Band-Aid Still Stuck on Big Bailout Banks

In September last year, the Bush regime left behind its old refrain that “the fundamentals of the economy are strong,” and went to Congress for a quick $700B to bail out collapsing banks stuck with toxic assets.x60x61 Then-Treasury Secretary Henry Paulson called for giving himself total control of the fund and making his decisions “non-reviewable … by any court of law or any administrative agency.”x62 Congress passed the Troubled Assets Relief Program (TARP) to provide the money, but wrote-in oversight, and created the Congressional Oversight Panel (COP). Senate Majority Leader Harry Reid (D-NV) appointed as chairman Elizabeth Warren, a bankruptcy law professor free of banking and government ties. In October, Paulson reported to COP that Treasury had used the TARP fund to buy assets “at or near par”, but COP researched and found that to be false: Paulson had overpaid by $78B, nearly a third of what was spent. Now, with a new regime, and Treasury Secretary Timothy Geithner in charge of TARP, the U.S. may be getting a better price for bank assets, but it still avoids taking over big banks, de-toxing them and selling them back into private hands—like the FDIC does for smaller failed banks. As chairman of COP, Warren does not give policy advice, but the professor did answer an interviewer’s question about what a bankruptcy proceeding for a bank would look like:

Here’s how it would work in a Chapter 11 if this were any other industry: all the equity would be wiped out, then the creditors would get a percentage on the dollar,” she said. “We would totally protect all the deposit accounts, and the rest of the debt would get some combination of stock and pennies on the dollar. The minute that happens, the banks are solvent, and new capital can flow in.”

Someone said to me, You’re describing ripping the Band-Aid off all at once, and we’re saying how ‘bout we just keep peeling the corners off a little at a time—ouchy, ouchy, ouchy—and maybe we can adjust as we go along. [In the early 90’s,] Sweden ripped the Band-Aid off all at once, and Japan took ten years. But the Band-Aid had to come off.

Who are we trying to protect here? Is it a banking system that is in service to American families and the economy, or is it the American families and the economy in service to a banking system? I know what I think the answer should be.”

The biggest taker of banking bailout money, AIG—getting $40B of TARP money in November, plus $43B from its own special bailout fund and $38B in loan money—is now in line to get another $30B from TARP.x63 Ouchy, ouchy, ouchy.