Something interesting happened over the past few days. The financial crisis ceased being a President Bush creation and became strictly a President Obama problem. The financial crisis exploded during Bush’s tenure and McCain and other Republicans paid the price at the polls. That is as it should be in politics, it’s called accountability and it’s not based on fairness.

But now, Obama having been safely elected [from a MSM perspective], the basic facts of the financial crisis do not place any of the major Federal responses outside the ability of the Obama administration to alter, including TARP:

• No Bush legislation can be tied to the financial crisis. The one piece of legislation which is seen as directly contributing to the crisis, the Commodity Futures Modernization Act of 2000 was passed prior to Bush taking office.
• The initial response of the Bush Administration to the financial crisis has now been officially endorsed by the new Obama regime given the nomination of Timothy Geithner for Treasury Secretary. Geithner has been a part of all the key decisions made during the past few months of the crisis. If Paulson and Bernanke were moving in the wrong direction, you wouldn’t know it from Geithner.
• The latest bailout–Citigroup–was handled in a manner consistent with other bailout scenarios [negotiations were secret] and again involved Geithner. However, having Rubin proteges negotiate a bailout of Rubin’s bank, was at best problematic.
• The Rubin sandwich effect. When the history of the financial crisis is written, Robert Rubin will have had a very large role at every stage – here is an excerpt of the WSJ’s Editorial about him:
  

  “Citi never sleeps,” says the bank’s advertising slogan. But its directors apparently do. While CEO Vikram Pandit can argue that many of Citi’s problems were created before he arrived in 2007, most board members have no such excuse. Former Treasury Secretary Robert Rubin has served on the Citi board for a decade. For much of that time he was chairman of the executive committee, collecting tens of millions to massage the Beltway crowd, though apparently not for asking tough questions about risk management.The writers at the Deal Journal blog remind us of one particularly egregious massaging, when Mr. Rubin tried to use political muscle to prop up Enron, a valued Citi client. Mr. Rubin asked a Treasury official to lean on credit-rating agencies to maintain a more positive rating than Enron deserved. What signal will President-elect Barack Obama send if his Administration, populated with Mr. Rubin’s protégés, allows this uberfixer to continue flying hither and yon on the corporate jet while taxpayers foot the bill?

So it’s official, all of the Federal government’s response to the financial crisis comes with the blessings of the new Obama Administration, otherwise they would be reversing course, not doubling down.

But hey, not all is the news is bad. William Greider, a big-time lefty is starting to feel a little used:

A year ago, when Barack Obama said it was time to turn the page, his campaign declaration seemed to promise a fresh start for Washington. I, for one, failed to foresee Obama would turn the page backward. The president-elect’s lineup for key governing positions has opted for continuity, not change. Virtually all of his leading appointments are restoring the Clinton presidency, only without Mr. Bill. In some important ways, Obama’s selections seem designed to sustain the failing policies of George W. Bush.This is not the last word and things are changing rapidly. But Obama’s choices have begun to define him. His victory, it appears, was a triumph for the cautious center-right politics that has described the Democratic party for several decades. Those of us who expected more were duped, not so much by Obama but by our own wishful thinking.

Music to my right-wing ears. This opposition party stuff may be fun after all.

Articles referenced are copied in full at end of post.

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Citi’s Taxpayer Parachute – Why are Robert Rubin and other directors still employed?
NOVEMBER 25, 2008

Another Sunday night, another ad hoc bank rescue rooted in no discernible principle. U.S. taxpayers, who invested $25 billion in Citigroup last month, will now pour in another $20 billion in exchange for preferred shares paying an 8% dividend.

Taxpayers will also help insure $306 billion of Citi’s mortgage-backed securities. Citi will cover the first $29 billion in losses on these toxic assets, and then taxpayers will cover 90% of the rest, in exchange for another $7 billion in preferred. Dilution for Citigroup investors? Yesterday’s 58% pop in the bank’s share price suggests the bailout is a good deal for equity holders. For taxpayers, it is another large exposure for uncertain benefits.

More than a year into the financial crisis and decades into the perception that Citi is too big to fail, we once again have three tired guys making it up as they go. We wish Treasury Secretary Henry Paulson, New York Federal Reserve President Tim Geithner and Fed Chairman Ben Bernanke cared as much about their obligations to U.S. taxpayers as they do about the expectations of Asian investors. Few would argue that a bank with Citi’s size and scope wasn’t too big to fail, but is it too much to ask Washington to develop a policy that isn’t crafted in a scramble of private phone calls?

