Michael Hirsh: Tear Down Wall Street

Michael Hirsh of newsweek has a very strong article in this week's magazine comes out strong for radical changes to Wall Street and the American economic system that has developed. He points out that the survivors of Wall Street melt down who appeared before Congress this week are 'too big to fail', but are doing just that. They're failing, now what should we do.

It was a classic populist spectacle, reminiscent of William Jennings Bryan's "Cross of Gold" speech or Huey Long's mid-Depression campaign to "Share the Wealth." There, arrayed before Rep. Barney Frank and other voices of the people's outrage, sat the former titans of Wall Street, each of them trying desperately to convince their congressional questioners, and the world, that they deserved some fate other than oblivion.

And these were the survivors! The hardy ones. The eight CEOs who appeared before the House Financial Services Committee on Wednesday—among them Jamie Dimon of JPMorgan Chase, Lloyd Blankfein of Goldman Sachs and John Mack of Morgan Stanley—were actually the bankers who have best navigated the financial turmoil in recent months after taking money from the "Troubled Asset Relief Program," or TARP. That may help explain why some of the angrier congressmen, like Gary Ackerman of New York (who last week roared to former SEC officials: "You couldn't find your backside with two hands if the lights were on!") were a little calmer this time. But it was a striking display of the new balance of power in America. One by one, the former "captains of the universe," as Rep. Maxine Waters described them, genuflected before their congressional masters. "I feel more like a corporal of the universe," Bank of America's Ken Lewis joked weakly. The CEOs described how much they've slashed their salaries and bonuses, how hard they've tried to lend out the billions of taxpayer dollars, and how quickly they'll try to get off the federal dole.

Truth is, this is all mostly whistling past the graveyard—which is where most of these giant banks are headed someday. Or at least let us hope so, while Washington still has the power to make it happen. With a couple of possible exceptions, these financial behemoths can't be allowed to survive and securitize us to the brink again, only to have to be rescued because they're too important to the economy to be permitted to go bankrupt. This is still the heart of the crisis—the problem that President Obama's stimulus package and Treasury Secretary Tim Geithner's financial plan don't even touch. If it weren't for the fact that too many of these banks are too big to fail—"systemic risks," in the jargon—we would have been through a lot of the worst already. Bankruptcy and oblivion is supposed to be the fate of market players who make bad choices. That's how capitalism works. The system gets cleaned out, the survivors deservingly pick up their failed rivals' business and get richer, and the economy comes back to life quickly. But that's what is not working now. Oversize screw-ups like AIG and Citigroup survive on, zombielike, with Fed and Treasury "commissars" on the inside watching their every move, because no one can bear the thought of how many other institutions they would take down if they failed.

Among those who appear to understand this is Federal Reserve Chairman Ben Bernanke. " 'Too big to fail' is an enormous problem," Bernanke said in his own congressional testimony on Tuesday. "We are very unhappy with this problem, and we think that it should be a top priority to fix it as we go forward, so that … the situation doesn't arise again." One of the most telling moments at the CEO hearing came when one congresswoman asked if any of them had grown too large. All were silent. At other points, the CEOs tried to make the case that, with a thaw in lending barely under way, the issue is not with them but with the "nonbank" sector that was responsible for most of the worst mortgage-lending practices during the bubble. What they didn't say is that some of their own companies, among them Bank of America, actually went out and bought the most predatory and seamiest nonbank lenders, like Countrywide Mortgage. Just swallowed them whole. They're incorrigible.

This is the main reason why, to the market's chagrin, Geithner declines to provide details on how to unwind the bad loans and assets at these big companies. Geithner's predecessor, Hank Paulson, dithered over this problem as well. The indecision has been dragging on for five months. That's because the problem is all but insurmountable. If you value those toxic assets at actual market levels, most of these banks would become insolvent. Letting them fail would almost automatically trigger the depression the government has been trying to avert. But if instead the government artificially inflates the assets' values, it commits itself to spending trillions more in public money at a time when Congress and the public are fed up with bailouts (the IMF estimates that potential losses are still $2.2 trillion; Bernanke countered Tuesday that only half of those are with U.S. institutions, but he admitted the banks still have yet to write down about $500 billion in losses). And if the government declines to do either of these things—if it neither values the bad assets at market level nor buys them up at inflated prices—bank stocks will continue to be suspect and private capital will stay on the sidelines. The economy will remain frozen.

