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Congressional Oversight Panel to Call for Wiping Out Shareholders, Ouster of Top Brass at TARP Recipients

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This is going to get interesting. The head of the Congressional Oversight Panel, Elizabeth Warren, is expected to issue a report this week calling on the Treasury to get much tougher with the big recipients of TARP funds. And if the report in the Guardian is right, the recommendations have been softened a tad so as not to be too hard on Treasury Secretary Timothy Geithner.

From the Guardian:

Elizabeth Warren, chief watchdog of America’s $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration’s approach to saving the financial system from collapse.

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government’s Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be “wiped out”. “It is crucial for these things to happen,” she said. “Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade.” ….

Yves here. Note that Warren did not indicate how much (in absolute or relative terms) a bank has to have received for the COP to deem it to be subject to those measures. The report may give a clearer indication of the criteria. Back to the article:

Warren also believes there are “dangers inherent” in the approach taken by treasury secretary Tim Geithner, who she says has offered “open-ended subsidies” to some of the world’s biggest financial institutions without adequately weighing potential pitfalls. “…

She said she did not want to be too hard on Geithner but that he must address the issues in the report. “The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous.”

The report will also look at how earlier crises were overcome….”Three things had to happen,” Warren said. “Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out.”

Geither appears to be trying to make it sound as if he is more in alignment with the some of the report’s recommendations than he actually is. From the New York Times:

Treasury Secretary Timothy F. Geithner says he is prepared to oust the senior management and directors at banks that require extensive aid from the federal government.

“If in the future, banks need exceptional assistance in order to get through this, then we will make sure that assistance comes,” while ensuring that taxpayers are protected, Mr. Geithner said Sunday in an interview on “Face the Nation” on CBS. “Where that requires a change in management and the board, then we will do that.”

Yves again. Ahem, Warren is saying these steps should already have been taken. However, Geither no doubt hopes that saying he is in concept willing to get tough with bank executives is as far as he needs to go.

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36 comments

  1. Anonymous

    I wonder what it would take to oust Geithner at this point. Is he still in Dead Girl Live Boy safety levels, or has he taken enough heat that something less serious, like actual job performance, would be enough to give him the boot?

  2. Anonymous

    What do I know? Seems to me we are being had. Given this nation’s enormous social and economic safety nets, there is no reason to bail out bank share/bondholders. Let them die from their self-inflicted wounds. Let the good banks

    Geitner is not bailing out banks, but rather shareholders. It is a crime.

  3. Anonymous

    Given this nation’s enormous social and economic safety nets

    Enormous? Really? Are you sure you’re talking about the United States?

  4. Anonymous

    The head of the Congressional Oversight Panel, Elizabeth Warren, is expected to issue a report this week calling on the Treasury to get much tougher with the big recipients of TARP funds.

    I love that woman.

  5. MLM

    Wiping out equity holders doesn’t matter. It’s giving the bond holders a haircut that would actually cut total debt — and that’s the only sane way to start working our way out of this. Because I don’t see that suggested, I smell a political rat. Warren can now be painted as holding the “extreme” position, thereby marginalizing anyone who’s hoping for sanity.

  6. Yves Smith

    MLM,

    Fair point, but the equity holders need to get taken out before debt for equity swaps make sense. It is possible Warren sees this as a multi round game.

  7. James B

    MLM,
    Yes! Why must they bail out the bondholders? Do they fear the CDS cascading cross-defaults? The damage to pension funds? Are they afraid no one will lend to banks if there’s the possibility they’ll lose their principal? I’d like someone in authority to explain this because letting the bondholders absorb the losses seems like the most obvious solution, and it seems like it isn’t even on the table.

  8. Red Baron

    We can only hope Ms. Warren’s proposals are adopted. Otherwise the zombification of the U.S. economy will be nearly complete.

    These totally insolvent institutions–AIG, Bank of America, Citigroup, Wells Fargo, etc.–need to be put into receivership and broken up, with the management removed, shareholders wiped out, bondholders haircut, and depositors made whole up the FDIC insurance limits.

    This country needs to get serious and deal with the problems rather than kick the can down the road with more open-ended bailouts for the banksters.

  9. MLM

    Agreed Yves, equity is obviously the first to take a hit. But if they stop there, they haven’t really changed the equation. Will be interesting to see after we get more info.

