I made a juvenile joke the other day about the Northeast taking over Commerce and Freedom in Georgia. But the reality that banks are being taken over by the FDIC all over the country is no laughing matter.

FDIC allowed 60 Minutes to follow it as it closed down one small bank–watch the YouTube to see how it works (in this case it was fDiC taking over our Heritage, ha ha).

Two things, though. First, notice Sheila Bair’s reaction to two questions: how many more (she didn’t answer, "tons") and why not Citi (she didn’t answer, "we’re not equipped to take over Citi yet"). If I were Sheila Bair, I’d already be having nightmares about FDIC’s upcoming feast on Citi.

As to the latter point, remember this video shows a five branch bank being taken over, and the FDIC stationed 8 FDIC employees at each branch when they did the simultaneous takeover. How many branches does Citi have? This says 1,400, plus 3,800 ATMs. So 8 employees for all 1,400 branches, and the FDIC needs at least 11,200 employees just for the takeover, even before you get to runs on the ATMs and the website and the infrastructure (and given the global reach of Citi, "simultaneous" gets more challenging). I guess that’s why they’re hiring in big ways.

On October 18, 2007, the Senate Intelligence Committee passed the first version of a bill that would grant corporations retroactive immunity for helping Bush spy on Americans.

The Senate intelligence committee yesterday produced a new bipartisan bill governing foreign intelligence surveillance conducted inside the United States, but objections by several Democratic lawmakers to some of its provisions raised questions about how quickly it might gain passage.

[snip]

It would further give some telecommunications companies immunity from about 40 pending lawsuits that charge them with violating Americans’ privacy and constitutional rights by aiding a Bush administration’s warrantless surveillance program instituted after September 2001. That provision is a key concession to the administration and companies, which lobbied heavily for the provision. 

On October 22, 2007, right in the middle of the larger debate about retroactive immunity, FBI Deputy Director John Pistole gave a pep talk at a money laundering conference, cheering the work bankers had done to help pursue terrorists. He described the pattern analysis FBI was doing on financial transactions.

We established a specialized section in our Counterterrorism Division called the Terrorism Financing Operations Section, or TFOS. 

The mission of our agents and analysts in TFOS is to trace transactions and track patterns.  This painstaking work helps us identify, disrupt, and prosecute terrorists, their associates, their leaders, and their assets. 

[snip]

First and foremost, we’re looking for basic personal information—addresses, birthdates, phone numbers, and employment.  These help us understand day-to-day expenses and spending habits.  This information then helps us uncover travel patterns, other accounts, important transactions, and financial histories.  And these in turn may lead us to previously unknown business or personal associations, including other members of a network.

He lauded the al-Haramain indictment, without noting that the government–after apparently wiretapping al-Haramain illegally–dismissed the charges.

In 2000, the FBI discovered possible connections between Al Haramain and al Qaeda and began an investigation.  We started where we often start—by following the money.  And we uncovered criminal tax and money laundering violations. 

Al Haramain claimed that money was intended to purchase a house of prayer in Missouri—but in reality, the money was sent to Chechnya to support al Qaeda fighters. 

In 2004, the Treasury Department announced the designation of the U.S. branch of Al Haramain, as well as two of its leaders, and several other branch offices.  In 2005, a federal grand jury indicted Al Haramain and two of its officers on charges of conspiring to defraud the U.S. government.

We relied on BSA information and cooperation with financial institutions for both the predication and fulfillment of the investigation.  Because of reporting requirements carried out by banks, we were able to pursue leads and find rock-solid evidence. 

Yes, we used other investigative tools—like records checks, surveillance, and interviews of various subjects.  But it was the financial evidence that provided justification for the initial designation and then the criminal charges. 

And, most of all, Pistole exhorted the bankers to fill out detailed data on certain kinds of clients so the FBI doesn’t have to reconstruct "who, what, when, where, why, and how" information after it develops probable cause. 

So when your bank’s officers are conducting reportable transactions, there are some things they can do to help us glean even more information right off the bat.  Let me just run through a few:

1. You can complete each applicable field.
2. You can verify personal identifiers, where possible, and even complete the “description” narrative.  When you fill out the “who, what, when, where, why, and how” on the front end, this saves us all time on the back end, because we don’t have to come back to you with subpoenas, looking for specific information.
3. You can check all the violation types that apply and avoid checking the “other” box.
4. Finally, you can file the reports electronically, which will save all of us time.
5. And if a customer strikes you as especially suspicious, call us in addition to filing a SAR.

