Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?
For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold.
And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes.
So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.
So here are several questions that should be answered, in public, under oath, to clear the air:
What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?
Was it already known who the counterparties were and what the exposure was for each of the counterparties?
What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?
What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.
Why weren't the counterparties immediately and fully disclosed?
Read on.
Showing posts with label Eliot Spitzer Op-Ed. Show all posts
Showing posts with label Eliot Spitzer Op-Ed. Show all posts
Wednesday, March 18, 2009
Saturday, February 21, 2009
Spitzer's Op-Ed: Predatory lenders' partner in crime
I thought I would repost this again. This is Spitzer's Op-Ed in 2008 about predatory lending warning. One month after his Op-Ed, Spitzer was hit with the Emperor Club prostitution scandal. Days later, Spitzer resigned as the Governor of New York.
How the Bush Administration Stopped the States From Stepping In to Help Consumers
By Eliot Spitzer
Thursday, February 14, 2008; Page A25
Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.
Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.
Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.
What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
Read on.
How the Bush Administration Stopped the States From Stepping In to Help Consumers
By Eliot Spitzer
Thursday, February 14, 2008; Page A25
Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.
Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.
Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.
What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
Read on.
Wednesday, February 18, 2009
Spitzer Op-Ed: Can we finally kill this terrible idea of privatizing social security?
By Eliot Spitzer
Posted Wednesday, Feb. 4, 2009
"We told you so" is just about the most annoying sentence one can utter. But when it comes to the debate over Social Security, this is a moment for Democrats to say: We told you so. Use your time machine to travel back four years: In his 2005 State of the Union address, delivered during a period of economic and stock-market growth, President Bush made the privatization of Social Security the centerpiece of his domestic agenda for his second term.
The grand domestic project of the Bush administration was to repeal the two major components of New Deal ideology: the regulatory apparatus of the federal government and the social contract embodied by social welfare programs—Social Security, Medicare, Medicaid. The effort to roll back the regulatory agencies—the SEC, EPA, OSHA—and place all faith in an unregulated market has been well-chronicled, as have been the ensuing market collapse and suffering. The effort to repeal Social Security, which is what privatization amounts to, was to have been followed by private health savings accounts.
Fortunately, the effort failed, and much damage was avoided. But it is worth taking a quick look at some of the debate about privatization, especially in the context of today's market turmoil, just to make sure the issue does not, like a bad sequel, return.
Read on.
Posted Wednesday, Feb. 4, 2009
"We told you so" is just about the most annoying sentence one can utter. But when it comes to the debate over Social Security, this is a moment for Democrats to say: We told you so. Use your time machine to travel back four years: In his 2005 State of the Union address, delivered during a period of economic and stock-market growth, President Bush made the privatization of Social Security the centerpiece of his domestic agenda for his second term.
The grand domestic project of the Bush administration was to repeal the two major components of New Deal ideology: the regulatory apparatus of the federal government and the social contract embodied by social welfare programs—Social Security, Medicare, Medicaid. The effort to roll back the regulatory agencies—the SEC, EPA, OSHA—and place all faith in an unregulated market has been well-chronicled, as have been the ensuing market collapse and suffering. The effort to repeal Social Security, which is what privatization amounts to, was to have been followed by private health savings accounts.
Fortunately, the effort failed, and much damage was avoided. But it is worth taking a quick look at some of the debate about privatization, especially in the context of today's market turmoil, just to make sure the issue does not, like a bad sequel, return.
Read on.
Sunday, January 25, 2009
Spitzer Op-Ed: America's Fear of Competition
By Eliot Spitzer
Posted Thursday, Jan. 22, 2009
Although everybody claims to love the market, nobody really likes the rough-and-tumble of competition that produces the essential "creative destruction" of capitalism.
At bottom, this abhorrence of competition and change are the common theme that binds together the near death of the American car industry, the collapse of the credit market, the implosion of the housing market, the SEC's disastrous negligence, the Madoff Ponzi scheme, and the other economic catastrophes of recent months.
Consider the examples of the SEC and GM, which would appear to have nothing to do with each other. The traditional critiques of the SEC have been that it was underfunded and didn't have up-to-date laws needed to regulate sophisticated financial transactions in evolving markets. That's not accurate.