  10. VV111y

    I had watched her before knowing she had this position.
    Long clips – but if you’ve got time:

    ‘The coming collapse of the middle class’ or ‘higher risks, lower rewards, and a shrinking safety net’
    http://www.youtube.com/watch?v=akVL7QY0S8A

    conversations with history:
    http://www.youtube.com/watch?v=S1Uk-DwUvJw
    - her parents lived through the depression and it shaped her upbringing.

    the COP has a youtube channel:
    http://www.youtube.com/user/oversightpanel

    the COP’s website:
    http://cop.senate.gov/
    and… go to their blog and guess who’s on the blog roll ;)

    wikipedia:
    http://en.wikipedia.org/wiki/Elizabeth_Warren

  11. Independent Accountant

    YS:
    Is Elizabeth Warren ready to pick up, then use Andy Jackson’s flintlocks? Go Liz! She’s a “Cougar”, A University of Houston, grad to boot! I’ve been partial to Liz ever since she attacked part of Hillary’s bankruptcy bill a few years ago as favoring the banks. Go Liz!

  12. Jim T

    It’s about time someone in Washington wants some blood from these fricken bankers! Now take it a step further and wipe out the bond holders too! For God sake the government has put more money into Citi then the damn company is (Market Cap)worth. That is redicules Asswipe Geither hasn’t already done this! (FIRE THE BASTARD)

  13. rahuldeodhar

    a lot rides on her shoulders. If the common person is going to come out of this with some pride – we have to support her.

    All my wishes – and support to her standing for the truth and common person agenda!

    Best of Luck – Prof. Warren

  14. Russ

    The NYT piece gave the impression that Geithner is saying “the situation and our actions were exceptional where it came to AIG and Fannie and Freddie, so we did replace the management there”, while implicitly saying he doesn’t consider the BofA bailouts to be “exceptional”.

    Regarding wiping out bondholders, NYT also has an article on why the admin (and other govts) think this cannot and should not be done. (Though the article tries, it still fails to overcome the impression that it’s simply about corporatist ideology.)

  15. carol

    MLM,
    I agree with you; equity holders are already almost wiped out, so why, oh why doesn´t Warren talk about bond holders need for a necessary loss?!

    This must have to do with the too well connected to fail which we have seen from both administrations (no change at all). I recall (not verbatim) Barney Frank recently replying when asked about bond holders taking a haircut: Oh, but there are endowment funds and charities amongst those. And then later no one wants to invest in banks anymore!!! That so much shows how Wall Street has bought Washington DC: Only mentioning one poor guy, suggesting he cannot take a hit, and thereby covering up all the 99 others who could and should take the loss for misplacing their risk capital. And implying that no one wants to be a bondholder of good banks anymore, after bondholders of bad banks took a hit. Horrible!

    I was also stuck by this in Thomas Friedman´s column over the weekend:
    ¨As Obama officials put it to me: If you’re certain that you have to do some radical surgery — nationalize the banks — do it sooner rather than later. But if you think you might have an option, and if you think that nationalization brings with it other huge problems — like who is going to run these banks and who will want to work in them if the government takes over — and if you think that Congress isn’t going to give you another cent, then you try other things first.¨
    (http://www.nytimes.com/2009/04/05/opinion/05friedman.html?scp=2&sq=friedman&st=cse)

    It borders on the silly: The ¨Huge¨ problems of receivership, like who is going to run these banks, pale in comparison to the not tackled balance sheet recession problems. And yet, that should be a reason not to do what is the least worse for the people? And how does that square with Geithner´s own admission yesterday in an interview on “Face the Nation” on CBS. “Where that requires a change in management and the board, then we will do that.”

    So again, what is blocking this no change administration to do what is necessary, and according to William Black (Savings and Loan regulator) and others required by law (Prompt Corrective Action Law)? Black called it a COVER UP, both from the Bush and the Obama admins (as was linked a couple of days ago, http://www.pbs.org/moyers/journal/04032009/watch.html
    (The first half of the interview is introductory stuff, but it gets interesting from 13:30 minutes onwards.)

  16. Anonymous

    Evidently President Obama has called on the Democrat party and MoveOn.org to begin hosting “A New Way Forward” rallies and web site against bankers. These two ousted Republicans from office across the US. I feel confident they can oust banksters from the northeast US.

  17. Anonymous

    Always a knight on a white horse in scamerica when the marks get agitated …

    This is just more good cop bad cop bs meant to incrementally place the common folk into the new ruler and ruled harness.

    The looting has already taken place.

    Deception is the strongest political force on the planet.

    i on the ball patriot

  18. doc holiday

    Re: “”The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous.”"

