[by Andrew Pollack]
Simultaneous with the announcement of his 10-year budget plan, Obama rolled out new bank bailouts.
Obama announced on February 26th he was considering giving $750 billion or more to banks, and that he had budgeted $250 billion in reserves, based on a conservative estimate of what it could lose in the course of spending that $750 billion on assets which might never regain their value.
The day before Obama ordered the nation’s 19 biggest banks to undergo “stress tests” to see whether they could survive if the economy deteriorated further.
The banks will have to carry out supervised analyses of how much their capital would be depleted under various scenarios. If regulators conclude a bank would not have enough capital, it would have to raise private capital within six months or get it from the government in exchange for ceding a part-ownership stake to Washington. And such a stake will be bought at prices pegged to a date when they were relatively high, minimizing existing shareholders’ losses.
Administration officials, insisting they want to avoid full-fledged bank nationalizations, left themselves wide discretion on how to interpret the results of the stress tests.
“It sure sounds to me like they are designing this to make it sound like the banking system is in great shape,” said Paul Miller, an analyst at a brokerage firm.
Christopher Whalen of Institutional Risk Analytics said the biggest banks would almost certainly become insolvent once they absorb the full brunt of losses from the economic downturn – and that Obama’s plan doesn’t address this.
“The stress test is about politics,” Whalen said. Washington, he added, already knows the results of the test.
Progressive economist Doug Henwood described the plan as “coddling” bankers,” and quoted two Citigroup analysts saying it was “bank- and investor-friendly.” The goal, they said, was to increase bank capital “while minimizing the amount and duration of any government ownership of common stock.”
And by painting a rosy picture of the economy’s road to recovery, Obama provides himself an excuse for not intervening more drastically in the banks’ business. The stress tests lay out two scenarios, a baseline and a “more adverse” scenario. The latter, which in theory would lead to more drastic government intervention, are in fact more like nongovernment economists’ baseline predictions.
So the banks – which want bailout cash, not government takeover of even a minority of their shares – can tell Washington “we’re fine, thanks” and not have to announce what would happen to them under the much more drastic downturn still to come.
Obama’s motivation for the plan, said Henwood: “Anything but nationalization!”
More evidence of Obama’s kindly feelings toward bankers and other financial institutions came in late February, with new bailouts of Citigroup and the world’s biggest insurer, AIG.
Citigroup got its third bailout in the form of a plan for conversion of $52 billion in US-owned preferred stock to common, giving the US potentially as much as 40% of such voting stocks. There is no new infusion of cash involved, but the change leaves taxpayers liable for losses in the common stock’s value: holders of common stock absorb losses before those of preferred. And ironically the seeming advantage of common – that it gives holders voting rights – is one the government is refusing to wield for fear of seeming to tread on the rights of private property!
Meanwhile AIG, the world’s biggest insurer, got its fourth bailout, for $30 billion.
Yet mainstream commentators were universal in their expectations that this will not be the last bailout for either firm, or for the financial sector in general. As a result calls for “nationalization” Swedish style are on the lips of a growing number of pundits and politicians. In the 1990s Sweden temporarily took over banks, but returned them completely to private hands once their books were straightened out and they had been relieved of the worst of their debts.
“This idea of nationalizing banks is not comfortable,” said Sen. Lindsey Graham (R-SC), a self-described “fiscal conservative,” on ABC’s “This Week.” “But we’ve got so many toxic assets spread throughout the banking and financial community, throughout the world, that we’re going to have to do something no one ever envisioned a year ago, no one likes. I would not take off the idea of nationalizing the banks.”
Nationalization fears helped drag down shares of Citigroup and Bank of America as much as 36% at one point on February 20th, after Senate Banking Committee Chair Chris Dodd said he could see regulators briefly taking over the two.
Even Alan Greenspan, former Federal Reserve chair and staunch free marketeer, told the Financial Times that the government may have to nationalize some banks on a temporary basis.
But this developing ruling class consensus is so far blocked by crucial holdouts. New York Senator Chuck Schumer – a Democrat, and the biggest recipient of campaign funds from Wall Street – rejected nationalization calls: “I don’t think government is good at making these decisions.”
