these clueless mandarins who are intent on throwing away what may be the last buckets of currency we'll be able to borrow from no longer trusting foreigners; "Pour encourager les autres" .

During the Sommes' slaughter the French Army would shoot one out of every 10 men in the mutinous regiments so as "to encourage the others'. That practice began during the French Revolution but was used to keep the admirals and generals left over from the old Régime eh, how would you say; focused on their new responsibilities. I think that's the perfect way to view the new position that the execs at AIG & Citi, for example, are in.

"Mon General, there will be no more champagne and cards, if you save what's left of the army, then perhaps, you too will survive.

Gitmo could still be a useful place, after all, how do we know these people aren't criminals until they're put under a little "stress" and are given the opportunity to confess?

After all, that's how the outgoing administration rolled, and the devious hucksters that created those incomprehensible derivatives and then guaranteed the buyer's profits are doing way more damage then some goat herder in Afghanistan.

Posted by: The Pale Scot on November 26, 2008 at 1:18 AM | PERMALINK

Back to the topic... I'm not so gracious as Hilzoy.

Vengence, or at least some form of justice, is not inappropriate here. I say fire the folks who made personal fortunes by running their corporations into the ground, and then go after their ill-gotten personal assets. Teach them and anyone who aspires to follow in their footsteps what that personal responsibility they're always preaching to the rest of us really means.

Posted by: beep52 on November 26, 2008 at 1:20 AM | PERMALINK

Thre's nothing wrong with a little vengeance. We need to see some pinstriped Wall Street pimps do the perp walk, then we need some show trials, and the convicts need to go to a prison that isn't Club Fed, in order to throw the fear of God into the rest of the Wall Street cabal.

And if it's Rubin that walks the plank and becomes shark chum, so much the better. That way, the Clintonscum in the new administration get to know their necks are on the chopping block too, if they fail to produce.

Posted by: TCinLA on November 26, 2008 at 1:50 AM | PERMALINK

Hmmm, well, Lehman Bros. was allowed to fail and it was deemed a mistake, one which the fed prefers not to repeat.`This latest injection is caused by a run on the bank. The hot money is choosing not to stick around at Citi and the only short term liquidity is the Fed. Lend the money or shut the doors, there isn't time for a plan.
Waste of monet suing the board, there's "business judgment" as the defense.
Rob't Waldmann has it right, the WJ and talk radio are linking Rubin and his familiars to the Obama. As they see it, this s part of disavowing the last 8 years as un-conservative wih the new kids following along.
If only a true conservative..... well yeah....anyway....

Posted by: mickscottty on November 26, 2008 at 2:00 AM | PERMALINK

Any lawyers among the commenters familiar with the RICO statute? Do the shenanigans of these financial firms, or the industry as a whole, qualify for such a prosecution? Doesn't RICO allow for seizure of personal property?

Posted by: allbetsareoff on November 26, 2008 at 2:01 AM | PERMALINK

Too bad I didn't heed my father's advice, years ago. "Go into banking and brokerage, son."
He was adamant - he'd been running ships for a shipping line, and realized exactly where the big money was made, and that was not in the hands on.

Become a broker, he said, and was willing to finance that to the hilt. "Those guys never lose."

And right he was.

Posted by: SteinL on November 26, 2008 at 2:13 AM | PERMALINK

As I understand it, RICO is essentially a mechanism for federalizing state-level criminal offenses, and for bulking them up with a treble-damages sweetener. You have to establish that a criminal offense has been committed to get started -- separate from RICO.

Unfortunately, as far as I know, there is no state that will uphold an indictment for sunny optimism.

Posted by: Jassalasca Jape on November 26, 2008 at 3:00 AM | PERMALINK

Notice, Hilzoy or Pelosi never said " we have to allow some banks to fail" they all say, "we have to make sure..." Neither of them ever considered the possibility that this particular bank,or that particular investment house, or this particular pension fund or that particular government program should be allowed to fail, as the author implied.

I get your point but it is hard, perhaps impossible to tell ahead of time, how much systemic risk a bank failure poses because there's so much of the Big ShitPile that's off the books.

Posted by: Steve J. on November 26, 2008 at 3:21 AM | PERMALINK

Rewarding failure is a really dumb concept.

Even dumber is it's only applied to persons in positions of responsibility.

Dumbest of all is we tolerate it.

Posted by: JohnK on November 26, 2008 at 6:22 AM | PERMALINK

I seem to recall reading, either here or in WaPo, that Citi's net worth was only about $25 Billion. It's had almost twice that poured into it to save it, and the institution has not offered to take any cuts or forego bonuses. What kind of sense does that make.

But the one that really stuck with me, I saw in the Seattle paper, a few days before the election. Washington Mutual collapsed, as you all know, but did you know that the CEO had worked there less than a month? About 3 weeks, to be more accurate. He had been seduced into the position with a generous multimillion-dollar incentive package, which (as far as I know) he kept. But not only that; he took a multimillion-dollar severance package and retirement benefit, from the bank that was collapsing. Why not; they were being bought out. Don't take my word for it - check it out.

It's that kind of greed that has to be rewarded with a bailout, if the innocent mixed in among the cynical bandits are to be saved.

