Who Wants to Kick a Millionaire?

By Frank Rich, NY Times

DURING the Great Depression, American moviegoers seeking escape could ogle platoons of glamorous chorus girls in “Gold Diggers of 1933.” Our feel-good movie of the year is “Slumdog Millionaire,” a Dickensian tale in which we root for an impoverished orphan from Mumbai’s slums to hit the jackpot on the Indian edition of “Who Wants to Be a Millionaire.”

It’s a virtuoso feast of filmmaking by Danny Boyle, but it’s also the perfect fairy tale for our hard times. The hero labors as a serf in the toilet of globalization: one of those mammoth call centers Westerners reach when ringing an 800 number to, say, check on credit card debt. When he gets his unlikely crack at instant wealth, the whole system is stacked against him, including the corrupt back office of a slick game show too good to be true.

We cheer the young man on screen even if we’ve lost the hope to root for ourselves. The vicarious victory of a third world protagonist must be this year’s stocking stuffer. The trouble with “Slumdog Millionaire” is that it, like all classic movie fables, comes to an end — as it happens, with an elaborately choreographed Bollywood musical number redolent of “Gold Diggers of 1933.” Then we are delivered back to the inescapable and chilling reality outside the theater’s doors.

Just when we thought that reality couldn’t hit a new bottom it did with Bernie Madoff, a smiling shark as sleazy as the TV host in “Slumdog.” A pillar of both the Wall Street and Jewish communities — a former Nasdaq chairman, a trustee at Yeshiva University — he even victimized Elie Wiesel’s Foundation for Humanity with his Ponzi scheme. A Jewish financier rips off millions of dollars devoted to memorializing the Holocaust — who could make this stuff up? Dickens, Balzac, Trollope and, for that matter, even Mel Brooks might be appalled.

Madoff, of course, made up everything. When he turned himself in, he reportedly declared that his business was “all just one big lie.” (The man didn’t call his 55-foot yacht “Bull” for nothing.) As Brian Williams of NBC News pointed out, the $50 billion thought to have vanished is roughly three times as much as the proposed Detroit bailout. And no one knows how it happened, least of all the federal regulators charged with policing him and protecting the public. If Madoff hadn’t confessed — for reasons that remain unclear — he might still be rounding up new victims.

There is a moral to be drawn here, and it’s not simply that human nature is unchanging and that there always will be crooks, including those in high places. Nor is it merely that Wall Street regulation has been a joke. Of what we’ve learned about Madoff so far, the most useful lesson can be gleaned from how his smart, well-heeled clients routinely characterized the strategy that generated their remarkably steady profits. As The Wall Street Journal noted, they “often referred to it as a ‘black box.’ ”

In the investment world “black box” is tossed around to refer to a supposedly ingenious financial model that is confidential or incomprehensible or both. Most of us know the “black box” instead as that strongbox full of data that is retrieved (sometimes) after a plane crash to tell the authorities what went wrong. The only problem is that its findings arrive too late to save the crash’s victims. The hope is that the information will instead help prevent the next disaster.

The question in the aftermath of the Madoff calamity is this: Why do we keep ignoring what we learn from the black boxes being retrieved from crash after crash in our economic meltdown? The lesson could not be more elemental. If there’s a mysterious financial model producing miraculous returns, odds are it’s a sham — whether it’s an outright fraud, as it apparently is in Madoff’s case, or nominally legal, as is the case with the Wall Street giants that have fallen this year.

Wall Street’s black boxes contained derivatives created out of whole cloth, deriving their value from often worthless subprime mortgages. The enormity of the gamble went undetected not only by investors but by the big brains at the top of the firms, many of whom either escaped (Merrill Lynch’s E. Stanley O’Neal) or remain in place (Citigroup’s Robert Rubin) after receiving obscene compensation for their illusory short-term profits and long-term ignorance.

