A Fighting Chance (53 page)

receiving a fair deal?:
See December 2008 COP report, 8–9. The first COP report asked the following primary questions, with explanatory text and various secondary questions as well. The ten questions, paraphrased, were:

(1) What Is Treasury’s Strategy?

(2) Is the Strategy Working to Stabilize Markets?

(3) Is the Strategy Helping to Reduce Foreclosures?

(4) What Have Financial Institutions Done with the Taxpayers’ Money Received So Far?

(5) Is the Public Receiving a Fair Deal?

(6) What Is Treasury Doing to Help the American Family?

(7) Is Treasury Imposing Reforms on Financial Institutions that Are Taking Taxpayer Money?

(8) How Is Treasury Deciding Which Institutions Receive the Money?

(9) What is the Scope of Treasury’s Statutory Authority?

(10) Is Treasury Looking Ahead?

Hensarling testified:
For Congressman Hensarling’s testimony before the House Financial Services Committee on December 10, 2008, see
http://votesmart.org/public-statement/401754/hensarling-testifies-before-house-financialservices-committee
.

here’s what we got
: See COP report, January 9, 2009. Treasury “did not provide complete. answers to several of the questions and failed to address a number of the questions at all” (1).

“
that money is used”:
“Tidy Up the Bailout,” editorial
Boston Globe,
January 15, 2009. Also Justin Rood, “Bailout Czar’s Secret? Copy. Paste. Repeat,” ABC News, January 9, 2009.

value of the shares they got back was also $100:
Treasury noted in “Responses to Questions of the First Report of the Congressional Oversight Panel for Economic Stabilization” on December 30, 2008: “When measured on an accrual basis, the value of the preferred stock is at or near par” (8) (
http://www.treasury.gov/press-center/press-releases/Documents/123108%20cop%20response.pdf
).

a $78 billion shortfall:
The financial valuation study of TARP assets was conducted by the COP’s Advisory Committee on Finance and Valuation and by the international valuation firm Duff & Phelps Corporation (D&P). The Advisory Committee was composed of Adam M. Blumenthal, former First Deputy Comptroller of the City of New York, Professor William N. Goetzmann of Yale University, and Professor Deborah J. Lucas of Northwestern University. Together, the Advisory Committee and D&P devised a methodology for evaluating the fair market value of TARP assets. Rather than rely on any single valuation approach, the team used multiple methods to calculate, company by company, the fair market value of preferred stock and warrants received by Treasury, applying a “reduced marketability discount” under each approach to reflect the diminution in value of these relatively illiquid securities. (The team concluded that, given the liquidity and market volume in the trading of securities, it was reasonable to rely on market pricing for ascertaining economic value.) This analysis yielded a range of values per company, and the team selected the midpoint as representative for purposes of the final report. The final report ultimately revealed that for the ten largest TARP investments made during 2008, Treasury received about $66 for every $100 spent, amounting to about a $78 billion shortfall. See “Valuing Treasury’s Acquisitions,” Congressional Oversight Panel, February 6, 2009,
http://cybercemetery.unt.edu/archive/cop/20110402010539/http://cop.senate.gov/documents/cop-020609-report.pdf
.

brought the company to its knees:
The story first broke on March 14–15, with the number “$165 million” quoted (others would later cite the $168 million figure). See Edmund L. Andrews and Peter Baker, “A.I.G. Planning Huge Bonuses After $170 Billion Bailout,”
New York Times
, March 14, 2009. The reaction was swift and intense. There were rumors of death threats against AIG executives, and the House quickly passed a bill that called for a 90 percent tax on bonuses for certain TARP recipients. Neil Barofsky,
Bailout
, (2012), 140. There is considerable debate about the role of Treasury oversight in this debacle. Secretary Geithner told AIG that these bonuses were “unacceptable” and “demanded they be renegotiated.” He also convinced AIG to reduce its bonuses for the financial products units by 30 percent. See Edmund L. Andrews and Peter Baker, “Bonus Money at Troubled A.I.G. Draws Heavy Criticism,”
New York Times
, March 15, 2009.

