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Experts split on Obama’s plan

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The U.S. Treasury Department in Washington, DC. —
The U.S. Treasury Department in Washington, DC. —

Senator John F. Kerry says the government should not take over banks

“The U.S. is repeating the mistake made by Japan in the 1990s, when the economic powerhouse pumped huge amounts of money into failing banks.”

With major banks flailing and criticism swelling in some quarters over how President Obama is handling the crisis, a growing chorus of economists, former top government officials, and analysts is calling on the Obama administration to put the institutions into federal receivership and closely follow the model of how the government dealt with the savings and loan crisis.

They avoid the word “nationalisation,” but say that some major institutions that have received billions in taxpayer money might otherwise be insolvent.

Those voices, from both parties, include a Republican senator, a Nobel-winning economist who backed Obama, and a former top banking regulator given a starring role by Obama’s team during the height of last year’s presidential campaign.

William K. Black — the regulator featured in an Obama video denouncing John McCain’s ability to deal with the looming bank meltdown and reminding voters of his Republican rival’s role in the 1980s savings and loan crisis — now says that Obama is mishandling the financial crisis by pouring hundreds of billions of dollars into institutions without any assurance that taxpayers will get the money back. Black says the federal government should take over the banks, sack their executives, unload “toxic” assets, then auction the viable parts of the companies.

“What they are doing hasn’t worked and is vastly more expensive,” said Black, whose regulatory jobs included being deputy director of the Federal Savings and Loan Insurance Corp. But Mark Zandi, the chief economist at Moody’s Economy.com, rejected Black’s proposal, saying it would be “catastrophic” for the companies be taken over by the government because that would devastate shareholders and debt holders.

Zandi is among those who praise the administration’s rescue plan, in part because it relies on a private-public partnership to buy toxic assets. He said that if Obama’s plan fails, the president can still go to a “plan B” in which the government acquires the “toxic” assets without taking over the companies. The opposing views of Zandi and Black underscore the divide of opinion over whether Obama’s financial rescue plan can succeed. While injecting huge amounts of taxpayer money into the banks — $242 billion so far — has always been controversial, the criticism has intensified in recent days amid the latest efforts to keep afloat financial behemoths such as AIG and Citigroup.

Citigroup, which has received $45 billion in taxpayer assistance, saw its stock on Thursday sink below $1 for the first time ever, raising new questions about whether the federal investment is working.

On top of the bank rescue money, the Obama administration last week put another $30 billion into AIG, bringing the potential taxpayer aid to $180 billion for the giant insurance company.

The Obama administration says companies such as AIG and Citigroup cannot be allowed to fail because they have so many ties to other major companies that their demise would threaten the entire financial system.

So far, the White House has rejected the receivership approach, saying it would be far more expensive than propping up the banks. The Treasury Department says that the largest bank previously taken over by the government — Continental Illinois in 1984 — represented about two per cent of the nation’s banking assets, while the four largest banks in the current crisis — Citigroup, Bank of America, Wells Fargo, and JP Morgan — represent about 60 per cent of such assets.

But Black, a top regulator in the 1980s when hundreds of savings and loans failed, said the response to that crisis is relevant.

Receivership

During the S&L crisis, Black learned McCain was complaining about a government investigation of a thrift run by one of the senator’s major campaign donors. Black accused McCain of political interference, and McCain was admonished by the Senate Ethics Committee for using “poor judgment.”

A spokeswoman said McCain was not available to comment on the receivership idea.

In a political twist, Black’s thinking now is more closely aligned with that of Senator Lindsey Graham, a South Carolina Republican who has long been one of McCain’s closest allies. Graham said he believes that the Obama administration should seriously consider putting AIG and other institutions that have received huge infusions of federal money into receivership and selling their assets.

Senator John F. Kerry of Massachusetts said that the government should not take over banks, saying that federal officials would not be the best managers. In an interview airing last weekend on Bloomberg Television, Kerry acknowledged, however, that the cost of the bank rescue will be “clearly over a trillion dollars and maybe over two.”

But as more money is poured into the institutions, more questions are being raised about the strategy from high-profile observers across the political spectrum.

Nobel-prize winning economist Joseph Stiglitz, former chairman of the Council of Economic Advisers in the Clinton administration, has called on Obama to consider taking over the banks. In an interview, Stiglitz called the Obama administration’s policy a “foolish” gamble in which “the probability of it paying off was very, very low.”

Stiglitz, who said he strongly backed Obama during the campaign, said the president is being poorly advised by a Treasury Department that he says is too closely tied to Wall Street. He agrees with Black that it would be cheaper for the government to immediately take over failing financial institutions.

James A. Baker III, the former Reagan administration treasury secretary, wrote last week that he feared that the United States was repeating the mistake made by Japan in the 1990s, when that economic powerhouse pumped huge amounts of money into failing banks — which had been hit hard when a housing bubble burst — in hopes that they would recover, only to descend into a prolonged economic slump known as its “lost decade.”

Treasury officials dispute Baker’s analogy, saying the U.S. has acted much faster than Japan in shoring up banks.

At a congressional hearing last week, Federal Reserve Board Chairman Ben Bernanke said he didn’t know of any “large zombie institutions in the U.S. financial system.” — © 2009 The New York Times News Service


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