General Motors and General Petraeus

Books by Wilson Jeremiah Moses

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General Motors and General Petraeus

By Wilson J. Moses

February 14, 2009

Americans have notoriously short memories, so I have to remind myself that the first $700 billion bail-out, the “Troubled Assets Relief Program” (TARP), was a product of the Bush administration. It was presented to the Senate by former Treasury Secretary, Henry Paulson, who isn’t stupid. Federal Reserve Chairman, Ben Bernanke, also not stupid, accompanied him on his trip to the Senate, but the proposal belonged to the Bush administration. Paulson graduated from Dartmouth, where he demonstrated sufficient agility and mental quickness to become an All-Ivy linebacker, and to make Phi Beta Kappa, as well. Paulson was obviously playing dumb, like a fox, in his intentionally inept responses to the questions of Richard Shelby (R-Ala) ranking member of the Senate Banking Committee.

Much as I oppose the ideology of Senator Shelby, I must give him credit for saying that “Even if the Paulson plan works perfectly, which many doubt, including nearly two hundred economists, it will not stimulate new lending, stop de-leveraging, help distressed home owners, or jump start the economy.” The Senator’s doubts were obviously well-founded, for, so far the plan has not worked. As many suspected, although Sen. Shelby did not say it, Mr. Paulson has shown himself to be no more than high quality stick-up artist. Many bankers have lined their pockets, with the bail-out monies, and so have the executives at General Motors.

Paulson got away with playing dumb, but he knew exactly what he was doing when he got $700 billion from the government for his Wall Street bail out. He knew the heads of insolvent banks had no intention of addressing the economic melt-down. He knew the money would disappear into the pockets of brilliant, but incompetent executives. Paulson himself, formerly employed by Goldman Sachs, one of the banks he arbitrarily selected for salvation, is estimated to have earned over $16,000,000 in the year he became Secretary of the Treasury. His estimated worth is around $700,000,000. Fair enough everybody wants to be rich, but why should I pay him, or people like him, for performing no detectable public service, and lining their friends’ pockets?

President Barack Obama seems to think that people like Henry Paulson have expertise for which we must pay whatever astronomical salaries the market supposedly demands. Compensation in the $15 million range is the unavoidable cost of the superior expertise of people like Stan O’Neil, who ran Merrill Lynch into bankruptcy. But Ben Bernanke, presumably an expert of similar acuteness, draws a salary of only $191,300, and we trust him to clean up the mess. It seems unlikely the quoted figure is Bernanke’s entire annual income, but if he is willing to serve the Fed for such a reasonable salary, why can’t the government find other people of his caliber to work in banking for similar amounts?

General David Howell Petraeus does his job for less than $250,000 per year

General Petraeus, who holds a Ph.D. from Princeton University, isn’t stupid, but he too works for a reasonable salary. Even his critics must admit that he is capable, intelligent, ambitious, and loyal. He has shown far more competency at his job than the people who have been managing General Motors, Chrysler, Ford, Bear Stearns, Lehman Brothers, Freddie Mac, Fannie Mae, Wells Fargo, Bank of America, Morgan Stanley, or Goldman Sachs. Most of them are compensated with salaries and bonuses in the multi-millions.

And General Petraeus does his job for less than $250,000 per year.

I say nationalize all corporations that benefit from any government bail-out, and immediately rescale all executive salaries to correspond to salaries paid in the United States military. If senior business executives don’t want to work for $250,000, then let them walk. Every year a considerable number of military officers, above the rank of major, but below the age of fifty go into retirement. Why cannot we dip into this reservoir of talent to replace the parasites that are currently leeching off the taxpayers? This question is somewhat rhetorical, for retired colonels and brigadiers are not the only pool of available talent. There are other persons in this economy, besides younger military retirees, who are capable of running businesses and industries for reasonable salaries. But the candidate pool for a nationalized business or industry would logically include military retirees, many of whom have demonstrated administrative ability along with their records of commitment to public service.

Source: WilsonMoses

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Obama on Nationalizing Banks and the Stimulus—E.J. Dionne—When even Sen. Lindsey Graham, a solidly conservative Republican from South Carolina, says he “would not take off [the table] the idea of nationalizing the banks," something big is happening. And it turns out that while President Obama isn’t inclined to nationalize the banks, at least not yet, he hasn’t taken that idea off the table either.

Graham made his comment today on ABC’s “This Week.” Obama spoke about temporary nationalization during an interview Friday with a group of columnists he had invited to travel with him. The journalists on Air Force One were Ron Brownstein, Bob Herbert, Clarence Page, Kathleen Parker and me.

Tomorrow’s column has more on our interview with Obama. But the president’s comments on the banks play right into an ongoing debate -- see the excellent piece in today’s Post by Matthew Richardson and Nouriel Roubini -- so I’m posting Obama’s answers in detail because his words will influence the outcome of this debate and how the markets respond. WashingtonPost

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Nationalize the Banks! We're all Swedes Now—Matthew Richardson and Nouriel Roubini—The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion—including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans—is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages. WashingtonPost

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Five Ways to Restore Financial Trust—Bill Bradley—Trust a market approach first to deal with the bad assets. Given the complexity and opaqueness of derivatives such as collateralized debt obligations, mortgage backed securities, and the $60 trillion of credit default swaps, the best way to set their value is to let independent, knowledgeable investors who are willing to put their own money on the line negotiate the price and buy the toxic assets from the banks.

President Barack Obama's financial team seems to be heading in this direction with its public-private fund for toxic assets. Taxpayers will pay less if individual Americans are allowed to invest alongside the knowledgeable investors, thereby reducing the amount of public money that is necessary. However, banks will incur losses and, depending on their size, the government should temporarily relax capital ratios, give banks more time to write off losses, or recapitalize the banks with oversized losses.

Treasury Secretary Timothy Geithner's decision to send bank examiners and forensic accountants into banks will provide essential information for the public whatever actions follow. True transparency is a necessary condition for getting out of this financial morass. WSJ

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A Short History of the National Debt— When President Barack Obama signed The American Recovery and Reinvestment Act of 2009 into law yesterday, he was adding to what is already almost guaranteed to be the largest deficit in American history. In January, the Congressional Budget Office projected that the deficit this year would be $1.2 trillion before the stimulus package. That's more than twice the deficit in fiscal 2008, more than the entire GDP of all but a handful of countries, and more, in nominal dollars, than the entire United States national debt in 1982.

But while the sum is huge, it is not in and of itself threatening to the solvency of the Republic. At 8.3% of GDP, this year's deficit is by far the largest since World War II. But the total debt is, as of now, still under 75% of GDP. It was almost 130% following World War II. (Japan's national debt right now is not far from 180% of that nation's GDP.)

Still, it's the trend that is worrisome, to put it mildly. There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. WSJ

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posted 15 February 2009