To be fair, there are virtues here, when placed in the context of this year of bailouts. Unlike the initial AIG “rescue,” this deal appears to be helping the intended beneficiary. In contrast to Bear Stearns, there is a more plausible case for systemic risk. What is missing is a statement that at least some American bankers still have the freedom to fail, an essential ingredient if we hope to restore functioning capital markets. Not a single one of Citigroup’s senior managers and directors will be let go as a condition of taxpayer assistance that now totals close to $350 billion.

“Citi never sleeps,” says the bank’s advertising slogan. But its directors apparently do. While CEO Vikram Pandit can argue that many of Citi’s problems were created before he arrived in 2007, most board members have no such excuse. Former Treasury Secretary Robert Rubin has served on the Citi board for a decade. For much of that time he was chairman of the executive committee, collecting tens of millions to massage the Beltway crowd, though apparently not for asking tough questions about risk management.

The writers at the Deal Journal blog remind us of one particularly egregious massaging, when Mr. Rubin tried to use political muscle to prop up Enron, a valued Citi client. Mr. Rubin asked a Treasury official to lean on credit-rating agencies to maintain a more positive rating than Enron deserved. What signal will President-elect Barack Obama send if his Administration, populated with Mr. Rubin’s protégés, allows this uberfixer to continue flying hither and yon on the corporate jet while taxpayers foot the bill?

Chairman Sir Win Bischoff has held senior positions at Citi since 2000. Six other directors have served for more than 10 years — including former CIA Director John Deutch, Time Warner Chairman Richard Parsons, foundation executive Franklin Thomas, former AT&T CEO C. Michael Armstrong, Alcoa Chairman Alain Belda, and former Chevron Chairman Kenneth Derr.

When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi’s dubious investments, how can these men possibly say they deserve to remain on the board? All the more so given that Citi’s board has lately been airing dirty laundry about Mr. Bischoff’s role and leaking petty grievances. The directors all but started a run on the bank themselves, even as the bank assured the world it was sturdy enough to withstand any losses.

Oh, and to get the FDIC on board, Citi has agreed to implement the agency’s proposal to modify delinquent mortgages to avoid foreclosures. The White House believes the program will cost almost three times FDIC estimates. And even though more than half of modified mortgages go delinquent again, Citi will modify mortgages to create lower payments now, in the hope that escalating payments later will avoid more delinquencies down the road.

While other banks can claim to be victims of the current panic, Citi is at least a three-time loser. The same directors were at the helm in 2005 when the Fed suspended Citi’s ability to make acquisitions because of the bank’s failure to adhere to regulatory and ethical standards. Citi also needed resuscitation after the sovereign debt disaster of the 1980s, and it required an orchestrated private rescue in the 1990s.

Such a record of persistent failure suggests a larger — you might even call it “systemic” — management problem: If taxpayers have to risk so much to save Citigroup, then regulators should at least exert the discipline to break up this behemoth so it is never again too big to succeed, much less to fail.
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Where Was Geithner in Turmoil?
November 25, 2008
Dealbook Column
By ANDREW ROSS SORKIN

President-elect Barack Obama unveiled on Monday an economic team with deep experience handling economic crises. But does the man at the center of this star-studded cast, Timothy F. Geithner, the nominee for Treasury secretary, have what is needed to take the nation in a new financial direction?

That is what a number of Wall Street chieftains are quietly asking, even after the stock market surged with relief after his nomination.

One reason Mr. Obama gave for nominating Mr. Geithner was his “unparalleled understanding of our current economic crisis, in all of its depth, complexity and urgency.” More important, he suggested, “Tim will waste no time getting up to speed. He will start his first day on the job with a unique insight into the failures of today’s markets — and a clear vision of the steps we must take to revive them.”

Mr. Geithner is clearly a 47-year-old wonder boy.

A graduate of Dartmouth, he has a master’s degree from the Johns Hopkins School of Advanced International Studies, did a turn with Henry Kissinger’s consulting firm, a stint in the Clinton administration and, for the last five years, has been the president of the Federal Reserve Bank of New York.

He will effectively lead the team Mr. Obama has chosen to mend a crippled economy. That’s important because they won’t just be debating economic theory — they will be making deals Wall Street-style, negotiating billion-dollar bailouts and restructuring entire industries on behalf of their client, the taxpayers.

But Mr. Geithner’s involvement in several ultimately ill-fated efforts to buttress the American financial system is the very reason some Wall Street C.E.O.’s — a number of whom spoke on the condition of anonymity for fear of piquing the man who regulates them — question whether he’s up to the challenge.

