Friday, July 06, 2012

John Taylor uncovers a hideous threat to our freedoms

John Taylor uncovers a dire and hitherto little-known threat to the freedoms we Americans hold dear:

In a recent speech at Stanford former Wells Fargo Chairman and CEO Dick Kovacevich told the full story of how he was forced to take TARP funds even though Wells Fargo did not need or want the funds. The forcing event took place in October 2008 at a now well-known meeting at the U.S. Treasury with Hank Paulson, Ben Bernanke, as well as several other heads of major financial institutions... 
“You might ask why didn’t I just say no, and not accept TARP funds.” [Kovacevich] then explained: “Hank Paulson turned to Chairman Bernanke, who was sitting next to him and said ‘Your primary regulator is sitting right here. If you refuse to accept these TARP funds, he will declare you capital deficient Monday morning.’ This was being said when we were a triple A rated bank. ‘Is this America?’ I said to myself.”... 
According to Kovacevich: “It was truly a godfather moment. They made us an offer we couldn’t refuse.” It was also truly a deviation from the principles of economic freedom, such as those I have highlighted in my book First Principles—predicable policy, rule of law, reliance on markets, limited scope for government... 
[A]fter his talk, I asked Dick Kovacevich why more business people were not speaking out on this important issue. He explained how he had in fact waited a long time after he left Wells Fargo before speaking out because he did not want to risk some kind of retribution. He said he thought many others had a “fear” of speaking out.” 
In their book Free to Choose Milton and Rose Friedman wrote about this problem: “Restrictions on economic freedom inevitably affect freedom in general, even such areas as freedom of speech and press.” (p. 67) They quoted from a letter they received from business executive Lee Grace. I was reminded of this letter when I heard Dick Kovacevich answer my question. In the letter Grace had said “We grow timid against speaking out for truth…government harassment is a powerful weapon against freedom of speech.” 

My reactions:

1. "Oh noooo!!! The government is forcing us to take billions of dollars!!! THE HORROR!!! IS THIS AMERICA?!!!"

2. Wells Fargo suffered a ratings downgrade in December 2008, shortly after the events described. Something tells me it was not because they took TARP funds. Something tells me it was because they owned some amount of assets whose value had been called into question by the recent crisis. So Kovacevich's assertion that "we were a triple A rated bank" is a little disingenuous.

3. The "violation of freedom of speech" discussed by John Tayor is not based on anything anyone in the government actually did. It is based entirely - 100% - on the statement of one man, Dick Kovacevich, that he was afraid of "some kind of retribution" if he spoke out. First of all, Kovacevich obviously has a vested interest in saying this. But even if Kovacevich is being honest, he might not be right. There might have been no implicit threat from the government except in his own mind. But despite all this, John Taylor takes Kovacevich's statement at face value.

4. UPDATE: Commenter MaxUtility writes: "[H]asn't this episode been public knowledge for several years now? I guess all the government jack booted thugs threatening people to keep the secret got laid off." Pretty much.

Basically, this John Taylor post is an exercise in unintentional self-parody. Well, probably unintentional.


  1. Anonymous5:46 PM

    to be fair if he's going to write an intellectually dishonest book he will probably need to promote it with some intellectually dishonest blog posts

  2. MaxUtility6:20 PM

    At a meeting in which the government had to set out the specifics of handing out 100's of millions of $ to bail out much of the world's banking system in a matter of hours, THIS is an affront to the "limited scope of government"?

    Also, hasn't this episode been public knowledge for several years now? I guess all the government jack booted thugs threatening people to keep the secret got laid off.

    1. WIN. I will now steal that line. :)

    2. dilbert dogbert11:42 AM

      I think it was two jack booted rethuglicans, Paulson and the Bernank who play on the red team making theats.

  3. Zlati Petrov9:22 PM

    Well come on, in John Taylor's paradigm this is serious indeed. If you propose that any arbitrary government action (defined as any action X such that no information filtration produces X as an expected outcome) is dangerous and classify what actually happened in this category, you have a legitimate complaint.

    You can disagree with the premises but I don't think it's worthwhile mocking him (Point #1). Of course, I know that statements like the one in Point #1 appeal to those readers who are as convinced in their paradigm as John Taylor is convinced in his and enjoy mocking others, but your blog has never been about campaigning for the favor of these people. You don't want those people here, the ones that prefer slogans to arguments and violence to discussion.

    They are difficult and, frankly, uninteresting. Why appeal to them? Why draw them here with statements like that?

    Point 3 is legitimate, I think. If he twists reality to deceive people (basing a conclusion on 1 example), call him out.

  4. I am with you Noah, but those funds were very much strings attached. Suddenly the citizenry and politicians believed they had a say in the day to day operations of the bank, 'you're not lending enough!', 'employees shouldn't be paid!' which needless to say most bond holders and minority owners do not have. So I don't think it's correct to characterize TARP funds as desirable for all punters in that circumstance.

