“Banks or Peanuts?” A cop asked that question as I cleared the metal detector at the east entrance to the Rayburn House Office Building. “Peanuts” was a House Energy and Commerce subcommittee hearing on the salmonella outbreak traced to the Peanut Corporation of America—in Room 2123. “Banks” was the full House Financial Services Committee hearing on the bailout of the nation’s big banks—in Room 2118. Two hot topics in the same hallway on the same day. “Banks” was the big draw, with a crowd so large that I thought Code Pink might need its own overflow room. For an ambitious writer, “Banks or Peanuts” is the perfect title for a book examining the huge task confronting the 111th Congress: cleaning up after George W. Bush. Both of these hearings were perp walks—one for a Georgia peanut magnate, who might end up facing negligent homicide charges for salmonella deaths caused by tainted products he is alleged to have knowingly shipped out to consumers; the other for the eight Wall Street CEOs whose banks created the financial instruments that started the worldwide economic collapse. The theme that ties them together is the Bush administration’s dismantling of the federal regulatory system. It’s the unifying theme that seems to tie everything together. Other than the filling of cabinet positions, the big cleanup has dominated President Obama’s first month in office. And much of this Congress’s legislative agenda is not of its own making. It was defined by a president who, like Ronald Reagan, believed that “government is not the solution to our problems; government is the problem.” Imagine that. On this Wednesday morning, I chose “Banks.”
WHAT NOT TO LIKE ABOUT Alan Grayson—except maybe his sartorial excess? Grayson spent years suing contractors in Iraq, including Dick Cheney’s former corporate home, KBR, on behalf of whistle-blowers who claimed contractors were defrauding the government or abusing their employees. Then in November, Grayson used his reputation as a scourge of war profiteers to defeat a four-term Republican incumbent from Florida’s 8th Congressional District. In one campaign TV spot, Grayson walks through a mock-up of a war contractor’s warehouse, discharging faulty fire extinguishers, shooting holes in inadequate body armor, and dropping parachutes that won’t open. “You can send me to Congress, and I’ll send them to prison,” Grayson says. A prison cell door slams shut as the ad segues into its “and I approved this message” tag.
Nobody’s in prison yet, but Grayson is in Congress and off to a terrific start. He hired progressive blogger Matt Stoller to run his press office and quickly found his voice on the House Financial Services Committee as a populist critic of bank CEOs lining up at the federal Treasury trough for bailout money.
Massachusetts Democrat Michael Capuano sucked most of the oxygen out of the hearing room where eight Wall Street bankers testified on February 11. Capuano did get off some good lines, mocking the CEOs who traveled commercial class and itemized their charitable contributions and minority lending practices for the committee. (“You come today on your bicycles after buying Girl Scout Cookies and helping out Mother Teresa.”)
Ranting isn’t oversight, which when done right is fact-based. Although the press ignored it, Grayson’s cross-examination of Citigroup’s CEO focused on the generous terms by which $700 billion of the taxpayer’s money is being handed over to the nation’s banks—most of it to the institutions represented by the eight CEOs sitting at the witness table.
Context is important here. For most of the day, members of the Financial Services Committee played a variation on three themes:
- Why is there no credit for creditworthy small businesses in my district?
- How can bankers borrow federal funds at 5 percent and charge credit card holders as much as 20 percent?
- Where did the first $350 billion go?
The only real news the committee made was that Financial Services Committee Chair Barney Frank (D-MA) finally secured a commitment to help homeowners in financial crisis avoid foreclosure: $50 billion, with a prospect of an additional $50 billion at a later date. Frank has been fighting for foreclosure relief funding since September, when Bush Treasury Secretary Henry Paulson convinced a majority in Congress to put up almost three-quarters of a trillion dollars to save the nation’s banks from collapse. The $700 billion Troubled Asset Relief Program fund, however, is less than half of an estimated $2.5 trillion that the Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation have poured into a banks that seem incapable of cleaning up their balance sheets and lending at levels that would fuel an economic recovery.