Believe me, we know that this creates a lot of work for you.  We also know you don’t necessarily see an obvious return on your investment.

Mind you, this kind of analysis undoubtedly will help the FBI track down criminals of all sorts, and with the FISA Amendment Act, the yoking of financial data to telecom data has probably been made legal. Heck, once the FBI dedicates some resources to Ponzi schemes and money laundering, such "who, what, when, where, why, how" information might help prevent the next Madoff scam. Maybe Congress will even ask some questions about why all this data analysis didn’t alert the FBI to the massive fraud on Wall Street.

But I can’t help but imagine that this speech was designed to reassure the bankers that they–like the telecoms that were being actively discussed–would be protected from legal liability for their role in helping the government select targets for illegal wiretapping. 

And I can’t help but wonder whether the newly "accurate" information the government supplied to Vaughn Walker on Friday alerts him to the fact that banks–and not just telecom providers–would be in line for retroactive immunity, too. 

Already, Vaughn Walker is assessing whether the retroactive immunity language was specific enough to be Constitutional. I wonder how he will feel about Congress granting immunity to an entire group of people without once admitting it publicly?

After Chesley "Sully" Sullenberger and his union crew brought US Airways 1549 to a safe landing and evacuation on the Hudson River last month, I pointed out that most of the key parties involved in the rescue–the pilots, the flight attendants, the ferry crews, the first responders, and the air traffic controllers–had all benefited from years of union activism demanding better safety training.

But Sully, who testifies before the Aviation Subcommittee of the House today, says that the cuts airlines have demanded of pilots in recent years have been chasing the best pilots out of the business, which may lead to a decline in safety in the industry.

It is an incredible testament to the collective character, professionalism and dedication of my colleagues in the industry that they are still able to function at such a high level. It is my personal experience that my decision to remain in the profession I love has come at a great financial cost to me and my family. My pay has been cut 40%, my pension, like most airline pensions, has been terminated and replaced by a PBGC guarantee worth only pennies on the dollar.

While airline pilots are by no means alone in our financial struggles – and I want to acknowledge how difficult it is for everyone right now – it is important to underscore that the terms of our employment have changed dramatically from when I began my career, leading to an untenable financial situation for pilots and their families. When my company offered pilots who had been laid off the chance to return to work, 60% refused. Members, I attempt to speak accurately and plainly, so please do not think I exaggerate when I say that I do not know a single professional airline pilot who wants his or her children to follow in their footsteps.

I am worried that the airline piloting profession will not be able to continue to attract the best and the brightest. The current experience and skills of our country’s professional airline pilots come from investments made years ago when we were able to attract the ambitious, talented people who now frequently seek lucrative professional careers. That past investment was an indispensible element in our commercial aviation infrastructure, vital to safe air travel and our country’s economy and security. If we do not sufficiently value the airline piloting profession and future pilots are less experienced and less skilled, it logically follows that we will see negative consequences to the flying public – and to our country.

We face remarkable challenges in our industry. In order to ensure economic security and an uncompromising approach to passenger safety, management must work with labor to bargain in good faith. We must find collective solutions that address the huge economic issues we face in recruiting and retaining the experienced and highly skilled professionals that the industry requires and that passenger safety demands. But further, we must develop and sustain an environment in every airline and aviation organization – a culture that balances the competing needs of accountability and learning. We must create and maintain the trust that is the absolutely essential element of a successful and sustainable safety reporting system to detect and correct deficiencies before they lead to an accident. We must not let the economic and financial pressures detract from a focus on constantly improving our safety measures and engaging in ongoing and comprehensive training. In aviation, the bottom line is that the single most important piece of safety equipment is an experienced, well-trained pilot.

The hero of the "Miracle on the Hudson" just told Congress that unless our country starts valuing the experience and commitment of labor, it will lead to less safe conditions and economic consequences.

You think maybe Congress will listen to Sully?

