The View From Greece

Greek_proestYou think we have some difficult divisions within our country? Have you noticed what’s happening lately in Greece?

I write this from my family’s summer vacation. My wife, my daughters, my mother and I have immersed ourselves in sunny beaches, folkloric cobblestone streets in a two thousand year-old village, and chocolate croissants eaten on the daily. We are blissfully happy on our Greek island paradise, thank you for asking.

But! As an amateur dabbler in the dismal science – economics – I can’t resist pondering the underlying finances and of the beautiful place I’m visiting.
Ugh. I am sorry I lifted up that heavy rock, to see what blackened worms lay squirming beneath.

Alonissos_Old_villageWorms like the unemployment. The inability to control their own destiny. The maybe inevitable reaction to this horrific situation: a radical left-wing party in power clashing with Neo-nazis in Parliament.

Greek unemployment stood officially at 21.5 percent at the end of 2017, an improvement – if you can really call it that – from rates of 27.5, 26.5, 24.9, and 23.5 percent respectively the previous 4 years, 2013 to 2016.

How does that level of unemployment feel to the Greek people? Can you picture those grim black and white photographs of the Great Depression?
Compare those numbers to employment in the US during the worst stretch of the Great Depression, 1932 to 1936: 23.6, 24.9, 21.7, 20.1, and 16.9 percent respectively.
The Greek rates of unemployment over the past five years are similar, but actually a bit worse, than the US rates of unemployment in our darkest days. Think breadlines and grinding poverty in the cities and dust bowls in the agricultural areas. Your parents and grandparents were forever changed by those years.

And there’s not necessarily a cure for the Greek unemployment situation.

Mainstream economists believe that the best monetary policy response to high unemployment – meaning what a central bank should do with the supply of money – is to vastly increase the amount of money circulating in the economy.
During the financial crisis in 2008 in the US, the Chairman of the Federal Reserve Ben Bernanke earned the epithet “Helicopter Ben” for doing essentially the correct thing, which was to adopt a policy, metaphorically speaking, of dumping vast quantities of money from the central bank’s helicopter onto the economy. By and large, it worked. Unemployment peaked at 10 percent in 2009 in the US, and now is at an historically amazing 3.8 percent, a 49-year low.

Alonissos_mapIn Greece, by contrast, the European Central Bank controls the money supply. And the European Central Bank, by general consensus, responds to the cues of Northern Europe in general, and Germany in particular. Germany, unfortunately for Greece, right now has a 3.4 percent rate of unemployment, a 38-year low. The right thing for Northern Europe and Germany right now is to restrict the supply of money.

What I’m pointing out is that Greece and Germany have incredibly mismatched economies to share the same currency and monetary policy, to the terrible detriment of Greece in the midst of a massive depression.

Imagine now the gut feeling many Greeks must feel about the politics of this situation. You think there are political divisions in the US right now? You’ve noticed some resentment of possible foreign interference in our sovereignty? This sense that the German monetary policy keeps the Greek economy under its thumb with low growth, high unemployment, and high debt would naturally lead to resentment. Imagine if the Federal Reserve were controlled by a committee made up of financiers from Canada, the UK and the Moon, and they set policy with huge implications for the US economy. That’s how the Greeks feel.

Actually, it probably feels far worse than that.

On the island where I’m visiting this summer a statue proclaims the names of nine young men shot in 1944 by German occupiers on the island in World War II, as a warning against resisters. It wouldn’t take much stoking of nationalist resentment to make Greeks upset about their situation. Again, unemployment is worse that it ever got in the US during the Great Depression, for 5 years running.

Next problem. Since 2009, Greece has suffered from an unsustainable national debt problem. The national government collects too little in taxes and owes too much to domestic pensioners and foreign debt holders.

Not only do the Greeks not control their own monetary policy, their fiscal policy – government policies of spending and taxation – are deeply subordinate to what’s referred to as The Troika – the leadership of the European Commission, the European Central Bank, and the International Monetary Fund. In order to remain solvent, the Greek government has had to compromise its sovereignty to the Troika.

Meanwhile, the financial stress has fractured Greek politics. The
Neo-Nazi party known as the Golden Dawn holds 15 seats in the 300-person parliament and earlier was the third largest in parliament.
The ruling left-wing party Syriza was elected on a platform of opposing the Troika.

Greece_German_invasionBefore his election as Prime Minister, Alexis Tsipras promised the Greeks an attractive combination of butterflies, moonbeams, and fairytales regarding taxes and spending. In other words, he wouldn’t raise taxes and he wouldn’t cut spending on pensions. The Greek electorate seemed to like butterflies and moonbeams. I mean, who doesn’t?

Once elected, Tsipras immediately reneged on his promise, agreeing to raise taxes and lower spending because, well, the Troika demanded it. Cleverly, he called elections right afterward. For some reason, despite the reversal of course and lies, his party won election again.
This week while we blissfully vacationed, a member of the Golden Dawn party called for the arrest of the Prime Minister and President, essentially asking for a military coup.