THE ART OF THE DEAL—Rather than ranting, Grayson turned to a transaction that illustrates how the government ran up a $2.5 trillion tab underwriting banks that can’t right themselves. He focused on one $306 billion deal the government made with Citigroup. The $306 billion was the book value of toxic assets Citi dumped on taxpayers in November. Grayson claimed that the package of assets, like many of the arcane debt instruments that caused the current economic crisis, is unmarketable today.
Committee hearing-rooms in the House office buildings are divided down the center by party and tiered by seniority. Because Grayson is a junior member of the committee, he sits on the bottom tier. Nose-to-nose with the eight CEOs at the witness table, Grayson read a few angry e-mails from constituents. Then he turned to Citigroup’s Vikram Pandit, who found himself confronted by a 6′-4″ trial lawyer in a charcoal pinstripe suit, dark blue shirt, and a stunning neon-blue tie.
“I would like to focus specifically on a deal,” Grayson said. “A deal the government made several months ago with Citigroup. Let’s talk about where the money went.” Grayson reminded Pandit that he had provided him a copy of a term sheet when the committee recessed for lunch, so Pandit had ample time to read it.
“Mr. Pandit, that was a $306 billion deal, correct?”
The two men quibbled over its total—$301 billion or $306 billion, and the precise dollar amount of losses ($29 billion or $30 billion) the bank would incur before the government eats what remains. Grayson got Pandit to admit that, according to the agreement’s terms, Citigroup accepts losses up to $30 billion, while the government assumes those that remain: $250 billion in securitized real estate loans. Unless the assets increase in value. In that case, Citi reaps the profit. (Citigroup provided documentation that the final agreement was for $301 billion in assets and the losses the bank would incur were $30 billion.)
“So you get 100 percent of the upside. And the government gets 90 percent of the downside,” Grayson said. “Correct?”
“That’s what the insurance policy is designed to do,” Pandit said.
The November 3, 2008, summary of terms between Citigroup, the Treasury Department, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve describes a quintessential lemon socialism deal. The government assumes (socializes) Citi’s bad assets (lemons) while leaving to the company any profits that might be made. In this case, the Treasury, the Fed, and the FDIC are left holding a quarter of a trillion dollars in potential losses (and no potential gains) on their balance sheets. It makes Barney Frank’s $50 billion in foreclosure relief look like chump change.
“This is not insurance,” Grayson said after the hearing. “Here are the terms. The government gets $7 billion in preferred stock. And the government is on the hook for $250 billion.”
AGAIN, THE “N” WORD—On the same day that President Obama discussed, then dismissed, Sweden’s success with the nationalization and subsequent re-privatization of its banking system (won’t work here because it doesn’t fit our culture regarding how government relates to markets, and Sweden has only five banks), Keith Ellison (D-MN) put the nationalization question to the bankers at the witness table.
Ellison is youthful, hesitant, and in this case didn’t seem to have the chops to stand up to CEOs who probably have enough personal wealth to buy his Minneapolis district. “Are you talking to me?” Bank of America CEO Ken Lewis snapped in response to one of Ellison’s questions.
Keith Ellison is easily dismissed. New York University economist Nouriel Roubini is not. In September 2006, Roubini predicted the current financial crisis in very specific terms. He’s been right ever since. California Republican Gary Miller cited Roubini’s figures that suggest the bankers have overvalued their assets.
What are Roubini’s numbers?
Writing in his RGE Monitor, Roubini estimates that total losses on loans made by U.S. financial firms stand at $3.6 trillion. Because about half of the loans are held by other financial institutions in the U.S and abroad, the banks have $1.8 trillion in bad loans on their books. The capital the banks claim to have on hand is $1.4 trillion, so they are $400 billion in the hole—”effectively insolvent in the aggregate.” These figures should terrify investors who own common stock in banks, considering that the CEOs of Bank of America, JPMorgan Chase, Citi, State Street, the Bank of New York, Wells Fargo, and Morgan Stanley told the Financial Services Committee that shareholders should take the losses if banks are declared insolvent. (Goldman Sachs CEO Lloyd Blankfein equivocated.)
Roubini believes it will take six to twelve months for the Obama administration to free itself from political constraints and nationalize the banks. He hopes that won’t be too late.
