Why Wall Street Cheers Geithner's Plan and the People Should Worry

3-24-09, 1:29 pm

On Monday 23 March 2009, U.S. Secretary of the Treasury Timothy Geithner unveiled the latest and most expansive bank rescue plan to date since the global financial crisis began to deepen in August 2007. Billed as a 'public-private partnership' to take toxic assets off the balance sheets of major banks (such as JP Morgan, CitiGroup, and Bank of America), the plan involves three programs that could rise to a staggering $2 trillion in public money put at risk to bailout private financial institutions that have run the world economy into the ground. It also involves lending from the FDIC (Federal Deposit Insurance Corporation), which is charged with safeguarding depositors in US banks. The knee-jerk reaction on Wall Street was overwhelmingly positive with the major indices surging six to seven percent on Monday. Outside the halls of the major financial firms, however, there may be cause for concern.

As the New York Times noted Tuesday 24 March 2009 in its front page story on Geithner's plan, the program 'offers private investors vast amounts of cheap, tax-payer supported financing for every dollar they put up of their own money.' Put another way, the New York Times described the plan as the 'Treasury and the Federal Reserve ... offering at least a tablespoon of financial sugar for every teaspoon of risk that investors agree to swallow.'

The first component of the plan involves the FDIC taking on a pool of bad home loans (mortgages in default or at risk of default) and auctioning them to the highest bidders. If the bank values them at $100 and the highest bid is $84, then the FDIC steps in to provide $72 in financing, the private investor puts up $6 and the Treasury (you and me) puts up $6. This amounts to a 6-1 leverage for the private investor – they get $6 for every dollar they put up. The private investor then manages the assets, seeking to sell them off. Thus, with only $6 of capital risked, the private investor gets all the control, while the $78 of public money secures virtually no say in the asset management. If the assets decline in value or re-gain toxic status a result of a deepening of the economic crisis, the investor is only out the original $6 they put up. The public eats the losses.

The second part of the plan involves taking mortgage-backed securities and other risky assets off banks' balance sheets, hiring asset managers that raise $100 in private financing to purchase the assets, then gets matching funds from the treasury ($100) and a further $200 loan from the Treasury Department (2-1 leverage for the private investor). The asset manager controls the purchased instruments and shares the returns with the government (assuming there are any). If the assets revert to 'toxic' status, then the investor loses their original investment, but is not on the hook for the treasury loan or the Treasury's outright investment. In other words, all the risk is – once again – taken on by the public (you and me).

Geithner was careful to insist that there will not be any restrictions on compensation for those participating in the plans, attempting to avoid the 'stigma' now attached to the Troubled Asset Relief Plan (TARP) or the recent firestorm over exorbitant bonuses paid to executives at American International Group (AIG), recipients of huge bailouts from the TARP and outright government grants. Bill Gross, chair of Pimco (the world's largest bond dealer) and a participant in the new program, described it as a 'win-win-win policy' and told the New York Times that he was ''intrigued by the potential double-digit returns' that it offered.'

As it stands, the plan amounts to a huge (probably the largest on record) transfer of public money to private hands, the very hands that have driven the global economy into crisis. This is a scenario that Naomi Klein describes in her book, The Shock Doctrine: The Rise of Disaster Capitalism. In that well-researched and powerfully-argued study, Klein writes that a cornerstone of neo-liberal ideology as propagated by Milton Friedman and implemented by US President Ronald Reagan and UK Prime Minister Margaret Thatcher was to either take advantage of or bring about major catastrophes to radically restructure the economic system by way of transferring huge amounts of public money into private hands. This usually involves seizing the opportunity of a major political upheaval, economic crisis, or natural disaster in order to push through programs that otherwise would meet massive public opposition. By the time the initial shock has worn off, the economic rules of the game have been fundamentally altered and the laws on the books designed to protect the people from catastrophe and the avarice of greedy capitalists have been changed or eliminated. This is what came to be known as the 'Shock Therapy' program imposed on the former Soviet Union and the former People's Democracies of Eastern Europe in the late 1980s and early 1990s (among many other countries pummelled by the scorched-earth campaign of neo-liberalism across the globe in the 1980s and 1990s). It is no wonder that Wall Street reacted so euphorically to the details of Geithner's plan.

As Sam Webb, national chair of the Communist Party of the USA, eloquently noted in his address to the Party's National Committee on 21 March 2009, this is not a 'socialist moment,' however, it is a time when the idea of socialism (and the term itself) is being widely discussed. Wall Street celebrated Monday because many major financial firms believed that the Geithner Plan took 'bank nationalization' off the table as a government response to the economic crisis. However, all it has done is massively expand the scope and amount of government give-aways to the very institutions responsible for the current mess. It has not taken bank nationalization off the table. It has made the discussion of socialism as an alternative to the current failed system more urgent than ever.