Whether it is Henry Paulson, Tim Geithner or the yammering dipsticks on CNBC, it seems the there has been a headlong rush to seek analysis, wisdom and solutions from the very self proclaimed geniuses that put the US and the world in the problem to start with. Aren’t there any big bankers/finance ministers that really got it right? Turns out there are, and he comes from a most unexpected place. From the Los Angeles Times comes the story of Riad Toufic Salame:

Instead, the silver-haired banker became a hero by playing it very, very safe. In 2005, he defied pressure from the Lebanese business community and bucked international trends to issue what now looks like a prophetic decree: a blanket order barring any bank in his country from investing in mortgage-backed securities, which contributed to the most dramatic collapse of financial institutions since the Great Depression.

So as major banks in America and Europe were shuttered or partly nationalized and thousands of people in the U.S. financial sector were laid off, Lebanon’s banks had one of their best years ever.

Billions in cash continue to pour in to the relative safety of Lebanese savings accounts, with comfy but not extravagant yields of 6%. A nation shunned for years as the quintessential failed state has become a pretty safe bet, or as safe a bet as investors are likely to find in this climate.

Well, that is kind of refreshing, how did Salame do it? By being a rational technocrat, eschewing excesses, turning a deaf ear to cries for irrational rates of return, maintaining tight regulation, imposing conservative balance-sheet requirements, refusing to launder dirty money and, most critically:

When the real estate boom crested this decade and investors began bundling debt into nebulous financial instruments fueled by easy credit, the pressure was on for Salame to let banks take advantage of the high yields.

But Salame steadfastly refused.

He says the mortgage-backed securities worried him from the start. He watched curiously as investment bankers engaged in what he calls "rituals" to please the credit ratings agencies and got back such safe assessments of their products. He didn’t get it. Why were these considered safe investments? They were just too complicated. They went against a major tradition in Lebanese and Middle Eastern banking: Know to whom you’re fronting cash and who’s going to pay you back.

"We could not really sense who would be responsible in the end to collect these loans," he said. "And we do not perceive banking as being a place to speculate on financial instruments that are not really concrete."

There, that wasn’t all that hard was it? Keep it simple, be willing to work and ding the bling. The way to responsibly run a nation’s banking system and economy is to adhere to good old fashioned principles of banking, economics and governmental regulation. It is really not hard, in fact it is blindingly simple.

Go with what you know.

Image from ExploreHistory.com

Ian has a great piece up at FDL on the financial sector’s problems, their genesis, and the Obama Administration’s conventional wisdom, status quo, manner of dealing with them:

I have become increasingly concerned that some in the Obama administration are treating this economic crisis as a "black swan" event. That is a very rare, random and unpredictable event. The key thing about black swans is that they are random and unpredictable and you can’t stop them from happening, you can only create your systems so that they can handle them if they occur.
…
But, of course, the economic and financial crisis unfolding right now was not random. It was predicted by multiple people, and it was predicted because of policy steps taken by government and widely known private actions.
…
All of which is to say the crisis was caused by a number of factors. It was not random. It was predictable and predicted. If we just muddle through this current meltdown—spend a lot of money bailing out the banks, throw some stimulus around—and don’t fix the fundamentally flawed incentives and structures of the system, it will likely happen again.

Ian was discussing the financial sector, but it strikes me that the same applies for America’s industrial and manufacturing sector. The United States was built on the backs of hard working people that planted and built things, sweated, toiled and prevailed. In the post-modern hustle and flow of the digital and financial whiz bang world, we seem to both forget and neglect the industry, manufacturing and workers that put us here. I want to focus, and open a discussion, on that.

I am not expert on the issues and economics that underpin this area, so I am going to rely on the collective wisdom here to engage and flesh out the discussion. I do, however, want to open that discussion on a familiar note, the American automotive industry. Roland Jones at MSNBC.com yesterday did an interesting piece as to why bankruptcy is not a viable option for General Motors:

“If these companies went into bankruptcy right now, in exactly the position they are in today, they would be liquidated because no one out there would supply them with the financing they need to get through bankruptcy,” Mark Zandi, chief economist with Moody’s Economy.com, told CNBC Wednesday.

That would mean a few million jobs lost, Zandi said, which would be “cataclysmic” for the U.S. economy, already shedding about a million jobs every two months. A better option would be to give the automakers the extra funding they need to stay in business until March 31. Then the government could prepare for a bankruptcy later on with provisions for securing financing to bring them through Chapter 11 and guarantee vehicle warranties.
…
An outright liquidation of either of the companies — which would bring massive unemployment, lost tax revenues, and would place the burden of the automakers’ pension liabilities on the government’s shoulders — would cost the government more, according to Rebecca Lindland, director of the Automotive Group at consultancy IHS Global Insight.