The SEC is a gargantuan bureaucracy of 3,500 employees and a budget of $900 million—vast compared with the offices that actually did ferret out fraud in the marketplace. And the general investigative powers of the SEC are so broad that it needs no additional statutory power to delve into virtually any market activity that it suspects is improper, fraudulent, or deceptive.
After each business scandal (Enron, Wall Street analysts, Madoff …), the SEC claims a need for more money and statutory power, yet those don't help. The SEC has all the money and people and laws it needs. For ideological reasons, it just didn't want to do its job, and on the rare occasions when it did, it didn't know how.
Read on.
Posted Thursday, Jan. 22, 2009
Although everybody claims to love the market, nobody really likes the rough-and-tumble of competition that produces the essential "creative destruction" of capitalism.
At bottom, this abhorrence of competition and change are the common theme that binds together the near death of the American car industry, the collapse of the credit market, the implosion of the housing market, the SEC's disastrous negligence, the Madoff Ponzi scheme, and the other economic catastrophes of recent months.
Consider the examples of the SEC and GM, which would appear to have nothing to do with each other. The traditional critiques of the SEC have been that it was underfunded and didn't have up-to-date laws needed to regulate sophisticated financial transactions in evolving markets. That's not accurate.
The SEC is a gargantuan bureaucracy of 3,500 employees and a budget of $900 million—vast compared with the offices that actually did ferret out fraud in the marketplace. And the general investigative powers of the SEC are so broad that it needs no additional statutory power to delve into virtually any market activity that it suspects is improper, fraudulent, or deceptive.
After each business scandal (Enron, Wall Street analysts, Madoff …), the SEC claims a need for more money and statutory power, yet those don't help. The SEC has all the money and people and laws it needs. For ideological reasons, it just didn't want to do its job, and on the rare occasions when it did, it didn't know how.
Read on.
Wednesday, January 21, 2009
Spitzer Op-Ed: Robots, Not Roads
By Eliot Spitzer
Posted Monday, Jan. 5, 2009
The incoming Obama administration and Congress are planning a huge fiscal stimulus package. They hope that such a stimulus will catalyze an economic turnaround and be a cornerstone of a "New New Deal." If the early reports are reliable, the stimulus will include a huge tax cut and will fund projects like road-building and bridge repair, laying the infrastructure foundation for the economy of the future.
Yet two huge problems with this approach must be confronted. First, the capacity of even the U.S. government to affect the overall global economy is limited. Suppose the package is $800 billion over two years: $400 billion is less than 1 percent of the global economy and a mere 3 percent of the U.S. economy. In relative terms, $400 billion isn't all that much more than the $152 billion spent on the 2008 stimulus, which had nary an impact on the economy.
Here is where the New Deal analogies are instructive. The New Deal probably didn't pull us out of the Depression; World War II did that. What the New Deal did was redefine the social contract—perhaps just as important an outcome. The ultimate significance of the Obama package may be not its short-term demand-side impact but rather its capacity to transform our economy and, in turn, some of the fundamental underpinnings of our society. This introduces the second major problem: The "off the shelf" infrastructure projects that can be funded immediately and provide immediate demand-side stimulus are almost by definition not the transformative investments we really need. Paving roads, repairing bridges that need refurbishing, and accelerating existing projects are all good and necessary, but not transformative. These projects by and large are building or patching the same economy with the same flaws that got us where we are. Our concern should be that as we look for the next great infrastructure project to transform our economy, we might rebuild the Erie Canal and find ourselves a century behind technologically.
This moment presents the administration with what is likely to be its best—and perhaps only—opportunity to have essentially unlimited capital (both fiscal and political) to spend on a transformative economic agenda. It is a unique moment to build a new foundation. It would be wise to ensure that a significant portion of the stimulus package is spent on new investments that may not be quite as ready to go but are surely more important to our long-term economic viability. There are many such critical investments, but here are a few for consideration. These are not, of course, the only ideas, and they may not be the best ideas. But they should spur discussion of how to use the fiscal stimulus not just to put people to work but also to build the over-the-horizon projects that will set the stage for the next great American economic miracle.
