Lawrence Summers

A couple of news items from that noted right wing message machine--MSNBC.

First, this..AIG’s turmoil depletes Obama’s political capital

President Obama's apparent inability to block executive bonuses at insurance giant AIG has dealt a sharp blow to his young administration and is threatening to derail both public and congressional support for his ambitious political agenda.

I notice my own Senator, Chris Dodd, has finally found his voice about this debacle.

I warned them this would be met with an unprecedented level of outrage," Sen. Christopher J. Dodd (D-Conn.),

No, Chris, What should generate an "unprecedented level of outrage" is that you wrote the TARP bill and failed to put appropriate safeguards in the bill to protect the taxpayers.

In October the Hartford Courant wrote 

 And whether you call it a bailout or a rescue of the U.S. economy, the Connecticut senator's fingerprints are all over it. 

Do we need CSI:DC to figure out why there isn't effective compensation limits written into the TARP bill? Oops opensecrets might have an answer. $175,000 in reasons for leaving AIG honchos alone.

Maybe that's why you "pulled a Plaxico" 

Well, he's not alone "Jive talkin""Brother Gibbs" assured everyone he "was confident" he knew what AIG was doing with its $100 Billion plus in bailout cash. Right.  

You know, maybe properly staffing the Treasury Department might be more important than insulting Rush Limbaugh right about now.

So we know the Obama team is flailing around dealing with AIG.

 We can be sure today's meme is : We inherited this from Bush.

MSNBC offers a different take.   

In a story entitled Congress played major role in AIG bonus mess they point out the roots of the meltdown of AIG were planted before George W. Bush set foot in the White House.  The reason AIG collapsed was it was overexposed in insurance of exotic derivatives that went poof along with the mortgage securities that were their underlying asset. And why was this market so weakly regulated? 

After the 1998 collapse of Long Term Capital Management, a giant hedge fund that pioneered the use of derivatives, the Fed engineered a rescue to prevent the unwinding of risky bets from spreading to the larger financial system. That brought calls for tighter regulation of derivatives, including a push for greater derivatives regulation at the Commodity Futures Trading Commission, led by a former Wall Street attorney named Brooksley Born. 

But strong opposition to the proposal from then-Fed Chairman Alan Greenspan and senior Clinton administration officials sank the idea. On Dec. 21, 2000, President Clinton signed into law the Commodity Futures Modernization Act, which further eased restrictions on derivatives like credit default swaps.

The new law cleared the way for an explosion in credit default swaps. In the first half of 2001, there were $632 billion in credit default swaps outstanding, according to the International Swaps and Derivatives Association. By the second half of 2007, that number was up 100-fold — to more than $62 trillion.

So much for the "greatest economy ever". And if I recall correctly Lawrence Summers--now Obama's "adult" on economics policy--was Treasury Secretary then.

I'll make one final point on the "we can't sue. They have a binding contract". This comes from an old banking lawyer.

Yes. You. Can. 

You may lose the suit. You may pay more to the executives. You will pay lots of legal fees (Wall Street law firms are laying people off: think of this as a stimulus program). But a bank can and will undertake litigation for strategic reasons where the chance of success is remote.

Why. Moral Hazard.  

Screw the AIG execs. Let them sue you in a court in Manhattan where half the jury pool are going to be folks laid off from Wall Street. Good luck.

You make the cost of doing things you don't want so high other people don't try it.  That's how you prevent "moral hazard".  The Obama team has set a very dangerous example in the AIG bonus debacle; they are rule bound sissies who let themselves be rolled rather than picking a fight they could lose. 

Hope Vladimir Putin and the mullahs in Teheran weren't watching. 

In today's Washington Post , Bill Clinton's Treasury Secretary, Lawrence Summers, sounded as if he had joined the Heritage Foundation in expressing profound skepticism that the Chris Dodd Mortgage Bailout Bill will not implode at stupendous cost to the taxpayer.

While adopting the Bush adminstration posture that the crisis at Fannie and Freddie made even a wretched bill better than inaction, Lawrence Summers offered zero grounds to believe that we will not be back doing this all over again real soon. 

Unfinished Business at Freddie and Fannie

What the Government Should Do if the Housing Giants Can't Stand on Their Own

Anyone who cares about the health of the U.S. economy should welcome the enactment of the Treasury's rescue plan for Fannie Mae and Freddie Mac, along with other measures to support the housing market. While there is room for argument about details, the risks to the financial system were too great to allow delay. .......

No one should suppose, however, that the issue is satisfactorily resolved, even for the short term. Emergency legislation was necessary because market participants were unwilling to buy Fannie and Freddie's debt; investors doubted that the government-sponsored enterprises, or GSEs, were healthy enough to repay it and did not draw sufficient reassurance from the implicit guarantee of federal support. If their debt proves easier to place now, it is only because this guarantee has been strengthened, not because anything has changed at the GSEs.

This, to put it mildly, is a highly problematic posture for policy. While I strongly supported the Federal Reserve's policy response to the crisis at Bear Stearns, because it was necessary to avoid systemic risk, it is easy to sympathize with those who fear that bailouts inhibit market discipline. Consider how much more problematic the Bear Stearns response would have been had policymakers signaled their commitment to back the company's liabilities without limit; left management in place with no change in the business model; and allowed dividends to be paid and shareholders to keep going with hope for a better tomorrow. Yet all these elements are present in the cases of Fannie and Freddie.

To see the temptation and danger inherent in such a situation, one need only look back to the mismanagement of the savings-and-loan crisis.... http://www.washingtonpost.com/wp-dyn/content/article/2008/07/27/AR2008072701167.html

 

One of the arguments against term limits is that more experienced officeholders will learn from their mistakes. Throw that argument out. Since Chris Dodd and co. are eager to re-enact the 1989-90 Savings & Loan debacle, while adding another zero to the ultimate price tag, we can garner that one learns nothing from service on the Senate Banking Committee besides how to invite financiers to fundraisers.