“If taxpayers are complaining now, wait until the pension obligations are swapped over — it will cost a lot more than the $39 billion the automakers are asking for now,” she said. “So in any scenario, it’s not as if the taxpayer’s going to get away with this scot-free. With so many workers losing their jobs there would be a lot of federal aid required.”

This is an aspect of the auto mess that is consistently given short shrift. We are worried about our economy, but keep trying to patch it up with financial jiggering, and don’t seem to be paying attention to the real foundation. That is how we got to this point, not how we will get out of it. It is time for a wake up call in that regard. One person who has been speaking out on this is author William Holstein who has a new book, Why GM Matters, on just this phenomenon, using General Motors as a microcosm of the larger problem:

Holstein is using GM as a symbol for whether it makes sense for the U.S. to bother with manufacturing. That might sound odd for a country that for now probably remains the world’s largest manufacturing economy. But Holstein argues that our political and financial leaders don’t get manufacturing, and don’t think it’s important. This is the crux of the Main Street vs. Wall Street debate, and it is shaping up as the core fight of economic policy over the next few years: do we get a justifiable return if we invest in making things, or should we focus on information-driven innovation?

Holstein seems to represent the argument that information-driven companies — such as financial services firms — simply cannot sustain our economy by themselves, and we must continue to be able to manufacture. In fact, he does directly argue that GM can now manufacture head to head with Toyota, and he might be right.

This is a discussion that is important to have at least side by side with, if not in fact primary to, the discussion on the Wall Street, finance and housing bailouts. Sometime in the next day or so, I plan to bring Holstein in for a live chat discussion about his book and the greater state and future of American industry. I hope one and all will join in, but in the meantime, let’s get the discussion going.

As you may know, President Obama came to Phoenix in order to roll out his $75 Billion Plan to Fight Home Foreclosures. This was exciting for me, because Obama spent last night at a resort, Montelucia, about 3/4 of a mile from my house. Lots of excitement; even more jammed up traffic yesterday afternoon and evening. Still, all in all, pretty exciting for an old desert dweller. Our dog, Kiki, is still barking at all the helicopters. Interlaced into this post will be a series of pictures taken by various Phoenicians and submitted to the Arizona Republic for open use on their website. I would have taken proprietary photos for Emptywheel, especially of the shots going down the road right by my house and entering Montelucia, but, alas, I was tied up with conference calls with multiple attorneys, all of whom are every bit as annoying as I am. Trust me on the latter.

From the New York Times:

President Obama pledged on Wednesday to help as many as 9 million American homeowners refinance their mortgages or avert foreclosure, an initiative he said would shore up distressed housing prices, stabilize neighborhoods and slow a downward spiral that he said was “unraveling homeownership, the middle class, and the American Dream itself.”

The plan, more ambitious than many housing analysts had expected, was unveiled by Mr. Obama in a high school gymnasium here, in a community that is among the nation’s hardest hit by the foreclosure crisis.

“This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” the president told the crowd. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

In a nutshell from the LA Times, the plan would:

• Remove restrictions on Fannie Mae and Freddie Mac that prohibit the institutions, both taken over by the government last year, from refinancing mortgages they own or have guaranteed when more is owed on a home than it is worth. The White House says this could reduce monthly payments for up to 5 million homeowners.

• Create incentives for lenders to modify subprime loans at risk of default or foreclosure. For lenders that agree to reduce rates to levels borrowers can afford, the government will make up part of the difference between the old monthly payment and the new payment. Participating lenders also will be required to cut payments to no more than 31 percent of a borrower’s income. Up to 4 million homeowners could benefit.

• Keep mortgage rates low for millions of middle-class families seeking new mortgages. Using money already approved by Congress for this purpose, the Treasury Department and the Federal Reserve will continue to buy Fannie and Freddie mortgage-backed securities to maintain stability and liquidity in the marketplace. The department, through its existing authority, will provide up to $200 billion in capital for this purpose.

• Pursue reforms to help families avoid foreclosure. The administration will continue to support changing bankruptcy rules so judges can reduce mortgages on primary homes to their fair market value, as long as the borrower sticks to a court-ordered repayment plan. As part of the $787 billion stimulus package that Obama signed into law on Tuesday, the administration will award $2 billion in competitive grants to communities experimenting with innovative ways to prevent foreclosures.