Read on.
Posted Monday, Jan. 5, 2009
The incoming Obama administration and Congress are planning a huge fiscal stimulus package. They hope that such a stimulus will catalyze an economic turnaround and be a cornerstone of a "New New Deal." If the early reports are reliable, the stimulus will include a huge tax cut and will fund projects like road-building and bridge repair, laying the infrastructure foundation for the economy of the future.
Yet two huge problems with this approach must be confronted. First, the capacity of even the U.S. government to affect the overall global economy is limited. Suppose the package is $800 billion over two years: $400 billion is less than 1 percent of the global economy and a mere 3 percent of the U.S. economy. In relative terms, $400 billion isn't all that much more than the $152 billion spent on the 2008 stimulus, which had nary an impact on the economy.
Here is where the New Deal analogies are instructive. The New Deal probably didn't pull us out of the Depression; World War II did that. What the New Deal did was redefine the social contract—perhaps just as important an outcome. The ultimate significance of the Obama package may be not its short-term demand-side impact but rather its capacity to transform our economy and, in turn, some of the fundamental underpinnings of our society. This introduces the second major problem: The "off the shelf" infrastructure projects that can be funded immediately and provide immediate demand-side stimulus are almost by definition not the transformative investments we really need. Paving roads, repairing bridges that need refurbishing, and accelerating existing projects are all good and necessary, but not transformative. These projects by and large are building or patching the same economy with the same flaws that got us where we are. Our concern should be that as we look for the next great infrastructure project to transform our economy, we might rebuild the Erie Canal and find ourselves a century behind technologically.
This moment presents the administration with what is likely to be its best—and perhaps only—opportunity to have essentially unlimited capital (both fiscal and political) to spend on a transformative economic agenda. It is a unique moment to build a new foundation. It would be wise to ensure that a significant portion of the stimulus package is spent on new investments that may not be quite as ready to go but are surely more important to our long-term economic viability. There are many such critical investments, but here are a few for consideration. These are not, of course, the only ideas, and they may not be the best ideas. But they should spur discussion of how to use the fiscal stimulus not just to put people to work but also to build the over-the-horizon projects that will set the stage for the next great American economic miracle.
Read on.
Sunday, December 28, 2008
Spitzer's Op-Ed: Seeing Through Wall Street
Source:Slate
By Eliot Spitzer
Posted Tuesday, Dec. 23, 2008
There is an odd symmetry to a year that began with a subprime meltdown—initially affecting those at the lower end of the economic spectrum, before it lit the fuse that burned down the entire house—and ended with the Bernard Madoff scandal, an old-fashioned Ponzi scheme whose victims were nominally sophisticated investors. Clearly, nobody has been immune to this now-global plague. Every effort to rebuild an economy in free fall has been one moment too late or one step too short, and the remedies, though expensive, have so far at least failed to address underlying structural issues.
Yet certain truisms have continued to prove their validity. As Justice Brandeis observed, sunlight is the best disinfectant. The transparency that comes with the glare of sunlight is hard for companies and government to deal with—and so is resisted.
But transparency could begin to remedy one of the great costs of our current crisis: the public's monumental loss of confidence in the markets. One of the great accomplishments of the past 50 years has been the so-called "democratization" of the markets—the successful effort to get Americans of all economic levels to invest in our process of capital formation. Not only did this create greater liquidity, but more important, it gave a much larger piece of America the opportunity to benefit from economic growth. The rise of the "ownership society" became a noted part of our politics as well as our sense of well-being.
Now, many of these investors are rightly concluding that the market has become nothing more than a casino on steroids—with Wall Street and corporate CEOs playing the role of the house, swinging the odds against the investors at every turn. Trust will be regained only if there is a fundamental change in the rules of transparency and only if those rules are enforced. Such transparency could have prevented many of the cataclysms of the past year. So it is all the more troubling that we continue to fail to require anything close to the information flow that we should—either about the behavior that brought us to where we are or about the transactions and efforts that are now being funded by taxpayers.