Posted by: Mark on November 26, 2008 at 6:51 AM | PERMALINK

Trillions of dollars available to the financials and banks and insurance agencies and---no one bothering to sit back and think: "What happens to the entire economy, once the production of these non-existent dollars pushes us from recessionary deflation to apocalyptic hyperinflation?"

Here's a hint, boys and girls---look at Haiti, and imagine "that" being "us."

I really don't care for the idea of having to stand in a mob, six months from now, to await my family's weekly apportionment of food-staples, all because my government wants to give 11-figure Thanksgiving dinners with all the trimmings to some worthless financial institution that has nothing better to do than send me stupid envelopes three times every week, offering me pathetically-stupid promises in exchange for accepting a Platinum card with a $20,000 credit limit. I paid off my last credit card in 1979; I bought my last car on credit in 1981; the only thing in my household that wasn't paid for "in cash" is the house---and we'll have that paid off early.

I do not need Citi. I do not need their plastic money. Personally, I think it would be a good idea to just start letting these credit-based megaliths drop off the edge of the earth.

What was that old saw? Oh, yeah----"No pain; no gain...."

Posted by: Steve W. on November 26, 2008 at 7:08 AM | PERMALINK

It shouldn't come as a surprise that all these folks are getting what amount to unconditional bailouts. If we've learned anything from the past 8 years of the Accountability-Free Administration brought to us by the Party of Personal Responsibility™, it's that personal responsibility, like taxes, is for the little people. No one got fired for 9/11. No one got fired for the lies about WMDs. Katrina and torture and DOJ corruption and outing a spy were contained with a few resignations and show trials - notably of the more minor figures involved rather than those who made the decisions allowing the major clusterfucks to happen.

Posted by: Jennifer on November 26, 2008 at 8:14 AM | PERMALINK

If there's anything that demonstrates what a farce this is it's the difference between the way the finance community is being treated versus the way that Detroit is being treated. Before the automakers get a loan they must come up with plans, possibly curtail CEO pay, renegotiate contracts, etc., etc. The financiers, on the other hand, are just given orders of magnitude more money with no conditions.

Posted by: Dennis-SGMM on November 26, 2008 at 8:27 AM | PERMALINK

interesting how top administrators--at companies, at universities--believe in accountability for everyone but themselves

they're also against socialism for the proletariat, but socialized bailouts for the rich are a-ok

Posted by: sjw on November 26, 2008 at 8:34 AM | PERMALINK

Suing under the RICO statute involves proving that the mail, "wire services", phone lines, etc. were used to promote a criminal enterprise. The attorney I work for has tried several civil RICO suits. And there is always some upper level, arrogant ass hole who thought he wouldn't get caught and who hasn't destroyed an inciminating e-mail or memo. In the cases of these large banks, there has to be some angry employee who would be happy to spill the beans.

Posted by: diav on November 26, 2008 at 8:49 AM | PERMALINK

Hmmmm - if these institutions are run into into the ground by a bunch of crooks and incompetents (gee, sounds like we're talking about the Bush administration, doesn't it?), and deemed too big to fail, so that taxpayers have to bail them out, then what is the point of blaming all the scoundrels when it's obviously the system that is at fault? Why are we letting these monsters emerge that become so big they wreck our economy if we try to kill them off for their evil deeds?

Have we not learned from history that too much power and wealth concentrated in the hands of far too few is a recipe for catastrophe? Separation of powers, oversight, anyone?

We have worshiped at the alter of Reagan's unfettered free market capitalism, kept the only controlling mechanism, the government, completely at bay for nearly three decades, and we're shocked at the outcome? Even as we witnessed many serious quakes along the way, such as the 1987 market crash, the S&L scandal, the housing bubble of the late 1980s, the dot.com bubble, the Enron scandal?

And now we're letting our fears dictate our reactions as all the moguls and tycoons try to scare us into coughing up real dollars to replenish the phony fortunes they've lost.

Unbelievable.

Is our people learning, as Bush might ask? Obviously not. We're talking about adding a few feckless rules to patch this system up, and we're asking the very perpetrators which little rules they'll abide by, as they rebuild their fortunes and as income and wealth disparity continue to grow in America.

Posted by: hark on November 26, 2008 at 10:08 AM | PERMALINK

I'd also like to see Citi broken up into three or four companies. Small banks that do not control so much of the economy that they must be saved. Stockholders get shares in the four companies. If any of the small companies wants to hire the losers that caused the parent to be broken, so be it.


Don't want to split? Fix the problem without public help.

Posted by: toowearyforoutrage on November 26, 2008 at 11:14 AM | PERMALINK

I don't understand the whole "too big to fail" argument - they've already failed, hence the need for taxpayer funds to bail them out.

I understand that there has to be an attempt to limit the damage from this failure. But I don't believe that this attempt has to do anything to help the people who led Citi down the tubes, or the shareholders who failed to act to halt the decline.

Posted by: Cap'n Phealy on November 26, 2008 at 11:56 AM | PERMALINK

Ha, ha. Slickest move ever by Bush and the Republicans. Having no voter appeal due to greed and warmongering, they are looting the treasury so that when Obama comes in he won't be able to pay oldsters their social security, or vets for their therapy, or health care, or much of anything really. The voters will be so pissed off the Republicans will win the House back overwhelmingly in two years.

Posted by: Luther on November 27, 2008 at 2:59 AM | PERMALINK




 

 

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