Saturday, April 3, 2010

Treasury Profits

Felix Salmon is a financial / econoblogger over at Reuters and I must admit that I usually agree with most of what he writes. However, he's got an anti-nationalization position that he's still holding on to (and defending), even though evidence has moved against him.
He gave an interview to BNN recently and in it, he said the current profit of the Treasury's investment (bailout) in Citi is vindication of the anti-nationalization screed he wrote in October of last year. In his October post he said the government stress-tests proved the banks didn't need to be nationalized, which was a major weight-bearing leg of his anti-nationalization platform. However, that leg's been chopped off and can no longer be used to defend any anti-nationalization stance he takes (and I think he knows this, so why would he link back to that October post now?)
Let's see where else he went wrong... he also claimed (back in October) that the fallout from nationalizing the big banks would have hurt the Obama Administration's chances of passing Health Care Reform, but what support did the administration get from pro-banking Republicans after NOT nationalizing the big banks? And now that the administration has NOT nationalized the big banks, what further help can they expect from conservatives on FinReg and environmental legislation? None is a pretty good starting -- and ending -- point, if you ask me.
Again, this was another supporting leg of his anti-nationalization platform in October of last year but, like the stress-test leg, was chopped off, which means he shouldn't still be linking to that October post or pushing his anti-nationalization beliefs.
The other two legs of his platform rest on questionable views which deserve further scrutiny as well. The first is that it's okay for the FDIC to dismantle failing and insolvent small banks but it's not okay to do the same to failing and insolvent big banks. Nationalizing a big bank is not any different than how the FDIC breaks up small banks so how can he justify one but not the other? Sweep away that third leg if you want to, but for the sake of argument I'll be nice and leave it standing.
Which brings us to the fourth and final leg. He made the point that since the Treasury's stake in Citi had moved into the black by $7 Billion the Treasury should get out of the trade and get their money back. He felt that by leaving the money in any longer they were simply speculating and he was using the profits of the trade as a final justification for not nationalizing the big banks. This is a really important point because it gets at the real flaws in Salmon's thinking. He's viewing the Treasury as if it's a for-profit organization, but it is NOT a for-profit organization with a fiduciary duty to "maximize taxpayer wealth" in the same way a corporation has a fiduciary duty to maximize stakeholder wealth.
Instead the Treasury's duty is to protect taxpayers from economic collapses, bank runs and financial crises... in short their duty is to foster and create an environment that's conducive to "maximizing taxpayer wealth" through for-profit ventures. So Felix is wrong when he claims the Treasury should get its money out now that it's in the black. After all, they shouldn't be looking to maximize their returns, they should be looking to stabilizing the economy. And since Felix got his wishes and Obama and the Treasury went the anti-nationalization route, then he (like the Treasury) should stick to his guns and push for recapitalizing the Death Star as quickly as possible so that taxpayers can get back to enjoying a free, fair and productive economy. If he believes not-nationalize was the right way to go, he should also realize that the current profitable position the Treasury holds in Citi should be used as a capital buffer and loss reserve to write down the 2nd Liens chewing a hole in its balance sheet. If the Treasury does anything else (like take their profits now, for instance) all they'd be doing is forcing our largest bank to hold losses on its books, a la Japan during their lost decade. Believe me, I'm wholeheartedly for nationalization when a huge bank is on the brink of failure, but I also realize it isn't going to happen, so isn't it in the better interest of the taxpayers that Citi take the Treasury's money and use it productively? If the Fed wants to create a fair and equitable environment for helping taxpayers grow wealth then they also have to realize they're in a race against time because the gruesome way they're recapitalizing the the banks now is a scheme that isn't sustainable.


Anonymous said...

"Instead the Treasury's duty is to protect taxpayers from economic collapses, bank runs and financial crises... in short their duty is to foster and create an environment that's conducive to "maximizing taxpayer wealth" through for- profit ventures."

No, that's the Fed's job, not Treasury's job. You seem to be confused.

Sprizouse said...

The Treasury has supervisory responsibility over banks and thrifts. What purpose does that supervision serve, Anon? The generation of profit?

Not to mention that TARP money was distibuted through the Treasury in combination with Fed policies. I appreciate your close-read, but in this instance you're being willfully naive or nit-picking.