Don’t expect the suits who got us into this mess to get us out of it

Filed under: Hazlehurst |

In the antediluvian days when socialists and communists still roamed the earth, they engaged each other in powerfully irrelevant debates about economic policy.
Communists opposed all private enterprise, while socialists were less doctrinaire, believing that government need only control the “commanding heights” of the economy.
In the waning days of the nominally Republican administration in Washington, it would appear that a clumsy corporate socialism has replaced capitalism as our economic system of choice.
Consider the contents of our national shopping bag, now full to the brim with investment banks (Bear Sterns, Lehman Brothers, Merrill Lynch), insurance companies (AIG), banks (Citigroup, IndyMac, Wachovia) and mortgage lenders (Fannie, Freddie, Countrywide).
We’ve spent enough to nationalize the banking system — yet the taxpayers have gotten little but soothing words to show for their “investment.”
It has been an awkward, ill-planned, badly conceived and chaotic takeover, one which would appear to violate every principle of free markets and private enterprise. It’s not so much socialism as oligarchic crony capitalism, in which profits go to the private sector and the taxpayers are stuck with the losses.
Consider Citigroup, the now-forlorn financial behemoth, brought low by its own speculative excesses. The feds handed the company $45 billion and guaranteed $277 billion in dubious assets.
And what did the hapless taxpayers get in return for their investment? Preferred stock with an 8 percent coupon and less than 10 percent of the bank’s equity. Existing shareholders were scarcely diluted, although when the deal was made, Citigroup’s market capitalization was less than $20 billion.
Think about it. The taxpayers paid $45 billion in cash and assumed $277 billion in contingent liability for an equity stake worth about $2 billion, and an annual preferred dividend (if all goes well) of $3.6 billion.
Suppose that the government had stepped in, recapitalized the bank, fired management, and wiped out the shareholders — just as the Resolution Trust Corporation did during the 1980s savings and loan crisis?
The RTC made a lot of mistakes, but it at least threw out the scoundrels and scammers who had created the mess.
A government-structured bankruptcy would, for starters, have enabled Citigroup to cancel its 20-year, $400 million dollar contract to name the Mets’ new stadium — Citi Field. But now, thanks to Hank Paulson and the gang, Colorado taxpayers will have the privilege of helping fund the Mets as they pound the Rockies during years to come.
And now? What about the predatory dealmakers who got fat during the boom? What about the traders who routinely received bonuses of $20 million annually, paid from illusory profits? What about their bosses, who made even more, and gleefully took part in a multi-trillion dollar pyramid scheme?
The predatory dealmakers who got fat during the boom are — doing just fine.
Take Citigroup CEO Vikram Pandit, who joined the company when the bank bought his hedge fund for $800 million during April of last year. Within a year, the unit recorded substantial losses, and the bank dissolved it.
Don’t worry about Mr. Pandit, though — the bank paid cash.
But you can’t blame Pandit for flim-flamming the innocents at the Treasury Department and the Federal Reserve. His fiduciary duty is to his bosses, Citi’s shareholders, who should have been wiped out in the debacle.
What happened to Treasury Secretary Paulson, Treasury Secretary-designate Tim Geithner, President Bush and President-elect Obama?
They all signed off on the deal, making the government the biggest, the most reckless and maybe the dumbest subprime lender of all time. Why are they offering such incomprehensibly generous terms?
Maybe because they can’t bring themselves to admit the truth — that the architects of this disaster were engaged in a de facto criminal conspiracy, which almost brought down the world financial system.
That’s because the perps aren’t swarthy foreigners with sinister mustaches, or Russian oligarchs or murderous Mafiosi. They’re Paulsen’s former colleagues at Goldman Sachs, or Obama’s classmates at Harvard Law or people who worked with Geithner in the Clinton Treasury Department.
They’re smarter than you are. They give to charity, collect art, spend summers in Maine or the Hamptons and raise bright, well-mannered children.
Like Dr. Faust, they made a deal with old Scratch. Forget making a better world — they went for the money.
If they had any youthful idealism, they kept it under wraps. If they had doubts about the world they helped create, they kept them secret — and took far more than 20 pieces of silver. And it was all legal … wasn’t it?
Smart men and women in expensive suits got us into this mess, and we shouldn’t expect that their peers will get us out of it. We need clear-eyed enforcers and calm analysts, unencumbered by class loyalty. We need someone who understands capitalism and can fix it, however distasteful the job may be. We need the powerful intelligence of someone who can think outside the box.
We need … is Karl Marx still alive?
John Hazlehurst can be reached at or 227-5861.