Bailout fatigue starting to show

Business Times - 24 Apr 2009


Bailout fatigue starting to show

Congress and citizens alike are becoming dissatisfied with Washington's piecemeal rescues of big financial institutions

By LEON HADAR
WASHINGTON CORRESPONDENT

DURING his much anticipated testimony on Capitol Hill this week, US Treasury Secretary Timothy Geithner indicated that most of America's banks had sufficient reserves on hand to cover possible future losses. And he defended the federal government's US$700 billion bank rescue plan, insisting that the federal bailout fund still had enough money to cover future capital demands of troubled banks.

Mr Geithner's testimony came as Congress was studying the Obama administration's proposal to provide regulators with power to seize financial institutions in future when their collapse could potentially devastate the entire financial system.

At the same time, Americans regulators were preparing to release the results of the 'stress tests' that will determine whether 19 of the nation's largest financial institutions need to raise more funds.

Meanwhile, reports suggest that all but three of the biggest recipients of federal bailout assistance made fewer loans in February than they did before they got the funds.

Asked by reporters about the failure of the banks receiving taxpayer money to increase lending, President Barack Obama responded that he was not 'going to simply put taxpayer money into a black hole'.

During his appearance on Capitol Hill, Mr Geithner admitted that it was too early to conclude whether the government's rescue programme for the banks was a success or not, using instead the term 'mixed', and suggesting that the administration was considering the idea of converting some of the government's preferred equity stakes in some banks to common equity.

But many lawmakers, especially Republicans, have expressed scepticism, if not hostility, towards the expanding Washington-Wall Street partnership, and in particular to the continuing use of taxpayer money to bail out Wall Street.

These Republicans have made it clear that they will resist any new request by the Obama administration to approve new money for the bailout fund.

In fact, some Republicans are urging Mr Obama to let some of America's big banks fail instead of propping them up with federal funds. Hence, Senator Richard Shelby from Alabama, the highest-ranking Republican on the Banking Committee and a long-time critic of the bailout programme, has called on the administration to cut some big banks loose from government support. 'Close them down,' Mr Shelby told ABC News. 'Get them out of business. If they're dead, they ought to be buried. We bury the small banks. We've got to bury some big ones.'

Other Republican leaders, including former presidential candidate Senator John McCain from Arizona, have joined Mr Shelby in his call for permitting big banks to fail.

Their position reflects rising bailout fatigue around the country where most Americans regard the bailouts of well-connected financial institutions such as Citigroup and AIG as a violation of traditional American values of fair play.

Why should hard-working middle class Americans who fail to pay their mortgages lose their homes while Washington spends federal money to bail out irresponsible and greedy bankers? Why not allow the market system to discipline failed financial institutions and let shareholders suffer a loss?

There are also many bailout sceptics among some of American leading economists who urged Congress this week to press the administration to change its approach to saving troubled financial firms. Columbia University professor and Nobel laureate Joseph Stiglitz and Massachusetts Institute of Technology professor Simon Johnson warned lawmakers that propping up troubled financial giants amounted to subsidising politically connected financial institutions, and could hamper long-term economic recovery.

And what about the argument that some of these financial institutions were too big to fall? Prof Stiglitz and Prof Johnson suggested that, if anything, Washington should consider taking steps to break up giant financial institutions, perhaps by using anti-trust laws, so as to prevent them from threatening the entire system.

'We really now ought to draw the line and say where we want to go from here,' Prof Stiglitz said, calling for a more bold action on the part of the administration and Congress. Many in Congress and a lot of people are clearly dissatisfied with Washington's piecemeal rescues of big financial institutions that started under former president George W Bush in the form of the US$700 billion bailout package - approved by Congress and distributed in an ad-hoc fashion to both failing and fine banks alike, as well as to Detroit's carmakers and other ailing firms.

But are the American people and their lawmakers ready to back up with taxpayer money the kind of 'bold' action promoted by critics like Prof Stiglitz?

The critics of the current bailout programme do not want to see taxpayer money to be used to save the failed banks' shareholders. But even under the best case scenario, breaking up some financial institutions and their possible takeover or 'nationalisation' by government regulators would mean that these firms would remain under government control for several years before being sold to private investors.

That will require Washington to spend more billions of dollars on helping the financial system recover. Will Congress be ready support such a costly programme?

Mr Obama and his economic aides do not think so. Hence with only a bit more than US$100 billion left of the original US$700 billion, Mr Geithner seems to believe that converting the government's investments into common stock will relieve the troubled banks of having to pay 5 per cent dividends to the government, and could help them protect themselves against future losses.

With the government being in a position to become the largest shareholder in some of these banks, it could be described as a creeping but cost-free process of nationalisation, something that Congress could probably live with.



Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.

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