Anyway, vacation is so relaxing. I assume everything’s good back home?


A version of this ran in the San Antonio Express News and Houston Chronicle.


Please see related post:

Podcast: A Greek Businessman on the Crisis Part I – Government Bloat

Podcast: A Greek Businessman on the Crisis Part II – European versus Sovereign Power

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SIGTARP is Back! Be Mad Again. And Happy

My favorite government watchdog of all time, SIGTARP[1], The Norse God of Financial Accountability, recently published another great critique of Treasury’s handling of TARP rules, this one about executive compensation within bailed out firms.

SIGTARP is a favorite of mine because they point out mistakes and errors with the TARP program. At its best, SIGTARP represents to me a hopeful sign that our federal government can learn from its mistakes.

In a time of deep cynicism about how “Washington is broken,” the Special Inspector General[2] role fills me with optimism. If our federal government is strong enough to weather pointed and non-partisan critiques from within, then we’ve got a pretty robust system.[3]

Which makes me happy. Ok, now back to the latest report.


Pay Czar blew it

SIGTARP reports that the Treasury department – and in particular the “Pay Czar”[4] put in place to limit executive compensation at bailed out firms – pretty much blew it.

Here’s what happened in simplest terms:

In 2009, Obama and then Treasury Secretary Geithner announced that firms that took TARP bailout money would be subject to rules about how much they could pay their top 25 executives.

This made and makes sense because

  1. When you take public money to save your firm, it’s a bit nasty to then turn around and send that public money out the door for private compensation in the form of salaries and bonuses. Which is EXACTLY what happened in 2008 with bailed out Wall Street firms, all of whom took TARP money, and then paid bonuses to their employees.
  2. At a time of deepening economic malaise, the ‘optics’ of bailed out executives taking big bonuses while Main Street folks lost their jobs and homes after earning 1/300th of the compensation seemed a bit, well, unfortunate.
  3. Geithner claimed that excessive executive compensation actually contributed to pre-crisis risk-taking. I don’t know if really buy this, but anyway, it was a theory of his that became part of the justification for limiting compensation.
  4. Restricting executive compensation should incentivize top executives to pay back their TARP money early, in order to return to the good old days of unrestricted compensation awards for themselves. Thus aligning taxpayer public interests with top executives’ private interests, as seems to have happened, according to Citigroup and Bank of America executives later interviewed by SIGTARP.


The Pay Czar rules said:

  1. The top 25 highest-paid executives at each firm should not receive cash compensation above $500K without special permission from the Pay Czar. Which permission, it turned out in retrospect, was not hard to get, as we read in the SIGTARP report.
  2. Compensation above $500K would have to come in the form of long-term restricted stock in the bailed company. Which is frankly not that onerous a rule, and probably ironically served to further enrich some executives who received huge stock awards at depressed 2009-2011 share prices. There’s a long and distinguished tradition of excessively compensating executes through share awards, as I’ve written about before.
  3. Compensation for the next 75 most highly-compensated employees had to be made in reference to average payments for comparable employees in similar jobs in the market. They couldn’t, or shouldn’t, be paid more than the average in the market without special permission. Which, again, makes sense because why are you being paid more than average when your freaking firm just got its ass bailed out with taxpayer money?
  4. These restrictions would stay in place until firms repaid their TARP bailout money.


My favorite GM bailout poster

My view on these rules, and what happened

When you look at these rules in aggregate, they do not seem to me restrictive at all. This is not written by some “Socialist Gubmint that wants to attack Capitalism and END OUR FREEDOMS.”

On the contrary, the only reasonable view of these rules, in my opinion, is that these rules were practically written by the bailed out firms themselves. Which, if you believe in at least the cognitive capture of the leaders of our regulatory system[5], you could plausibly argue they did write the rules.

Despite that, as SIGTARP reports, the Pay Czar totally failed to enforce even these executive-friendly rules, especially with some of the final TARP bailout companies, GM and Ally Financial.


SIGTARP: Norse God of Financial Accountability

The main points of the SIGTARP report, summarized for your reading pleasure (and to make your head explode with anger if you think about it too hard)


