U.S. Is Finding Its Role in Business Hard to Unwind
President Obama left Washington on Monday ahead of a trip to Wall Street, where he was speaking from Federal Hall.
WASHINGTON — When President Obama travels to Wall Street on Monday to speak from Federal Hall, where the founders once argued bitterly over how much the government should control the national economy, he is likely to cast himself as a “reluctant shareholder” in America’s biggest industries and financial institutions.
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A trader at the New York Stock Exchange watched President Obama in June. Mr. Obama is to speak Monday on Wall Street.
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But one year after the collapse of Lehman Brothers set off a series of federal interventions, the government is the nation’s biggest lender, insurer, automaker and guarantor against risk for investors large and small.
Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy — 26 percent — than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government.
If you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank.
And if you buy life insurance from the American International Group, you will be buying from a company that is almost 80 percent federally owned.
Mr. Obama plans to argue, his aides say, that these government intrusions will be temporary. At the same time, however, he will push hard for an increased government role in overseeing the financial system to prevent a repeat of the excesses that caused the crisis.
“These were extraordinary provisions of support, not part of a permanent program,” said Lawrence H. Summers, director of the National Economic Council at the White House. “You’re seeing a process of exit every day. It’s a process that’s going to take quite some time, but the prospects are much brighter today than they were nine months ago.”
That process unfolds every day in a bland bureaucrat’s haven, an annex connected by an underground tunnel to the Treasury’s main building on Pennsylvania Avenue. There, about 200 civil servants — accountants, lawyers, former investment bankers — oversee the $700 billion program that pumps taxpayer money into banks, insurance companies and two of Detroit’s Big Three auto companies.
In the main Treasury building, senior officials hold veto power over executive pay packages for the biggest recipients of government loans, like Citigroup and Bank of America. A separate group, working closely with the Federal Reserve Bank of New York, oversees the multibillion-dollar bailout of American International Group. Ten blocks away, at the Federal Reserve, officials are still providing the emergency liquidity that keeps a battered economy moving.
To Mr. Obama’s critics, thousands of whom took to the streets of Washington this weekend to protest a new era of big government, all these efforts are part of a plan to dismantle free-market capitalism. On the ground it looks quite different, as a new president and his team try to define the proper role, both as owners and regulators.
A Light Hand on the Reins
Far from eagerly micromanaging the companies the government owns, Mr. Obama and his economic team have often labored mightily to avoid exercising control even when government money was the only thing keeping some companies afloat.
A few weeks ago, there were anguished grimaces inside the Treasury Department as the new chief executive of A.I.G., Robert H. Benmosche, whose roughly $9 million pay package is 22 times greater than Mr. Obama’s, ridiculed officials in Washington — his majority shareholders — as “crazies.”
Causing even more unease to policymakers, Mr. Benmosche insisted that A.I.G. — one of the worst offenders in the risk-taking that sent the nation over the edge last year — would not rush to sell its businesses at fire-sale prices, despite pressure from Fed and Treasury officials, who are desperate to have the insurer repay its $180 billion government bailout.
But in the end, according to one senior official, “no one called him and told him to shut up,” and no one has pulled rank and told him to sell assets as soon as possible to repay the loans.
A similar hands-off decision was made about the auto companies. Shortly after General Motors and Chrysler emerged from bankruptcy, some members of the administration’s auto task force argued that the group should not go out of business until it was confident that a new management team in Detroit had a handle on what needed to be done.
But Mr. Summers strongly rejected that approach, and the Treasury secretary, Timothy F. Geithner, agreed.
“The argument was that if the president said he wasn’t elected to run G.M., then we couldn’t hire a new board and then try to run any aspect of it,” one participant in the discussions said. The auto task force took off for summer vacation in July, and it never returned.
But it will probably be several years before the government can begin to sell its stake in G.M. back to the public, and even then, according a report issued last week by the independent monitor of the Troubled Asset Relief Program, some of the $20 billion or so funneled to G.M. and Chrysler is probably gone forever.
Winding Down Programs
By contrast, Mr. Obama’s team and the Federal Reserve have been more successful than generally recognized at winding down many of the support programs for banks. Nearly three dozen financial institutions have repaid $70 billion in loans to the Treasury, and officials predict that $50 billion more will be repaid over the next 18 months. Indeed, the government has earned tidy profit on the first round of repayments.