“We have only two things to say about Tim Geithner, who we do not know: A.I.G. and Lehman Brothers,” said Christopher Whalen of Institutional Risk Analytics. “Throw in the Bear Stearns/Maiden Lane fiasco for good measure,” he said.

“All of these ‘rescues’ are a disaster for the taxpayer, for the financial markets and also for the Federal Reserve System as an organization. Geithner, in our view, deserves retirement, not promotion.”

Ouch.

“He was in the room at every turn of the crisis,” said another executive who participated in several such confidential meetings with Mr. Geithner. “You can look at that both ways.”

While Henry M. Paulson Jr., the current Treasury secretary, has taken a drubbing for the changeable nature of the government’s efforts to bolster the financial industry — some of which clearly contradicted each other — Mr. Geithner has managed, for the most part, to remain unscathed. He’s been widely praised as a bright, articulate out-of-the box thinker who is a bailout expert, to the extent anyone can truly be an expert at fast-changing emergencies.

Behind the scenes, Mr. Geithner was the point person for weeks of sleep-deprived Bailout Weekends. It was Mr. Geithner, not Mr. Paulson, for example, who put together the original rescue plan for the American International Group.

And, of course, Mr. Geithner also oversaw and regulated an entire industry whose decline has delivered a further blow to an already weakened American economy. Under his watch, some of the biggest institutions that were the responsibility of the New York Fed — Bear Stearns, Lehman Brothers, Merrill Lynch and most recently, Citigroup — faltered. While he was one of the first regulators to smartly articulate the potential for an impending disaster, a number of observers question whether he went far enough to stop the calamity.

Perhaps what has most people on Wall Street stirring is Mr. Geithner’s role in the fall of Lehman. At the time of its bankruptcy, he, along with Mr. Paulson, appeared to be the most vocal in supporting the government’s refusal to bail out the firm, according to people involved in various meetings. With hindsight, many in the financial industry blame a deepening of the global financial crisis on the government’s decision to let Lehman crumble.

Perhaps not surprisingly, there have been moves afoot in recent weeks by some in the New York Fed and Obama team to put distance between Mr. Paulson and Mr. Geithner, whose salary was $398,200 last year and who will take a pay cut to $191,300 in his new role.

These include the suggestion that Mr. Geithner was not in league with Mr. Paulson over Lehman; that Mr. Geithner pressed to save the firm from bankruptcy; that he was a lone voice on the subject and was overruled by Mr. Paulson and Ben S. Bernanke, the Fed chairman, on this issue.

The validity of this new claim is hard to verify. The New York Fed declined to comment.

Many executives suggest it may be a bit of revisionist history. “If that’s true, he did a good job of hiding it,” said one executive who spent the weekend at the New York Federal Reserve the weekend of Lehman’s fall.

Mr. Paulson has only praise for Mr. Geithner. “I have the highest regard for Tim — his judgment and creativity have been critical to designing and implementing the necessary actions we’ve taken to protect and strengthen our financial system,” he said.

Let’s hope he’s right.
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An Obama Tilt in Washington Post Campaign Coverage

By Deborah Howell
Sunday, November 9, 2008; B06

The Post provided a lot of good campaign coverage, but readers have been consistently critical of the lack of probing issues coverage and what they saw as a tilt toward Democrat Barack Obama. My surveys, which ended on Election Day, show that they are right on both counts.

My assistant, Jean Hwang, and I have been examining Post coverage since Nov. 11 of last year on issues, voters, fundraising, the candidates’ backgrounds and horse-race stories on tactics, strategy and consultants. We also have looked at photos and Page 1 stories since Obama captured the nomination June 4.

The count was lopsided, with 1,295 horse-race stories and 594 issues stories. The Post was deficient in stories that reported more than the two candidates trading jabs; readers needed articles, going back to the primaries, comparing their positions with outside experts’ views. There were no broad stories on energy or science policy, and there were few on religion issues.

Bill Hamilton, assistant managing editor for politics, said, “There are a lot of things I wish we’d been able to do in covering this campaign, but we had to make choices about what we felt we were uniquely able to provide our audiences both in Washington and on the Web. I don’t at all discount the importance of issues, but we had a larger purpose, to convey and explain a campaign that our own David Broder described as the most exciting he has ever covered, a narrative that unfolded until the very end. I think our staff rose to the occasion.”

The op-ed page ran far more laudatory opinion pieces on Obama, 32, than on Sen. John McCain, 13. There were far more negative pieces about McCain, 58, than there were about Obama, 32, and Obama got the editorial board’s endorsement. The Post has several conservative columnists, but not all were gung-ho about McCain.

