Dirt Diggers Digest

The first thing that stands out in the financial rescue scheme just introduced by Treasury Secretary Timothy Geithner is the curious choice of terminology. The plan is labeled a Public Private Partnership Investment Program (sometimes “partnership” is left out). Was any thought given to the fact that public private partnership (PPP or P3) is a common euphemism for the privatization or outsourcing of public services by state and local government? Does Geithner really want people to associate his plan with contracting boondoggles?

Then there’s his use of “legacy” to refer to what most people have come to call toxic assets. Yet “legacy” is also the term the auto industry uses when speaking of retiree health benefits and other structural labor costs. Geithner’s references to “legacy assets” and “legacy securities” are thus both a clumsy effort to sanitize common parlance and a potential insult to unionized workers.

Finally, the plan depends heavily on “non-recourse loans.” That same phrase is associated with agricultural subsidy programs—a form of spending that the Obama Administration is seeking to curtail.

The flaws in Geithner’s plan do not end with the branding gaffes. There’s also the awkward fact that the content is essentially the same as the original Troubled Asset Relief Program, with extraordinarily generous sweeteners added for private investors. In other words, Geithner is proposing an even bigger giveaway to private interests than was envisioned by Henry Paulson.

Paulson, of course, abandoned the idea of toxic asset auctions in favor of massive infusions of federal funds into banks large and small. He apparently did so in part because of concerns that it would be difficult for anyone to attach a value to those repugnant securities. There was also a built-in contradiction between the desire of vulture investors to buy at the lowest possible price and the need of banks to get paid something approaching the nominal value of the assets, so that their balance sheets did not collapse. Not to mention the conflict of interest stemming from the fact that the money managers Treasury wanted to handle the sale of the assets had their own holdings in the mortgage-backed securities market.

None of that has changed six months later. The only difference is that Geithner is willing to commit up to $100 billion of taxpayer money to allow investors to purchase the “legacy” assets in a way that puts very little of their own money at risk. The feds would both contribute directly to the purchase price and lend additional money to investors so they can buy more. These are the non-recourse loans, meaning that the purchaser does not have to repay them in full if the security plunges in value.

I get the impression this is the posture Geithner finds most appealing—giving cushy deals to major financial players. As his lame handling of the AIG bonus controversy and his unwillingness to terminate zombie banks such as Citigroup show, he is not inclined to really crack down on Big Money. So why is he handling one of the most important portfolios of an administration committed to change?

Far be it from me to discourage the current populist outburst over the $165 million in employee bonuses paid out by American International Group, but I can’t avoid the feeling that this is drawing attention away from a much larger outrage.

The bonus controversy erupted just as AIG was forced to reveal the identities of the parties that were the biggest beneficiaries of the federal government’s massive bailout of the insurance company last fall. Billions of federal dollars flowed through AIG to make good on complex financial transactions with major banks. The institutions included ones that also received bailouts or capital infusions, including Goldman Sachs ($12.9 billion from AIG), Bank of America ($5.2 billion) and Citigroup ($2.3 billion). It also included foreign banks such as Société Générale ($11.9 billion), Deutsche Bank ($11.8 billion), Barclays ($8.5 billion), UBS ($5 billion) and BNP Paribas ($4.9 billion).

U.S. taxpayers were in effect preventing losses at firms that were also getting direct public financial assistance. The likes of Goldman Sachs, Bank of America and Citi were in effect double or triple dipping at the federal trough. By keeping the identity of the parties secret until now, AIG saw to it that these deals did not get considered when the bank bailouts were being debated. It also kept U.S. taxpayers in the dark on the extent to which the AIG rescue was actually a bailout of foreign banks.

More evidence of the coddling of financial institutions by AIG and the federal government came in a document quietly filed by AIG with the Securities and Exchange Commission on Monday. In it the insurance company gives details on the terms by which it resolved its credit-default swaps with major banks with the help of a financing entity called Maiden Lane III LLC, which was set up last fall by AIG and the Federal Reserve Bank of New York (then run by the current Treasury Secretary Timothy Geithner).

