The TARP on our politics

It is certainly ironic -- at a time when most of us assumed irony is dead -- that one of the few programs launched by the Bush administration, and now being used to kill the political fortunes of everyone from Bob Bennett to Barack Obama, has succeeded.

WASHINGTON — Even as voters rage and candidates put up ads against government bailouts, the reviled mother of them all — the $700 billion lifeline to banks, insurance and auto companies — will expire after Sunday at a fraction of that cost, and could conceivably earn taxpayers a profit.

A final accounting of the government’s full range of interventions in the economy, including the bailouts of the mortgage finance giants Fannie Mae and Freddie Mac, is years off and will most likely remain controversial and potentially costly.

But the once-unthinkable possibility that the $700 billion Troubled Asset Relief Program could end up costing far less, or even nothing, became more likely on Thursday with the news that the government had negotiated a plan with the American International Group to begin repaying taxpayers.

The rescue of the troubled insurer included $70 billion from the bailout program that was enacted two years ago, at the height of the global financial crisis late in the Bush administration, initially to prop up big banks.

At the White House on Thursday, the Treasury secretary, Timothy F. Geithner, briefed President Obama about A.I.G. and about the broader outlook for the expiring rescue program, putting the projected losses at less than $50 billion, at most. Yet neither the White House nor Congressional Democrats are likely to boast much in the month remaining before midterm elections. For most voters, TARP remains a four-letter word.

Brian A. Bethune, the chief financial economist in the United States for IHS/Global Insight, while critical of parts, called the program over all “a tremendous success. Now obviously, they can’t go out on the campaign trail and say that, because certainly, for a lot of voters, it’s just not going to resonate.”

The “bank bailout” was the first big issue, before the Obama administration’s roughly $800 billion stimulus plan and its health insurance overhaul, to stoke the rise of the Tea Party movement. After supporting TARP, several Republicans have lost elections largely because of their votes. For many Americans, TARP is more than a vote; it is a symbol of big government at its worst, intervening in private markets with taxpayers’ billions to save Wall Street plutocrats while average Americans struggle through the recession those financiers spawned.

Fewer than three in 10 Americans say they believe the program was necessary “to prevent the financial industry from failing and drastically hurting the U.S. economy,” according to a poll in July for Bloomberg News.

Of course, what is often forgotten, is that TARP didn't bring out the tea party crazies. It was when the Obama administration proposed helping struggling homeowners stop drowning in their underwater mortgages that set off the righteous, smarmy indignation.

I'll wait for the movie

Gretchen Morgenson thinks that at 3,000 pages, the financial reform bills awaiting reconciliation still don't do enough to prevent future obscure financial products that lead ultimately to meltdowns.

Another part of the Senate bill that keeps derivatives markets opaque resulted from a tiny change in the proposal’s original language.

Initially, the Senate bill’s discussions of derivatives platforms defined them as “trading” facilities, a term of art from the Commodity Futures Modernization Act of 2000. In that law, a trading facility refers to a system in which multiple participants place bids and offers and in which price transparency exists both before and after a trade is made. Such a definition usually excludes making deals over the telephone because negotiating on the phone may not provide access to as many different prices as an exchange does.

But the word “trading” was eventually struck from the final Senate bill’s definition of derivatives platforms. That change would allow dealers to make derivatives deals over the phone, hardly a victory for transparency. Dealers love trading by phone because it makes it harder for customers and investors to see prices and comparison-shop, which, of course, bolsters dealer profits.

Because the House bill never specifically took on the issue of “trading” facilities, it is unlikely that the reconciliation of the two proposals will bring back this important distinction — leaving derivatives trading more opaque than it should be.

Finally, lawmakers who are charged with consolidating the two bills are talking about eliminating language that would bar derivatives facilities from receiving taxpayer bailouts if they get into trouble. That means a federal rescue of an imperiled derivatives trading facility could occur. (Again, think A.I.G.)

Enjoy your stay at the casino.

The fault lines

Kevin Drum takes a look at the state of play for financial reform and is left feeling more than simple "resigned cynicism."