    Obama, Timmy, Bernanke, Paulson and Bush are all preposterous crooks that have done everything in their power to abuse he Constitution; screw them all and may history remember them for being crooked liars — notto mention Congress, DOL, FBI, SEC, FASB, DOL, et al …..

  19. Moopheus

    Somebody forgot to give Prof. Warren the memo that says oversight committees are supposed to be toothless and keep their mouths shut.

    Since we can’t count on Treasury or FDIC officials to do what needs to be done, clearly Prof. Warren should be given the authority to call in military support. Send in the Marines!

  20. Anonymous

    I hope the same fate that befell Brooksley Born does not befall Elizabeth Warren.

    How about kicking conflicted and corrupt Larry Summers out and replace him with one of these much more capable women.

  21. Anonymous

    “This is going to get interesting.”

    As well it should. My question would
    be – how much jurisdiction does Ms. Warren have to implement these changes?

  22. Stefan

    hooray for elizabeth warren! she’s the first person to pipe up with any real integrity.

  23. Jim T

    If she is purposely excluding the bondholders from being wiped out or at least taking sizable hair cuts, then she is pretty much towing the (Government) company line. We need someone to standup for the “Innocent Tax Payers” who did not invest in these institutions at all, but yet are getting stuck with the bill to bail them out.

    I would have been more impressed with her position if it included taking out the bond holders too!

  24. john bougearel

    I missed the Warren report (hmmmm, this could be the second big Warren report in US political history)the to be issued this week. This could big or it could be another railroaded Brooksley Born (recall Summers was around for that derailment).

    But I did catch Bloomberg’s post on Geithner coming around to Warren’s point of view. His timing can hardly be coincidence!

    When I read the piece on Geithner thinking it was possible to oust the bankster CEO’s I viewed it with a great deal of suspicion, and the reason is that if the cards play out right, he won’t ever have to back up what he was quoted as saying. In short, it is more about agreeing to another viewpoint knowing that if you are lucky you will never have to do anything about that point of view.

    First, Geithner made his statement prospective, something that would only be done with banks that get in trouble in the future, not the ones that are in trouble today:

    “If in the future, banks need exceptional assistance in order to get through this, then we will make sure that assistance comes… Where that requires a change in management and the board, then we will do that.”

    To Geithner’s credit, it could be the administration is floating another trial balloon, to see how that goes over publicly and within the bankster community (but would you believe Geithner?).

    To wit, Geithner also said the Obama administration has no intention of letting banks get around the rules. “Our obligation is to apply the laws that Congress just passed,” he said. Hmmm, Congress just eliminated the FV rule on April 2 precisely so the banksters could go on giving fictitously inflated marks to their assets. This allows the banksters to claim they don’t need assistance.

    Likewise for Geithner’s PPIP program, it is intended to have taxpayers pay insanely over-inflated marks so that the banksters don’t need exceptional assistance. Geithner’s soundbites sound good and are made to look as if they are really doing something, when in fact, the laws and programs are intended to allow banksters to skirt the need for exceptional assistance.

    “We will do what’s necessary to make sure our banking system emerges out of this stronger,” he said. He declined to say whether Treasury will force banks to sell assets.

    My take: until we see the administration shit-can Pandit and Lewis, and until we see banks being forced to sell their assets at market value, there will be no price discovery with regard to these toxic non-performing assets and therefore there will be no clearing of the clogged plumbing in the financial system.

  25. Anonymous

    Not to worry–someone will get to Elizabeth Warren and tell her to tone it down for fear of panicking shareholders; if she doesn’t listen to reason, then she will be labeled as an extremist and will be blamed for stock market losses.

    By God, we need someone like Harry S. Truman, someone with guts and integrity, who’s willing to make a stand; unfortunately, that calibre of person is quickly dying out. Geithner, by contrast, is like a parent who is always scolding and threatening his child, but never making good on the punishment. The naughty child keeps getting away with murder.

    And so the spectacle and the drama continue to play out. But few realize what a real tragedy is in store for all of us.

  26. Anonymous

    Riiiiight! Ms Warren can bark all she wants. It’s still Obama’s decision. And Obama proved he’s willing to sacrifice his own credibility to save the ass of this tax cheat, Geithner.

    Sorry chumps, Geithner ain’t going anywhere. And neither are the CEOs of Citi, BOA, AIG, or the rest of the gangsters that hijacked this nation.

    It’s time to sharpen your pitchforks, you suckers. It’s time to boogie!

    Vinny GOLDberg

  27. Linden

    Obama and MoveOn are not organizing the “New Way Forward” protests. The protests are against what Obama is doing. Just sayin’.

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