For example, the document shows how AIG and Maiden Lane helped Goldman Sachs recoup the full nominal value of nearly $14 billion on contracts whose market value had sunk to $8 billion. Merrill Lynch (now part of Bank of America) was made whole on $6 billion in contracts whose market value was only half that amount. A variety of foreign banks also enjoyed big recoupments.

Given the spectacular failure of AIG, the company’s bonus plan certainly deserves all the fulmination being directed at it by politicians of all stripes. But the few hundred million involved is inconsequential compared to the tens of billions in taxpayer money that went to AIG customers in sweatheart deals enabled by the Federal Reserve. Some of the effort now being exerted to recoup the bonuses should be put to work trying to claw back the much bigger misappropriation by the banking giants.

Amid the worst financial and economic crisis in decades, the U.S. business press tends to get caught up in the daily fluctuations of the stock market and, to a lesser extent, the monthly changes in the unemployment rate. By contrast, London’s Financial Times is looking at the big picture. It recently launched a series of articles under the rubric of The Future of Capitalism. In addition to soliciting varying views on this monumental question, the paper published a feature this week presuming to name the 50 people around the world who will “frame the way forward.”

Kicking off the series, the FT’s Martin Wolf was blunt in asserting that the ideology of unfettered markets promoted over the past three decades must now be judged a failure. Sounding like a traditional Marxist, Wolf writes that “the era of liberalisation [the European term for market fundamentalism] contained seeds of its own downfall” in the form of tendencies such as “frenetic financial innovation” and “bubbles in asset prices.”

An article in the series by Gillian Tett casually notes that “naked greed, lax regulation, excessively loose monetary policy, fraudulent borrowing and managerial failure all played a role” in bringing about the crisis. Richard Layard of the London School of Economics weighs in with a piece arguing that “we should stop the worship of money and create a more humane society where the quality of human experience is the criterion.” Did editorial copy intended for New Left Review mistakenly end up in the FT computers?

Wolf finished his initial article with the statement: “Where we end up, after this financial tornado, is for us to seek to determine.” Yet who is the “we” Wolf is referring to?

Following the damning critique of markets and poor government oversight, the last ones we should turn to for leadership are the powers that be. Yet that is exactly the group that dominates the list of those who, according to the editors of FT, will lead the way forward. The 50 movers and shakers include 14 politicians, starting with President Obama and Chinese Prime Minister Wen Jiabao; ten central bankers; three financial regulators; and four heads of multinational institutions such as the IMF and the WTO. Also included are six economists, including Paul Krugman and Obama advisor Paul Volcker, and three prominent investors, among them George Soros and Warren Buffett.

The list also finds room for three chief executives (the heads of Nissan, PepsiCo and Google) and, amazingly, the chiefs of four major banks: Goldman Sachs, JPMorgan Chase, HSBC and BNP Paribas. It even includes two talking heads: Arianna Huffington and Rush Limbaugh.

Except for Olivier Besancenot of France’s New Anticapitalist Party, who is included among the politicians in a way that seems a bit condescending, there is not a single person on the list directly involved in a movement to challenge corporate power or even to significantly alter the relationship between business and the rest of society. There is not a single labor leader, prominent environmental advocate or other leading activist. The editors at FT seem never to have heard of civil society.

Then again, the problem may not be thickheadedness among FT editors. Perhaps the voices for radical change have simply not been loud enough to earn a place on a list of those who will play a significant role in the shaping capitalism’s future. In fact, one of the articles in the FT series suggests that in Europe neither the Left nor the labor movement has taken a leadership role in responding to the crisis, even as spontaneous protests have erupted in numerous countries.

In the United States, where those forces are weaker, anger at the crisis has to a great extent been channeled into support for the Keynesian policies of the Obama Administration. That’s unavoidable in the short term, but it doesn’t address the need for fundamental alteration of economic institutions. If, as the Financial Times suggests, the future of capitalism is up for grabs, let’s make sure we all join the fray.