Taking care of the banks

Isn’t nationalization un-American? No, it’s as American as apple pie.

Lately the Federal Deposit Insurance Corporation has been seizing banks it deems insolvent at the rate of about two a week. When the F.D.I.C. seizes a bank, it takes over the bank’s bad assets, pays off some of its debt, and resells the cleaned-up institution to private investors. And that’s exactly what advocates of temporary nationalization want to see happen, not just to the small banks the F.D.I.C. has been seizing, but to major banks that are similarly insolvent.

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.  ... Paul Krugman

It's time to go back to Ken Silverstein's cover story on Senator Obama's financial backers as he jockeyed for position during his early days in Washington politics.  Soon after his election to the Senate, Obama got busy touching all the bases. 

Obama’s top contributors are corporate law and lobbying firms (Kirkland & Ellis and Skadden, Arps, where four attorneys are fund-raisers for Obama as well as donors), Wall Street financial houses (Goldman Sachs and JPMorgan Chase), and big Chicago interests (Henry Crown and Company, an investment firm that has stakes in industries ranging from telecommunications to defense). Obama immediately established a “leadership PAC,” a vehicle through which a member of Congress can contribute to other politicians’ campaigns—and one that political reform groups generally view as a slush fund through which congressional leaders can evade campaign-finance rules while raising their own political profiles. ...

Don't forget the sad song many Republicans sang during the long campaign:  "Obama?  He's got Wall Street wrapped up."  Indeed, even before Barack Obama reached Washington, his contacts were already in place, according to Silverstein.

Word about Obama spread through Washington’s blue-chip law firms, lobby shops, and political offices, and this accelerated after his win in the March primary. Mike Williams, vice president for legislative affairs at The Bond Market Association and a member of an African-American lobbying association, had been following the race in Illinois and was introduced to Obama through acquaintances in Washington who had known him at Harvard Law School. “We represent Wall Street firms,” Williams said in recounting his first conversation with Obama. “A big issue for us since 2000 is predatory lending. He worked on that issue in Illinois; he was the lead sponsor of a bill there. I talked to him about that. He had a different position from ours. There’s a perception out there that the Democrats are anti-business, and I talked to him about that directly. I said, There’s a perception that you’re coming at this from the angle of consumers. He was forthright, which I appreciated. He said, I tried to broker the best deal I could.” Williams still had his differences with Obama, but the conversation convinced him that the two could work together. “He’s not a political novice and he’s smart enough not to say things cast in stone, but you can have a conversation with him,” Williams said. “He’s a straight shooter. As a lobbyist, that’s something you value. You don’t need a yes every time, but you want to be able to count the votes. That’s what we do.”

Williams subsequently set up a conference call between Obama and a group of financial-industry lobbyists. That, too, went well, and in June of 2004, Williams helped organize “a little fund-raiser” for Obama at The Bond Market Association. “It wasn’t just the financial community. There was a broad cross-section,” he said of the 200 or so people who turned out. “There was overwhelming support, not just people from associations giving $2,000 but from individuals who just wanted to meet him, giving smaller contributions.”

The Wall Street Journal kept an eye on the candidate early last year after the Iowa win:  "The buyout guys join some other deep-pocketed finance types in the Obama Camp: Robert Wolf, CEO of UBS Americas; George Soros; former Federal Reserve Paul Volcker; top Credit Suisse banker Steve Koch, and the Oracle of Omaha himself, Warren Buffett. Wolf alone has raised $1 million for Obama. Obama even employs former consultants from McKinsey and Andersen."

What is constant throughout most of the coverage of Barack Obama -- first as senator, then candidate and nominee, president-elect and now president -- is that he is, maybe in the best sense, playing both ends against the middle.  Or maybe he's just being practical.  Temporary nationalization of the banks isn't going to turn us into Sweden (we should be so lucky!)  Krugman writes:

Once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.”

The Obama administration, says Robert Gibbs, the White House spokesman, believes “that a privately held banking system is the correct way to go.” So do we all. But what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery.

What we want is a system in which banks own the downs as well as the ups. And the road to that system runs through nationalization.

Lo and behold! Citi is "in active talks" with fed regulators.