In other words, there are no good choices. According to a Treasury source, Geithner knows what a lot of these assets are worth. "The government has gone through these assets very carefully," Citigroup's Vikram Pandit told the House committee. But knowing the value doesn't help. So the Treasury secretary is trying to finesse his way through, probably case by case, hoping he can gradually nudge asset values higher by restoring confidence to the market.

Geithner may be too optimistic. As one senior economic official in Washington said to me the other day, "the Obama administration has got as much political capital as it's ever going to have. This is the time to lay it all out." In other words, tell everyone just how bad the problem really is. It's more than a matter of how much public money to commit. The "fundamental reshaping" of the financial system that Geithner referred to on Tuesday has to be part of the solution as well. The Citigroups and AIGs should be carefully broken up as soon as possible.

True, you're not going to place artificial limits on a firm's size; that's a bridge too far into socialism. But as John Kay of the Financial Times wrote on Wednesday, there's no reason why we can't rediscover the wisdom of Senators Glass and Steagall during the Depression. "Tension between the buccaneering culture appropriate to trading and investment banking and the meticulous processing and caution needed for retail banking is perpetual," Kay wrote. Indeed, as Joseph Stiglitz wrote in 2003, the wisdom behind Glass-Steagall goes "back even further to Teddy Roosevelt and his efforts to break up the big trusts." Let's simply acknowledge that. Yes, finance marches on. We're not going back to 1933. But some things about human nature never change. Now that we understand the fallacy of the "dispersion of risk" idea—which Wall Street, with a big assist from Alan Greenspan, sold us on before the crash—we should arrive at about the same place as Glass, Steagall and Teddy Roosevelt did. We can't have a free-market economy dominated by institutions so huge that they don't have to play by free-market rules. And yet we still do.
© 2009

Michael Hirsh of Newsweek on TYT

Every Monday Michael Hirsh of Newsweek comes on the Young Turks to give his take. This week Michael had an interesting take on Bush and his incompetense. He literally states the obvious that the Iraq war was not a rational act.

Watch it here:

"Wasilla Hillbillies"

Newsweek has another interesting story

From Newsweek:

NEWSWEEK has also learned that Palin's shopping spree at high-end department stores was more extensive than previously reported. While publicly supporting Palin, McCain's top advisers privately fumed at what they regarded as her outrageous profligacy. One senior aide said that Nicolle Wallace had told Palin to buy three suits for the convention and hire a stylist. But instead, the vice presidential nominee began buying for herself and her family—clothes and accessories from top stores such as Saks Fifth Avenue and Neiman Marcus.

According to two knowledgeable sources, a vast majority of the clothes were bought by a wealthy donor, who was shocked when he got the bill. Palin also used low-level staffers to buy some of the clothes on their credit cards. The McCain campaign found out last week when the aides sought reimbursement. One aide estimated that she spent "tens of thousands" more than the reported $150,000, and that $20,000 to $40,000 went to buy clothes for her husband. Some articles of clothing have apparently been lost.

An angry aide characterized the shopping spree as "Wasilla hillbillies looting Neiman Marcus from coast to coast," and said the truth will eventually come out when the Republican Party audits its books.

This is a really odd story, but I have a feeling we will be hearing more. Republican recriminations are going to really start this weekend, and will help fuel and be fueled by the 24 hour cable news channels. Personnally I am quite interested in watching the Republican civil war that is about to start.

This fight started almost two weeks ago with a McCain aides calling her Sarah Palin a "diva," and progressed to at least one aide calling her a "whack job." Now Sarah Palin's being called a "Wasilla hillbilly."I also saw that Steve Schmidt refused to say that adding Palin to the ticket was a good idea. Now someone in the campaign dishes to Newsweek that McCain "rarely spoke to Palin during the campaign."

This is an opening salvo.

Soon those who are pro-Palin will start hitting back.

as I have said, a Republican Civil War is coming.