James Baker Is Back

Writing in the Financial Times, James Baker of Reagan-Bush-Florida fame comes out in favor of nationalizing some US banks, as long as we call it something else and make it quick.

Interesting.  Some people blame Baker's comments about currency management for triggering the crash of 1987, and today the Dow is down about 4%.
An excerpt:

We should act decisively. First, we need to understand the scope of the problem. The Treasury department – working with the Federal Reserve – must swiftly analyse the solvency of big US banks. Treasury secretary Timothy Geithner’s proposed “stress tests” may work. Any analyses, however, should include worst-case scenarios. We can hope for the best but should be prepared for the worst.

Next, we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless. The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage.

To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000 (€197,000, £175,000). But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector.

This is not a call for nationalisation but rather for a temporary injection of public funds to clean up problem banks and return them to private ownership as soon as possible. As president Ronald Reagan’s secretary of the Treasury, I abhor the idea of government ownership – either partial or full – even if only temporary. Unfortunately, we may have no choice. But we must be very careful. The government should hold equity no longer than necessary to restructure the banks, resume normal lending and recoup at least a portion of taxpayer investment.

After replacing bank management with new private managers, the government should have no say in banks’ day-to-day operations.

[END OF THREAD]

Comments

[Charlie (Colorado)]

If we didn't say "nationalization" and said "receivership with the US providing debtor in possession financing" would it be better? Honestly, I'm having a little trouble figuring out the difference.

[Patrick R. Sullivan]

Last week on the Lehrer Newshour, William Isaac explained what the problem is (and undressed Paul Krugman's strawman into the bargain):

WILLIAM ISAAC: Well, let me deal with that in a second, but, first, I want to address -- Paul really misquoted me. I didn't say these banks are in fine shape. I said they're in better shape than the major banks in this country were in the 1980s. And I'll guarantee you they are.

Every one of the major banks, if they had had to follow mark-to-market accounting in the 1980s, would have been insolvent, and clearly insolvent. So what I'm saying is that these banks are doing relatively well in a very difficult environment.

Of course they need help. And mark-to-market accounting has destroyed $600 billion of capital in the banking industry, which is $6 trillion of lending capacity. And it's been a major, major cause of the crisis we're in.

Now, as far as a short-term takeover, there's no such thing. You take these things over, you're stuck with them for a long time. Mexico had to stay with them for 17 years. They nationalized 80 percent of their banking system, and it was a total mess after 17 years of government ownership.

[Patrick R. Sullivan]

Speaking of Krugman, there's a new kid on the blog, and Krugman doesn't want to play with him.

It's the same tactic he used against Isaac; ignore the argument and try to slough it off with a strawman.

[Pagar]

After replacing bank management with new private managers, the government should have no say in banks’ day-to-day operations.

Let me guess how the new private managers will be selected : The Obama administration just happens to have an experienced bank managment person in Penny Pritzker. To help her select the best available Obama contributor, the noted tax specialist, Mr. Geithner will assist.

[ben]

"This is not a call for nationalisation"

If the author of the article says he is not calling for nationalization why would we say he is? I think there are enough people out there calling for it outright we should criticize first.

[Soylent Red]

I'm having a little trouble figuring out the difference.

I'll bet you had difficulty correctly parsing the word "is" as well.

[Lesley]

Just got off the phone with a dear friend who fled Castro's Cuba in the early 60's. She reminded me that one the first things Castro did was nationalize the banks.

[fdcol63]

Oh, I guess it's all just a big coincidence that the same people who've advocated anti-capitalistic Marxist-Socialism for the past 30-40 years, and whose social engineering policies during the Carter and Clinton years helped to created the whole banking and mortgage crisis we're now in, are now able to use these crises to advance their Marxist-Socialistic, anti-capitalism agenda, huh?

Rahm Emanuel: “Never let a serious crisis go to waste”.

[bad]

Gibbs just said that Rush said in January, that Rush wanted the economy to fail.

[Matt]

James Baker is a lawyer. It's sort of like having a dentist diagnose and recommend a cancer treatment program, I guess, but they comment anyway. next up will be Bruce Springsteen on derivitives.

