Obama Stakes His Fortunes on Failed Banksters: Jonathan Weil

Now that we have a rough idea how President Barack Obama and his lieutenants plan to prop up insolvent financial institutions using taxpayers’ money, we’re left with a more difficult question: Why?

Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first? It’s the “why” that’s so vexing. The who, what, when, and how are mere details, by comparison.

More than anyone else’s, it should be in Obama’s political self-interest to accelerate the worst of the financial crisis and get as much of the inevitable pain behind us as quickly as possible. Every day he waits is one less day he will have between the time we hit rock bottom and the next election. And yet, Obama and his minions are doing all they can to delay the reckoning, which only will make it worse.

When publicly owned companies change management, often the smartest thing a new chief executive officer can do is clear the decks and take a “big bath” charge to earnings. In other words, the company writes off all its worthless assets and reports huge losses, pushing every conceivable drop of red ink into the past. The new CEO gets to blame his predecessor’s dumb mistakes. The company gets a fresh start with the investing public.

Obama could have taken the same approach with the banks the moment he took office, while he still had standing to blame the financial crisis on George W. Bush’s administration, stupid regulators, and corrupt lawmakers -- that is, everyone but himself.

Executive Order

He could have ordered all U.S. financial institutions to immediately confess whatever losses they hadn’t yet recognized. And he could have backed that up by vowing to prosecute every officer, director and auditor the Justice Department could find who had approved numbers they knew to be wrong.

Obama didn’t do that. And now, six months into the government’s Troubled Asset Relief Program, his administration’s approach to the financial crisis is largely indistinguishable from its predecessor’s. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.

The Obama administration’s “strategy,” for lack of a better word, is to keep plying broken financial institutions with as much taxpayer money as the government can print. And so the government will keep subsidizing failed mega-banks indefinitely, rather than placing any into receivership or liquidating them.

Taxpayers at Risk

The latest iteration of this policy is the Treasury Department’s Public-Private Investment Program. In short, struggling financial institutions will be encouraged to swap their most toxic mortgage-related assets with one another at inflated prices. The purchases will be financed by big government loans, so that taxpayers are at risk for the bulk of any losses.

If the government wanted transparency, it would force financial institutions to write down their bad assets now, and figure out afterward which companies deserve taxpayer support. Instead, the Treasury plans to recapitalize them first, keep their current financial condition hidden, and let their failed managers stay in their jobs.

The key assumption underlying this plan is that the declines in the values of these companies’ toxic assets are the result of private investors’ temporary reluctance to buy them, and that prices will rebound if Treasury can revive the markets where these assets trade.

Proper Values

The Treasury hasn’t explained why it believes the assets’ proper values are their original book values, rather than the prices unsubsidized investors are willing to pay for them. (This is one of the points made in an April 7 report by the U.S. bailout program’s Congressional Oversight Panel.) If Treasury’s hunch proves wrong, the government will need to rely on something other than a rising economy to restore the banks to solvency.

So why don’t Obama, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke force the banks to write down their troubled assets first, as a condition of government assistance? We can only speculate, because their explanations so far have made no sense.

Perhaps they’re scared the markets would panic if large, insolvent financial institutions started telling investors just how undercapitalized they are. There’s the distinct chance some of Obama’s advisers are beholden to failed banksters, because they used to work for them and may want to do so again someday.

Manpower Shortage

There also could be a manpower problem. The government might not have enough employees to seize all those sickly banks and supervise the process of winding them down. Probably, it’s some combination of those and other factors.

Why else would the Treasury tell the 19 biggest U.S. banks to undergo “stress tests” of their financial health, and then put the banks in charge of performing the tests on themselves? Those reasons also might help explain why regulators pressured the board that sets U.S. accounting standards to weaken the rules on mark-to-market accounting, so the banks could hide their losses and show more capital.

Whatever the case, as long as the government refuses to remove the cancer of zombie banks from our financial system, there’s little hope the U.S. will return to robust economic growth anytime soon. And the longer our wounded banks are allowed to stagger along with no end-game in sight, the greater the risk for Obama that voters will conclude he’s as responsible for blowing the cleanup as others were for causing the crisis.

Obama Says U.S. Will Consult With Pakistan on Terrorism Strikes

President Barack Obama said the U.S. will consult with Pakistan before raiding militant bases on Pakistani territory, as he called on leaders in Islamabad to be “much more accountable” in combating terrorism.

“If we have a high-value target within our sights, after consulting with Pakistan, we’re going after them,” Obama said in an interview on CBS television’s “Face the Nation” program yesterday. “But our main thrust has to be to help Pakistan defeat these extremists.”

The U.S. expects some accountability from Pakistan and its understanding of the “severity and the nature of the threat” from the terrorists.

