By Simon Johnson
At 11am ET this morning, from the Cash Room at the Treasury, Secretary Geithner will lay out his vision (and hopefully some convincing details) regarding how to get the US financial system back on its feet. What should we listen for as indications that this is heading in the right direction?
1) If there is a “once and for all” audit of the banking system, as President Obama seemed to say yesterday, what do we learn about the toughness of the rules under which this will be conducted? Annoucing a thorough assessment is potentially a positive step, but vagueness spells trouble (for us, not the banks) down the road. We need this audit to force major banks to use market prices to mark down fully their portfolios; anything else is evasion and procrastination.
2) Are there any indications that the Treasury will pursue other policies that are tough on the bankers? We already know that in terms of executive compensation, Mr Geithner argued for - and won - very weak limitations (or, you might say, a generous insurance scheme for their future bonuses). And the NY Times is reporting that he also prevailed on whether bank executives should lose their jobs or bank shareholders suffer further losses. Is there anything at all in the speech that would at least make the CEO of a major bank frown? Writing in the Financial Times yesterday, Lloyd Blankfein (head of Goldman Sachs) essentially said that it is “business as usual” - is there any sign Secretary Geithner will call his bluff?
3) Is the Secretary using private equity to reform or to shore up the banking system? Any hint that Treasury will send private equity in to clean up banks and clean out their managers would be most welcome. But if today’s proposals bring private equity’s interests into line with the bankers, e.g., because they both gain from hidden government subsidies in a private-public toxic assets acquisition, that is not helpful. The financial lobby is powerful and our only hope is to split it and use, for the time being, some of the Finance Oligarchs against the others.
4) Then, of course, we have to figure out how to contain the power of the Oligarchs who win big. It would be a major breakthrough for the Secretary to recognize, in any fashion, that the largest banks are “too big to exist.” Is there even a hint that he thinks the size and concentration of our banking system is a problem, and that our new regulations and supervisory structures should take this on? Does he make any move that would create incentives or pressure for large banks to break up (or to be broken up by new owners)?
5) What is the market reaction? If the stock prices of the largest, most troubled US banks are up after his announcements, that means the market is expecting further generous handouts for these compananies and the people who run them. This is a rare instance when a Treasury Secretary’s words should aim to push down at least some prominent stock prices.
I’ve talked over the past few days with people with extensive financial market experience, with journalists who’ve covered every angle of this story, and with academics who think about these issues all day and night. And I’ve had remarkably similar conversations with each. After a short warm-up on the depth of our predicament and the excess of our bankers, the person looks at me and says: “of course, we should just nationalize.”
Personally, I don’t favor nationalization in the sense of the government trying to run the banking system. But I increasingly feel that, ultimately, the government will have to (a) properly recapitalize the banks, (b) as a result, acquire the right to determine who are the next private owners of these banks, and (c) bring in private equity and other financial interests to clean up the banks (yes, oligarch v. oligarch). I don’t know how long it will take to get there, but I’m afraid most of the time between now and then will be wasted.
Unless Secretary Geithner can lay out an alternative path with convincing detail today, my expectation remains: The banks will not be fixed with the current approach, and the true reckoning still lies before us.
(Along these lines, our detailed proposed questions for Secretary Geithner’s Senate hearings, this afternoon and tomorrow morning, are here.)