No doubt we all have our favorite questions that have not been answered. But here are a few year-ending queries to the players who have been central to the unfolding events of the past months. Some of these questions are retrospective in nature; some are prospective.
First, for our Treasury Department—and the Federal Reserve—which seem able to lend or guarantee at a scale unheard of until now: Where is all the money going, and how is it decided who gets it? Many of the investments appear to be much less critical than an investment in Lehman Bros. would have been, for example. If this reflects learning, wonderful. But what is the current metric for evaluation?
Speaking of Lehman, what precisely was the conversation at the Fed among the various bankers that led to the conclusion not to give Lehman assistance but to give AIG an almost unlimited Fed pipeline? What, exactly, did each bank tell the government about its exposure to Lehman or AIG, and when?
What did the government tell the banks about their obligation to lend, once they had received the infusion of billions to restore their balance sheets? As we have seen, the banks are holding onto an enormous amount of the cash, failing to inject needed oil into a system whose gears have ground to a halt. It defies common sense that the banks have been permitted to receive this capital and yet have not been required to lend in any significantly greater volume. As a result, the economy continues to fall like a rock.
When did the Fed, Treasury, or the Office of the Controller of the Currency begin to evaluate the credit risk of the subprime debt pipeline, and what did any of them do about it? This is the old what-did-they-know-and-when-did-they-know-it question.
Have these government entities begun to think through the possibility of requiring banks that securitize debt to maintain an ownership of some significant percentage of this debt? That would begin to address the risks that result when those who originate debt really have no concerns or accountability for the long-term capacity of borrowers to pay.
For the banks, which have received an unceasing supply of credit and guarantees: We have heard too often from those at the top that "we didn't have operational responsibility; we relied on our risk managers." We are now major equity investors in these banks. Our capital is now at risk.
So let's get—right now—all the analysis of the subprime debt that was originated, securitized, or bought. If the credit departments got it so wrong, we deserve to know that so we can remedy the situation by bringing in analysts with greater skills. If the credit analysis was correct and the risk managers were sending warnings up the chain, we deserve to know that as well. Because then the senior managers—despite their disclaimers—have some questions to answer. There are few things more essential for a bank than knowing that its loans will be paid back. We had better figure out how the banks got it so wrong. Any bank unwilling to release these documents should not get public funding.
Also for the banks: What would it cost to modify meaningfully all the subprime mortgages such that delinquencies and defaults can be brought back into line? Have they calculated this figure? Loan modification is a necessary step to resolving the underlying housing crisis, and one way or another, it has to get done. Why loan modification wasn't a condition of the banks' receipt of capital is a mystery that remains unresolved.
For the rating agencies, we should also require public disclosure—of their subprime analysis. Let them withstand the public scrutiny of the process that generated AAA ratings on debt that so soon became toxic. Perhaps they will be vindicated. Perhaps there really was no way to see around the corner. Or perhaps we will conclude that the agencies simply do not have the analytical tools to sense inflection points, in which case their ratings really are not worth a great deal.
As we struggle through the difficult process of rebuilding, many errors will be made in good faith by those trying to deal with an unprecedented situation. But it will almost always be the case that transparency will assist in the long term, uncomfortable though it may be in the near term. Until we get comfortable with that notion, we will continue to sink deeper and deeper into the crisis of confidence gripping our economy.
On a side note: The Spitzer family had an indirect investment with Bernard Madoff. According to a National Public Radio report, Spitzer revealed at a holiday party this week that his family real estate firm had investments with a Madoff subsidiary.The report did not say whether Mr. Spitzer said how much the firm had lost.
By Eliot Spitzer
Posted Tuesday, Dec. 23, 2008
There is an odd symmetry to a year that began with a subprime meltdown—initially affecting those at the lower end of the economic spectrum, before it lit the fuse that burned down the entire house—and ended with the Bernard Madoff scandal, an old-fashioned Ponzi scheme whose victims were nominally sophisticated investors. Clearly, nobody has been immune to this now-global plague. Every effort to rebuild an economy in free fall has been one moment too late or one step too short, and the remedies, though expensive, have so far at least failed to address underlying structural issues.
