The Crisis That Could Bring Down Obama

Goldman Sachs reports better-than-expected profits this quarter. Wells Fargo cleared record profits last week.
The President, understandably, points to signs of hope and encourages
Americans to be optimistic about the economy. But when do we move from
healthy confidence to a confidence game? The banks are reporting
profits thanks to massive infusions of taxpayer bailout funds. It's
simply silly to be lulled by cheery-sounding reports when the
institutions are actually insolvent. At some point we have to take a
clear-eyed look at the massive failure of our financial system.
Ignoring it won't make it go away.

That's more or less what Elizabeth Warren, the distinguished chair
of the Congressional Oversight Panel, says in her panel's six-month
report on the bank bailout. Warren, the government's watchdog, concedes
that there are differences of opinion on her panel, which probably
accounts for her very carefully couched discussion of the crisis.
Although she told The
Observer
that it is "preposterous" that the government hasn't fired the bank
managers who are responsible for the derivatives disaster, her panel's
report is cautious, with a scholarly explanation of the crisis in her video introduction. Nonetheless, the underlying criticism is obvious.

In a financial crisis like the current one, Warren explains, the
government has three choices: 1. Liquidate failed banks. (That's what
happened in the S&L crisis. The government took over institutions,
fired the managers, wiped out investors, but protected depositors. A
lot of savings and loans simply went out of business.) 2. Put them in
receivership. (That's what Sweden did in the 1990s: failed managers
were fired and replaced, depositors were protected, and the banks were
returned to private hands under new management with healthier balance
sheets.) or 3. Subsidize the banks. This last option is what led Japan
to its "lost decade"--the real value of bank assets are obscured, as
the government funnels tax money into insolvent banks, propping them up
indefinitely. This last is the approach the United States is now taking.

If you want to hear someone absolutely destroy that approach to the
current crisis, check out a round of recent interviews with William
Black, the professor of economics and law at the University of Missouri
who was deputy director of the Federal Savings and Loan Insurance Corp.
during the S&L crisis in the 1980s. Black, who liquidated a few
banks in his time and earned the eternal enmity of Charles Keating,
minces no words in describing the massive fraud by bankers and the
regulators, including Treasury Secretary Tim Geithner, whom he
describes as abetting them.

"This whole bank scandal makes Teapot Dome look like some kind of
kids' doll set," Black told the investors' journal Barron's in an
interview published in the print edition on April 13. (The interview
appeared online on April 9, but you need a paid subscription to access
the site). He covers the same points in a highly watchable interview on Bill Moyer's Journal..

"We have lost the ability to be blunt," Black tells Barrons. He is
talking about the person he describes to Bill Moyers as a "failed
regulator," Geithner. "Now we have a situation where Treasury Secretary
Tim Geithner can speak of a $2 trillion hole in the banking system, at
the same time all the major banks report they are well capitalized. And
you have seen no regulatory action against what amounts to a $2
trillion accounting fraud. The reason we don't see it--aren't told
about it--is that if they were honest, prompt corrective action would
kick in, and then they would have to deal with the problem banks."

In other words, the banks are insolvent. That's why they must rely
on the Troubled Assets Relief Program. But at the same time, they are
claiming to be healthy. Both things can't be true.

So we get smiley-face reports about how Goldman and Wells Fargo are
posting record profits. Investors and citizens are supposed to be
excited to see those profit numbers--comprised of their own tax dollars
plus the banks refusing to accurately value their toxic assets.

This is more than an unfortunate downturn, Black says. It is the
result of massive, pervasive fraud, and a deregulatory culture that has
nurtured criminal behavior by very highly paid bank executives.

The whole culture is rotten. And the regulators come right out of that corrupt, Wall Street culture.

"No one has to tell someone to stretch the numbers," Black says of
the way corruption trickles down through these institutions. "It is all
around them. It is in the rank-or-yank performance and retention
systems advocated by top business executives. Here, the top 20 percent
get the bulk of the benefits and the bottom 10 percent get fired. You
don't directly tell your employees to lie or cheat. You set up an
atmosphere of results at any cost."

Yet we live in a broader culture so enamored of the money-making magicians of Wall Street that a front-page story in the Sunday New York Times
is still lamenting the "brain drain" on Wall Street. The lead anecdote
features former UBS employee (whose firm's major screw-ups turned it
into a prime TARP welfare recipient). He is so disturbed by shrinking
bonuses and a climate of gloom in his old gig that he has moved to the
high-rolling Aladdin Capital. That's the real name. As in Poof! There
goes your money!

It's time for real regulation to stop all this, says Black. Geithner must go.

"Unless the current administration changes course pretty
drastically, the scandal will destroy Barack Obama's presidency," he
predicts.

The beauty part: real regulators will have no trouble getting
through Congress, Black tells Moyers, because they pay their taxes.