Paulson Bailout Plan A Historic Swindle

Paulson Bailout Plan A Historic Swindle

By William Greider

The Nation

September 19, 2008

http://www.thenation.com/doc/20081006/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 worthless.

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.