Wednesday, July 22, 2009

"What we have here is a failure to communicate..."



In Cool Hand Luke, Paul Newman, in the title role, is serving a jail sentence for chopping the heads off of parking meters (foreshadowing the rage felt today in Chicago for the parking meter mess.)

Luke is a rebel, fond of questioning authority and, as seen in the scene posted above, the authorities don't want to be questioned; they want to be blindly obeyed. "What we have here is a failure to communicate," says the chain gang captain, after beating Luke to the ground.

The American consumer is feeling a little beaten up these days, what with the crushing collapse of their portfolios and job prospects. There are grumblings 'round the fact that Goldman Sachs, JPMorgan Chase, BoA and Citigroup are having such fabulous success at a time when the rest of the nation remains paralyzed by the crash of the economy.

We're puzzled, those of us outside of the Wall Street / Washington, D.C. corridor, by the extreme diversity in luck. All those "too-big-to-fail" firms - the ones that survived the blood bath and have grown even bigger as a result - are posting unbelievable profits. And as they do so, the economy outside of the shadows continues to tank. Hundreds of thousands of people laid off each month. No real job creation in sight.

And I wonder if perhaps we'd be a much more obedient public if only Henry Paulson had communicated his goals and vision for TARP more clearly last fall. So many of us are kind of pissed about the outcome - what with record profits for the too-big-to-fail firms in the financial sector and record unemployment outside of Wall Street. The dichotomy in fortunes between the two is rough to process. Who knew that massive bonuses had to be paid to the financial community in order to jump start the economy elsewhere?

This was an outcome that had not been properly communicated - which made me wonder just what did Paulson communicate last fall? How did he frame this bailout?

So I decided to go back and see just how Paulson explained the situation to the public last fall.

Did he clue us in on the grand plan? My memory was that TARP was needed to save the economy - and thus it was a shock to learn that Paulson's economy was just that fragment of it over on Wall Street.

In August 2008, it was clear our economy was going through a rough patch. Unemployment had increased to 5.7 percent in July, up from 5.5 percent in June. Gas prices were the highest they'd ever been (more than $4 a gallon.) The housing sector was undergoing a painful correction.

The treasury department's Economic Update for August included this quote:

"Today's jobs data reflect the headwinds affecting the U.S. economy--the housing correction, credit market strains, and higher energy prices. Yesterday's GDP data reflect the positive impact and timeliness of the stimulus payments, which will continue to support spending as we work through these headwinds."
Assistant Secretary Phillip Swagel, August 1, 2008"

According to treasury's 08/01/08 update, there appeared to be no swine flu-like economic pandemic threatening to overthrow our nation. Some concern, yes, we were definitely buffeted by headwinds, but seemed like nothing we couldn't handle via the stimulus. The stimulus would support spending and we'd be saved.

Five weeks later, treasury announced the Freddie and Fannie bailout. In a 9/7/08 release, Paulson defined his goals:

"Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure."

I suppose one could argue that in placing "stability to financial markets" first and "protecting the taxpayer" last in his list of priorities, Paulson gave us a big clue to his real intentions.

But then the avalanche began, and we were all very distracted by the catastrophe that followed. Lehman failed and was not bailed out. AIG failed, but was bailed out after some frank discussions, apparently, with Lloyd Blankfein, Goldman Sachs CEO.

On September 19, 2008, Paulson tried to inform consumers of the issues surrounding the crisis:

"The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods, with 5 million homeowners now delinquent or in foreclosure. What began as a sub-prime lending problem has spread to other, less-risky mortgages, and contributed to excess home inventories that have pushed down home prices for responsible homeowners.

A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them. These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged."


When I read this, I can only think that the financial community had decided to abandon all the complex business theories and equations they'd learn at the Harvard MBA program - instead falling under the influence of one of the most invidious American cultural evils - the craps table at Vegas. The entire Wall Street community had apparently all turned into Swingers:



Yes, we all want to break even now, like the esteemed older gentleman in the scene, but many Americans seem to be experiencing the downer of the failed "double down" bet - without really having a seat at the table...

Back in September, Paulson's press release continued, with nary a reference to Vince Vaughn or Jon Favreau:

"These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.

To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible. The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion."


So we needed to embark on a plan to remove illiquid assets from the system... which has yet to materialize - the toxic assets remain on the books for someone else to deal with.

When we reach the end of the press release, it becomes clear that Paulson is seeking salvation for the economy by focusing on Wall Street:

"Right now, our focus is restoring the strength of our financial system so it can again finance economic growth. The financial security of all Americans – their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs – depends on our ability to restore our financial institutions to a sound footing."


It is also interesting to note that here Paulson recognizes that there is an economy outside of Wall Street - and that the two economies, at least in his mind last September, were interconnected.

Today, however, the profits seen by Wall Street - profits that are heavily subsidized by the federal government - profits that are only possible thanks to the federal bailout of Wall Street - those profits are not at all connected to the economy outside of Wall Street. Goldman is planning to pay out record bonuses to its employees - averaging approximately $700,000 to every person who works there.

The stability sought by Henry Paulson last fall seems to be experienced only by those too-big-to-fail companies that have been the beneficiaries of some of the most extraordinary federal interventions into the free market.

And though we were told that jobs would follow as a result of this extraordinary intervention, we were not told that we had to wait until after Wall Street execs paid themselves exceptional bonuses.

So what we have here is a terrible failure to communicate. Before a penny of TARP funds had been paid out, we should have been told that billions of the tax bailout dollars would be going to fund extraordinary bonuses for those most responsible for the debacle.

Perhaps then it would all make sense - and we'd be docile and obedient. Or perhaps TARP would have been structured in a completely different way, in which the key investors in the economic recovery - the taxpayers - would be receiving the fabulous return on their investment today, instead of the Wall Street swingers.

1 comment:

Ted K said...

My favorite Newman film was "The Verdict". Then maybe "Bronx Zoo" (I like the scene where he catches the girl using drugs) and "Butch Cassidy and the Sundance Kid". I saw "Sundance" on an old movie reel when I was like 11 years old in a boys choir. About 30 boys eating root beer floats and hot dogs and an old man running the old movie reel. You could hear the sound of the projector and the see the beam of light going to the screen. That was around 1983. We didn't watch it there but that town still had a drive in theatre you could watch movies at on the outskirts of town. The funny deal about Newman was, he SHOULD have gotten the Oscar for "The Verdict" and he got screwed, so he got a makeup Oscar for "The Color of Money" which is one of the worst movies he ever made. "Nobody's Fool" is also one of my favorites.