Meet the Regulators of Team USA Economy
Just back from a week in LA, where I scoped out UCLA’s Center for Social Theory and Comparative History lecture on Economic Meltdown: Causes and Consequences. Call it a History Dept. vs. Economics Dept. smackdown. (More on that in a future Shot).
I’d have gotten you some student attendee commentary — the young shoulders upon which said consequences shall weigh heavily — but I had to dash to my friend’s VIP suite at the Staples Center for the LA Kings versus Vancouver Canucks hockey game. I think you’ll find this metaphor apt to the Team USA economy.
The score was 3-2, Kings. The only reason: the Kings’ goalie. Offensively, the Vancouver natives passed fluidly and with fierce determination. Defensively, they nixed the Kings at nearly every foray. There was hardly a moment in the 2nd and 3rd periods for the Canuck goalie to work it. (Lucky thing the Kings played hard in Q1.)
Right now, the fate of America’s economic system rests on one “goalie”: Timothy Geithner.
Late in the 3rd Quarter, Geithner Scrambles
Here’s my main beef with Timothy the Timid. He hasn’t got enough gusto to be Obama’s right-hand money man and stand up to gale-force winds of economic change. (Obviously, Congress agreed, and took AIG matters into their own hands.)
Geithner writes to Pelosi: “I registered my strong objections to Mr. Edward Liddy, the CEO of AIG, last week.” It is said that in the halls of the now-dead Salomon Bros., swearing was how they breathed. I wonder if Geithner’s “strong objections” ran thus. That way, he’d accomplish nothing — but win populist appeal — just like Mr. “Resign or Suicide” Grassley. There’s no better way for a man to make his feelings understood.
Instead, cowering behind the Bush-era American Recovery and Reinvestment Act, he proves such regs had little bite and all bark in the face of contract law. Go, corporate lawyers and outside consultants! Earn that dough!
I know we shouldn’t overturn centuries of contract law precedent (companies won’t roost here from Asia otherwise). But Geithner could have lead the charge and barked about tax legislation. (Perhaps he’s hoping not to take a fall, should things go awry). In 2008, there were 500 changes to the tax code — and any idiot could have seen the AIG bonus payments coming.
However, the Johnnies-Come-Lately of Congress are eager to oblige. The same day I penned my thoughts below, the House passed a 90% surtax. The tally in favor: 328-93. (As you read this, we’ll be here, manning the screens, counting the Senate votes as they come in.) The Senate proposal offers a more modest move: 70% surtax, split between company and worker.
But I say, let’s bypass the heavyweight voting hand of Congress. The states should be free to go after this one on their own (Cuomo-style). After watching my sis prepare her fiance’s New York state tax return, I think it’s a plum shot.
As you may be finding out this filing season, there are plenty of ultra-specific credits and subtractions already on the N.Y. code. Since they’re already there — let’s add more. Isn’t that the mantra of a “can-do” gov’t?
Consider these gems:
- Sport utility vehicle expense deduction (do not include hearse)
- Income earned before 1960 and previously reported (applies to descendents)
- Purchasing a defibrillator
- Payments to restore historic N.Y. barn
- Income from assets stolen, hidden, or otherwise lost to a victim persecuted by the Nazis (do not include if you are NOT a: victim, spouse of victim, descendent, or first recipient of assets).
There’s our precedent. So let’s write us some tax code:
IF you are one of the AIG employees making over $100,000 in 2008 year-end bonuses asked by Edward Liddy, your CEO, to return half of that, first check box labeled “Distateful” and either give us the other half or, should you prefer, pay other half back directly to AIG. (Distateful’s choice.)
IF you are shockingly absent from aforementioned Group A, or are no longer with AIG altogether, your president hates you and drafts you for his Hope Now AIG Mending Package. Mandatory enrollment includes a one-time “uniform” fee of $100,000 or half of your 2008 bonus, whichever is the larger sum.
IF by some miracle you managed to unwind a derivative contract successfully in the last year on record, pat yourself on the back and take a credit of 0.0001% of said derivative contact’s closing value — as determined by Hank Paulson and Co., c/o the Office of Thrift Supervision’s interim director: Scott M. Polakoff
This brings me to our second Team USA economy defender — over at the Office of Thrift Supervision (OTS) — John M. Reich. And he’s just quit the game.
What the Office of Thrift Supervision Does for Banking
John Reich was set up in the director’s post by our dearly departed W in 2005. In such capacity he also warmed a seat on the board of directors of the FDIC.
In short (and polite) terms, all this dog and pony show happened under his watch — since he was acting chair and vice chair of the FDIC 2001-2002.
When, in November 2008, he announced his departure, he said charmingly: “I am honored to have led this agency during one of the most challenging economic periods in U.S. history.”
Yes, it was a great time to get the hell out of Dodge — just when the challenges need to be unwound as fast as possible — and run properly. Reich didn’t give a date back then, but added that his departure would be “sooner, rather than later.” That sooner was Feb. 27, 2009.
Enter the Heir to the OTS Challenge
But be consoled, Reich is “confident in his successor.” In accordance with statute, Scott Polakoff serves as director until Obama offers a successor. He joined the OTS in 2005 — the same year as Reich. But Polakoff has logged over two decades with the FDIC. He’s come a long way from trainee bank examiner in Tulsa, in 1983. Unlike some of the other players on the Team USA economy, Mr. Polakoff hails from the non-WASP world of Southern Methodist University in Dallas, on an accounting degree from West Chester U. in Pennsylvania.
Does this bode well for Team USA? Hard to say. Trolling the OTS news of recent months, we find little fodder for confidence.
Chew on these facts, courtesy of Washington Post writers Binyamin Appelbaum and Ellen Nakashima, back in November.
The greatest thrift failures we had — which cost us a pretty penny — all struck under the OTS watch: Countrywide, IndyMac, and WaMu. In fact, with other government regulators hot on its tail, Countrywide Financial switched regulators in that perilous spring of 2007. It switched to OTS.
Going back a little farther, the OTS lauded the thrift culture’s embracing the “innovation” of the option ARM — the hair trigger of the whole crisis. Then the OTS director, pre-Reich, offered this: “Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion.”
By late 2006 — post-Reich — the OTS-regulated banks had the lowest capital reserves in two decades. If a simple thing like making sure there is adequate capital cushion escapes these regulators — well, why pay them?
For bedtime reading, you could check out Polakoff’s recent testimony before Dodd and the Senate Banking Committee — or wait a few days, and I’ll offer you the “plain-speech” take in a morning Shot.
And this just in — from our colleagues over at The 5 Min. Forecast: There’s a new defender behind Geithner: Lewis Alexander. Don’t know the name? Maybe all you want to know is that he’s a former Citigroup economist. In fact, Alexander was chief economist at Citi circa 1999-2008. He’d thought the housing market would recover in mid-2007. Think that poor prediction cost him his job?
I’m banking on the fact that he actually found some sense — too late in the game.
The official word leaked to the press: his sympathy for the “staff shortage” at the Treasury. How’s that for team spirit?
Yours in the spirit of Ida M. Tarbell,
March 23, 2009