Steve Burns: Stopping the bankers "Plan B"

Wisconsin's Kewaunee nuclear plant produces a good profit for its Virginia-based owner, Dominion Energy, but if things were to go terribly wrong at Kewaunee, causing dangerous radioactive contamination in the nearby city of Green Bay, it won't be Dominion picking up the tab. That job would go to you and me, as U.S. taxpayers, under the Price-Andersen Act, which makes the federal government the insurer of last resort for all U.S. nuclear plants. There's nothing at all unusual about this relationship - it's simply business-as-usual for modern capitalism, where profits are privatized and losses are socialized.

Now that the equivalent of a nuclear meltdown has hit the world financial system, the same Wall Street players who reaped billions when the home-mortgage-backed-securities bubble was on the upswing expect business-as-usual to socialize their losses and deliver to them a full, publicly-funded bailout. There's still a chance that we can disrupt their plans, saving ourselves and future generations trillions of dollars, if we educate ourselves about the roots of the crisis and the deceptive means that will be used to sell a taxpayer-funded bailout.

First, some background: The largest banks in the country, themselves the products of a wave of merger-mania that began under the Clinton administration, hold trillions of dollars in toxic mortgage-backed securities. Each security represents thousands of home mortgages sliced and diced in the Wall Street Cuisinart until a single investor can hold a stake in millions of homes, and a single home can be owned by hundreds of investors. Because an ever-increasing number of the home mortgages on which they are based are now in default, some of these securities are literally worthless, and they are all certainly worth much less than their face value. The banks holding the securities aren't willing to sell them for their true value on the open market because each sale would require the bank making the sale to correct its books to reflect the dramatic loss in value of these securities. After more than a few losing sales like this, it would be clear that these banks are essentially insolvent. Just to give a sense of how far the bankers are from facing reality, the lowest price than any bank has offered to potential buyers of mortgage-backed securities is 75 cents on the dollar, and private investors are willing to offer only 25 to 45 cents on the dollar. It's not hard to figure out whose estimate is more likely to reflect the true value of the paper the banks are holding.

And so it's Uncle Sam to the rescue. Bush Treasury Secretary Henry Paulson's plan, introduced in September of 2008, was to have the government buy the toxic paper from the banks, taking the losses off of the banks' books and onto the public balance sheet, potentially increasing the Federal deficit by trillions of dollars. As outrageous as this plan was, Paulson was able to blackmail Congress into handing over $700 billion for it. But this paltry sum is only a small downpayment on the trillions that would be needed for a full bailout, and the firestorm of public and Congressional opposition that resulted made it impossible for Paulson to proceed with the direct-purchase plan with the money he had obtained from Congress, and made further requests of this sort untenable.

And so it's Obama Secretary of the Treasury Timothy Geithner to the rescue, with a Plan B that presents just enough of a difference in appearance from Paulson's Plan A to possibly (or hopefully, if you're a banker) confuse and deflect public opposition. Geithner has been close-mouthed about his plan - his testimony to Congress about the plan was literally "I'll get back to you in a few weeks" - but enough details of the Geithner plan have already leaked into the financial press to give us a good sense of the soaking that the taxpayers are in for. Instead of the direct Federal purchase of bad bank assets that got Paulson in so much trouble, Geithner proposes a "public-private partnership" in which the government would loan investors up to 95% of the full face value of the bank's toxic mortgage-backed securities, and then guarantee the purchasers - the same hedge funds and private-equity firms that got us into this mess - against any potential losses. Geithner's loan guarantees would have the effect of increasing the price that private investors would be willing to pay the banks, but at a huge cost to the public, if the securities turn out to be worth less than the banks claim they're worth - a virtual certainty, at this point.

Just as the controversy about Paulson's direct-purchase plan led Geithner to propose a more indirect approach involving loans and loan guarantees, the nearly-successful Congressional effort to kill the Paulson plan will lead Geithner to do everything in his power to cut Congress out of the loop. In this, the United States Constitution presents a complication, with its requirement that "No money shall be drawn from the treasury, but in consequence of appropriations made by law." Geithner will bypass this quaint eighteenth-century provision by using the Federal Reserve as his source of funds. As a recent New York Times report has it, "the Federal Reserve, making use of its ability to print money," will be Geithner's source for much of the $2.5 trillion he now estimates he will need. No Congressional debate needed, no filibusters to contend with, Geithner will simply rely on, as the same Times report puts it, "the Fed's ability to create money, in effect, out of thin air. "

OK, enough background. What do we do about it?

