Obama's Wall Street Bailout Failure
Before it can clean up Wall Street or do much of
anything else, the administration has to clean up
the way it's been trying to clean up Wall Street.
By Robert Reich
http://www.salon.com/opinion/feature/2009/03/20/reich/
Mar. 20, 2009
AIG is rapidly becoming a nightmarish metaphor for the
Obama administration's problems administering the
bailout of Wall Street. One central problem is the lack
of transparency. According to some news reports,
Treasury Secretary Tim Geithner knew weeks ago that AIG
was planning to issue the bonuses to executives in its
notorious credit default swap unit, and felt it was
contractually bound to do so. But even if Geithner
discovered all this just last week, he faces an awkward
question about why he didn't know sooner. These bonuses
in fact were only the latest in a series, and were not
even distributed until last Friday. But it was not
until Saturday, after the story leaked to the press,
that Geithner went public to express his "outrage" about them.
Meanwhile, the Treasury has been readying yet another
big multibillion-dollar payout to AIG on top of the
$170 billion already provided the company, because AIG
has been hemorrhaging red ink. The company's balance
sheets have been deteriorating far more quickly than
the Treasury had anticipated. But there's been no clear
exit strategy for stopping the flow of taxpayer money.
What's particularly embarrassing for the current
administration is that it had promised to undertake the
Wall Street bailout far more transparently and
effectively than the way the Bush administration went
about it. The Obama administration had assured the
public that, among other things, taxpayer money would
no longer be used to backstop Wall Street bonuses.
(It's worth noting, in this regard, that the related
plan put forward by the Obama Treasury to limit
executive pay in Wall Street firms that received
bailouts turned out to be riddled with holes.)
We've also learned that much of the $170 billion has
been used by AIG to pay off AIG's putative obligations
to other Wall Street banks such as Goldman Sachs.
Goldman has maintained that it got no bailout money
from the Treasury. But in fact it received some $13
billion through AIG. More troubling is that the
original plan to bail out AIG was concocted at a
meeting held last fall, run by then Treasury Secretary
Hank Paulson who, before becoming treasury secretary,
had been CEO of Goldman Sachs. Also attending the
meeting was Lloyd Blankenfein, the current CEO of
Goldman Sachs. Also at the meeting: Tim Geithner, then
head of the
None of this would be nearly as awful if the Wall
Street bailout were working. But here we are six months
after it began and it’s still the case that almost no
loans are being made to
is launching its own program to get loans to consumers
financed by private investors, in effect bypassing the
big Wall Street banks.
The Wall Street bailout is starting to look like the
most expensive tax-supported fiasco in history. The
problem for the Obama administration is that this
bailout is near the very center of the president's
economic recovery program. It's not possible for the
economy to bounce back until credit markets are working
again. Yet even though the bailout so far is a bust,
Geithner still hasn't decided -- or told the public --
how he's going to use the remaining $300 billion of
bailout money differently.
The president cannot afford to lose the public's
confidence that his administration is a careful steward
of the public's money. The public was willing to go
along with a large stimulus package. But it won't go
along with a second stimulus, and certainly not another
TARP. And until the public feels confident that its
money isn't being thrown down a rat hole, it may balk
at other ambitious undertakings such as healthcare or
education or the environment.
Bottom line: Before it can clean up Wall Street or do
much of anything else, the administration has to clean
up the way it's been trying to clean up Wall Street.
-- By Robert Reich
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