[jean]

If you want a laugh go to Gatewaypundit then click over to the video cam of the Global Warming march.You have to look around the snow to see anything.I really feel sorry for the police having to stand out in the cold and watch a bunch of freaks

[Thomas Collins]

You mean you think lawyers have a tendency to pontificate on matters about which they know diddly-squat? How could you make such an accusation, Matt? :-))

I suppose I should offer up some sort of defense of the field that has kept me off the street for 30 years. So I'll point to Alexander Hamilton, a lawyer who structured and sold a finance plan that got the fledgling Republic out of a far greater financial mess than the one in which it now finds itself. Then again, I must admit that there aren't many Hamiltons in any walk of life.

[LindaK]

What would Hamilton have done? That's an excellent question. In any case we wouldn't be wandering in the wilderness of mark to market when the long time basis for valuing these assets is making an assessment of their long-term value. Vikram Pandit said at a recent congressional humiliate the bankers fest that the banks are stuck with the dilemma of potential forced sales of assets at rock bottom prices, which since the bank believes the asets have a higher intrinsic value, is at odds with their duty to shareholders. But now that the government is the significant shareholder, that changes.

Penny Pritzker?

[bio mom]

So, does James Baker have economic, banking, finance, or stock brokerage expertise?? I don't know. If not, why should what he says matter?

[Amused bystander]

They have to be holding of the mark to market on purpose now. I can see no other reason.

[Rick Ballard]

bio mom,

He's giving cover for the nationalization of Zombiegroup based on his service as Sec. Treas. for Reagan. It doesn't ring any bells with me but watching the gobbets of flesh falling off of Citi as it stumbles around doesn't either.

Those fellows who dreamed up the MBS/CDS/CDO/SIV toys sure were clever. I hope they were paid in Citi or AIG stock.

[bio mom]

So the White House went after Rush Limbaugh again. That is so childish. Wish there was a way for Rush, as a private citizen, to get recourse for these continuing personal attacks. It's not like attacking congressional republicans. Seems wrong and big brotherish. And Michael Steele should be ashamed of himself for playing right along. Very unfair remarks by him about Rush. And incorrect.

[Extraneus]

How'd you like to be Rush right now, though? Did anyone hear his monologue today? He knew people were listening, and he delivered.

[Extraneus]

He gave it to Steele later on, too. I only caught a little here and there.

[DebinNC]

Hugh Hewitt says Rush is similar to Oprah: LUN

The reporter asked me if Rush was a "leader," and I said no. He is, I continued, a communicator, a pundit and an entertainer, one of the two best in the country --along with Oprah. And a man of extraordinary influence. I think the Rush-Oprah comparison startled the reporter, but it is exactly correct. They have the same reach, and though they have almost completely different approaches to life, both are deeply sincere about their views and thus far beyond merely "effective." Both communicators change lives.

[centralcal]

Michelle Malkin has a piece at her blog about "liberals comparing the Republican National Convention to Nazi Germany," and says Michael Steele nodded in agreement.

Oh brother!

I heard all of Rush re: Steele. The very first part - his initial remarks - was particularly good and Steele would be very wise to listen.

[Davod]

Penny Pritzker - I cannot find a link. However she was Obama's Campaign Finance Chair. She was also an executive in her family's private bank. She was in charge of the part of the bank making very questionable investments/deals. I believe the government eventually fined the bank hundreds of millions of dollars.

And you thought Frank and Dodd were problems.

Change we can believe in.

[Davod]

"Michelle Malkin has a piece at her blog about "liberals comparing the Republican National Convention to Nazi Germany," and says Michael Steele nodded in agreement."

From A Western Heart - Monday, March 02, 2009 http://awesternheart.blogspot.com/”> The Left do NOT mean well
Fifteen years ago Jeff Jacoby's first regular column appeared in the Boston Globe. He has recyled it recently. See below. I usually agree with him but I have some reservations about this column that I set out at the foot of it

So what's a nice conservative like me doing in a newspaper like this? Wondering, for a start, why so many liberals think of conservatives not so much as people they disagree with, but as people they despise.