De-mystify the language. Geithner and the bankers will attempt to use technical language to confuse and intimidate us. Don't let them. When you hear "public-private partnership", say, "private profits and public losses." When you hear "loan guarantee", say "gift to the bankers and private investors." When you hear, "Congress doesn't need to appropriate money for this, because the Federal Reserve is taking care of it," say, "We will all pay for this in devalued currency."

There is an answer - it's called the FDIC. The Federal Deposit and Insurance Corporation was created more than seventy years ago to deal with the task of remaking insolvent banks. This same agency recently dealt with the insolvent IndyMac bank, by liquidating its assets and firing its management. IndyMac's FDIC-insured depositors didn't lose a dime. IndyMac's much wealthier shareholders were wiped out. If you were a banker, or a bank shareholder, which approach would you prefer, the Paulson/Geithner approach or the FDIC approach? The answer to that question should be obvious. As MIT economist Simon Johnson explained to Bill Moyers:

We have no problem in this country shutting down small banks. In fact, the FDIC is world class at shutting down and managing the handover of deposits, for example, from small banks. They managed IndyMac, the closure of IndyMac, beautifully. People didn't lose touch with their money for even a moment. But they can't do it to big banks, because they don't have the political power. Nobody has the political will to do it.

So you need to take an FDIC-type process. You scale it up. You say, "You haven't raised the capital privately. The government is taking over your bank. You guys are out of business. Your bonuses are wiped out. Your golden parachutes are gone." Okay? Because the bank has failed.

You know enough about economics to stop this. As Professor Johnson's quote above makes clear, the reason our government is headed towards the vastly more expensive Paulson/Geithner approach is not because it's the best approach economically, but because the Big Four banks are extremely powerful politically. Geithner and the bankers are counting on the intimidating power of econo-speak to convince us to "leave this to the experts." That's the worst thing we could do.

Break up the Big Four. Your local bank didn't get itself into trouble trading mortgage-backed securities. Small banks originated the home loans, but the toxic securities that precipitated this crisis were created and traded among a handful of big Wall Street banks. Just four mega-banks (Bank of America, JP Morgan Chase, CitiGroup and Wells Fargo) will now be the recipients of the vast bulk of our money, if the Geithner/Paulson plan goes through. And what have they done with the billions of dollars our government has already given them? They're using it to buy the small, local banks that invested wisely and stayed out of the mortgage-backed securities game, as a way of improving their balance sheets. This is going in exactly the wrong direction. The Big Four don't need to get even bigger, they need to be broken up. Think of the proper response to the banking crisis as "Roosevelt plus Roosevelt" : Franklin Roosevelt (FDIC-style liquidation and reorganization) and Teddy Roosevelt (aggressive trust-busting.) As Vermont Senator Bernie Sanders has said, "If it's too big to fail, it's too big to exist."

Put Congress back in the loop. Having the best alternative plan in the world won't help us if all the decisions are being made in closed-door meetings between the Treasury Department, the Federal Reserve, and a handful of bankers. Geithner is going with a Fed-financed approach precisely because he wants to sidetrack any popular opposition that could potentially stop his multi-trillion-dollar gift to the bankers. Call your Congressional representative and demand that they call for a Congressionally-authorized, FDIC-style reorganization and breakup of the biggest banks.

Don't lose hope. As bad as the Geithner plan is, one can only imagine how much worse the Paulson plan would have been if there had been no popular opposition. We've been successful in forcing the bankers off of their preferred "Plan A" and on to their "Plan B." How much farther (and farther up the alphabet) can we push them? With each step, the losses to the bankers and their cronies will be greater, and the cost to you and future generations will be proportionately less. Think about it: how often do you get to save a few trillion dollars with a few hours of phone calls and neighborhood organizing?

More Resources:
For the best hour you're ever going to hear on the roots of the banking crisis, I recommend This American Life's Giant Pool of Money.

Steve Burns: Why Harry Reid loves the filibuster

Like most Americans, my understanding of the filibuster was - until a few years ago - based entirely on the film Mr. Smith Goes to Washington. In the film, the filibuster was portrayed as a means by which a single Senator, by speaking for hours on end and refusing to yield the floor, could bring the entire Senate to a standstill.

Oh, if only real life were like the movies. In practice, the filibuster - especially in recent years - has become a gentleman's agreement in which the minority party - when it's Republican - need only threaten a filibuster to kill legislation it objects to or to force significant concessions from the majority party - when it's Democratic.