Pakistan has told the U.S. it considers missile strikes on its territory counterproductive. The Pakistani government says it is doing all it can to combat militants and is pursuing a strategy of selective military action, coupled with political and economic development programs, to try to persuade tribal leaders to expel foreign fighters sheltering along the border with Afghanistan.

Thousands of Taliban and al-Qaeda members crossed into Pakistan’s tribal region after the U.S.-led invasion of Afghanistan in late 2001. The U.S. says al-Qaeda leaders have established bases in the area.

“Our plan does not change the recognition of Pakistan as a sovereign government,” Obama said in the interview taped on March 27. “We need to work with them and through them to deal with al-Qaeda. But we have to hold them much more accountable.”

Economic Aid

The U.S. will give Pakistan the “tools” to defeat al- Qaeda, the president said. Obama has endorsed legislation to increase economic and development aid to Pakistan to about $1.5 billion annually for five years in exchange for that country cracking down on militants.

“One of the concerns that we’ve had building up over the last several years is a notion, I think among the average Pakistani, that this is somehow America’s war and that they are not invested,” Obama said, according to a transcript. “That attitude, I think, has led to a steady creep of extremism in Pakistan and that is the greatest threat” to the government.

The U.S. must recognize that the task of working with Pakistan isn’t just military, he said. Development and aid assistance are part of the package.

Combating extremism both in Pakistan and Afghanistan involves a comprehensive strategy that “doesn’t just rely on bullets and bombs,” Obama said.

Sending Troops

It relies on “agricultural specialists, on doctors, on engineers, to help create an environment in which people recognize that they have much more at stake in partnering with us and the international community than giving in to some of these extremist ideologies,” he said.

Obama announced last week that he will send 4,000 more U.S. soldiers, in addition to the 17,000 military personnel he already has ordered for Afghanistan, to train Afghan forces to take a bigger role in providing security. The announcement came after a review of U.S. policy on Afghanistan and Pakistan.

Pakistan last week denied a report in the Wall Street Journal that it has given the U.S. “tacit permission” to use drones to attack militants. Pakistan’s Foreign Ministry said the government has told the U.S. it opposes such strikes.

U.S. missile strikes in Pakistan’s borderlands have been effective and more than half of an initial list of 20 top al- Qaeda leaders have been killed or captured during the past six months, the Journal reported.

Obama Defends Health Care, Education Budget Plans

President Barack Obama said he won’t scale back his plans to revamp the health-care and education systems in his proposed $3.6 trillion budget and challenged Republican critics to do more than “just say no.”

Obama, gearing up for a fight in Congress over his fiscal 2010 spending blueprint, met privately with the chairmen of the House and Senate budget committees before issuing a public rebuttal to Republicans who have criticized his plan as including too much spending at a time when deficits are ballooning.

“‘Just say no’ is the right advice to give your teenagers about drugs. It is not an acceptable response” to economic policies “proposed by the other party,” Obama said at the White House with Senate Budget Committee Chairman Kent Conrad of North Dakota and House Budget Committee Chairman John Spratt of South Carolina at his side.

“The American people sent us here to get things done and at this moment of enormous challenge, they are watching and waiting for us to lead,” he said.

Republicans and some Democrats have questioned whether Obama’s budget is too ambitious at a time when the budget deficit is projected to hit $1.75 trillion this year and the U.S. is in the midst of deepest recession in decades.

Future Plans

At issue are proposals including the economic impact of Obama’s $646 billion cap-and-trade system to control greenhouse gas emissions; how to pay for the president’s $634 billion health care initiative; the effect of Obama’s plan to limit the value of itemized tax deductions for those making more than $250,000 a year and a proposal to increase taxes, starting in 2011, on individuals earning more than $200,000 and on households earning more than $250,000.

Obama repeated his vow to halve the deficit by the end of his first term and said his budget will trim the growth of discretionary spending.

“What we will not cut back, however, are those investments that are directly linked to our long-term prosperity,” he said, citing his plans for health care, education and energy.

Republicans are largely united in opposing Obama’s budget.

“The president and his allies in Congress want to spend too much, tax too much, and borrow too much,” Senator Charles Grassley of Iowa said in the Republicans’ weekly radio address on March 14.

Cost Questions

Still, some Democrats, including Conrad, are raising questions about the cost of Obama’s plan. Conrad last week said Obama’s plan to overhaul the health-care system “gives many of us great pause” because of the price tag.

The White House plans to send to Congress a detailed budget proposal by late April.

Democrats in the House and Senate are struggling to assemble a spending blueprint, called a budget resolution, in time for the April 15 deadline. The resolution doesn’t have the force of law but serves as a guide for tax and spending bills later in the year that reflect Obama’s priorities.

Obama is bracing for a fight, activating an all-out grass- roots campaign through the Democratic National Committee and a 13-million-member e-mail list built from his 2008 presidential candidacy to fight for his budget, the Washington Post reported yesterday.