However, Neil Barofsky, then Special Inspector General of TARP, is quite critical of Treasury’s handling of the bonuses: “Had Treasury officials been more effectively monitoring the government’s investment in AIG and more concerned with accountability and basic fairness, they might have helped prevent the blowup. For example, they could have forced AIG to renegotiate the terms of the contracts as a condition of the additional $30 billion in TARP funds that they had announced several days
after
learning about the imminent bonus payouts.” Barofsky also notes: “… the rationale Neel Kashkari had given me for making the payments—that the bonus recipients were essential personnel necessary to wind down AIG’s complex transactions—didn’t quite wash.” Barofsky,
Bailout
, 182. For more on executive compensation during the bailout and what he calls “the abject fetishization of the lords of high finance,” see Barofsky,
Bailout
, 139–40. He argues that TARP recipients “showed no shame in pushing for ever-high salary awards. More noteworthy, however, was the pressure exerted by several Treasury officials, who also pushed to increase the value of the pay packages.” Barofsky,
Bailout,
140.

“
resign or go commit suicide”:
Senator Chuck Grassley (Republican, Iowa) said on a March 16 radio interview: “I suggest, you know, obviously maybe they ought to be removed, but I would suggest that the first thing that would make me feel a little bit better towards them [is] if they would follow the Japanese example and come before the American people and take that deep bow and say I’m sorry and then either do one of two things: resign or go commit suicide.… In the case of the Japanese, they usually commit suicide before they make any apology.” Tahman Bradley, “GOP Senator: AIG Execs Should Follow Japanese Model—Suicide or Apology,” ABC News, March 16, 2009.

A similar approach should have applied during the 2008 crash:
Under current law, banks are not permitted to file for bankruptcy, but the crisis—including the hundreds of billions of dollars in bailout money—was all in unchartered territory with no legal precedent. It would have been possible for the Treasury to lay out the terms of a bailout with the primary features of a negotiated Chapter 11 reorganization, including replacing the CEOs, imposing significant losses for the shareholders, requiring the creditors to bear some of the losses, and drawing up a new business plan. In fact, most negotiated reorganizations are done in the shadow of the bankruptcy laws, with the parties agreeing that there will be no formal filing, so long as the agreed-upon conditions are met. In addition, because of the unprecedented investment of public funds, the banks could have been required to help meet certain public aims, such as reduced foreclosures and increased lending to small businesses.

Sheila Bair believes such an approach should have been considered for Citibank, and she points out that a bankruptcy-like receivership could have been used through the existing authority of the FDIC: “I took the position that we should at least consider the feasibility of putting Citibank, Citigroup’s insured national bank subsidiary, through our bankruptcy-like receivership process. That would have enabled us to create a good-bank/bad-bank structure, leaving the bad assets in the bad bank, with losses absorbed by its shareholders and unsecured creditors. My request that we at least look at using our receivership powers was met with derision by the other regulators. Hank Paulson and Tim Geithner mockingly accused me of saying that Citi was ‘not systemic.’” Sheila Bair,
Bull by the Horns
, 123.

Under this scenario, banks that did not want to subject themselves to a negotiated reorganization could continue operations, but they would not receive TARP bailout money. While Sheila Bair makes it clear that Secretary Paulson and Secretary Geithner were unwilling to consider such an alternative because Citi and the other huge banks were systemically important, it is worth considering that the markets (and the economy) might have responded more positively to the news that TARP money was available if the largest banks needed it, but the terms would require some serious accountability and a change in banking practices going forward.