  • General Motors (the pension-payments company that also happens to make cars that people don’t buy) and Ally Financial (formerly GM Acceptance Corp, the auto-finance branch of General Motors) were the last of a special group of extraordinary bailout firms[6] to pay back TARP money.
  • Both firms’ executives made the case to the Pay Czar that restrictions on their executive compensation were counterproductive, because they were trying to be “competitive in the market” in order to pay back TARP money. The Pay Czar, according to SIGTARP, found this entirely self-serving argument persuasive when bending the compensation rules for GM and Ally.
  • This happened, despite the fact that other TARP firms rushed to pay back TARP money, in order to loosen up their pay restrictions. In other words, the restrictions on executive compensation effectively accelerated repayment as intended for most bailed companies, but the Pay Czar later forgot this and felt like the rules should be bent in order to accelerate the repayment to taxpayers. The Pay Czar got this backwards.
  • GM and Ally Financial in particular cost taxpayers quite a bit of money in the final accounting. Instead of collecting the repaid TARP money, the federal government sold its stakes in the companies to public markets at a loss – $11.159 B for GM, $1.763 for Ally. That didn’t stop the firms from getting the compensation rules bent repeatedly for them prior to these final accounting of losses.
  • Both companies – as detailed in the SIGTARP report – managed to get pay raises, exceptions to the $500K limit, exceptions to long-term stock restrictions, and ignored policies and procedures put in place by Treasury regarding payment restrictions.
  • Restrictions on executive compensation actually got looser and looser in the 2009 to 2014 period, even as expected losses at GM and Ally Financial became clearer and more likely.
  • Treasury approved at least $1 million in pay for every top 25 employee at GM and Ally in 2013, despite the supposed rules in place to guide the Pay Czar, and prior to the ‘repayment’ of TARP through the government sale of shares to public markets.


In Conclusion

The 2008 crisis and aftermath makes different people mad for different reasons.

For me, the most egregious part of the whole episode has been the enjoyment of private profits with the benefit of public bailout funds before, during, and after 2008.

I love SIGTARP for making available the details on this egregiousness.

I’m mad, but I’m happy we have a paper trail to help me know exactly what I’m mad about.



Please see related posts:

Book Review of Neil Barofsky’s Bailout: The Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street

In Praise of SIGTARP – Norse God of Financial Accountability

SIGTARP I – Truth in Government

SIGTARP II – Biggest Banks Still Too Big To Fail

SIGTARP III – The Citigroup Bailout

SIGTARP IV – What Small Banks Are Going Under Next?

SIGTARP V – My Front Row Seat to the AIG Debacle

[1] SIGTARP stands for the Special Inspector General for the Troubled Asset Relief Program. Created by Congress, the SIGTARP periodically publishes reports on how TARP money was spent and misspent, investigations into criminal activity around TARP, and makes policy recommendations to Treasury about ways to do things better, or what it did wrong. I <3 SIGTARP.

[2] There are several Special Inspector Generals for a variety of important policy morasses in the federal government, including for “Iraq Reconstruction” and “Afghanistan Reconstruction. A big part of their role is to tell us exactly what got screwed up, how the money got wasted,  And that’s a good thing.

[3] I mean, we can all get ‘mad at Washington.’ But the fact is that Russia and China are not robust enough systems to handle an internal critique like a Special Inspector General. They are too fragile and they know it. We are anti-fragile.

[4] The Pay Czar is actually technically known as the Office of the Special Master for TARP Executive Compensation, shortened to OSM in the SIGTARP report. I like the phrase Pay Czar better, however, so I’m going to stick with it for the rest of this post. The first Pay Czar was Kenneth Feinberg, previously in charge of the 9/11 Victims Compensation Fund, and later the BP Oil Spill Fund, and Boston Marathon Bomb Victims Fund. Feinberg was later succeeded by Patricia Geoghegan, about whom I know nothing.

[5] ‘Cognitive capture’ is shorthand for my favorite theory I learned from from Chrystia Freeland’s Plutocrats, which I reviewed earlier.

[6] The Treasury Department especially tracked the ‘exceptional’ TARP bailout money given to AIG, Citigroup, Bank of America, Chrysler, Chrysler Financial, GM, Ally Financial (formerly GMAC), because these seven firms were especially FUBAR in 2008, meaning the amounts were really high and the risk of taxpayer losses were also exceptionally high.

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The USA of I.O.U.

usa of iouEvery once in a while I read a finance article that sticks in my head and never goes away.  An article about the historical intersection of debt and the United States from the New Yorker from four years ago by Jill Lepore is just one of these.[1]

The USA of IOU

Jill Lepore’s article explains that in many ways the United States was founded of the debtors, by the debtors, for the debtors.

We know from English literature that the United States represented a fresh start for insolvents from the lower and upper classes, which makes sense when we learn that both Dickens’ father went to debtor’s prison and Trollope’s father fled England to avoid it.

What I didn’t know is that as many as two-thirds of Europeans arriving in the Colonies were debtors, paying their way as indentured servants.  The colonial governments of Virginia and North Carolina for their part, eager for laborers, passed incentives by promising 5 years’ worth of debt protection.  The founder of Georgia, James Oglethorpe, specifically started the colony as a debtor’s refuge in 1732, as an alternative to English debtors’ prison.