There has been no punishment for many of those who failed to heed this repeated lesson. Quite the contrary. The business magazine Portfolio, writing in mid-September about one of the world’s biggest insurance companies, observed that “now that A.I.G is battling to survive, it is its black box that may save it yet.” That box — stuffed with “accounting or investments so complex and arcane that they remain unknown to most investors” — was so huge that Washington might deem it “too big to fail.”

Sure enough — and unlike its immediate predecessor in collapse, Lehman Brothers — A.I.G. was soon bailed out to the tune of $123 billion. Most of that also disappeared by the end of October. But not before A.I.G. executives were caught spending $442,000 on a weeklong retreat to a California beach resort.

There are more black boxes still to be pried open, whether at private outfits like Madoff’s or at publicly traded companies like General Electric, parent of the opaque GE Capital Corporation, the financial services unit that has been the single biggest contributor to the G.E. bottom line in recent years. But have we yet learned anything? Incredibly enough, as we careen into 2009, the very government operation tasked with repairing the damage caused by Wall Street’s black boxes is itself a black box of secrecy and impenetrability.

Last week ABC News asked 16 of the banks that have received handouts from the Treasury Department’s $700 billion Troubled Asset Relief Program the same two direct questions: How have you used that money, and how much have you spent on bonuses this year? Most refused to answer.

Congress can’t get the answers either. Its oversight panel declared in a first report this month that the Treasury is doling out billions “without seeking to monitor the use of funds provided to specific financial institutions.” The Treasury prefers instead to look at “general metrics” indicating the program’s overall effect on the economy. Well, we know what the “general metrics” tell us already: the effect so far is nil. Perhaps if we were let in on the specifics, we’d start to understand why.

In its own independent attempt to penetrate the bailout, the Government Accountability Office learned that “the standard agreement between Treasury and the participating institutions does not require that these institutions track or report how they plan to use, or do use, their capital investments.” Executives at all but two of the bailed-out banks told the G.A.O. that the “money is fungible,” so they “did not intend to track or report” specifically what happens to the taxpayers’ cash.

Nor is there any serious accounting for executive pay at these seminationalized companies. As Amit Paley of The Washington Post reported, a last-minute, one-sentence loophole added by the Bush administration to the original bailout bill gutted the already minimal restrictions on executive compensation. And so when Goldman Sachs, Henry Paulson’s Wall Street alma mater, says that it is not using public money to pay executives, we must take it on faith.

In the wake of the Madoff debacle, there are loud calls to reform the Securities and Exchange Commission, including from the president-elect. Under both Clinton and Bush, that supposed watchdog agency ignored repeated and graphic warnings of Madoff’s Ponzi scheme as studiously as Bush ignored Al Qaeda’s threats during the summer of 2001.

But fixing that one agency is no panacea. All the talk about restoring “confidence” and “faith” in capitalism will be worthless if we still can’t see what’s going on in the counting rooms. In his role as chairman of the Federal Reserve Bank of New York, Timothy Geithner, Barack Obama’s nominee for Treasury secretary, has been at the center of the action in the bailout’s black box, including the still-murky and conflicting actions (and nonactions) taken with Lehman and A.I.G. His confirmation hearings demand questions every bit as tough as those that were lobbed at the executives from Detroit’s Big Three.

On Friday, Geithner’s partner in bailout management, Paulson, asked Congress to give the Treasury the second half of the $700 billion bailout stash. But without transparency and accountability in Washington’s black box, as well as Wall Street’s, there will continue to be no trust in the system, no matter how many cops the S.E.C. puts on the beat. Even the family-owned real-estate company of Eliot Spitzer, the former “Sheriff of Wall Street,” had entrusted money with Madoff.

We’ll keep believing, not without reason, that the whole game is as corrupt as the game show in “Slumdog Millionaire” — only without the Hollywood/Bollywood ending. We’ll keep wondering how so many at the top keep avoiding responsibility and reaping taxpayers’ billions while relief for those at the bottom remains as elusive as straight answers from those Mumbai call centers fielding American debtors.

This wholesale loss of confidence is a catastrophe that not even the new president’s most costly New Deal can set right.

