Our Modern Financial System: Hypocrisy on Parade

Crony Capitalism and Incompetence Doom Obama Economic Plans Says Nobel Laureate

Nothing you have not heard here before, and frequently.

But this is a Nobel Prize winner in Economics saying it, and a Democratic appointee to boot.

"The people who designed the plans are either in the pocket of the banks or they’re incompetent."

That sounds like Larry Summers and Tim Geithner in a nutshell to us.

Joe Stiglitz is assuming that Crew Obama really WANT to fix the economy and serve their nation. It seems possible that, being out of power for so many years, the Democratic leaders are handing out favors to their campaign contributors and feathering their nests for the future.

Then they'll worry about the public welfare. Political reform, Chicago-style.

The banks must be restrained, and the financial system must be reformed, before there can be any meaningful recovery in the real economy.


Bloomberg
Stiglitz Says Ties to Wall Street Doom Bank Rescue
By Michael McKee and Matthew Benjamin

April 17 (Bloomberg) -- The Obama administration’s bank rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.” (That pretty much covers Larry Summers and Tim Geithner, respectively - Jesse)

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”

Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said. (Personally I'd give the bondholders a very high and tight haircut - Jesse)

Nobel Prize

Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time. His work is cited in more economic papers than that of any of his peers, according to a February ranking by Research Papers in Economics, an international database....

Bailing Out Investors

“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.

Andrew Gray, an FDIC spokesman, said Bair never said there would be no risk, only that the agency had “zero expected cost” from the program.

Redistribution

“We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”
Stiglitz was head of the White House’s Council of Economic Advisers under President Bill Clinton before serving from 1997 to 2000 as chief economist at the World Bank. He resigned from that post in 2000 after repeatedly clashing with the White House over economic policies it supported at the International Monetary Fund. He is now a professor at Columbia University.

Critical of Stimulus

Stiglitz was also critical of Obama’s other economic rescue programs.

He called the $787 billion stimulus program necessary but “flawed” because too much spending comes after 2009, and because it devotes too much of the money to tax cuts “which aren’t likely to work very effectively.”

“It’s really a peculiar policy, I think,” he said. (Peculiar? Perhaps he meant the odor. - Jesse)

The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.

Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.

Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said. (You got that right Joe - Jesse)

Recreating Bubble

“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long-run solution. It’s a solution that says let’s kick the can down the road a little bit.” (They have been kicking this cow pie down the road for so long we're almost at the edge of the world - Jesse)

While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”

Even with rates low, banks may not lend because they remain wary of market or borrower risk, and in the current environment “there’s still a lot of risk.” That’s why even with all of the programs the Fed and the administration have opened, lending is still very limited, Stiglitz said.

“They haven’t thought enough about the determinants of the flow of credit and lending.”

Whither the Rally? Three Short Term Stock Market Indicators

Second Largest US Commercial Retail Real Estate Company Files for Bankruptcy

This is the tip of the iceberg, still the early stages of failures in the real economy which has been distorted beyond all reason by the outsized financial sector, a failed regulatory regime under the influence of Wall Street, and reckless financial engineering by the Fed.


AP
Mall operator General Growth Properties files for Chapter 11 bankruptcy
Alex Veiga, AP Real Estate Writer
Thursday April 16, 2009, 3:14 pm EDT

LOS ANGELES (AP) -- The nation's second-largest shopping mall owner, General Growth Properties, filed for Chapter 11 bankruptcy protection Thursday in a tough bargaining move to restructure its $27 billion in debt.

General Growth, which owns more than 200 malls including four in Colorado, said shoppers at its malls will not be affected by its bankruptcy filing.

The Chicago-based company is paying the price for its aggressive expansion at the height of the real estate boom. General Growth, like many homeowners during the frenzy, bought several properties at top dollar and now is finding lenders unwilling to refinance.

The real estate crisis has been slow to affect the market for retail, hotels and office buildings. But the delinquency rate for commercial loans, while still relatively low, is creeping up and could deepen the economic recession.

"While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11," Chief Executive Adam Metz said in a statement.

The news sent the real estate investment trust's stock down 16 cents, or 15 percent, to 89 cents in midmorning trading. The stock traded last spring as high as $44.23.

The move by the General Growth had been widely anticipated since the fall, when the company warned it might have to seek bankruptcy protection if it didn't get lenders to rework its debt terms. Efforts to negotiate with its creditors ultimately fell short late last month.

Chapter 11 protection typically allows a company to hold off creditors and operate as normal while it develops a financial reorganization plan.

The company had about $29.6 billion in assets at the end of the year, according to documents filed with the U.S. Bankruptcy Court in the Southern District of New York.

The company noted that some subsidiaries, including its third party management business and joint ventures, were not part of the bankruptcy petition.

General Growth said it intends to reorganize with the aim of cutting its corporate debt and extending the terms of its mortgage maturities. The company has a financing commitment from Pershing Square Capital Management of about $375 million to use to operate during the bankruptcy process.

Last month, General Growth said it got lenders to waive default on a $2.58 billion credit agreement until the end of the year.

But its Rouse Co. subsidiary failed to convince enough holders of unsecured notes worth $2.25 billion as of Dec. 31 to accept a proposal that would let the unit avoid penalties for being behind on its debt payments and give it some time to refinance its debt load.

In February, the company reported lower-than-expected fourth-quarter funds from operations and a dip in revenue amid weaker retail rents.

The company has suspended its dividend, halted or slowed nearly all development projects and cut its work force by more than 20 percent. It also has sold some of its non-mall assets.