Geithner Plan: Another Subsidy For The Rich?

The Obama administration this week got a warning shot across its bow against structuring a bank resuce plan that would amount to yet another taxpayer subsidy of the wealthy. It's a shot that progressives who have the administration's ear on economic policy need to echo.

That shot was fired when Treasury Secretary Timothy Geithner was grilled before the Congressional Oversight Panel on Tuesday. The panel is probing the federal government's financial rescue efforts.

Damon Silvers, associate general counsel for the AFL-CIO and a member of the panel, zeroed in on the administration's plans for a Public-Private Investment Program, which would buy up so-called "toxic assets" from financial institutions, using a mix of taxpayer and private-investor dollars. The program is envisioned as a way to get bad and questionable loans off the books of troubled banks in exchange for cash the banks can use to make loans and restore themselves and the economy to health. When the economy recovers, the "toxic assets" could increase in value enough that they are no longer toxic, earning the investors and taxpayers a profit.

The question, as Silvers puts it in this interview, is who bears the losses and who earns the profits, and whether a government program is being used to transfer wealth from working people to Wall Street.

During the panel hearing Silvers displayed charts [1] that showed how a public-private investment program could end up being a bad deal for taxpayers. In one scenario, a financial institution puts up as little as 7 percent of the cost of a toxic asset, while the government puts up the other 93 percent. And even that 7 percent could be taxpayer money drawn from the federal government's Wall Street bailout efforts. But even though taxpayers put up between 93 percent to 100 percent of the value of the asset, they would stand to gain only 50 percent of the profit. Taxpayers would, however, end up bearing most of the loss if the value of the asset dropped.

Geithner challenged Silvers interpretation of how the program would work, but Silvers stands by it.

"You've got to ask the investors in the banks to bear as much of the losses as possible consistent with keeping the financial system stable," Silvers said. After all, that's how a market economy works. In particular, "that's the reality that working people are living through, that when things go bad in a market economy, individuals suffer."

The message that Geithner needs to hear, Silvers says, is that investors who reap the benefits of the upside should also be prepared to bear the risks of the downside.

The Treasury Department has set a deadline of Friday for soliciting participation in the program.