The filibuster is one of the Standing Rules of the Senate, instituted by the leadership of the Senate - effectively the leadership of the majority party - at the beginning of each Senate term. After the 2004 elections, when Republicans still held a majority in the Senate, the Republican Senate leadership threatened to eliminate the filibuster. This was met with strong objections by the then-minority Democrats, who claimed the filibuster was the very foundation-stone of our democracy, even though our founding fathers strangely omitted any mention of it in the constitution. The filibuster, they said, was an important check on the power of the majority and a vital protection of minority rights. The controversy was settled by an agreement to keep the filibuster in place, in return for a promise by certain "Moderate" Democrats (including then-Democrat Joseph Lieberman) that they would join with Senate Republicans to break any threatened Democratic filibusters.

After Democrats retook the Senate in the 2006, Republicans, now the minority, filibustered frequently, under a tacit agreement with Senate Democratic leader Harry Reid that they would never actually be required to go through exertions of Mr. Smith's Senator Jefferson Smith. No thermos of hot coffee and wax-paper-wrapped sandwiches for them, Republican leaders merely needed to utter the word "filibuster" and Reid would quickly drop any proposed legislation that didn't have a guarantee of 60 votes. This exercise became so routine that newspapers began to omit mention of the filibuster entirely, simply reporting that a piece of legislation failed because it didn't have the "60 votes needed for passage." An inattentive reader might be forgiven for thinking the Constitution had been quietly amended to require a three-fifths majority for passage of legislation in the Senate.

Why do the two parties have such differing levels of commitment to the filibuster? Republicans, when in the majority, are willing to discard it entirely, and agree to keep it only on the condition that it never be used, while Democrats cling stubbornly to the filibuster, even when it appears to ensure the defeat of their legislative program. Why?

Although Senate Democrats would claim that this difference merely reflects a greater commitment on their part to the principle of minority rights, it's important to understand that Senate Democrats gain significant benefits from the filibuster that have nothing to do with elevated principles.

Since 2006, the fundamental problem faced by House and Senate Democrats has been one of rising expectations, as the base of their party - which helped ensure their regaining control of both houses of Congress - came to make greater and greater demands of them. An end to the war in Iraq, universal health care, more money for schools, greater protections for the environment and quicker action to combat climate change were all grassroots demands that Congressional Democrats had to contend with. If the House and Senate Democratic leadership actually shared these goals, they would welcome this grassroots pressure as a means of strengthening their hand against other, more conservative Democrats and Republicans. But the leadership of the Democratic Party is actually quite far to the right of the mass of voters who put Democrats in power. How then can elected Democrats hold on to power, while also dampening the expectations of their party's base?

One answer is the filibuster. It places Senate Democrats in the enviable position of enjoying all the perks of being the majority party - like committee chairmanships and an increased ability to bring home the bacon - with none of the responsibilities that would normally accompany majority party status. "Want more money for Head Start? Sorry, we'd just love to do that, but those nasty Republicans won't let us - the filibuster, you know," is the standard Democratic refrain.

The filibuster also provides a useful tool to the Democratic Senate Campaign Committee, which must periodically go to those same Democratic voters in search of (admittedly small) campaign contributions. "Sure, we've got 58 Democrats in the Senate now, but if we could only get 60... why, then you'd really see something!" Until the next election, that is, when Democrats once again fall just short of the desired 60. "Darn! Well, there's always next time..."

If the filibuster such a useful tool for disciplining your party's base, why didn't the Republicans have the same attachment to it when they were in power? The answer is that the Republicans simply don't have the same yawning chasm between the views of their party's leadership and the views of the people who put them in power. Look through the Republican agenda of more tax cuts, more war, less environmental regulation and social-welfare spending and more repressive measures against women in need of an abortion: can you find a single point where the average Republican elected official is in strong disagreement with the average Republican voter? And so, when Republicans take power, they simply drive straight ahead for their maximum program, with no need to hide behind the minority party as an excuse for inaction.

What's a progressive voter to do? The first step, I think, is to correctly understand the problem, which is that Harry Reid's goals are not your goals. He's not trying to win the things you want, only to be thwarted by an antiquated and unnecessary rule. He's not "spineless", and "afraid to stand up to the Republicans." He's not lacking in the smarts needed to out-maneuver the Republicans. Any man who is capable of maneuvering his way to being one of the three most powerful people in Washington is plenty smart.

The second step should be to start asking questions, like: "Why was Harry Reid, conservative Democrat, chosen to replace Tom Daschle, conservative Democrat, as Senate Democratic leader?" And, "Why, if it were necessary to replace Reid, would his replacement be much more likely to be Evan Bayh or Ben Nelson than Russ Feingold?"

Now that Democrats hold power in Washington (no matter how much they disclaim that power) it's more important than ever that progressives have a clear understanding of the Democratic Party, what it really stands for, what it can be made to do, and what it cannot be made to do. Not falling for Harry Reid's "But we've got to get to 60 votes!" theatrics would be a good first step in that direction.