Lepore makes the interesting comment that Founding Fathers Jefferson and Washington were so up to their necks in debt to London bankers that the Declaration of Independence from England not only served democratic Enlightenment ideals but also their own balance sheets.[2]

Debtor’s prison

Before reading Lapore’s article I had no idea that the English tradition of locking up debtors in prison jumped the Atlantic and came to the American colonies and the young United States.  Debtors through colonial times and the first 40 years of the Republic routinely got locked up in brutal prisons, – often for very small amounts.  There the debtor would stay, half-starved and dependent upon alms from passers-by, until someone – usually a relative – paid the debt.

New York became the first state in the nation to outlaw debtors’ prisons in 1831, paving the way for other states to follow suit.

Debtors’ prisons largely predated proper bankruptcy law, which makes sense as bankruptcy would always be preferable to prison.

Bankruptcy for Traders vs. Everybody Else

You are not going to believe this[3], but in the 1800 to 1830 period, financial traders typically received preferable treatment, by law, over everybody else, when it came to insolvency.

If you were a stockbroker in 1800s Wall Street, for example, or you engaged in financing merchandise shipping and trade, or trading in agricultural commodity futures[4], you could declare bankruptcy if the business went awry.  But, if you were not a financier, you had no way of getting clear of your debts, and you might face debtors’ prison.

In essence when debts became overwhelming, Lepore explains, a bankruptcy law in 1800 allowed financiers to declare bankruptcy and receive a fresh start, freed of their debts.  Presumably lawmakers justified this disparity through a logic similar to today’s “Too Big To Fail” principal.  If the brokerage houses in turn of the 19th Century Wall Street couldn’t work through their financial distress, well then my goodness, what would happen to the economy????[5]

Since the bankruptcy law only applied to traders, everybody else was liable to be thrown into debtors’ prison.  Indefinitely, in fact, until their debts got paid.  Not until 1841 did Congress pass a permanent bankruptcy law so that ordinary folks could declare bankruptcy in the event of insolvency.[6]

So, if you were wondering whether the bailout of Wall Street in 2008 while Main Street suffered represented the nadir of financial inequality and injustice, you’d be wrong. Early 19th Century injustices were even worse. There, doesn’t that feel better now?

debtors prison

[2] Before reading Lepore’s piece I knew about the historical train of thought that the Founding Fathers were greatly motivated by selfish private interests, such as keeping taxes low and protecting their own private property, something that British sovereignty increasingly impinged upon in the years leading up to the Declaration of Independence.  As a recovering banker, however, I find the we’re-up-to-our-necks-in-debt-let’s-cut-ties-with-our-bankers argument plausibly intriguing.  I’m sure Jefferson and Washington were great guys and all, but any time you can simultaneously establish a radical new experiment in non-Monarchical government based on Enlightenment ideals and wipe out your personally huge debts at the same time?  Wow, I mean, that’s a two-for-one.  You kind of have to do it.

[3] Yes, that’s sarcasm.

[4] Yes, the concept and use of commodity futures are not hundreds, but thousands of years old.

[5] Does this sound familiar to anyone?

[6] Lepore relates the story of a clever insolvent who found a loophole in the bankruptcy law of 1800 that offered unequal treatment between traders and everyone else.  With extraordinarily large debts that had previously landed him in jail, her hero John Pintard managed to get a temporary reprieve from prison through a loophole in the debtors’ prison laws.  He took out an advertisement in a newspaper that he was doing business as a stock broker.  Pintard then traded a single stock, pocketed the fifty-eight cents profit (later donated to charity), and filed for bankruptcy as a trader.

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Book Review: Bailout; An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street

If every novel or Hollywood movie starts with either the premise of “A Man Walks Into a Town” or “A Man Goes On a Journey,” Bailout by Neil Barofsky begins with the former.  Neil Barofsky plays the leading Jimmy Stewart hero role in this modern update to Mr. Smith Goes To Washington.

In late 2008, the outgoing Bush administration nominated Barofsky, a federal prosecutor from the US Attorney General’s Office in New York, to head up the Special Investigator General of the Troubled Asset Relief Program (aka SIGTARP).  After then-Treasury Secretary Paulson pushed through Congress the approval of $700 Billion in government cheese dedicated to propping up the US financial system, Congress had the foresight to demand someone who could, in Barofsky’s turn of phrase, “catch the rats” inevitably attracted to the cheese.

Much of the humor and pathos of Bailout derives from Barofsky’s naïve outsider status[1] crashing awkwardly into – or exploding spectacularly against – the self-interested forces of Washington.  Time and again, he brings his moral outrage and laugh-or-you’ll-cry innocence to a self-interested, power hungry town.

He’s brutally harsh on well-known characters such as Treasury Secretary Tim Geithner[2], Paulson protégé Neil Kashkari[3], and Treasury deputy Herb Allison[4], as well as lesser known players who make up the DC financial policy world.  He’s also hilariously open about his own deficiencies for the SIGTARP job, in his role as a bridegreoom,[5] or as an initially clumsy political player on the Washington scene.

I’m not in the least surprised that I loved this book, as I’ve been a dedicated fan-boy[6] of Barofsky’s SIGTARP reports on this site (here, here, here and here), trying my hardest to make more people aware of how good and rare a job he did as SIGTARP.

