Stress Testing Tim Geithner

By Mary Bottari, cross-posted from Campaign for America's Future

DonkeyHotey

Thanks to Occupy Wall Street, in the State of the Union this week President Obama struck some of his most populist themes yet. He wants to tax millionaires, bring back manufacturing and prosecute the big banks. He touted his Wall Street reforms saying the big banks are “no longer allowed to make risky bets with customers deposits” and “the rest of us aren’t bailing you out ever again.”
But are we safe from the next big bank bailout?

Many experts are dubious and Wednesday the consumer advocacy group Public Citizen decided to test the theory in the most direct way possible. They used the administrative law process to formally petition the nation’s top bank regulators to move swiftly to break up Bank of America (BofA) asserting in their petition: “The bank poses a grave threat to U.S. financial stability by any reasonable definition of that phrase.”

A Ticking Time Bomb

BofA is not just big, its behemoth. With assets of $2.1 trillion, equal to more than 14 percent of U.S. GDP, it is bigger than many small countries. Yet, its stock is trading at $7.

What does Wall Street know that we don’t?

The petition provides a compelling list of disturbing data points. In 2008-2009, BofA publicly took $45 billion in TARP bailout funds and secretly took another $1 trillion in emergency Federal Reserve loans. Yet, several analysts predict that BofA is woefully short of capital reserves and facing potentially billions in legal liability for its role in the crisis.

Although the bank declared net profits in recent quarters, these profit comes from accounting tricks, one-time asset sales and stock swaps. BofA’s share price to tangible book value is extremely low. The market suspects the bank is worth roughly half of what management claims and the price of credit default swaps (a type of insurance) on BofA recently rose to record highs.

“The bank is a ticking time bomb,” says David Arkush of Public Citizen. “If Bank of America in its current form were to fail, it would devastate the financial system. We’re asking the regulators to make sure that never happens. The only way to be sure is to reform the institution into something safer before any crisis materializes.”

Public Citizen asked the new Financial Stability Oversight Council (FSOC), which is chaired by Treasury Secretary Tim Geithner and made up of the nation's top bank regulators, to use the tools provided in the Dodd-Frank Wall Street reform law to act before a crisis occurs and to break BofA into smaller separate institutions. The law allows the FSOC to limit big bank mergers and acquisitions, restrict products and services or order it to divest assets or off-balance-sheet items after a vote to designate the institution a “grave threat” to financial stability.

“Too Big to Fail” Alive and Well

Although President Obama said the goal of Dodd-Frank was to end the era of “too big to fail,” neither Geithner nor Fed Chair Ben Bernanke got the memo.

Geithner told the Special Inspector General for the Troubled Asset Relief Program in 2011 future bailouts are possible: “In the future we may have to do exceptional things again if we face a shock that large. You just don’t know what’s systemic and what’s not until you know the nature of the shock. It depends on the state of the world – how deep the recession is. We have better tools now, thanks to Dodd-Frank. But you have to know the nature of the shock.”

Bernanke may already be engaged in a back-door bailout of BofA. Recent news reports indicate that BofA is trying to move $22 trillion in derivatives out of its Merrill Lynch subsidiary into its FDIC-insured bank. The Fed favors the move. The Federal Depository Insurance Corporation (FDIC), which provides insurance to depositors if a bank fails, does not.

“By taking this action the Fed is allowing these derivatives to pose a direct risk to the FDIC insurance fund, keeping taxpayers on the hook for another bailout,” according to Arthur Wilmarth of George Washington Law School.

Groups like Public Citizen fought hard during the Dodd-Frank debates to insert into the bill tools to allow regulators to break up big banks and prevent the next crisis. With BofA on the brink, its time for a “test of the machinery,” said scholar Lawrence Baxter of Duke Law School.

Expand the Stress Tests

Geithner is right when he says regulators can’t predict future shocks; will it be the EU debt crisis, a multi-million dollar damage award against the bank or exposure to something out of the blue? While we may not know its origin, we know the shock is coming.

Remember in the Dodd-Frank debates, an amendment to break up the banks was rejected, efforts to restore Glass-Steagall were rejected, a proposal to force banks to spin off and separately capitalize their dangerous derivatives desks was quashed. In leading the fight against the stronger measures, Geithner instead pushed the FSOC to scan the horizon for risk and keep an eye on the behemoth banks. He also pushed “stress tests,” which all too many banks seem to pass with flying colors.
Now its time to stress test Geithner. If the FSOC fails to deliberate and vote on the very serious condition of BofA, the whole exercise will be proven a sham.

Click here to tell the President to Break Up Bank of America.

Occupy The SOTU

It is hard to imagine that the State of the Union would have included the populist rhetoric and the series of policy proposals aimed at redressing "economic unfairness" if the Occupy movement had not given voice to the concerns and demands of the 99%. 

