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The Zombies Play On

by Daniel Stern Saturday, Jul. 11, 2009 at 3:51 AM

"Tim Geithner made clear the US government does not plan any breach with disaster capitalism....No wonder Wall Street cheers. New life is breathed into speculation at state expense with junk securities.."


By Daniel Stern

[This article published in the Swiss WoZ-Die Wochenzeitung, 3/26/2009 is translated from the German on the World Wide Web,]

Barack Obama is still well disposed to Wall Street and endangers his own reforms.

The US Treasury secretary befriended Wall Street. The stock market reacted with a soaring flight. Hedge fund managers shouted for joy. In his choice of words, Tim Geithner made clear the US government does not plan any breach with disaster capitalism. Buying the “toxic assets” from financial institutions and starting a “repair process” for the stricken economy were emphasized.

Geithner wants to persuade hedge funds to take over up to a trillion dollars of securities from the banks. These junk securities based on mortgages of insolvent debtors cannot be currently sold and strain the balance sheets of the financial institutions.

Geithner’s predecessor Hank Paulson originally wanted to buy these securities for 0 billion but ultimately backed down because no one could determine their real value. Now the market should order things with the help of exorbitant state subsidies. The highest bidding investor should pay a small part of the purchase price for a certain slice. The state should take over the rest. If the securities are later resold at a higher price, the investor can expect great profits thanks to leverages through state subsidies.

No wonder Wall Street cheers. New life is breathed into speculation at state expense with junk securities. The zombie banks are given fresh blood although many of them were really bankrupt, as Nobel Prize winner for economics Paul Krugman said. The disappointment over Geithner’s plan on the day of its announcement shows the situation is dramatic. Top bankers fear write-offs in the billions, according to the Financial Times. If the banks valued their junk securities, this shows their books were inflated in the past. New financial injections from Washington will be necessary again.

Therefore the US government would be better advised to split up and smash system-threatening financial institutions in a controlled process. Because of their enormous size, these institutions will only extort again and again and pocket state funds in the event of crisis. These giants do not seem open to reform.

The insurance company AIG was preserved by the state with 0 billion. AIG had insured part of the junk securities for the banks and thereby accumulated ever-greater debts with expansion of the financial crisis. Nevertheless its top managers will receive 5 million in bonuses in 2009. First, the indignation of the general public and then a planned law taking back these funds as taxes have persuaded some to “voluntary” renunciation. Still the scandal remains. After disclosure of the first great losses, Joseph Cassano, the director of that division of AIG that precipitated the collapse of the business, was removed from his post but received a retirement bonus of million and acted as an advisor for the firm months afterwards with a monthly salary of a million dollars.

The AIG bonuses were a theme of a congressional hearing. However AIG was not an isolated case. J.P. Morgan Chase, a bank that received billion, recently purchased two brand new expensive private jets for its managers at million each. US president Barack Obama criticized the excesses but avoided a power struggle with Wall Street. He hopes the money circulation will function again when the banks first purge their junkyards although no one knows how much junk really lies there.

On Tuesday Obama made clear he wanted to hold to the corner-posts of his budget – more money for education, especially for the poor sector of the population, an urgently needed reform of health insurance and a more austere and less damaging energy policy alongside his support for Wall Street. In the Congress, Obama expected the concentrated opposition of republicans for this costly project and the will of austerity of representatives from his own party. Therefore the president needs help from the outside, from unions and organizations like MoveOn. Even more important is the support of those citizens who helped him to his election victory. Whether Obama can produce that energy from below and thus build pressure is doubtful. His popularity will fall to the extent he makes himself increasingly the hostage of Wall Street.

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