One of the biggest backstops has been the Temporary Liquidity Guarantee Program of the Federal Deposit Insurance Corporation, which now guarantees about $300 billion worth of bonds issued by banks.
The volume of new guarantees has declined to less than $5 billion a month in August from more than $90 billion a month earlier this year. The F.D.I.C. announced last week that it would either end the program entirely on Oct. 31 or reduce it further by substantially increasing the fees that banks have to pay.
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Why Wall Street Reforms Have Stalled
Has the financial industry always been better able to block government reforms than other industries?
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Similarly, one of the Fed’s biggest emergency loan programs, the Term Auction Facility, has shrunk by more than half in the last 12 months. A second big program, which finances short-term i.o.u.’s for businesses, has shrunk to $124 billion, from $332 billion a year ago.
Obama administration officials bristle at even the hint that their rescue measures have ushered in a new era of “big government.”
But supporters and critics alike worry that it will be difficult to shrink the government to anything like its former role. For one thing, Mr. Obama is determined to expand government regulation of business and to beef up federal protections for consumers.
Seeking More Oversight
Mr. Obama’s proposals to overhaul the system of financial regulation would give the Fed new powers to supervise giant financial institutions whose failure could threaten the entire financial system.
To limit the dangers posed by insolvent institutions that are “too big to fail,” the F.D.I.C. would receive new authority to close them in an orderly way.
The administration would impose much tougher regulation over the vast market for financial derivatives like credit-default swaps and other exotic instruments for hedging risk.
It would also create an entirely new Consumer Financial Protection Agency, which would have broad power to regulate most forms of consumer lending.
In his speech on Monday, White House officials say, Mr. Obama will step up pressure on Wall Street to accept tougher oversight. Even though his proposals have made little headway in Congress, largely because of the battle over health care, Democratic lawmakers said they were determined to pass comprehensive legislation by next year.
“Big government now is the consequence of too little government before,” said Representative Barney Frank, chairman of the House Financial Services Committee. “What you have right now, with the government owning companies, is the result of insufficient regulation before.”
On a practical level, experts say it will take years for the government to unwind some of its rescue programs.
Thanks to the mortgage crisis and the collapse in housing prices, private investors have fled the mortgage market, and the federal government now finances about 9 out of 10 new home loans in the United States.
The Treasury took over Fannie Mae and Freddie Mac, the government-sponsored finance companies that own or have guaranteed more than $5 trillion in mortgages, in the first week of September 2008. Fannie and Freddie now buy or guarantee almost two-thirds of all new mortgages. The Federal Housing Administration guarantees another 25 percent.
The cost of keeping the two giant companies afloat has been huge. The Treasury has provided Fannie and Freddie with $95 billion to cover losses tied to soaring default rates and losses in value on their own mortgage portfolios. Analysts predict that the companies will need considerably more in the year ahead. At the same time, the Fed is buying almost all the new mortgage-backed securities issued by Fannie Mae, Freddie Mac and the F.H.A. Buying up those securities drives up their price and pushes down their effective interest rates, and ultimately lowers borrowing costs to homebuyers.
An Enormous Scale
The scale of the Fed’s intervention has been staggering. The central bank has acquired more than $700 billion in mortgage-backed securities so far, and officials have said they will buy up to $1.25 trillion — a goal that should take the Fed until early next year. To help Fannie and Freddie raise the money they need to buy mortgages from lenders, the Fed is also buying $200 billion of their bonds.
All told, the government is propping up almost the entire mortgage market and, by extension, the housing industry.
As the government backs away from its rescue operations, economists and others worry about unknown consequences. Some analysts are already predicting that mortgage rates will bump higher when the Fed stops buying mortgage securities, potentially delaying a recovery in housing.
But the much bigger puzzle is how the government will untangle Fannie Mae and Freddie Mac, with their combustible mix of taxpayer support, public policy goals and for-profit structures.
“It will be very difficult to unwind, having stepped in as big as they did,” said Howard Glaser, a senior housing official during the Clinton administration and now an industry consultant in Washington. “There is no structure, no mechanism, for private investors to come back into the market.”
Other experts and policy makers have begun to raise broader concerns. Even if the Obama administration and the Fed do manage to shrink the government’s role to precrisis levels, has the government’s immense rescue simply set the stage for more frequent interventions in the future?
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