And so, we get:
(1)  The "Buffet Rule," which calls for a minimum 30 percent income tax rate for millionaires;
(2) A Financial Crimes Unit to investigate abusive lending and packaging of risky mortgages that will "hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans;
(3)  A mortgage refinancing plan, paid for by a new fee on the largest banks in the country which "gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates; and
(4)  A defense of public investment in the manufacturing sector of the economy and infrastructure.

And we get an unapologetic push back against the Republican's time-honored accusation that Obama is engaging in "class warfare," as well as their new one, that he is succumbing to the politics of "envy."

Washington should stop subsidizing millionaires.  In fact, if you’re earning a million dollars a year, you shouldn’t get special tax subsidies or deductions.  On the other hand, if you make under $250,000 a year, like 98 percent of American families, your taxes shouldn’t go up.  You’re the ones struggling with rising costs and stagnant wages.  You’re the ones who need relief.  
Now, you can call this class warfare all you want.  But asking a billionaire to pay at least as much as his secretary in taxes?  Most Americans would call that common sense.
We don’t begrudge financial success in this country.  We admire it.  When Americans talk about folks like me paying my fair share of taxes, it’s not because they envy the rich.  It’s because they understand that when I get tax breaks I don’t need and the country can’t afford, it either adds to the deficit, or somebody else has to make up the difference – like a senior on a fixed income; or a student trying to get through school; or a family trying to make ends meet.  That’s not right.  Americans know it’s not right.

This is a far cry from last year's address, which focused far more on such misguided themes as bipartisanship, national unity, deficits and belt-tightening.  (Although there were too many times tonight when he groused about the disconnect between "Washington" and the American people, and about obstructionist tactics and filibustering from "both sides of the aisle," when I wished he would have said "Republicans" instead.)

We have now have a sense of the narrative Obama will use to frame his re-election campaign and, hopefully, his second term.  As Greg Sargent summarized, "Obama not only argued that inequality and the precarious state of the middle class are the 'central challenge of our time,' but that this state of affairs flowed from a set of specific policy choices and priorities that Republicans would restore if they get back into power.

This is all good, but not quite good enough.  As Robert Borosage points out, the President is assuming we are on the road to economic recovery without the need for urgent action on job creation -- even on his own jobs plan.  And he can't quite let go of his deficit fetish, which has led to his "politically toxic willingness to trade Social Security and Medicare cuts (“reform) for broader deficit reduction."

Isaiah J. Poole sums it up well. "The America we want to build holds true to the promise that Obama mentioned in his speech: that each person has an opportunity to prosper, and each person who prospers has a responsibility to the society from which that prosperity was earned."  But to get there, Borosage asserts, "the movement that began in Madison, Wisconsin and spread from Wall Street across the country will need to continue to build"

So, as Poole, concludes:

At least on this defining issue of our time, conservatives have it catastrophically wrong, and the president is pointed in the right direction. The challenge for the progressive movement is to add the bold demands and sharp contrasts needed to fill out the vision of the America we must move toward.

State Of Disunion: A Globalizing Private Sector, A Government Overwhelmed By Corporate Money

By Robert Reich, cross-posted from his website

Who should have the primary strategic responsibility for making American workers globally competitive – the private sector or government? This will be a defining issue in the 2012 campaign.

In his State of the Union address, President Obama will make the case that government has a vital role. His Republican rivals disagree. Mitt Romney charges the President is putting “free enterprise on trial,” while Newt Gingrich merely fulminates about “liberal elites.”

American business won’t and can’t lead the way to more and better jobs in the United States. First, the private sector is increasingly global, with less and less stake in America. Second, it’s driven by the necessity of creating profits, not better jobs.

The National Science Foundation has just released its biennial report on global investment in science, engineering and technology. The NSF warns that the United States is quickly losing ground to Asia, especially to China. America’s share of global R&D spending is tumbling. In the decade to 2009, it dropped from 38 percent to 31 percent, while Asia’s share rose from 24 to 35 percent.

One big reason: According to the NSF, American firms nearly doubled their R&D investment in Asia over these years, to over $7.5 billion.

GE recently announced a $500 million expansion of its R&D facilities in China. The firm has already invested $2 billion.

GE’s CEO Jeffrey Immelt chairs Obama’s council on work and competitiveness. I’d wager that as an American citizen, Immelt is concerned about working Americans. But as CEO of GE, Immelt’s job is to be concerned about GE’s shareholders. They aren’t the same.


GE has also been creating more jobs outside the United States than in it. A decade ago, fewer than half of GE’s employees were non-American; today, 54 percent are.

This is all good for GE and its shareholders, but it’s not necessarily good for America or American workers. The Commerce Department says U.S. based global corporations added 2.4 million workers abroad in first decade of 21^st century, while cutting their US workforce by 2.9 million.

According to the New York Times, Apple Computer employs 43,000 people in the United States but contracts with over 700,000 workers abroad. It makes iPhones in China not only because of low wages there but also the ease and speed with which its Chinese contractor can mobilize their workers – from company dormitories at almost any hour of the day or night.

An Apple executive says “We don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.” He might have added “and showing a big enough profits to continually increase our share price.”