I am surprised, however, at how much this book should be the book everyone reads to understand our federal government in the early 21st Century.  I’m not going to insist yet that Barofsky’s Bailout is the Washington DC version of Michael Lewis’ Liar’s Poker, but the parallels are strong enough that I’m putting the comparison into the conversation.

Both relate hilarious and cringe-inducing stories of ambitious, smart, successful, and powerful jerks acting badly, for personal gain, to the public’s detriment.  Both walked away from short stints in their respective centers of power with the guts to risk complete ostracism from that center of power by eviscerating the players in hilarious character sketches and painful interactions.

Throughout Bailout, Barofksy reminds us that the only possible way he could succeed as the Top Cop of TARP would be to act with complete indifference toward his next job.  Any personal consideration of the professional consequences of his actions – like money or advancement or power or prestige or making friends – would keep him from pursuing his investigatory role to its fullest extent.

It helps that Barofsky, by his own description, has an almost Aspergers-syndrome disregard for niceties like human feelings or sympathetic tones when they get in the way of what he believes to be right.  He exudes a super-hero focus on righteousness – even more than I had realized when I first dubbed him the Norse God of Financial Accountability.

If Barofsky demonstrates any character flaw in Bailout, it’s this same self-righteousness, his personal conviction that he’s got the right answers that nobody else except he (and his SIGTARP deputy Kevin Puvalowski[7]) had in Washington.  He mocks the Treasury creators of TALF[8] and PPIP[9] for not fully understanding the potential for fraud in these programs or flays them for pushing plans with overly Wall Street-friendly terms.

On the one hand I have no doubt Barofsky’s mostly right (and neither does Barofsky), but on the other hand we hear the righteousness in his voice that must have rubbed the sleep-deprived-and-making-it-up-as-they-went-along TARP bailout folks in the Treasury department the wrong way.

To nitpick a bit more, Barofsky tends not to give much credence to the Wall Street view of the world throughout Bailout.  As a former Wall Streeter, my own instinct tells me that simply ignoring Wall Street’s concerns in late 2008 and early 2009, and pursuing the purer prosecutorial approach seemingly favored by Barofsky, could have led to its own disastrous consequences as well.  I’m not happy with Paulson’s and Geithner’s coddling of the Street, but Barofsky’s hard line might not have been optimal for the public good in the long run either.

Overall though, I admire his consistent choice to be right over being liked, and his consistent choice to push public welfare over private advantage.

Why don’t more people go to Washington and do the right thing?  Barofsky clearly provides the answer: Because everybody is always looking to the next job.  You don’t uproot bad actors if those bad actors might actually help you get the next plum position.

At Bankers Anonymous I remain obsessed with the nexus of finance and politics that brought us to the brink of financial apocalypse in 2008.  Bailout isn’t the book for understanding the Wall Street side of the crisis, but it’s the best so far for understanding what deeply embedded conflicts of interest prevent government officials from doing the right thing to prevent a Credit Crisis.

Nothing I’ve seen shows any resolution of those conflicts of interest.


Please see related post: All Bankers Anonymous Book Reviews in one place.



[1] I have to admit his Mr. Smith Goes to Washington naiveté throughout the book has to be a bit of a pose, given that he’s a badass prosecutor who went after Colombian drug lords and white color financial criminals, experience which I imagine prepared him for interacting with the less savory aspects of human behavior.

[2] Barofsky argues that the original tax evasion problem that came up at Geithner’s confirmation hearing in 2009 illustrates Geithner’s basic disrespect for law and truthfulness.  Let’s just say that based on Bailout we should be glad to see the back of Treasury Secretary Tim Geithner in a second Obama administration.  I’m still going to be so pissed when Geithner announces he’s joining Goldman Sachs as senior partner upon leaving office next month.

[3] Barofsky grudgingly calls TARP architect Kashkari a reasonably straight-shooter.  I love this typical Barofsky backhanded compliment: “Sure, he was combative, not always forthcoming, and excessively deferential to Wall Street, but Kashkari had generally been straightforward with me.  I don’t think he ever flat-out lied to me, which in Washington put him into rarefied air.”

[4] The book’s forward alone, in which Barofsky relays Herb Allison giving him a classic drug-lord choice of “Gold or Lead” is worth the price of the book.  Barofsky sums up – with that one anecdote – everything you need to know about Washington DC in the 21st Century, and why people so rarely act for the public good when that conflicts with their private interest.  Allison opens his Gold-or-Lead proposals with “[Y]ou’re a young man, just starting out with a family, and obviously this job isn’t going to last forever.  Have you thought at all about what you’ll be doing next?”  When Barofsky professes only an interest in doing this job well, not focusing on the next job, Allison gets nastier, saying his tone is losing him credibility, people are talking badly about him.  Barofsky calls his bluff, after which Allison reverts to bribery again, asking him what kind of job he’d like?  An appointment?  A judgeship?  Basically anything to get Barofsky to play ball.

