The Bailout Plan: Oops, Get Out the Big Checkbook

The “Draft Proposal for Bailout Plan” is now available. What to make of it? Well, it certainly is sweeping and simplistic. I have two complaints. The first complaint is that it gives to one individual enormous, unchecked power. My second complaint is that the very individuals we now must trust have in part led us into this impasse. They are the ones who should have acted sooner, the ones who should have sounded the alert much, much earlier.

Unfortunately, we are now left with few, if any, options. Nonetheless, I will register my complaints…and my anger.

With the only restriction that the financial institution be headquartered in the U.S. or any of its territories, Secretary Paulson now has carte blanche to purchase and then sell any mortgage related asset. No law can check him; no law governs him. He is restricted only by Title 5, Section 3109 of the United States Code, which means he can hire temporary help for a period not to exceed one year.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Clear the books. Clean the slate. Put on your best smile. The former CEO of Goldman Sachs is coming to the rescue. He cannot be held accountable to any law. His word is final and absolute. We have given him a very, very big checkbook.

Goldman Sachs? That was one going to be one of the dominoes slated to fall, was it not? Has the fox entered the hen house and can now have his way with all the chickens? Does he deserve our trust? Has he earned it?

Many hands brought us here, including Congressional ones, as our shadow banking system became less regulated, as restrictions were removed for what banks could and could not do. Nonetheless, those who are now charged with our financial system’s safe keeping were asleep at the wheel, drunk perhaps, from the party that has raged through the latter half of this decade. They should have seen the cliff over which we now have plunged, but they did not.

Blame Congress or blame Greenspan if you want. Bernanke has had almost three years at the helm; Paulson has had two plus years. Both men were expected to understand the issues when they accepted their responsibilities. They were obliged to tell us honestly and truthfully. If Congress had made mistakes or if Greenspan had failed, they should have told us…pointedly, frankly. To do less was a dereliction of duty.

And what have we witnessed as this festering, unregulated sore has grown? We have seen the application of larger and larger band aids. “More band aids and pray” seems to have been the Paulson-Bernanke motto. Now, because we have no option, we are forced to place our trust in both of them.

Belief in them is no longer an option; it is an imperative.

History, I suspect, will not share that assessment. This economy has been ill for some time.

Consider, for example, what Paul Volker said three years ago, in April of 2005:

Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks — call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it….A vulnerable financial/banking system. We live in a global laissez faire financial system that is highly leveraged with debt financing, derivatives and fractional reserve banking. Hedge funds are not really “hedged,” but highly speculative, and another collapse along the lines of Long Term Capital Management could be disastrous.

Now consider one of Henry Paulson’s band aids in January of 2008:

The U.S. economy is fundamentally strong and will continue to grow in the short term. But, growth is slowing down markedly as the housing correction, capital market turbulence and high oil prices are taking their toll. So while I expect our economy to continue growing, the risks are to the downside. Recognizing this, the President decided that the time had come to take steps to protect our economy. He directed me to work with the Congress to enact an economic growth package quickly, to boost economic growth and job creation this year….

To have an impact on our economic growth this year, we have to work with the Congress to enact legislation quickly. I have been very engaged with leaders of both parties in Congress, who share our commitment to getting legislation in place that can boost economic growth and job creation this year. I’m glad we reached agreement with the House, but our work isn’t done until this legislation reaches the President’s desk.

The economy needed a bit of stimulus. “Keep moving to the mall, folks.” Was this a political decision in an election year?

In December of 2007, Paulson was somewhat aware of the sub prime problem, but where was his focus?

Mortgage market financial innovation has benefited the U.S. economy and U.S. homeowners; it has also introduced some of the challenges we face today. Financial innovation led to the creation of mortgage products that put homeownership within the reach of more people. At the same time, innovation also made riskier loans – with no down payments or minimal documentation – more widely available. Similarly, securitization has brought benefits and challenges – making more capital available for mortgages, but creating greater market complexity. As a result, we now have an array of different market participants, often with different interests…

Even in December of 2007, Paulson had a hard time understanding that unregulated, un-transparent financial innovation was bringing us closer and closer to the precipice. The problem, he thought, might certainly be tidied up because the HOPE NOW Alliance

has brought the resources of investors to bear to enable non-profit mortgage counselors to be more widely available

We are entering the jaws of the most serious financial crisis since the Great Depression and he is talking about “more non-profit mortgage counselors”? You have to be kidding–“non-profit,” no less.

And what was Bernanke saying in 2005

Moreover, the agencies have made clear that no bank is too big too fail, so that bank management, shareholders, and uninsured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well managed and well controlled.

No bank is too big to fail? Hmmmmmmmm.

The bottom line is: These men are supposed to know the terrain, the data. They are not supposed to be surprised. They are not supposed to apply ever-larger band aids and then say, “Oops…bring out the hacksaw; we need to do foxhole brain surgery. (The comparison to the Iraq War has not escaped me.)

Does anybody know what he is doing?