    BUT, the whole reason for TARP was a statement that the government was standing behind its financial intermediaries and the system as a whole 100%. There are huge benefits of that support that accrued to Wells, its management, employees and shareholders. Not to mention, the regulators judged it in the interest of the system as a whole that all major institutions be getting a bailout, I.e. They judged the move less effective as only participated in by the weaker institutions only, (for several reasons). It was hardly too much to ask of Wells Fargo, under the circumstances, to play along. Banks are different, and as Spiderman's uncle said, with great power, comes a great sense of entitl... err... responsibility.

    1. But did Wells Fargo suffer employee salary cuts as a result of being forced to accept TARP funds? Did angry populists somehow force them to lend more?

      Anyway, yes, I agree, Wells Fargo reaped large benefits from being forced to accept TARP funds.

  5. IDontSeeTheProblem11:02 AM

    What a smarmy, irresponsible attitude to take concerning the bailouts.

    Majorajam is right, those funds were not without strings attached.

  6. Orange141:29 PM

    And then they go ahead and buy Wachovia in late 2008 which was one of the worst banks around. A lot of the problems that they have had since is cleaning up the Wachovia mess. I will give Wells Fargo a great deal of credit for having great customer service (we were legacy Wachovia customers and the difference was night and day).

    PS, I thought your blogging was on hiatus. Have you defended your thesis yet???

  7. Anonymous4:13 AM

    C'mon. You sound so partisan. Criticize John Taylor (Republican). Criticize "crazy" Ron Paul Libertarians (different post). Let me guess...your favorite columnist writes for the NYT and you call yourself an independent but have voted only for Dems. Taylor is showing the pitfalls of command economics. Wish more people understood that

  8. Blue Aurora4:25 AM

    Noahpinion: Sorry to go off topic, but did you get my e-mail, which I sent to your e-mail account? I lurk on your blog sometimes, and I'd like to engage in correspondence.

  9. Kovacevich doesn't have much of a choice other than to contrive a story about how Wells Fargo didn't really need the bailouts--it generally doesn't go over with shareholders when a CEO and chairman of the board of directors tells the public, "yeah, the company was basically bankrupt while I was in charge, mostly because I aggressively steered it into the risky mortgage markets at the height of the housing bubble."

    1. Anonymous12:27 PM

      Except I've been hearing this "story" from bank execs for years now.

    2. They all have the same incentives to pretend that their banks weren't/aren't bankrupt.

      All the megabanks are bust. They've been covering it up with accounting fraud and government bailouts, hoping to "earn" their way out of bankruptcy by charging fees to consumers and collecting the spread on interest rates.

      This is a disgusting scam and they need to be shut down. Now.

  10. Noah,

    I don't want to defend Kovacevich or his argument in particular, but I think that there are perfectly rational reasons you might not think TARP fund disbursement was done in a way that feels great. To the extent you are being dismissive of the possibility that the program was a little problematic, I think you are being unfair. If you feel I am mischaracterizing your view and you are not trying to be dismissive of any possible complaints about TARP, let me know.

    I would offer a couple of reasons bank executives might not have thought TARP was a good deal prospectively that I think are at least reasonable.

    I'm not sure (and I have not reviewed recently) when various program details became public, so I apologize in advance if any argument below is not one that could have been made at the time the funds were disbursed and "accepted" by the banks. Also, I would not necessarily endorse all the views below. I just think they are not obviously crazy as far as I can tell.

    1. They might have viewed capital as too expensive\dilutive and honestly had reason to believe their funding position was strong. There is clearly some price at which forced equity injections from central governments become nationalizations in all but name and, to the extent you are or believe yourself to be in charge of a solvent bank, I doubt you would want to accept nationalization. I suspect you would agree nationalization in some circumstances is problematic for the economy.

    2. You do not find credible government commitments to avoid interfering in your business. Indeed, the overall political environment around financial services that has actually developed I think owes something to the "they got bailed out, we got sold out" slogan and fact pattern. It's much easier to make the case you weren't bailed out if you did not, in fact, receive a bailout.

    3. You believe accepting funding will become a black mark in terms of private market access. This is mitigated somewhat because the regulators are forcing everyone to dip their hand, but again, the actual experience of the program might suggest that this is a more reasonable concern than it appears at first. Citi, BofA are not thought of the same way they were before the crisis in terms of prestige. This is true of GS and JPM too of course, but for different reasons and in different ways.

    4. You believe limits on payments for executives will be bad for you and you are selfish. You may also believe limits on pay for executives will be bad for your ability to retain top performers and they will leave your business. This is specific flavor of 2 that I think might have been more predictable.

    Of course, none of this means that TARP was a bad deal. It very likely was an extremely good deal for banks and bankers. However, you don't have to like the non-voluntary nature of it.

    If you'd care to respond, I would be very interested.


    1. I think this is all approximately right. Which is why the federal regulators *should* have said "We're not cutting any deals. You are capital deficient and we will be announcing it tomorrow morning. Have fun with that bank run! Bye-bye now!"

    2. Now, if Wells Fargo wasn't capital deficient, it would have enough capital to survive the bank run. Y'know? But obviously it was capital deficient, or Kovacevich wouldn't have been afraid.

  11. Wells Fargo is still capital deficient and bankrupt.