Most executives of American companies agree. If they can make it best and cheapest in China, or anywhere else, that’s where it will be made. Don’t blame them. That’s what they’re getting paid to do.

What they want in America is lower corporate taxes, less regulation, and fewer unionized workers. But none of these will bring good jobs to America. These steps may lower the costs of production here, but global companies can always find even lower costs abroad.

Global corporations — wherever they’re based — will create good jobs for Americans only if Americans are productive enough to summon them. Problem is, a large and growing portion of our workforce isn’t equipped to be productive.

Put simply, American workers are hobbled by deteriorating schools, unaffordable college tuitions, decaying infrastructure, and declining basic R&D. All of this is putting us on a glide path toward even lousier jobs and lower wages.

Get it? The strategic responsibility for making Americans more globally competitive can’t be centered in the private sector because the private sector is rapidly going global, and it’s designed to make profits rather than good jobs. The core responsibility has to be in government because government is supposed to be looking out for the public, and investing in public schools, colleges, infrastructure, and basic R&D.

But here’s the political problem. American firms have huge clout in Washington. They maintain legions of lobbyists and are pouring boatloads of money into political campaigns. After the Supreme Court’s Citizen’s United decision, there’s no limit.

Who represents the American workforce? Organized labor represents fewer than 7 percent of private-sector workers and has all it can do to protect a dwindling number of unionized jobs.

Republicans like it this way, and for three decades have been trying to convince average working Americans government is their enemy. Yet corporate America isn’t their friend. Without bold government action on behalf of our workforce, good American jobs will continue to disappear.

 Robert Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley.  He writes a blog at www.robertreich.org.  His most recent book is Aftershock.

SOTU Word Clouds

A picture is worth a thousand words, and vice versa.  Here is a Wordle word cloud (which takes all the words from the text and gives the greatest  prominence to words that appear more frequently in the text) of Obama's speech:

Here is a word cloud from the Republican response by Rep. Paul Ryan, which is certainly better then hearing the speech itself. 

 Interesting that in Obama's speech "people," "jobs," and "work" are prominent, while for Ryan's it is the "government, "spending" and "debt."

Finally, here is one I made up that I would have liked to have seen from the SOTU:

Party at the SOTU

As President Obama gets ready to deliver his State of the Union address, there is much speculation about what he will say and how he will say it.  David Corn writes about what he thinks progressives want from Obama's SOTU and concludes that those on the left -- even more than specific policy initiatives -- will be looking to see "how vigorously he will fight the newly empowered Republicans."

This progressive has written repeatedly and with great frustration about Obama's predilection for compromise and bipartisanship.  (See, e.g., Greider on Obama, No Se Puede, Holy Pointless Gimmick; What Krugman Said.)  I certainly would love to see a more combative speech from Obama, where he exposes Republican hypocrisy and makes a bold case for a progressive agenda.  I know that is not going to happen.  What I would settle for is a speech that does not adopt Republican talking points, especially about the need for belt-tightening and the over-arching importance of deficit reduction.

The New York Times reported Sunday that Obama plans to take a "centrist" approach and strike a theme of "national unity" in his speech.  Unfortunately, the more Obama tries to find common ground with Republicans, the more the ground keeps shifting -- and shifting to the right.  Obama will thankfully argue that we must spur the economy by investing in infrastructure, education and technological innovation.  But I am afraid he will also tip his hat to Republicans by stating that such spending must be tempered with the need to reduce the deficit, which will only succeed in giving cover to Republicans, who want to make deep spending cuts and prohibit any new government spending. 

Instead of searching for where Democrats and Republicans can agree, Obama should be gearing up for a defense of his spending priorities by explaining what it would mean to adopt Republican policies.  In this regard, he has been given a great gift -- if he would only take it -- with the selection of House Budget Committee Chairman Paul Ryan to provide the GOP response to the SOTU.  Rep. Ryan drafted a radical plan for reducing the deficit, known as the "Roadmap for America's Future," that Paul Krugman explained "is a fraud that makes no useful contribution to the debate over America's fiscal future."  Obama should anticipate Ryan's inevitable plea in rebuttal for budget cuts and no new spending by explaining what the Republicans truly have in mind.  The American public should know that the Roadmap calls for massive cuts to social programs, partial privatization of Social Security, severe cuts to Medicare, which is to be replaced by a voucher program, and more tax cuts for the wealthy.

Ryan and his fellow Republicans want to privatize Social Security and have been pushing the myth that Social Security is in dire crisis.  And Obama?  It is telling that the liberal Democrats in the House felt compelled to urge Obama to make it clear that he will not agree with Republicans to cut or make changes to Social Security.  As the letter from the co-chairs of the Congressional Progressive Caucus explains, the SOTU provides Obama with a " unique opportunity to set forth a framework of democratic values and to call for protecting Social Security for generations to come."  At the very minimum, this is an opportunity he should not pass up.

[Related posts:  Dead Armadillos; Let 'Em Eat Catfood; Must Read: Krugman]