Zap The Zombies, Stop The Bleeding

Bill Moyers interviewed economist and Campaign for America's Future board member Robert Johnson for the February 27 edition of Bill Moyers' Journal. Here is an excerpt of that interview. The video and full transcript of that interview are on the Bill Moyers' Journal page at PBS.org.

BILL MOYERS: Given what we know is happening around the world, are you scared?

ROBERT JOHNSON: Yes I am.

BILL MOYERS: What scares you the most?

ROBERT JOHNSON: That everybody will stand and watch and cater to past patterns of power. The banking system has been the dominant sector in our society and in our politics, which is heavily money driven, for a very long time. As they falter, we could stagnate, catering to their needs disproportionately while the system sinks.

BILL MOYERS: This week, a term came into play that I hadn't heard before. People refer to Citibank, Citigroup, as zombie banks. What's a zombie bank?

ROBERT JOHNSON: A zombie bank is a bank that's insolvent that's allowed to continue its activity. It's allowed to go on living as a dead financial entity.

BILL MOYERS: And what's the threat to the financial system of a zombie bank?

ROBERT JOHNSON: That the zombie will continue to lose more, and the taxpayer, kind of off the government's budget, will continue to experience larger and larger burden of future losses.

BILL MOYERS: So are these negotiations going on this week between Treasury and Citigroup crucial to this process?

ROBERT JOHNSON: I think they're crucial to the process. I also think, if you're going to allow them to act as zombies, then the regulators need to be really fierce. To curtail the activities within the bank while it's motoring along, hoping for a rebound.

BILL MOYERS: This is what puzzles me. I mean, Citigroup executives who got that bank into this ditch, seem to have as much authority in dealing with the government, the Treasury, as the Treasury has in dealing with them. Does that seem right to you?

ROBERT JOHNSON: It doesn't seem right, but it does seem real. When one looks at websites, like OpenSecrets.org, and looks at the scale of campaign contributions that come from Wall Street, one understands why Wall Street, how do I say -- when they talk, people listen.

On the other side of that issue, the flood lights are so bright now we're talking about $700 billion for TARP. Obama has asked for another $750 billion in the budget this week for the banks.

We're talking a trillion and a half dollars. People can't do sneaky things on the side as easily. Because the scrutiny, the watchdogs have now arrived. They understand this is a colossal problem. So I do think there's more scope for good public policy because it's such a large and deep crisis.

BILL MOYERS: What have you learned this week about the Obama plan that encourages you?

ROBERT JOHNSON: What encourages me is they're talking about very profound changes in financial regulation. I have yet to see the details. But Mr. Obama made a statement, a couple days ago, that was very, very concrete about: the old rules don't work.

He also spoke about what you might call free market fundamentalism. Unfettered, unregulated markets as one pole, and what you might call administrative socialism as another pole. We've got to end up somewhere in the middle. Where the market's dynamism and flexibility is honored, but where you have real regulation and real enforcement. It's been a long time since the president has talked like that. So I think that's a hopeful sign.

But the question is, as this man stands at the crossroads, as a very young president, will he exert the will to implement what, say, his heart tells him when he gets it?

BILL MOYERS: What do you mean crossroads?

ROBERT JOHNSON: The crossroads right now is that we could have a society become despondent. People who think that proper reforms, and proper business restructuring, are just romantic notions. And what Obama needs to do now is not talk, he needs to deliver the goods. He needs to deliver the goods plain and simple where people will regain their trust.

BILL MOYERS: How do we stop the bleeding?

ROBERT JOHNSON: People talk of nationalization. I just call it restructuring. Restructuring is a part of capitalism. That's how the airlines get restructured when they go through bankruptcy. How you might have to deal with the auto industry, how you deal with venture capital projects. Do the same thing with the banks.

BILL MOYERS: Exactly what does it mean to nationalize the banks?

ROBERT JOHNSON: Well, what I think they need to do is inspect them thoroughly, examine, mark down the assets to a conservative level that protects the taxpayer. See the resulting deficit on the balance sheet, which is the hole.

Then the government injects the capital. People continue to operate the banks. People who continue to work there then perhaps sign new contracts with the government. And the government just becomes the stockholder until such time that they sell the stock back to the market and get paid back a little bit for all the lost support that they're creating for these banks.

BILL MOYERS: So what's the objection to that from the people you talk to who don't like it?

ROBERT JOHNSON: One is people feel the government would make a mess of running things. I actually don't agree with that.

BILL MOYERS: Well, FEMA's a pretty unsettling model.

ROBERT JOHNSON: Yes, it is. But I would say you could work with Tim Geithner, who's quite a competent man, working with the existing Citibank management, with just a different set of stockholders. The one danger you have, when you keep these banks open, when they're insolvent, is they have a temptation to very risky activity.

Sort of like a quarterback throwing the Hail Mary pass. The losses on an interception accrue to the taxpayers. And the touchdown is kept by the stockholders. So if they take excessive risk in those times they can actually endanger the stockholders further. The plan that Geithner and the White House, the Obama administration, is adopting right now, which I will call intravenous drip capitalization, is one of forbearance. Meaning, don't realize the losses on the balance sheet now. Don't account for everything in a prompt way. Don't truncate the losses, but allow them to go on. And the danger is the ditch could get deeper and deeper.

BILL MOYERS: What's the most discouraging thing you've seen about the Obama plan?

ROBERT JOHNSON: I think the capital assistance program is warehousing zombie banks and running the risk of the taxpayer over the next one or two years, will experience much larger losses.

BILL MOYERS: The capital assistance program. That is?

ROBERT JOHNSON: That's the bailout, the drip intravenous capital injections.

BILL MOYERS: For which he's asking, in his budget this week, for another $750 billion.

ROBERT JOHNSON: That's right. And I do think, perhaps, the reason they went with the intravenous program, is they were fearful, given the way the well was poisoned by Henry Paulson's TARP plan, that Congress won't give him any more money. But they're foreshadowing that the scope of the problem is enormous.

Perhaps the only difference between Secretary Geithner and myself might be that he knew after negotiations, he couldn't get all the money he needed. So he has to go on the drip until he builds a consensus, and then can do the more profound restructuring.

BILL MOYERS: And you're saying that the drip is too slow, too risky, too dangerous, and that what we need is immediate surgery?

ROBERT JOHNSON: Well, I guess if the heart of the economy are the four or five major banks, you do need a transplant.

BILL MOYERS: And so the government would step in and do what?

ROBERT JOHNSON: I would ask for letters of resignation from the top executives of all the major banks. I would not do a case by case restructuring. I would take the largest group all in and say, "I want everybody's letter for resignation."

You might not honor all those letters, but you'd have them. I would then say, "The stock is worth zero. The balance sheet is too far negative to continue risking the taxpayer's money." The examiners, somewhat like FDR did in a bank holiday, would examine the depth of the hole in those balance sheets.

Fill that hole with money, taxpayer's money, to recapitalize. Send them back out into the marketplace where people know they're wholly capitalized. And last thing I would do is I would separate the toxic assets from the bank that you put back in the marketplace.

So everybody knew the resulting creature was sound and confidence could rebuild. Inner bank credit could start to flow again, 'cause they aren't afraid of each other.

BILL MOYERS: You're saying that the blade should fall, on the management of these banks, and the shareholders who went along with this excessive risk taking, because they wanted the big returns. The blade should fall on them. Get them out of the way. Government restructures. And then offers the banks back into the market and new investors come in.

ROBERT JOHNSON: That's correct.

BILL MOYERS: So the people pay the price who bet wrong, right?

ROBERT JOHNSON: That's correct. I think that's very fair. I think that's how markets are constructed.

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