Yet certain truisms have continued to prove their validity. As Justice Brandeis observed, sunlight is the best disinfectant. The transparency that comes with the glare of sunlight is hard for companies and government to deal with—and so is resisted.
But transparency could begin to remedy one of the great costs of our current crisis: the public's monumental loss of confidence in the markets. One of the great accomplishments of the past 50 years has been the so-called "democratization" of the markets—the successful effort to get Americans of all economic levels to invest in our process of capital formation. Not only did this create greater liquidity, but more important, it gave a much larger piece of America the opportunity to benefit from economic growth. The rise of the "ownership society" became a noted part of our politics as well as our sense of well-being.
Now, many of these investors are rightly concluding that the market has become nothing more than a casino on steroids—with Wall Street and corporate CEOs playing the role of the house, swinging the odds against the investors at every turn. Trust will be regained only if there is a fundamental change in the rules of transparency and only if those rules are enforced. Such transparency could have prevented many of the cataclysms of the past year. So it is all the more troubling that we continue to fail to require anything close to the information flow that we should—either about the behavior that brought us to where we are or about the transactions and efforts that are now being funded by taxpayers.
No doubt we all have our favorite questions that have not been answered. But here are a few year-ending queries to the players who have been central to the unfolding events of the past months. Some of these questions are retrospective in nature; some are prospective.
First, for our Treasury Department—and the Federal Reserve—which seem able to lend or guarantee at a scale unheard of until now: Where is all the money going, and how is it decided who gets it? Many of the investments appear to be much less critical than an investment in Lehman Bros. would have been, for example. If this reflects learning, wonderful. But what is the current metric for evaluation?
Speaking of Lehman, what precisely was the conversation at the Fed among the various bankers that led to the conclusion not to give Lehman assistance but to give AIG an almost unlimited Fed pipeline? What, exactly, did each bank tell the government about its exposure to Lehman or AIG, and when?
What did the government tell the banks about their obligation to lend, once they had received the infusion of billions to restore their balance sheets? As we have seen, the banks are holding onto an enormous amount of the cash, failing to inject needed oil into a system whose gears have ground to a halt. It defies common sense that the banks have been permitted to receive this capital and yet have not been required to lend in any significantly greater volume. As a result, the economy continues to fall like a rock.
When did the Fed, Treasury, or the Office of the Controller of the Currency begin to evaluate the credit risk of the subprime debt pipeline, and what did any of them do about it? This is the old what-did-they-know-and-when-did-they-know-it question.
Have these government entities begun to think through the possibility of requiring banks that securitize debt to maintain an ownership of some significant percentage of this debt? That would begin to address the risks that result when those who originate debt really have no concerns or accountability for the long-term capacity of borrowers to pay.
For the banks, which have received an unceasing supply of credit and guarantees: We have heard too often from those at the top that "we didn't have operational responsibility; we relied on our risk managers." We are now major equity investors in these banks. Our capital is now at risk.
So let's get—right now—all the analysis of the subprime debt that was originated, securitized, or bought. If the credit departments got it so wrong, we deserve to know that so we can remedy the situation by bringing in analysts with greater skills. If the credit analysis was correct and the risk managers were sending warnings up the chain, we deserve to know that as well. Because then the senior managers—despite their disclaimers—have some questions to answer. There are few things more essential for a bank than knowing that its loans will be paid back. We had better figure out how the banks got it so wrong. Any bank unwilling to release these documents should not get public funding.
Also for the banks: What would it cost to modify meaningfully all the subprime mortgages such that delinquencies and defaults can be brought back into line? Have they calculated this figure? Loan modification is a necessary step to resolving the underlying housing crisis, and one way or another, it has to get done. Why loan modification wasn't a condition of the banks' receipt of capital is a mystery that remains unresolved.
For the rating agencies, we should also require public disclosure—of their subprime analysis. Let them withstand the public scrutiny of the process that generated AAA ratings on debt that so soon became toxic. Perhaps they will be vindicated. Perhaps there really was no way to see around the corner. Or perhaps we will conclude that the agencies simply do not have the analytical tools to sense inflection points, in which case their ratings really are not worth a great deal.