In this he is joined by Obama, who in a recent interview with ABC rejected the Swedish solution: “We want to retain a strong sense of private capital fulfilling the core investment needs of this country.” And the day after Senator Dodd’s comments, a White House spokesperson said “The president believes a privately held banking system regulated by the government is what this country should have.” In this he was seconded by Federal Reserve chair Ben Bernanke.
With this stance the Administration reflects the sentiments of their banker friends, who don’t want even Swedish-style nationalizations, preferring continued bailouts without government ownership or control. Every time the media reports on threats to nationalize any or all banks, bank stocks plunge on fears that the value of their stocks will be diluted or even wiped out. But as the type of nationalization being discussed would eventually return the banks to private hands, the banks – and their friend in the White House – may yet change their tune as the depression deepens. (But not, we can be certain, before much more drastic efforts are made to get workers to pay the price for their swelling losses.)
But for now, the New York Times reports, “President Obama’s top aides have steered clear of the word [nationalization] entirely,” and the Washington Post notes, “Administration officials are … trying to offer federal assistance to financial firms without nationalizing them outright.” Treasury Secretary Tim Geithner told Congress, “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”
Simon Johnson told Fortune magazine: “The FDIC does it [seizing banks] all the time for small banks. But with the big banks, nobody has the political will to do it.”
Wielding another increasingly common phrase in this stage of the crisis – zombie banks (referring to the walking dead status of banks unable and/or unwilling to perform their lending functions) – Times columnist Paul Krugman wondered why, knowing that only the government can resurrect these banks, “the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.”
Krugman pointed out that under any of Obama’s proposals so far, whether guarantees to banks against losses on troubled assets, or lending money to private investors to buy toxic assets, bankers win and taxpayers lose, no matter what direction the prices of such assets go.
Normally any bourgeois government will recoil in horror at the notion of seizing bourgeois property – unless forced to do so in the interests of saving the system as a whole. This stems not only from a healthy respect for the sanctity of private property, but also from a desire to avoid the obligations which would come from exercising control over such property. Should the government become even the largest minority shareholder of a bank, political pressure to use that control to direct bank funds to production or services would mount.
As the Wall Street Journal put it: “While the goal of nationalization may be to return companies to private hands, the temptation to run them for political purposes would be immense.” That is, if the government controlled a bank, there would be political pressure for such control to be used on behalf of homeowners facing eviction, workers losing their jobs, and so on.
Writing in the middle of World War I, Lenin explained in his book “Imperialism” how the “interlocking” of big banks and manufacturers represented the objective socialization of production, and thus the potential for a revolutionary restructuring of society: “When a big enterprise assumes gigantic proportions, and organizes according to plan the supply of primary raw materials to the extent of two-thirds, or three-fourths, of all that is necessary for tens of millions of people; when the raw materials are transported in a systematic and organised manner to the most suitable places, sometimes hundreds or thousands of miles; when a single centre directs all the consecutive stages of processing the material right up to manufacture; when these products are distributed according to a single plan among tens and hundreds of millions of consumers — then it becomes evident that private economic and property relations constitute a shell which no longer fits its contents, a shell which must inevitably decay if its removal is artificially delayed, a shell which may remain in a state of decay for a fairly long period, but which will inevitably be removed.”
What we are going through now is that same process of decay despite the objective socialization of production via an even more thorough “interlocking” of finance and production. To escape it, workers must “remove the shell,” as did Lenin and his followers, by seizing in turn the banks, the biggest manufacturers, and ultimately the economy as a whole.
To start down that road we must demand access for committees of workers to all the banks’ books, both the ones they deign to show regulators and the ones they keep hidden even from their own government. Such committees meeting in congress can then work out a plan for restarting production with a precise calculation of the money available in these banks, the needs of working people, and the production levels needed to match the two.
Needless to say such a calculation will begin with a complete wiping off the books – not a bailout – of all “toxic assets” and fictitious, pyramided investments. And the complete price for such a measure will have to be paid by the country’s rich through confiscatory taxes, while deposits of workers would be fully protected.