The whole subject has left me with considerably more than that. Brutal partisan brawling over things like healthcare reform and climate change legislation was (and is) entirely unsurprising. It was the same old fights as always, and it never really left me with a feeling that politics had broken down in any real way. Financial reform is different. Politically, the obvious play for both parties is to outbid each other in efforts to rein in Wall Street, which practically everyone in America hates. But even though this would be an enormous vote getter, neither party is doing it. Democrats are offering up some mild reforms that would modify the playing a field a bit but not really fundamentally change anything. Republicans won't even go that far. Apparently motivated by industry fealty and a desire to simply oppose anything Democrats offer up, they're unwilling to support even modest reforms.

It's hard to know what to think about this. If your city were nearly destroyed by a huge earthquake, proposing better building standards would be an obvious response. It wouldn't be a left vs. right thing, it would be a property developers vs. everyone else thing. The financial meltdown of 2008 was like that. It exposed such massive fault lines in our banking system that outrage really shouldn't be a left vs. right thing. It should be a big banks vs. everyone else thing. But the intellectual and monetary hold of Wall Street on our political class is so overwhelming that it was able to turn the whole affair into just another excuse for the usual partisan bickering. The winners, of course, will be the big banks.

As weak a tea as Democrats propose brewing, the level of dishonesty the cynicism that Republicans are showing -- that voters won't bother to question McConnell's and Boehner's claim that legislation means permanent bail-outs by taxpayers. In fact, not doing anything means permanent bail-outs, and rather than those bail-outs being paid by the financial institutions, much the way the FDIC works, they'll continue to be paid by you and I. Whooppee.

The politics of banking reform

I've accused Krugman of ignoring political realities in the past, but on this I think he's right.

Let me conclude with a political note. The main reason for reform is to serve the nation. If we don’t get major financial reform now, we’re laying the foundations for the next crisis. But there are also political reasons to act.

For there’s a populist rage building in this country, and President Obama’s kid-gloves treatment of the bankers has put Democrats on the wrong side of this rage. If Congressional Democrats don’t take a tough line with the banks in the months ahead, they will pay a big price in November.

And reports like this don't help.

There seems to be some misreading of "voters' moods" around the country in which it is assumed that the president's party is going to take a massive hit in the Fall. I think that thinking can lead to self-fulfillment if Democrats aren't careful. Truth is, there is a deep anger at the elites in Washington and in the financial sector who helped to create the atmosphere of greed and self-enrichment that's left millions unemployed and millions more falling further and further behind economically. Democrats need to take advantage of that mood -- and the fact that Republicans will try to obstruct anything they do -- to push serious reform on the financial institutions that were on the verge of melting down in 2008 and would have done so without massive infusions of taxpayer dollars. Then remind voters in the Fall that it was under a Republican administration that the collapse occurred and that Republican politicians are uninterested in reining in those financial institutions.

I haven't written much about Chris Dodd, even though I live in the Nutmeg State and have long been a big supporter of his, other than to note that State Attorney General Blumenthal should have a far easier time holding the seat for Democrats than Dodd would. In deciding not to run for reelection Dodd did the right thing for himself, the party, and the country. The question now becomes will he feel even more free to usher in real financial reform, or will those who oppose reform be able to run out the clock on Dodd's term?

Change? We don't need no stinkin' change

EJ Dionne marvels at the short term memory loss.

Among other things, the Chamber promises "legal action to challenge unconstitutional and unlawful government regulations." Might that presage -- again, the New Deal parallels are striking -- a battle between a progressive president and a conservative Supreme Court?

Obama's preference is to transcend conflict, not confront it. He has been careful to present himself as a defender of free enterprise (as FDR did) and to insist that only unfortunate chance has made him the arbiter of the fate of banks and car companies.

Yet the paradox is that if the recovery continues, as Obama hopes it does, support for change will weaken, those threatened by change will be emboldened and slogans only recently discredited will be revived. The greatest danger to Obama's plans comes not from the Republican Party but from how short our memories are.

In the same paper, Summers and Geithners outline their proposal to not let a good financial crisis go to waste.

And, over at the Times, Krugman warns that it's starting to look a little like 1937.

Personal responsibility

There's something touchingly Gallic about this, but...how many "feeder funds" are out there and, surely, they can't have all simply invested in a single Ponzi scheme.