Stories and photos about Obama in the news pages outnumbered those devoted to McCain. Reporters, photographers and editors found the candidacy of Obama, the first African American major-party nominee, more newsworthy and historic. Journalists love the new; McCain, 25 years older than Obama, was already well known and had more scars from his longer career in politics.

The number of Obama stories since Nov. 11 was 946, compared with McCain’s 786. Both had hard-fought primary campaigns, but Obama’s battle with Hillary Rodham Clinton was longer, and the numbers reflect that.

McCain clinched the GOP nomination on March 4, three months before Obama won his. From June 4 to Election Day, the tally was Obama, 626 stories, and McCain, 584. Obama was on the front page 176 times, McCain, 144 times; 41 stories featured both.

Our survey results are comparable to figures for the national news media from a study by the Project for Excellence in Journalism. It found that from June 9, when Clinton dropped out of the race, until Nov. 2, 66 percent of the campaign stories were about Obama compared with 53 percent for McCain; some stories featured both. The project also calculated that in that time, 57 percent of the stories were about the horse race and 13 percent were about issues.

Counting from June 4, Obama was in 311 Post photos and McCain in 282. Obama led in most categories. Obama led 133 to 121 in pictures more than three columns wide, 178 to 161 in smaller pictures, and 164 to 133 in color photos. In black and white photos, the nominees were about even, with McCain at 149 and Obama at 147. On Page 1, they were even at 26 each. Post photo and news editors were surprised by my first count on Aug. 3, which showed a much wider disparity, and made a more conscious effort at balance afterward.

Some readers complain that coverage is too poll-driven. They’re right, but it’s not going to change. The Post’s polling was on the mark, and in some cases ahead of the curve, in focusing on independent voters, racial attitudes, low-wage voters, the shift of African Americans’ support from Clinton to Obama and the rising importance of economic issues. The Post and its polling partner ABC News include 50 to 60 issues questions in every survey instead of just horse-race questions, so public attitudes were plumbed as well.

The Post had a hard-working team on the campaign. Special praise goes to Dan Balz, the best, most level-headed, incisive political reporter and analyst in newspapers. His stories and “Dan Balz’s Take” on washingtonpost.com were fair, penetrating and on the mark. His mentor, David S. Broder, was as sharp as ever.

Michael Dobbs, the Fact Checker, also deserves praise for parsing campaign rhetoric for the overblown or just flat wrong. Howard Kurtz’s Ad Watch was a sharp reality check.

The Post’s biographical pieces, especially the first ones — McCain by Michael Leahy and Obama by David Maraniss — were compelling. Maraniss demystified Obama’s growing-up years; the piece on his mother and grandparents was a great read. Leahy’s first piece on McCain’s father and grandfather, both admirals, told me where McCain got his maverick ways as a kid — right from the two old men.

But Obama deserved tougher scrutiny than he got, especially of his undergraduate years, his start in Chicago and his relationship with Antoin “Tony” Rezko, who was convicted this year of influence-peddling in Chicago. The Post did nothing on Obama’s acknowledged drug use as a teenager.

The Post had good coverage of voters, mainly by Krissah Williams Thompson and Kevin Merida. Anne Hull’s stories from Florida, Michigan and Liberty University, and Wil Haygood’s story from central Montana brought readers into voters’ lives. Jose Antonio Vargas’s pieces about campaigns and the Internet were standouts.

One gaping hole in coverage involved Joe Biden, Obama’s running mate. When Gov. Sarah Palin was nominated for vice president, reporters were booking the next flight to Alaska. Some readers thought The Post went over Palin with a fine-tooth comb and neglected Biden. They are right; it was a serious omission. However, I do not agree with those readers who thought The Post did only hatchet jobs on her. There were several good stories on her, the best on page 1 by Sally Jenkins on how Palin grew up in Alaska.

In early coverage, I wasn’t a big fan of the long-running series called “The Gurus” on consultants and important people in the campaigns. The Post has always prided itself on its political coverage, and profiles of the top dogs were probably well read by political junkies. But I thought the series was of no practical use to readers. While there were some interesting pieces in The Frontrunners series, none of them told me anything about where the candidates stood on any issue.

Deborah Howell can be reached at 202-334-7582 or ombudsman@washpost.com.
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Restore TARP to Its First Purpose

By Peter Ackerman and John Vogelstein
Wednesday, November 26, 2008; A13

This month, the stock market dropped precipitously after the announcement that the emphasis of the Troubled Assets Relief Program would be shifted to direct equity infusions into banks and away from buying their “toxic” mortgages. This change was especially confounding because, when he first proposed TARP, Treasury Secretary Henry Paulson suggested that the financial crisis would not end until the mortgage market stabilized. The favorable reaction to the plan to backstop Citigroup’s mortgage portfolio, as well as the government’s announcement yesterday that it will buy additional mortgage-backed securities, is powerful evidence that Paulson had it right the first time.