OUR FIFTY-FIRST STATE—”Afghanistan is the fourth- or fifth-poorest country in the world,” Defense Secretary Robert Gates said. “And if we set ourselves the objective of creating some sort of Central Asian Valhalla over there, we will lose, because nobody in the world has that kind of time, patience and money, to be honest.”
To be honest? When Defense Secretary Gates cut himself free from the Bush administration’s Afghanistan policy (the Central Asian Valhalla position) at the end of January, it occurred to me that “to be honest” was a wink and a nod to let us know he has returned to the reality-based culture that has been out of fashion for eight years.
I’m convinced that Gates is an apolitical, or at least a non-ideological, public servant committed to the larger public interest. I hope I’m right. In a few weeks, President Obama and his Defense secretary will roll out a new policy on Afghanistan. Don’t look for the president to use the phrase, but think “generational commitment.”
Why a generational commitment (like what President Harry Truman locked us into when the Korean War ended in a stalemate)? Because even if the Obama administration is fortunate enough to achieve the most modest goals for Afghanistan that centrist policy types are selling to the Congress—rebuilding a country that is no longer a haven for terrorists who would attack the U.S. (or destabilize Pakistan), and that has a national security force capable of defending itself—the U.S. will be on the hook for decades to come. Afghanistan is in no way prepared to go it alone.
Barnett Rubin, a New York University professor and preeminent Afghanistan scholar, describes the country as the second poorest in the world (after Haiti). But who’s counting? Afghanistan is poor. Its taxable gross domestic product last year, according to Rubin and Ahmed Rashid, collaborating inForeign Affairs, was $9.6 billion, from which it derived $670 million in tax revenue. (California’s 2009 budget deficit, as a point of reference, is $42 billion.)
According to a report the Department of Defense provided the Congress in January, the Afghan government will cover only 20 percent of its budget expenses in 2009. As retired four-star General Jack Keane told the House Armed Services Committee on February 12: “After we win, it’s unlikely that the Afghan national economy can support what we will put in place.” Iraq has oil to pay for the functioning of the state. Afghanistan has rocks. An expanded Afghan national security force and the rudiments of a functioning state will likely become line items in the annual U.S. budget.
There’s more bad news. Keane urged the Congress to start selling the war, to keep the American people informed that we are beginning a long campaign, to prepare them for the spike in casualties that will be inevitable when an expanded American force moves into southern Afghanistan—which is part of the 70 percent of the country now designated as a “no-go” area for security forces.
Keane, who was a vice chief of staff of the Army at the time of the 9/11 terrorist attacks, implied that Afghanistan is the war that should have been fought to a conclusion six years ago. He said that in late November of 2001 he began to hear that there would be a shift in focus, when then-Defense Secretary Donald Rumsfeld and George W. Bush decided to turn from Afghanistan to Iraq. “Our concern was, why would we do that now? We had just brought the Taliban down, and we had al Qaeda on the run,” Keane said.
Keane’s observations on the shift from Afghanistan to Iraq are hardly breaking news. I include them here as another reminder that the greatest challenge confronting Barack Obama is the hand that was dealt to him by George W. Bush. Every president inherits what his predecessor left him. But not since FDR, whose big war lay ahead of him when he assumed office, has an American president confronted challenges of this magnitude.
Obama’s national security team is working on a revised plan for Afghanistan, which will include a larger military presence and a vastly expanded counterinsurgency campaign. The insurgents have been armed and active since the U.S. provided them missiles, money, and rifles to fight Soviet occupiers, then walked away when the Soviets were defeated.
Charlie Wilson, who as a Texas Congressman was deeply involved in arming the factions fighting the Soviets in Afghanistan in the 1980s, and who traveled to Afghanistan and Pakistan at the time, said the task is daunting. “If we had stayed there to bring order to the country when the war was over in ’89 and the Soviets left, it might have been doable,” said Wilson, now retired and living in Texas.
“It wouldn’t have been easy. The seven religious groups who were fighting the Soviets were all at each other’s throats. But that’s saying what I think we should have done then. I don’t know what’s doable now.”
We’re about to find out.