Last weekend I watched portions of Treasury Secretary Timothy Geithner’s testimony to the banking committee followed by portions of the big bank CEOs’ testimony. There were moments in both where I wanted to scream, “why can’t you guys just tell the truth?” I do not mean that any of them perjured themselves in a legal sense. I mean that they visibly avoided the most important part of truthfulness. This is the responsibility to tell people plainly what they have a right and need to know. How many trillion dollars do the taxpayers have to invest before they have a right to straightforward communication from everyone involved?
When Bill Clinton’s defense against perjury hinged on the meaning of the word “is”, his defenders said, “He doesn’t lie, he just tells the truth slowly”. Today’s proceedings are enough to make me nostalgic for the infamous blue dress. There are profoundly simple truths that many people in the hearing rooms could have and should have been saying. The bankers and the regulators appear to believe they have a collective interest in telling the truth slowly. This is feeding the fury of the people and it is permitting congress to at least appear to be confused. Perhaps Congress prefers this particular form of non-communication so that they can pack their pork in the smoky haze of mumble speak and feigned rage.
No individual reaches emotional maturity until they learn that, no matter how bad a situation appears, it is always best to tell the truth in a complete and forthright fashion to those involved. Until people embrace this idea, problems can be changed, but they will never be solved. Once people live truth in this fashion, almost any problem can be solved. We must insist that these bankers, congressmen and regulators act like adults and treat us like adults. This is serious business. It is our money and our future they are tossing around.
This type of non-communication requires its own vocabulary. This is a glossary of how and why these terms are being used.
1. UNCHARTED WATERS- This is not a helpful term. The future is, by definition, always uncharted. Time is not a pond upon which we sail in circles. Time is a river that flows one way. This term is a way of saying.”I don’t know what is happening and I won’t accept responsibility for the ship sinking if we hit a rock”. The ship is in danger of sinking. We don’t need the people at the helm telling us they can’t be held responsible for the outcome.
2. PERFECT STORM- A hurricane is what insurance people call an “act of God”. This financial crisis is an act of man. We ought not blame God. When bankers and regulators use this term it suggests that they somehow bear no responsibility for placing the ship in circumstances where it may sink. We are not here because a series of unfortunate and unforeseeable natural disasters occurred. We are here because financial executives saw advantage in the risks they took. The regulators were apparently unaware of the risks being run by these institutions and oblivious to the systemic risk of their combined actions. Please remember that in the wake of 9/11 explicit federal policy was to flood the financial markets with liquidity so that real estate activity would help us avert general economic collapse. This is like the University Chancellor announcing free beer on State Street in Madison and then being shocked that students get drunk and do stupid things.
3. TARP- A lot of the controversy and confusion centers on what TARP funds have been and should be used for. This discussion could be greatly aided by the straightforward admission that the large banks (with several possible exceptions) are more than flat broke. TARP recipients fall into two categories, those that are broke without it (most of the recipients) and those of us who accepted the investment because we expect to support the economy and clean up the mess in a manner which benefits our shareholders. The broke banks are broke for the same reason that any company or individual is. The value of their liabilities (deposits) substantially exceeds the value of their assets (loans and investments). We needn’t waste time talking about what they should use the TARP investments for. The TARP money gives them the capital necessary to write off bad investments and loans they made in the past. It has nothing to do with supporting tomorrow’s opportunities. It is paying for yesterday’s mistakes. It might still be repaid, but is going to take a long, long time for these institutions to earn their way out of the hole they have dug. Therefore when Congressmen X demanded that these banks lower charge card rates in his district or restructure mortgages because they made so much money making these loans, the correct answer should have been the following. “Sir, we have actually bankrupted our company making these loans and we are only here today because you gave us the money to continue to operate. We still need more money from you so I will do what you tell me to but you’ll have to give me even more money to do it”.
4. TOXIC ASSETS- When you hear this, substitute “bad loans and investments”. Someone made those loans and investments. This term is another way of distancing individuals from the accountability for decisions they took.
5. GOOD BANK/ BAD BANK- If we have to use this device, Bad Bank/Bad Bank would be a better description of it. The idea is to take bad assets off the broke banks books and resolve them in a single bad bank. A bad bank may be an effective mechanism for resolving bad assets, but it is not a way to avoid the losses imbedded in the bad loans and investments on the banks’ books at this time. There is no free money to be found here. If a bank made a loan for $100 that today is worth $50, moving it to a bad bank at its current value doesn’t change that math. It only changes the math if the bad bank pays $60 for the loan worth $50. In fact, if a publically sponsored bad bank pays $60 for a loan worth $50, that will help the selling bank. It sounds to me like an alternative to injecting another $10 of TARP into a broke bank. It is in fact worse than more TARP, because the bank at least has to agree to pay back the TARP. The only way this works for the public is, if by buying up these loans across the whole system, we can create a more orderly environment and eventually get $70 for the bad loan. If that is the bet the Treasury proposes, I wish they would explain it in a more transparent fashion.
6. ILLIQUIDITY- This term is also often used to mask the personal responsibility for bad loans and investments. Let’s say your college aged kid borrowed $5000 one year ago to buy a car for $5000 without telling you. They now need to sell the car, but they can only sell it for $2500. They come to you to borrow the $2500 they will need to sell the car. You ask them what the money is for and they finally tell you they own a car worth less than the related debt. When you ask them how they got in this position and they explain that liquidity conditions have deteriorated in the car market, are you going to give them the money? Will you be helping them or you if you let them get away with mumbling about liquidity conditions instead of accepting responsibility? Forming a “bad bank” in which to take title to the car will only help if the car really is worth more in the future.
There is a lot of discussion about nationalizing the large banks. It is pointless to argue whether we should nationalize them. We already have de facto nationalization. The bank CEOs I saw on CSPAN were acting exactly the way a ward of the state should. They already owe us so much money that it will be a long time until their shareholders see any value. Therefore we ought to be talking about what we intend to do with these institutions to enable them to pay us back. I am as angry as the next guy, in fact more so because I have had to compete with these corrupt organizations. In this period of nationalized risks I want to raise the caution flag. If you are mad about how Wall Street has run these institutions wait until you watch how Congress runs finance. We already have plenty of data on Congressional finance practices.
As we accept the nationalized status of the big banks, economic recovery depends on how we handle smaller banks. There are clearly some smaller institutions who followed the advice of the RSGs (really smart guys) on Wall Street. They will eventually reap the harvest they have sown. They will fail, sell or convince their communities that they are worth further support. The key to recovery is how we handle the sound smaller institutions. Economic recovery depends on the extension of credit. We ought to have learned that lending money is an intensely personal process. We need real people to make loans to other real people who are making things and doing things that ordinary people need, want and are willing to pay for. There are a lot of experienced bankers who are prepared to do this work of figuring out how to safely lend money in the worst banking environment in living memory. They generally work at those smaller institutions which have had the culture and the resources to resist the tide of industry groupthink. We need them to have a reason to do what they know how to do. They don’t deserve to be treated like the guys who bankrupted Wall Street. They won’t be willing or able to do their jobs if they are.