As we struggle through the difficult process of rebuilding, many errors will be made in good faith by those trying to deal with an unprecedented situation. But it will almost always be the case that transparency will assist in the long term, uncomfortable though it may be in the near term. Until we get comfortable with that notion, we will continue to sink deeper and deeper into the crisis of confidence gripping our economy.
On a side note: The Spitzer family had an indirect investment with Bernard Madoff. According to a National Public Radio report, Spitzer revealed at a holiday party this week that his family real estate firm had investments with a Madoff subsidiary.The report did not say whether Mr. Spitzer said how much the firm had lost.
Tuesday, December 16, 2008
Spitzer's Op-Ed: A Better Car-Bailout Plan
The Big Three would bid against one another for bailout money, and only two would get it.
By Eliot Spitzer
Posted Friday, Dec. 12, 2008, at 12:46 PM ET
A crisis is a terrible thing to waste. This moment of decision about the auto bailout should be when we summon the courage to reject broken policies, not just to throw more capital at them; use market forces to drive restructuring, not just provide bridge loans; and put in place true market-based pressures, not a veneer of government oversight that will substitute poorly for tough decision-making.
The unfortunate reality is that we are straying further from market-driven principles and moving to an economy that relies on government as benefactor. We have nationalized the financial-services sector and are on the cusp of nationalizing the automotive sector, yet we have failed to demand anything nearly adequate in the form of genuine competition, rule changes, or transparency from the affected firms.
The current iteration of the auto bailout—car czar and all—is a move in the wrong direction. Despite the appropriately rough ride the auto CEOs were given on their first jet-ferried trip to Washington, the House, faced with mounting job losses economywide—caved on the auto leaders' second, carpooled road trip. Senate Republicans blocked a congressional bailout on Thursday, but it now seems likely that the White House will use financial rescue money to fund some version of the bailout plan.
The Big Three will receive an initial payout of billions, and nobody believes that the first check is anything more than a down payment. As with the financial-services bailout, once Washington is in the game, it is almost impossible to turn off the spigot. Yet the companies have proffered only paper-thin platitudes about possible actions to restructure, platitudes that are neither binding nor creative. And we still know precious little about the finances of the companies, especially Chrysler/Cerberus.
Even worse, the Big Three may be subject to the authority of a car czar with theoretically almost unfettered power. Yet this modern Wizard of Oz will have no more real power than did the original. I have yet to find a single person who believes that the czar would really be able to guide or force real change on the industry—or will have the wisdom to do so. Progress comes from competition, not from oligarchs or bureaucrats.
More from Spitzer's article.
By Eliot Spitzer
Posted Friday, Dec. 12, 2008, at 12:46 PM ET
A crisis is a terrible thing to waste. This moment of decision about the auto bailout should be when we summon the courage to reject broken policies, not just to throw more capital at them; use market forces to drive restructuring, not just provide bridge loans; and put in place true market-based pressures, not a veneer of government oversight that will substitute poorly for tough decision-making.
The unfortunate reality is that we are straying further from market-driven principles and moving to an economy that relies on government as benefactor. We have nationalized the financial-services sector and are on the cusp of nationalizing the automotive sector, yet we have failed to demand anything nearly adequate in the form of genuine competition, rule changes, or transparency from the affected firms.
The current iteration of the auto bailout—car czar and all—is a move in the wrong direction. Despite the appropriately rough ride the auto CEOs were given on their first jet-ferried trip to Washington, the House, faced with mounting job losses economywide—caved on the auto leaders' second, carpooled road trip. Senate Republicans blocked a congressional bailout on Thursday, but it now seems likely that the White House will use financial rescue money to fund some version of the bailout plan.
The Big Three will receive an initial payout of billions, and nobody believes that the first check is anything more than a down payment. As with the financial-services bailout, once Washington is in the game, it is almost impossible to turn off the spigot. Yet the companies have proffered only paper-thin platitudes about possible actions to restructure, platitudes that are neither binding nor creative. And we still know precious little about the finances of the companies, especially Chrysler/Cerberus.