Powerful people worry too much about their potential next job to do the right thing in their current job.  In fact, the better-selling but largely uninteresting Andrew Ross Sorkin book Too Big To Fail suffers from precisely this problem.  Sorkin was too worried about enhancing his future journalistic career by protecting future sources such as the CEOs of Wall Street to criticize any of them in any interesting way.  Which is why the book should have been called Too Connected to Criticize.

[5] You have to love the story he tells on himself on the night of his own wedding rehearsal, unable to tear himself away from engaging over Blackberry in political fights with Treasury colleagues.  “Even when Karen tried to walk me through the drill for the ceremony, I couldn’t stop.  As she explained, ‘So we’ll come down this elevator and then walk down these stairs to this area, where we’ll have the ceremony,’ I responded, annoyingly, ‘Treasury is going to fight this.  Kevin’s right, they’re going to flip.  It’s going to shine a light in an area they want to keep dark.’  ‘And this is where the band will set up,’ Karen said, ignoring me and pointing out where the party would occur. ‘Treasury could just go out and tell the banks to respond with the ‘all money is green’ argument, and the banks will just say that they can’t respond to the request.  We’re going to have to get real specific in the subpoena,’ I blurted out, more to myself than her.  ‘This is where the buffet will be; we can taste some of the food tonight at dinner if you’d like,’ Karen placidly continued.  She very smartly refused to engage with my obsession, and she finally got some degree of peace after I walked into the pool with my Blackberry still clipped to my bathing suit, frying it.”

[6] For example, the post in which I named him the Norse God of Financial Accountability.

[7] Puvalowski is Barofsky’s buddy from the US Attorney’s office in New York who became his deputy at SIGTARP.

[8] Term Asset-Backed Securities Loan Facility.  A Federal Reserve program to lend public money to restart private investment in asset-backed securities after that portion of the market froze in the second half of 2008.  TALF proposed to provide loans of 95 cents on every private dollar invested, with non-recourse to the borrower.  For an introduction to some other non-recourse lending handouts from Washington to Wall Street, please read footnote #3 to this posting.

[9] Public-Private Investment Fund.  A Wall Street-friendly program providing 92 cents of federal funds for every dollar invested via PPIP to encourage private fund managers to purchase distressed assets off the balance sheets of big banks.  Also non-recourse to the borrower.  Again, see footnote #3 on this post for why that’s so awesome for Wall Street.

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The Citigroup Bailout – SIGTARP Part III

We love to criticize the wastefulness of bureaucracy, the agency ass-covering, and the naiveté of government officials.  But it’s a surprising pleasure to read[1] The SIGTARP [2]  review of the government’s response to Citigroup’s near-death experience and its bailout in the Fall of 2008.

Here we have a US Treasury position created for the purpose of reviewing the government’s own actions in the heat of the crisis, and we might be excused for bringing low expectations to the table.  I have to admit, however, that my jaundiced eye opens wide with the quality of the analysis and indeed the downright feistiness of the SIGTARP report.

The report reviews the timeline of the crisis, the systemic need to bail out Citigroup, and the particulars of negotiating – actually, Treasury mandated – a $20 Billion preferred-equity capital infusion and a loss-absorbing backstop for a $300 Billion ring-fence around Citigroup’s riskier assets.

We do not know what would have happened without government intervention on behalf of Citigroup, but the SIGTARP nicely summarizes the case for Citigroup’s status as a Too Big To Fail (TBTF) Bank for those of us with short memories.  Citigroup was at the time the largest currency exchange bank, the largest consumer finance lender, the world’s largest credit card lender, the 2nd largest banking organization, the third largest mortgage servicer, and the fourth largest student lender, with over $175 Billion in uninsured domestic deposits.

SIGTARP shares numerous interesting details from the negotiations in October and November 2008.

First, the government needed to lie to itself and the public in the Fall of 2008 when it declared Citigroup a ‘healthy and viable’ banking institution[3], as a necessary condition for providing an initial $25 Billion capital infusion through the Capital Purchase Program (CPP) in October 2008.[4]  Treasury Secretary Paulson and New York Federal Reserve Board (FRB) President Geithner clearly felt at the time that they could only get Congressional support for the CPP if it came with a large dose of self-deception about ‘healthy and viable’ banking institutions.  Why would a ‘healthy and viable’ banking institution need an emergency $25 Billion capital infusion from the government anyway?  It’s a Potemkin Village type absurdity, and SIGTARP lets us enjoy the irony.

Next, Treasury, FDIC, and the FRB cut a pretty good deal for taxpayers in negotiating with Citigroup.  Most importantly, they announced to the public (and Wall Street) the ‘ring-fencing’ of over $300 Billion in Citigroup assets – government insurance against losses.  By ring-fencing, they separated presumably toxic assets on Citigroup’s balance sheet, and declared these assets would be treated in a special way to limit Citigroup’s total losses.