The market wants to understand the dimensions of the losses that banks face from their mortgage holdings. We believe that using a significant portion of TARP’s remaining assets for its original purpose — buying distressed mortgage assets — is the fastest and most reliable way to achieve that.

In 1988, we participated in a fundamental restructuring of the Mellon Bank that holds many lessons for today. At the time, the market had no confidence regarding the size of Mellon’s asset problem. Instead of trying to convince investors that Mellon’s assets were valued accurately, chief executive Frank Cahouet asked that an entity be designed to hold all of Mellon’s nonperforming loans.

The Grant Street National Bank (In Liquidation) was formed, capitalized with Mellon’s troubled assets and financed as much as possible through debt secured against those loans. Over the next several years, loans were sold expeditiously to private buyers. Substantially all of the proceeds from the financing and the remaining liquid assets after debt repayment went back to Mellon.

Once Mellon no longer had nonperforming loans on its books, the write-downs taken by the bank from asset transfers into Grant Street could be quickly replenished through equity offerings. Mellon did not go through the trauma that other major American banks (including Citi) experienced in the early 1990s. Despite the dilution from the sale of new equity, its stock went up more than tenfold when it merged with the Bank of New York.

This “bad bank” model has been repeated many times since. The concept was used in the savings and loan bailout and in Korea in the 1990s. TARP can similarly foster a virtuous circle by facilitating:

· Investor confidence in the soundness of the banks (after their sale of toxic mortgage assets into TARP), leading to the injection of hundreds of billions of dollars of private equity. To grasp the potential, consider Wells Fargo’s recent sale of $10 billion of equity organized in just four days for the purchase of Wachovia.

· Accelerated activity by private investors already linked up with mortgage servicing organizations to research and bid for TARP assets. Many such pools of capital are being organized to compete aggressively for this business.

· A simple mechanism for individual borrowers to go back to their original banks to get mortgages they can handle. Individuals can use those proceeds to buy out, at a discount, the original mortgage held in TARP. The proceeds of the smaller mortgage may well exceed the value allocated to the mortgage held by the government. Everyone wins: The government makes money and a new, affordable mortgage is issued to the homeowner.

· A visible way for the public and lawmakers to see a resolution that is considered fair to all. The market would then be able to assess the dimensions of the mortgage crisis. The problem may well be less significant than most people assume. But whatever the number, clarity will create confidence.

Critics of TARP’s purchase of toxic mortgage assets say it is impossible to know whether the government is getting a fair price. To address that, the government can accept a price the banks deem fair but insist on a “true up” revision three years later. If the government fails to earn a significant return, it would get equivalent debt of that bank to make up the shortfall. With a “true up” system, banks would be reluctant to seek a windfall on sales to TARP.

Others argue that there are simply too many loans to track and renegotiate through these obscure investment vehicles. But we advocate Marshall Plans for every conceivable urgent public need. Why not devote a similar level of commitment to the creation of a database including a detailed accounting of every troubled mortgage in America? That way, TARP — working with local banks — could focus first on restructuring loans with the highest likelihood of foreclosure.

Finally, it is also said that it will take too long for TARP to do its work and that TARP does not have enough capital to buy all troubled mortgages. But TARP does not have to restructure every loan in America to be effective. Once the mechanism is clear for a fraction of the loans, the likely outcomes for the whole TARP asset base will be visible to all. In the meantime, taxpayers may even get lucky and see home prices stabilize and growing numbers of aggressive bidders for TARP assets start going directly to banks still holding toxic mortgages.

A financial crisis with many dimensions cannot be solved by putting Band-Aids on each tear in the system. The correct approach is to take the biggest wound and stitch it up. Once people see that the contours of the mortgage problem are known and are being dealt with, consumer confidence will return, leading, in turn, to profound improvements in the stock and corporate credit markets.

In the early 1990s, the Japanese government encouraged banks to keep nonperforming loans on their balance sheets and value these loans as if they were not impaired. The loss of transparency (as well as the failure to put these loans into the hands of those who would restructure them) contributed to over a decade of slow growth and an underperforming stock market.

The Obama administration should not make the same mistake. If its economic team uses TARP to enhance price and value discovery of mortgages held in the banking system, we will be a lot closer to the end of the financial crisis.

Peter Ackerman is managing director of Rockport Capital Inc. John Vogelstein is senior adviser at Warburg Pincus LLC, New York.
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