Even worse, the Big Three may be subject to the authority of a car czar with theoretically almost unfettered power. Yet this modern Wizard of Oz will have no more real power than did the original. I have yet to find a single person who believes that the czar would really be able to guide or force real change on the industry—or will have the wisdom to do so. Progress comes from competition, not from oligarchs or bureaucrats.
More from Spitzer's article.
Thursday, December 04, 2008
Spitzer's Op-Ed: Too Big Not To Fail
By Eliot Spitzer
Posted Wednesday, Dec. 3, 2008, at 5:59 PM ET
Last month, as the financial crisis and the government rescue plan dominated headlines, almost everyone overlooked a news item that could have enormous long-term impact: GE Capital announced the acquisition of five mid-size airplanes—with an option to buy 20 more—produced by CACC, a new, Chinese-government-sponsored airline manufacturer.
Why is that so significant? Two reasons: First, just as small steps signaled the Asian entry into our now essentially bankrupt auto sector 50 years ago, so the GE acquisition signals Asia's entry into one of our few remaining dominant manufacturing sectors. Boeing is still the world's leading commercial aviation company. CACC's emergence—and its particular advantage selling to Asian markets—means that Boeing now faces the rigors of an entirely new competitive playing field and that our commercial airplane sector is likely to suffer enormously over the coming decades.
But the second implication is even bigger. The CACC story highlights the risk that current bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector:
Our trade deficit has ballooned from about $100 billion to more than $700 billion annually in the past decade, and our federal deficit now approaches $1 trillion. These twin deficits leave us at the mercy of foreign-capital inflows that may diminish as Asian nations, in particular, invest increasingly at home.
Our household savings rate has been close to zero—and even negative in some years—not permitting the long-term capital accumulation required for the investments we need; China's savings rate, by comparison, is an astonishing 30 percent of household income.
U.S. middle class income has stagnated over the past decade, while the middle class in China—granted, starting from a lower base—has seen its income growing at about 10 percent annually.
Our intellectual advantage could soon turn into a new "third deficit," as hundreds of thousands of engineers are being created annually in China.
We are realizing that the service sector—all the lawyers, investment bankers, advertising agencies, and accountants—follows its clients and wealth creation. This, not over-regulation, is the reason investment-banking activity has begun to migrate overseas.
A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.
Read on from The Slate.
Posted Wednesday, Dec. 3, 2008, at 5:59 PM ET
Last month, as the financial crisis and the government rescue plan dominated headlines, almost everyone overlooked a news item that could have enormous long-term impact: GE Capital announced the acquisition of five mid-size airplanes—with an option to buy 20 more—produced by CACC, a new, Chinese-government-sponsored airline manufacturer.
Why is that so significant? Two reasons: First, just as small steps signaled the Asian entry into our now essentially bankrupt auto sector 50 years ago, so the GE acquisition signals Asia's entry into one of our few remaining dominant manufacturing sectors. Boeing is still the world's leading commercial aviation company. CACC's emergence—and its particular advantage selling to Asian markets—means that Boeing now faces the rigors of an entirely new competitive playing field and that our commercial airplane sector is likely to suffer enormously over the coming decades.
But the second implication is even bigger. The CACC story highlights the risk that current bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector:
Our trade deficit has ballooned from about $100 billion to more than $700 billion annually in the past decade, and our federal deficit now approaches $1 trillion. These twin deficits leave us at the mercy of foreign-capital inflows that may diminish as Asian nations, in particular, invest increasingly at home.
Our household savings rate has been close to zero—and even negative in some years—not permitting the long-term capital accumulation required for the investments we need; China's savings rate, by comparison, is an astonishing 30 percent of household income.
U.S. middle class income has stagnated over the past decade, while the middle class in China—granted, starting from a lower base—has seen its income growing at about 10 percent annually.
Our intellectual advantage could soon turn into a new "third deficit," as hundreds of thousands of engineers are being created annually in China.
We are realizing that the service sector—all the lawyers, investment bankers, advertising agencies, and accountants—follows its clients and wealth creation. This, not over-regulation, is the reason investment-banking activity has begun to migrate overseas.
A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.
Read on from The Slate.
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