Here’s the clever part about the ring-fence; Citigroup remaining on the hook for the first $39 Billion in losses, with a combination of Treasury and FDIC absorbing the majority of the next $15 Billion in losses, and the Federal Reserve Board absorbing the rest of the loss risk via non-recourse financing.  While the announcement emphasized the government insurance for Citigroup’s riskiest CDOs, RMBS, CMBS, and auto loan ABS, loss-scenarios suggested only Citigroup would bear the losses on the portfolio.[5]

If you can’t figure, as neither Citigroup nor the market could out at the time, what the bank’s biggest loss could be on its portfolio, then the market would assume the worst and treat Citigroup as a soon-to-fail entity going the way of Bear Stearns, Lehman, and AIG.  But if you can precisely define, as the ring-fence did, the upper limit of the bank’s losses, then the market understands the known limit and the self-fulfilling prophesy of expected losses leading to financial wipeout can stop.   So, that’s clever.

Following this announcement, as intended, markets credibly believed Citigroup to be TBTF, with a perceived government guarantee on a huge portion of its riskiest assets.  The stock-shorting activity reversed, CDS spreads tightened, and we saw no world-wide run on Citigroup’s bank deposits.

SIGTARP’s feistiness surfaces most particularly in reviewing not only the actions of government leaders, but their disagreements with each other and with its review.  Numerous times throughout the report, we learn of requests by FDIC’s Sheila Bair to change or redact statements in the report.  We also learn that Citigroup successfully withheld a listing of its ring-fenced assets from publication by SIGTARP, citing propriety information[6], but SIGTARP is not afraid to respectfully disagree.

SIGTARP’s summary of the story emphasizes the ad hoc, but ultimately correct, decision of government leaders to massively intervene on behalf of Citigroup.  SIGTARP calls out our own government for what they failed to make Citigroup do; this distinguishes the report and makes for good reading.

SIGTARP gets to the heart of unsolved problems with the government interventions of 2008.  Citigroup, along with more than a dozen financial institutions, today remains TBTF.  Which means we could repeat the same crisis we all just survived. 

Not only that, but SIGTARP rightly states that the last bailout may increase the likelihood and severity of the next crisis, because the moral hazard problem also remains with us today.  High-risk takers, namely Citigroup creditors and counterparts, were not punished in the bailout, so they may reasonably expect to under-price similar credit and counterpart risk in the future, believing that the government provides an invisible safety net underneath high-wire risk taking.

Even short of a repeat crisis, we know that the implied government guarantee for TBTF institutions constitutes a massive subsidy to Citigroup and its brethren via lowered borrowing costs and collateral costs.  This subsidy provides huge advantages over smaller financial firms, but, more troublingly sets the taxpayer up for unlimited liability for private institutions, with little discernible public benefit.  Citigroup, the big red umbrella, is still not paying us citizens for the giant insurance policy we offer them.

I don’t criticize the government, and neither does the SIGTARP, for preventing a Citigroup collapse in the Fall of 2008.  I do blame the US government, and thankfully SIGTARP does too, for allowing TBTF banks to continue their invisible but nevertheless powerful draw on free taxpayer support.

Ultimately, as SIGTARP rightly (and depressingly) points out, we cannot know the cost of this Citigroup bailout until we know the cost of the next bailout, partly born out of this one.

Two concluding thoughts make me optimistic, however.

First, although SIGTARP is part of the government, it plays the ombudsman role fairly, critically analyzing what other parts of the government have, and have not, done since the acute crisis subsided.  There’s hope in a system which can criticize itself and thus correct its future course.  Course change is hard, but a report like SIGTARP’s makes it possible.  I made this thematic point in an earlier post, but it’s worth emphasizing.  I’m not sure we’re improving, but I am sure that critical thinkers within the system, like SIGTARP, give us a chance at improvement.

Second, throughout the narrative of Citigroup’s near collapse and rescue, we see instances of massive government intervention but not a massive government power grab.  This too bears remembering.  The United States has a tradition of public official respect for private enterprise, which is both understood and credible  – but not always recognized by politicians wanting to score points. [7]

A market collapse and an overwhelming government bailout naturally give rise to conspiracy theories on the political fringes.  Many, if not most, societies in the rest of the world would fit the Citigroup events into a conspiratorial, but ultimately unhelpful narrative.  The specific history of Citigroup as told to us by the SIGTARP, however, reminds us that even if the government did not get everything right, they actually did pretty well, considering.


Please also see SIGTARP Part I – Truth in Government

SIGTARP Part II – Biggest Banks Still Too Big To Fail

SIGTARP Part IV – Which Small Banks are Going Under Next?

and SIGTARP Part V – The AIG Bailout

[1] Assuming you like wonkish reviews of the government’s response to the 2008 Credit Crunch as much as I do.