Here is the detailed plan (pdf) as put out by the White House. Obama was wildly received by the audience from the video I caught, and there were people camping out in line outside the high school he spoke at over a day ahead of his appearance. There was only one serious group of protesters, and they were not anti-Obama. They were demanding justice against our locally oppressive and deadly Sheriff Joe Arpaio. Ya gotta love that.

All in all, a short, but victorious, visit from the President of the United States.

I asked yesterday whether or not the "private investors" whom Geithner expects to pony up billions if not trillions to bail out our biggest banks were Sovereign Wealth Funds.

The WSJ and Robert Reich suggested they might be. But, Reich wondered, what incentive would other countries have to keep investing in our shitpile?

Some additional financing is thought to come from China, Japan, and the Middle East. (It seems likely that some hedge fund financing is now coming from rich Arabs.) But why exactly would Asia or the Middle East be willing to commit even more money to the United States when they’re already nervous about their US loans and investments, and when their own economies are under more and more stress?

Meanwhile, Atrios points to what might be one source of leverage we have to persuade Asia and the Middle East to ante up again.

WHEEEEEEEEEEEE

The Fed has decided it can do whatever it wants. Just in case you didn’t know.

WASHINGTON — The White House plan to rescue the nation’s financial system, announced on Tuesday by Timothy F. Geithner, the Treasury secretary, is far bigger than anyone predicted and envisions a far greater government role in markets and banks than at any time since the 1930s.

Administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money.

Yes, it can do that.

WHEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

It seems the "public-private partnership" gimmick presents the world with an either/or proposition. Either "private investors" (of which foreign countries have some of the most ready cash) ante up, or the Fed will just print money and print money and print money until it comes up with the cash.

I’m beginning to see why foreign investors–and SWFs more specifically–might have an incentive to invest. 

Countries have SWFs, after all, as a way to do something with their giant surplus of dollars. The manufacturing exporters (Asia) and oil exporters (Middle East) created them as a means to invest their dollar reserves, hopefully getting a higher return on all those dollars just sitting and collecting dust. Now, as I suggested, a lot of those SWFs may be willing to invest further because it’s the only thing staving off nationalization of companies they own up to 5% of.

But even the threat to print money in huge amounts might get their attention. After all, by definition, most countries with SWFs have huge numbers of dollars. That means these countries want to make sure their pile of dollars collecting dust retains as much of its value as possible. If the Fed prints and prints and prints new dollars, those dusty dollars will be worth less and less. Geithner is suggesting he’ll devalue not just the $10 to $50 billion these SWRs have invested in our banks, but the trillion dollar stash they’re faced with.

Aside from the apparent fact that this is all a gimmick atttempt to avoid nationalizing the banks, which may well be necessary anyway, I’ve got a gut feel that threatening Asian and Middle Eastern countries with inflation and dollar devaluation isn’t going to work out as planned.

ProPublica has done a comparison of the House and Senate stimulus packages. It shows, in striking fashion, how much the Grassley-Isakson-Coburn-Collins-Bad Nelson bill skews spending away from the poor–the most stimulative kind of spending, since these people need this money badly and would spend it right away–to the upper middle class:

 The Senate bill took out $27 billion in spending for the poor, ending with a total of $97 billion.

The Senate bill put in $117 billion in new tax cuts for individuals–more money than the entire $97 billion they give for those items ProPublica classifies as "Aid to Low-Income Families."

Those tax cuts consist primarily of two things: the AMT patch ($64 billion), which affects primarily upper middle class people in areas with high home prices, and the house flipping subsidy (up to $48 billion), the full credit of which is only available if inidviduals pay at least $7,.500 in taxes a year (there’s also $10-11 billion for auto sales incentives).

There are other reasons to oppose including these two tax cuts in the stimulus. The AMT patch, which isn’t really stimulative in the first place, would get passed and properly off-set in the budget appropriations process anyway. And the house flipping subsidy does little else than put money in realtor’s pockets. 

But the biggest reason is this: we’re taking food, housing, and medical care away from those who desperately need it, to put more money in the pockets of the upper middle class.

The Senate "Moderates’" reverse Robin Hood: Steal from the poor and give to the affluent!

The big gimmick to Tim Geithner’s new plan to avoid nationalizing the banks save the big banks is a public-private partnership.