Most mainstream conservatives acknowledge that liberals are essentially well-meaning. Misguided, to be sure. And naive? Certainly. And elitist, self-righteous, collectivist know-it-alls, chronically unwilling to learn from their mistakes, clueless when it comes to the workings of the marketplace, always persuaded that the next government program will fix whatever went wrong with the last government program? Yeah. But well-meaning.

It should go without saying that you can mean well and do ill. Those liberal good intentions have helped pave more than a few of the 20th century's roads to hell, from the Evil Empire to the welfare state to the meltdown of the American criminal justice system. Conservatives condemn the demonic results that liberal good intentions have led to, and with gusto. What they don't do, as a rule, is demonize their opponents. Liberals do.

Liberals look at conservatives and see moral cripples: Conservatives hate the poor. Conservatives are greedy. Conservatives have no compassion. Conservatives are Neanderthals . . . racists . . . homophobes . . . warmongers. To be conservative, in the eyes of many fervent liberals, is to be by definition a vile human being -- someone to recoil from, not reason with; someone to damn, not to debate.

Personal vignette: It was a roundtable discussion about poverty and social welfare policies in Massachusetts, and I had made some point or other about welfare and illegitimacy. The representative from the prominent, Boston-based foundation spoke up in disagreement. "People like Mr. Jacoby can say that because they don't care about the poor," she began. "But the rest of us . . ."

"They don't care about the poor". Period, end of story. No room for differences of philosophy here. You're a conservative? Then you're morally defective, your views are warped, and would you please get out of the marketplace of ideas before you stink up the joint. Think of Ted Kennedy's slander of Judge Robert Bork in 1987 ("Bork's America is a land in which . . . blacks would sit at segregated lunch counters, police could break down citizens' doors in midnight raids . . ."). Or of Boston City Councilor Charles Yancey's foul comparison of his colleague, conservative James Kelly, to a Nazi ("It would be like electing David Duke . . . he has the same politics and rhetoric as David Duke.")

"Liberals go for the jugular," says David Horowitz, the one-time antiwar activist and editor of the radical magazine Ramparts. "With them, it's always about character assassination. If you're conservative, you're either sick or in some way deeply malevolent."

The most flagrant recent example oozed across The New York Times op-ed page last month, when columnist Frank Rich launched a vitriolic personal assault on conservative journalist David Brock, author of a controversial article on Bill Clinton's extramarital adventures. Brock's "motives are at least as twisted as his facts," wrote Rich. "It's women, not liberals, who really get him going. The slightest sighting of female sexuality whips him into a frenzy of misogynist zeal. All women are the same to Mr. Brock: terrifying, gutter-tongued, sexual omnivores."

Imagine a conservative trying to discredit a liberal by sledgehammering him as an unhinged woman-hater, or none-too-subtly "outing" him as a homosexual. Actually, that's hard to do: The last well-known conservative with a taste for baseless personal invective was named Joe McCarthy.

At the 1984 Democratic National Convention, Tip O'Neill -- the great-hearted, much-mourned late Speaker himself -- voiced his opposition to President Reagan's policies thus: "The evil is in the White House." The evil. Never would Reagan have used such language to describe O'Neill.

But then, Reagan wasn't a man of the left. He wasn't on a utopian crusade. Like most conservatives, he didn't think the blights of the world could be ended by transforming human nature. And he certainly didn't imagine the only thing blocking that transformation was wrong-thinking people who must be gotten out of the way -- or excommunicated as "evil."

So what's a nice conservative like me doing in a newspaper like this? Why, conserving. Looking to the past to figure out what has succeeded, and trying to apply its wisdom to the conundrums of the present. Acknowledging that there are no guarantees and that life is unfair, but knowing that the best road for the pursuit of happiness is the one marked with the old signposts: Freedom. Responsibility. Virtue. Work.