[2] Special Inspector General for the Troubled Asset Relief Program, aka SIGTARP, aka Norse God of Financial Accountability.

[3] Both Treasury Secretary Hank Paulson and FDIC Chair Sheila Bair used this description in written and spoken statements.

[4]A banking institution had to be “healthy and viable” to be considered a “Qualifying Financial Institution,” as only “Qualifying Financial Institutions” could receive this capital infusion.

[5] As, in the end, it turned out.  When the $300B guarantee program unwound in the Fall of 2009, only Citigroup had suffered losses.  So we’ve got that going for us.  Which is nice.

[6] In pointing this out we get to share SIGTARP’s undoubted chuckle about the ‘special sauce’ of proprietary information Citigroup keeps from its competitors, which contributed to one of the most catastrophic losses in human financial history.  Seriously, guys?  No one wants your special recipe of assets that contribute to financial Armageddon for your bank.

[7] Anti-market and anti-government cranks both see vast conspiracies and vindication of their own warped views in the events of 2008, but thankfully they mostly troll the Internet commentary pages and do not reflect, you know, reality.

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In Praise of SIGTARP, Norse God of Financial Accountability

“…But in 2012, the people became restless.  They mistrusted the 1% who lived far away in beautiful, unattainable, icy Jotunheim.

And the people quarreled amongst themselves.  They could not agree with one another or keep the peace.  The people were the 99%, and they divided into warring ideological camps, visiting bloody internecine raids upon the other side.

One group, the Teaparty tribe, worshiped the demigod Free Market and raged against encroachments from their sworn enemy, Big Gov, who dwelt smugly in the elaborate Federalist castles of Washington DC.

The others, the Occupy tribe, supplicated before the Mother Goddess Collective Action, and they named their enemy Big Bank, who ruled cruelly from the executive suites of New York skyscrapers.

Periodically one tribe drew blood from the other side in a furious ideological battle.  But even amidst the carnage, both sides wished for a savior, a hero who could unite them.  The One.

In the beginning, little did the people notice online publications from Neil Barofsky, which showed the 99% their common enemy lived in both Washington DC and Wall Street.  Who was this Neil Barofsky?  At first he appeared to be a mild-mannered grunt, a common civil servant, toiling in the basement of the US Treasury from 2008 to 2010.  But on July 25, 2012, with the publication of Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, he became known to the world as SIGTARP[1], Norse God of Financial Accountability!

At last revealed in all his glory, SIGTARP arrived, flanked by Amazons!

The 99% needed a hero to unite them, to show them how both Washington and Wall Street betrayed them all.  SIGTARP unfurled his fearsome flag of financial accountability.  The two tribes put down their weapons against one another and turned toward the new banner.

They finally understood the truth.  Big Government and Big Bank conspired together to keep them down.  A new unity began to emerge, as the armies of the 99% integrated.

No longer needing his disguise as Neil Barofsky, SIGTARP ripped off his itchy wool suit to reveal rippled musculature and a mighty pen describing infernal, festering corruption.  Under the Bailout banner, SIGTARP and the newly united 99% began their determined march upon Jotunheim.”


Ok, I haven’t read Bailout yet, as it was just published today.  Based on today’s NY Times Review, the book suffers from some simplistic moralizing and, perhaps, Barofsky’s savior-complex.

But – and I mean this in earnest – I have had a serious man-crush on Neil Barofsky for a while now.  As SIGTARP, he managed to accurately review the TARP process, while maintaining critical distance from both Washington and Wall Street.[2]  I will highlight in the next few weeks some of the excellent reporting done by his office.  For all the unhappy things that may be said about the cynical nexus of Wall Street and Washington, SIGTARP has given me hope in the last year that our system can be resilient and accountable.  A hero may yet rise.

Thank you SIGTARP!

“No problem, kid,” answers a booming, disembodied voice, before soaring upward, headed toward Jotunheim.

[1] SIGTARP stands for Special Investigator General  for the Troubled Asset Relief Program, the Congressionally appointed watchdog over the $700B TARP program created in 2008 at the height of the Credit Crunch.

[2] Not an easy trick!  As the NY Times review excerpts from the book preface, Barofsky met in 2010 with Herb Allison, former head of TIAA and Fannie Mae:  “ ‘Have you thought at all about what you’ll be doing next?’ Mr. Allison asks Mr. Barofsky, soon adding, ‘Out there in the market, there are consequences for some of the things that you’re saying and the way that you’re saying them.’  ‘Allison was essentially threatening me with lifelong unemployment,’ Mr. Barofsky concludes, and alternatively suggesting a plum government appointment some day if Mr. Barofsky would simply ‘change your tone.’  When Mr. Barofsky tells his deputy of the exchange, the deputy says, ‘it was the gold or the lead,’ resorting to their joint experience prosecuting drug kingpins in New York: Cooperate and share the riches, or don’t and get plugged.”


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