Washington Subsidizes: Toxic Asset Purchases

by Andrew Pollack / April 2009

As the furor over AIG dissipated—thanks to adept media handling and for lack of a political force in the labor movement able to channel that furor—Obama felt comfortable announcing his newest bailout plan. The plan was panned even by many mainstream economists as another huge giveaway to the banks that would do little to revive the economy.

Said a New York Times publisher’s editorial: "[Obama’s] long-awaited plan to revive the banks could work if certain assumptions are right. But there is not much reason to believe those assumptions will pan out."

The plan would use at least $500 billion to buy banks’ bad assets, 90 percent of it in the form of low-cost government loans and loan guarantees for private investors.

The editorial noted that for the government to be repaid, the plan assumed that the assets could recover value or even be priced rationally—an unlikely occurrence given that no one even knows how much they’re worth and the disinterest of investors in buying them. For the assets to be priced high enough to convince the banks to unload them, the government would be stuck with huge losses.

The New York Times estimated that the government might yet have to put in as much as $2 trillion if enough of the assets are to be taken off their hands to ward off the very real threat of insolvency, much less to resume lending.

In sum, The Times called the plan "one big transfer of wealth from the government to bank investors. It is a near complete socialization of losses, with little value flowing to taxpayers."

The plan was greeted with a huge rally on Wall Street, the Dow Jones closing up 6.8 percent. According to the McClatchy news service, "The potential for huge gains [under the Obama plan] attracted big names such as Pacific Investment Management, the world's largest bond trader. The company said ‘count me in’ within hours of the plan's unveiling. ‘We are intrigued by the potential double-digit returns,’ said founder Bill Gross."

President Obama’s plan was announced after a series of consultations with bank heads, which included demands that he derail the House bill on AIG bonuses, and that he stop even the tepid anti-bank rhetoric he had previously engaged in.

But the broader goal of the meetings was to craft a plan acceptable to the banks. Administration officials spent days briefing crucial actors on Wall Street and lining up endorsements from equity fund managers—in particular, said the Washington Post, two leading global investment management firms, BlackRock and Pimco.

The Wall Street Journal said: "In spite of public furor over huge bonuses at AIG, the administration has concluded it needs the private sector to play a central role in fixing the economy. So over the weekend, the White House worked to tone down its Wall Street bashing and to win support from top bankers for its bailout plan." As if he really needed such pleading to gain their support for a plan that is yet another huge giveaway to these same bankers!

"In weekend television appearances," said The Journal, "Obama and administration officials tempered their criticisms of the financial sector. Geithner and colleagues told executives they don't favor using the tax code to retroactively penalize specific individuals who had received bonuses."

Obama was more than willing to comply with Wall Street’s demands, dictating to his aides new language for the speech announcing the plan. He tried "to tamp down" public fury, said an adviser. "I know how unpopular it is to be seen as helping the banks right now, especially when everyone is suffering in part from their bad decisions," said Obama. But, he added, "In a time of crisis, we cannot govern out of anger."

On March 10, chief White House economic adviser Lawrence Summers met privately with financial executives for dinner. A few days later, he said that the past decade had contained "too much greed and too little fear. Today our problem is exactly the opposite."

The next day JPMorgan Chase Chief Executive Jamie Dimon was ushered into the White House, where advisers brain-stormed with him about how banks and markets would react to the plan. The following day, at a White House meeting, when business executives asked Obama to get credit flowing again, the president told them he'd have his people "talk to Jamie."

Treasury officials have held conference calls with Ford, GM, Chrysler, Sallie Mae, BlackRock, and other financial firms, said The Wall Street Journal, seeking input on ways to "improve or enhance" Treasury programs in the works. "Outreach is operating on all cylinders," an administration official reported.