I think Jacoby is right in saying that many conservatives give Leftists the benefit of the doubt -- but I think that is a mistake. I think Leftist motives have to be inferred from their deeds, not their words -- and their deeds are with eerie consistency destructive of the wealth and wellbeing of the society in which they live. That cannot just be a mistake. Except for Joe Biden, Leftists are not stupid people. I think that the Leftist AIM is destruction of the world they see about them and which they hate for various reasons. Conservatives may or may not support the status quo but Leftists uniformly want to destroy it. And the Leftist hatred of conservatives is a part of that. They see that conservatives do NOT want to destroy the society in which they live so conservatives are hated obstacles to Leftist aims. I think conservatives should view Leftists as evil. They have no hesitation in viewing us that way. It is of course an old Leftist dodge to see in others what is true of themselves ("projection"). Conservatives need to wake up to that. "You're just projecting" should become a standard reply to Leftist abuse.

[Davod]

Sorry for the multiple posts.

I read early on the that, as stated earlier, the bigger issue is the implimentation of the mark to market rule. This is what caused the initial blow up with the big UK bank. An expert on this sugested that revoking the mark to market rule for a while could be a major benefit.

This might have been why some in government finance are so eager to buy into some of these banks.

[ben]

This is so simple. Rush said he hoped Obama would fail. Obama is failing. It's the fault of Rush Limbaugh.

[Charlie (Colorado)]

Bio Mom, Baker was Sec'y of the Treasury under Reagan. Whether that counts as finance experience I suppose is debatable.

[ben]

Steele has apologized to Rush....good...we need both these guys.

[Extraneus]

Got a link, ben?

[Extraneus]

Sorry, I see it on Drudge.

[PD]

next up will be Bruce Springsteen on derivitives.

Or Obama on the BCS.

Oh, wait. He's already done that. At least twice.

[Patrick R. Sullivan]

The Illusionist tells Krugman to keep that weak cheese outahere:

If Krugman reads this reply I hope he doesn’t respond “now Sumner is proposing the Fed buy land in Kabul,” but rather gives my ideas a sympathetic reading. If he then disagrees, fine. I hoped for a serious discussion of the $10s of trillions of dollars in relatively safe debt that could be purchased, and also my proposal for limiting excess reserves.

In the developing world 10s of millions of poor workers are losing jobs, partly (not entirely), due to excessively deflationary monetary policies in the U.S., Europe, and Japan. It is a very important issue.

[DebinNC]

Steele: He [Rush] brings a very important message to the American people to wake up and pay attention to what the administration is doing," Steele said. "Number two, there are those out there who want to look at what he’s saying as incendiary and divisive and ugly. That’s what I was trying to say."

And "those" includes most MSM. Good for Steele for clearing it up quickly. Hope he's more guarded in interviews in the future and drops some of his glibby jive talk.

[man_in_tx]

James Baker? Ohhhh.... You mean the guy who is (in)famous for saying: "F--- the Jews?"

This guy needs to be chosen US Ambassador to Gaza.

[bad]

Sebelius is big into partial birth abortion. She appears to be as pro-abortion as Obama.

[Meredith]

I support Obama's choice regarding Penny Pritzker. And I think it's important for people to get the facts.

http://www.pittsburghlive.com/x/pittsburghtrib/opinion/s_612373.html

Praising Penny Pritzker

Regarding the Trib's editorial that criticized President Obama's choice of Penny Pritzker to serve on his Economic Recovery Advisory Board ("Obama's judgment: Poor & deteriorating," Feb. 8 and PghTrib.com), I have known Ms. Pritzker for many years.

Obama's selection of her is an excellent choice. Pritzker knows how to build businesses and create jobs and she is an experienced executive who understands many industries.

As for the Trib's statement that Pritzker was "intimately involved in the failure of Superior Bank of Chicago," which The Wall Street Journal said " 'engaged in unsound financial activities and predatory lending practices,' " Superior Bank closed eight years ago.

As CEO of Promontory Financial Group, which was engaged to advise on the Superior Bank matter, I know firsthand that Pritzker was not an owner or officer of the bank. She served as a director of the holding company of the enterprise, and business interests of her extended family owned 50 percent of the bank.

When the bank encountered difficulties, she stepped in to assist it. She and other family members agreed to have their business interests pay $460 million to the government to reduce losses.

In doing so, Pritzker went well beyond the norm and acted in an ethical and responsible manner.

Eugene A. Ludwig

Washington, D.C.