Public-Private Investment Fund: One aspect of a full arsenal approach is the need to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as “legacy” assets. Many proposals designed to achieve this are complicated both by their sole reliance on public purchasing and the difficulties in pricing assets. Working together in partnership with the FDIC and the Federal Reserve, the Treasury Department will initiate a Public-Private Investment Fund that takes a new approach.

• Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
• Private Sector Pricing of Assets: Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets

There are a couple of sources of private money available on the scale that is necessary to help out: billionaires like Warren Buffett (net worth, $62 billion), pension funds (total assets as of last September, before the crash, $28.1 trillion), mutual funds (total assets before the crash, $26.2 trillion). While Buffett has shown some willingness to bail out these banks for the right price, I can’t see pension and mutual funds wanting to take on the risk.

And then there’s a source of funding that the big banks have already turned to in an effort to stave off this crash–a source which has a lot invested in forestalling nationalization: sovereign wealth funds (total assets before the crash, $2.7 to $3.2 trillion, and expected to grow to between $5 and $13 trillion).  SWFs, of course, are the investment arms of oil producers like Saudi Arabia, Kuwait, and the UAE, and exporters like China, Singapore, and South Korea.

I’m particularly interested in whether or not Geither is expecting sovereign wealth funds to be involved in this public-private partnership because of the role they had in "saving" a few big banks between November 2007 to January 2008. The GAO describes these investments to include:

November 27, 2007: Abu Dhabi Investment Authority invests $7.5 billion in Citigroup for a 4.9% stake in the company.

December 19, 2007: China’s SWF invests $5 billion in Morgan Stanley for a 9.9% stake in the company.

December 24, 2007: A Singapore SWF and Davis Selected Advisors invest $6.2 billion in Merrill Lynch for a 13% stake in the company.

January 14, 2008: Kuwaiti and South Korean SWFs, and Mizuho Bank of Japan invest $6.6 billion in Merrill Lynch for an undisclosed stake in the company.

January 17, 2008: Singaporan and Kuwaiti SWFs (and Saudi Arabia’s Prince Alwaleed bin Talal) invest $12.5 billion into Citigroup for an undisclosed stake in the company (as of November 2008, bin Talal personally owned a 5% stake in Citi).

So basically, the investment arms of a bunch of foreign countries dumped tons of money just a year ago into banks that were already hemorrhaging money. I’m guessing those investment arms have been lobbying pretty hard for Geithner not to nationalize these companies, which would have meant they would lose billions. 

SWFs are reported to have invested further, even larger funds into failing banks last year (including an additional $50 billion into Citi) but there appears to be much less reporting on these investments–since the GAO report on SWFs came out just before the crash, attention seems to have turned to TARP at the expense of the SWFs. And all this investment in US banks comes on top of huge stakes SWFs have taken in Barclays and UBS, as well as China’s SWF nearly investing in a huge stake in Bear Stearns.

There are two big problems (at least) with SWFs owning such big stakes in these banks. It is already hard to separate foreign policy issues from economic issues: but if nations can devastate our economy with their actions on our biggest bank, it risks severely constraining our foreign policy. Further, some of these loans give the SWFs further equity starting in 2010, at which point the SWFs may have even more flexibility to mess with these companies. And to what degree is Geithner’s refusal to nationalize the banks driven by the demand from these foreign countries that he not make their considerable stakes in the banks worthless? To what degree are we focusing on fixing Wall Street–to the neglect of Main Street–because these powerful investors don’t want to lose their billions?

But also, what would it mean for the US to engage in a "public-private partnership" with what are essentially other countries? There is some review of SWF acquisitions under CFIUS.

CFIUS and its structure, role, process, and responsibilities were formally established in statute in July 2007 with the enactment of the Foreign Investment and National Security Act (FINSA). FINSA amends section 721 of the Defense Production Act to expand the illustrative list of factors to be considered in deciding which investments could affect national security and brings greater accountability to the CFIUS review process.11 Under FINSA, foreign government-controlled transactions, including investments by SWFs, reviewed by CFIUS must be subjected to an additional 45-day investigation beyond the initial 30-day review, unless a determination is made by an official at the deputy secretary level that the investment will not impair national security.12 CFIUS reviews transactions solely to determine their effect on national security, including factors such as the level of domestic production needed for projected national defense requirements and the capability and capacity of domestic industries to meet national defense requirements. If a transaction proceeds to a 45-day investigation after the initial 30-day review and national security concerns remain after the investigation, the President may suspend or prohibit a transaction. According to Treasury, for the vast majority of transactions, any national security concerns are resolved without needing to proceed to the President for a final decision. The law provides that only those transactions for which the President makes the final decision may be disclosed publicly. [my emphasis]

But so long as a Deputy Secretary–say, working for Geithner, whose plan this is–decides these investments won’t harm national security, it appears to escape all meaningful review. 