fall in line for partial payment:
When AIG was running out of cash in late 2008, it began negotiating with creditors for write-downs of their debts. Elias Habayeb, the CFO who oversaw the Financial Products unit of AIG, reportedly tried to get creditors to accept discounts of as much as 40 cents on the dollar. See Richard Teitelbaum and Hugh Son, “New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers,”
Bloomberg
, October 27, 2009. Although it is typical to have creditors take some haircut, Tim Geithner, then head of the Federal Reserve Bank of New York, guaranteed creditors would be paid 100 cents on the dollar, placing the burden on taxpayers without having the creditors—including the counterparties to AIG’s credit default swaps—shoulder any of the losses. See Brady Dennis, “Fed Criticized for Not Negotiating Harder with AIG Creditors,”
Washington Post
, November 17, 2009.

walked away with $12.9 billion:
One of the biggest beneficiaries of the government bailout of AIG was Goldman Sachs, which received a $12.9 billion payment from AIG. Once Goldman learned that the government was likely going to bail out AIG in 2008, it refused to take a haircut. According to one report, Goldman would later feature AIG as a “client success story,” even though its role in the bailout of AIG came at significant cost to the taxpayer. See Lauren Tara LaCapra, “Goldman, AIG and the Government Renew Their Friendship,”
Unstructured Finance
(blog), Reuters, April 15, 2013.

but a pain-free bailout:
Note that the “nostrings-attached” approach for the major bank bailout is in sharp contrast to how the auto companies were treated. After an initial infusion of cash in the fall of 2008, Ford was in relatively secure shape but Chrysler and GM asked for huge loans, arguing that they had no other access to cash, and without help they would be forced to shut down. Ultimately Treasury lent the money, but their bailout was accompanied by a Chapter 11 bankruptcy and most of the attendant features, including the requirement that shareholders be wiped out and creditors share some of the pain. See Martin Kady, “Dems Attach Strings to Auto Bailout,”
Politico Live
(blog),
Politico
, November 15, 2008. Both companies adopted new business plans, and their relatively new CEOs agreed to work for $1 a year. To help the companies survive, the unions agreed to modify their contracts and adjust their pension obligations. See also Sheryl Gay Stolberg and Bill Vlasic, “US Lays Down Terms for Auto Bailout,”
New York Times,
March 30, 2009.

for a long time:
In fact, the price of Too Big to Fail is still weighing on our economy. Concentration in the banking industry was one of the principle problems cited at the time TARP was passed, and yet, the largest financial institutions are now 30 percent
larger
than they were before the financial crisis and the five biggest banks now hold more than half of all banking assets in the United States. This is based on our calculation of assets for the top four banks, which grew from a combined $6 trillion to $7.8 trillion between 2007 and 2013. Similarly, one report in 2012 showed that the top five banks are about twice as large as they had been a decade earlier relative to the economy. David Lynch, “Big Banks: Now Even Too Bigger to Fail,”
Bloomberg Businessweek
, April 19, 2012.

The continued faith in Too Big to Fail also gives large financial institutions access to cheaper capital, since investors believe the government would never let them fail. One estimate pointed to “a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.… The top five banks—JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc.… would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.” “Why Should Taxpayers Give Big Banks $83 Billion a Year?” editorial,
Bloomberg
, February 20, 2013. See also COP report, January 2011.

actual policies were anemic:
COP criticized Treasury’s foreclosure prevention policies as insufficient and ineffectual. COP noted that HAMP, Treasury’s signature foreclosure program, “ha[d] failed to make a significant dent in the number of foreclosures and [did] not appear likely to do so in the future.” COP report, December 2010, 133. COP viewed these failings as particularly significant in light of the relationship between housing, unemployment, and long-term economic growth. COP also found that HAMP “was not designed to address the root causes of the housing crisis” and that HAMP borrowers were “still paying 63 percent of pre-tax income towards debt” even after receiving a modification (236–38, 385). COP also noted that “to the extent that HAMP simply kicks the foreclosure can down the road, it ends up hurting all of the people who are desperate for the economy to start growing again so that their lives can return to normal.” COP report, December 2010, (450).