|Paulson Bailout Plan a Historic Swindle
By William Greider
FINANCIAL-MARKET WISE guys, who had been seized with fear, are
suddenly drunk with hope. They are rallying explosively because they
think they have successfully stampeded Washington into accepting the
Wall Street Journal solution to the crisis: dump it all on the
taxpayers. That is the meaning of the massive bailout Treasury
Secretary Henry Paulson has shopped around Congress. It would relieve
the major banks and investment firms of their mountainous rotten
assets and make the public swallow their losses--many hundreds of
billions, maybe much more. What's not to like if you are a financial
titan threatened with extinction?
If Wall Street gets away with this, it will represent an historic
swindle of the American public--all sugar for the villains, lasting
pain and damage for the victims. My advice to Washington politicians:
Stop, take a deep breath and examine what you are being told to do by
so-called "responsible opinion." If this deal succeeds, I predict it
will become a transforming event in American politics--exposing the
deep deformities in our democracy and launching a tidal wave of
righteous anger and popular rebellion. As I have been saying for
several months, this crisis has the potential to bring down one or
both political parties, take your choice.
Christopher Whalen of Institutional Risk Analytics, a brave
conservative critic, put it plainly: "The joyous reception from
Congressional Democrats to Paulson's latest massive bailout proposal
smells an awful lot like yet another corporatist lovefest between
Washington's one-party government and the Sell Side investment banks."
A kindred critic, Josh Rosner of Graham Fisher in New York, defined
the sponsors of this stampede to action: "Let us be clear, it is not
citizen groups, private investors, equity investors or institutional
investors broadly who are calling for this government purchase fund.
It is almost exclusively being lobbied for by precisely those
institutions that believed they were 'smarter than the rest of us,'
institutions who need to get those assets off their balance sheet at
an inflated value lest they be at risk of large losses or worse."
Let me be clear. The scandal is not that government is acting. The
scandal is that government is not acting forcefully enough--using its
ultimate emergency powers to take full control of the financial system
and impose order on banks, firms and markets. Stop the music, so to
speak, instead of allowing individual financiers and traders to take
opportunistic moves to save themselves at the expense of the system.
The step-by-step rescues that the Federal Reserve and Treasury have
executed to date have failed utterly to reverse the flight of
investors and banks worldwide from lending or buying in doubtful
times. There is no obvious reason to assume this bailout proposal will
change their minds, though it will certainly feel good to the
financial houses that get to dump their bad paper on the government.
A serious intervention in which Washington takes charge would, first,
require a new central authority to supervise the financial
institutions and compel them to support the government's actions to
stabilize the system. Government can apply killer leverage to the
financial players: accept our objectives and follow our instructions
or you are left on your own--cut off from government lending spigots
and ineligible for any direct assistance. If they decline to
cooperate, the money guys are stuck with their own mess. If they
resist the government's orders to keep lending to the real economy of
producers and consumers, banks and brokers will be effectively
isolated, therefore doomed.
Only with these conditions, and some others, should the federal
government be willing to take ownership--temporarily--of the rotten
financial assets that are dragging down funds, banks and brokerages.
Paulson and the Federal Reserve are trying to replay the bailout
approach used in the 1980s for the savings and loan crisis, but this
situation is utterly different. The failed S&Ls held real
assets--property, houses, shopping centers--that could be readily
resold by the Resolution Trust Corporation at bargain prices. This
crisis involves ethereal financial instruments of unknowable
value--not just the notorious mortgage securities but various
derivative contracts and other esoteric deals that may be virtually
Despite what the pols in Washington think, the RTC bailout was also a
Wall Street scandal. Many of the financial firms that had financed the
S&L industry's reckless lending got to buy back the same properties
for pennies from the RTC--profiting on the upside, then again on the
downside. Guess who picked up the tab? I suspect Wall Street is
envisioning a similar bonanza--the chance to harvest new profit from
their own fraud and criminal irresponsibility.
If government acts responsibly, it will impose some other conditions
on any broad rescue for the bankers. First, take due bills from any
financial firms that get to hand off their spoiled assets, that is, a
hard contract that repays government from any future profits once the
crisis is over. Second, when the politicians get around to reforming
financial regulations and dismantling the gimmicks and "too big to
fail" institutions, Wall Street firms must be prohibited from
exercising their usual manipulations of the political system. Call off
their lobbyists, bar them from the bribery disguised as campaign
contributions. Any contact or conversations between the assisted
bankers and financial houses with government agencies or elected
politicians must be promptly reported to the public, just as regulated
industries are required to do when they call on government regulars.
More important, if the taxpayers are compelled to refinance the
villains in this drama, then Americans at large are entitled to
equivalent treatment in their crisis. That means the suspension of
home foreclosures and personal bankruptcies for debt-soaked families
during the duration of this crisis. The debtors will not escape injury
and loss--their situation is too dire--but they deserve equal
protection from government, the chance to work out things gradually
over some years on reasonable terms.
The government, meanwhile, may have to create another emergency
agency, something like the New Deal, that lends directly to the real
economy--businesses, solvent banks, buyers and sellers in consumer
markets. We don't know how much damage has been done to economic
growth or how long the cold spell will last, but I don't trust the
bankers in the meantime to provide investment capital and credit. If
necessary, Washington has to fill that role, too.
Finally, the crisis is global, obviously, and requires concerted
global action. Robert A. Johnson, a veteran of global finance now
working with the Campaign for America's Future, suggests that our
global trading partners may recognize the need for self-interested
cooperation and can negotiate temporary--maybe permanent--reforms to
balance the trading system and keep it functioning, while leading
nations work to put the global financial system back in business.
The agenda is staggering. The United States is ill equipped to deal
with it smartly, not to mention wisely. We have a brain-dead lame duck
in the White House. The two presidential candidates are trapped by
events, trying to say something relevant without getting blamed for
the disaster. The people should make themselves heard in Washington,
even if only to share their outrage.
National affairs correspondent William Greider has been a political
journalist for more than thirty-five years. A former Rolling Stone and
Washington Post editor, he is the author of the national bestsellers
One World, Ready or Not, Secrets of the Temple, Who Will Tell The
People, The Soul of Capitalism (Simon & Schuster) and--due out in
February from Rodale--Come Home, America.