And with a "public-private partnership," we would be insuring their investments and they would basically be giving us chunks of their surplus dollar reserves in hopes of staving off total failure of these investments. What happens when–as the economists who predicted this crash expect–the banks are ultimately nationalized? What will we owe Kuwait or Singapore at that point?

I’m not sure that Geithner is thinking of partnering with SWFs for this latest TARP. But it’s a question that Robert Reich seems to be pondering. I just wonder whether the whole refusal to nationalize the banks comes out of a last-ditch effort on the part of Geithner and the SWFs to prevent them from losing their shirts.

Update: Here’s a recent WSJ column on this:

How long will Asia’s sovereign-wealth funds remain a sleeping tiger when it comes to their plummeting investments in Wall Street banks?

[snip]

Ed Greene is a partner with law firm Cleary Gottlieb who has lectured around the country about sovereign-wealth funds and worked as the general counsel of Citigroup’s investment bank until recently. He told Deal Journal Thursday that U.S. banks probably will need to entice sovereign-wealth funds to pour more money in. The enticement this time? “They will look for investments where they can have influence or control,” he said. “The investments where they lost money have been passive.”

[snip]

If sovereign-wealth funds do become more-active participants in U.S. banks in return for more money, it will provide some interesting twists in America’s approach to foreign investment. When these government investment funds first put money into the banks, the U.S. government wasn’t a fellow shareholder; now, through the TARP $700 billion, it is. The U.S. government will be the most powerful shareholder in these banks. That could result in a certain amount of tension if bank managements, federal officials and foreign shareholders disagree about how best to preserve the value of the banks’ shares. [my emphasis]

Last Wednesday, Linda Thomsen was one of a handful of contemptuous SEC officials who appeared before Congress–and pretty much refused to answer any questions. That same day, new SEC head Mary Schapiro sent a very contrite letter to Paul Kajorski, admitting, "Today’s hearing before your Subcommittee cannot have been satisfactory for you." Schapiro offered to meet at Kanjorski’s earliest convenience so, "we can determine a course forward." On Friday, Schapiro got rid of rules that GOP hack Chris Cox and his predecessor had put into place that made it hard to impose financial penalties on companies.

Securities and Exchange Commission chairman Mary Schapiro announced Friday she would make it easier for SEC staff to launch formal investigations of corporations, and she overturned her predecessor’s policy of requiring commission approval for levying financial penalties against public companies.

The latter move, in particular, represents a rebuke to her predecessor, Christopher Cox, and to former SEC commissioner Paul Atkins.

[snip]

Schapiro said the enforcement staff had told her the pilot program had "introduced significant delays into the process of bringing a corporate penalty case; discouraged staff from arguing for a penalty in a case that might deserve a penalty; and sometimes resulted in reductions in the size of penalties imposed." 

Schapiro also said it was too difficult for enforcement staff to launch a formal investigation, which currently also requires permission from the SEC.

In undoubtedly related news, Linda Thomsen will announce her resignation today.

The U.S. Securities and Exchange Commission’s top enforcement official, Linda Thomsen, is expected to resign on Monday, CNBC television said.

[snip]

The enforcement division has been heavily criticized for how it handled the Bernard Madoff case, in which the former financier is accused of defrauding investors of $50 billion.

And in other, probably related news, the SEC has decided that Madoff will be held civilly, as well as criminally, liable for his deeds.

The Securities and Exchange Commission says it has agreed with Bernard Madoff on a deal that could eventually force the disgraced money manager to pay a civil fine and return money raised from investors.

The agency said Monday the agreement states that Madoff cannot contest allegations of civil fraud and that possible penalties will be decided "at a later time."

I look forward to seeing whether this civil fraud deal reflects the earlier contemptuous approach of Linda Thomsen, or whether it reflects the new responsive era of Mary Schapiro.