A Simple Question

From me... please read the following articles. They should provide you with varying information on the $700 Billion Bailout using our money.

Henry Paulson wants no Congressional oversight, no need to answer to any courts, no equity for U.S. Citizens for providing all of this money, and.... NO SALARY CAPS FOR CEO's AND WALL STREET EXECUTIVES!

His reason? He's afraid these companies won't participate.

My simple question? If they need this money so badly and so quickly.... why wouldn't they accept those limits on salaries if they're not able to share that risk we're taking?

I may ask a second question. (I know I said I'd only ask one.) If they're not willing to share in equity and risk... and cap their salaries if they're underperforming... DO THEY REALLY NEED THIS BAILOUT THAT THEY'RE ASKING FOR SO QUICKLY?

Where's George?

Wall Street's Man in Washington

By Harold MeyersonThursday, September 25, 2008;

This past winter, when American banks were already scrambling for capital, foreign investors came to their rescue. Last November, the Abu Dhabi Investment Authority put $7.5 billion into Citigroup. One month later, Merrill Lynch sold $4.4 billion worth of new stock to Temasek Holdings of Singapore, and Morgan Stanley sold a $5 billion stake to China Investment Corp. In January, Merrill Lynch issued $6.6 billion of preferred stock to Korea Investment Corp. and the Kuwait Investment Authority, among others.

These far-flung buyers had one thing in common: They aren't private concerns. Each is a sovereign wealth fund, investing its national treasury's money -- its citizens' money -- in an effort to help out the hemorrhaging banks of Wall Street.

But these were not charitable outlays. The citizens of Abu Dhabi, Singapore, China, Korea and Kuwait got something in return for their treasuries' aid packages to American finance. They got stock. They got an equity interest in those banks.

These may not, just now, seem like the shrewdest investments ever made. Still, all those East Asian and petro-state citizens will probably reap some long-term profits if their treasuries hang on to those shares in Bank of America-Merrill, or Citigroup, or Morgan Stanley and Whomever It Merges With.

Which, sadly, is more than can be said for American citizens in the deal that Treasury Secretary Hank Paulson brought down from his Mount Sinai penthouse over the weekend. In Paulson's plan, the American public pours at least $700 billion of its money into purchasing the bad loans on Wall Street's books and gets -- well, it gets the thanks of a grateful Wall Street. It does not get any equity in return. To receive a return for their investment, Americans would have to become Chinese or Kuwaiti or Abu Dhabian; they would have to move to some country that accords a little more respect to the public's claim over its money.

During past financial crises, Americans did get something in return for the assistance their government proffered to Wall Street. As my American Prospect colleague Robert Kuttner has noted, when the Depression-era Reconstruction Finance Corp. (a bipartisan creation -- Herbert Hoover started it and Franklin Roosevelt continued it) poured $35 billion into American banks and corporations, it often became a preferred shareholder in those concerns and appointed members to those companies' boards to oversee their operations. Other quids offset the quos of the Resolution Trust Corp., which handled the savings and loan meltdown in the 1980s.

In Paulson's original proposal, by contrast, the Treasury secretary would write plenty of checks, unconstrained by any balances. Not surprisingly, Democrats in Congress have countered with a set of proposals to subject Treasury to stricter oversight and congressional accountability, to provide more direct relief to beleaguered homeowners, to restrict the pay of executives at companies that dump their bad deals on the Treasury, and to provide the public with an equity interest in the companies that taxpayers bail out. Paulson has reportedly acceded to more oversight and some more help for homeowners but is still defending the rights of CEOs to pay themselves astronomical sums and opposing efforts to give Americans a share of the companies whose bad loans they are assuming.

On one Sunday talk show, Paulson dismissed the idea of reining in top executives' pay. "If we design [the bailout] so it's punitive and so institutions aren't going to participate," he said, "this won't work the way we need it to work."

That depends on your definition of "we," does it not? In recent years, Wall Street salaries and bonuses have soared as investment banks peddled ever more profitable schemes that enabled Americans to take on debt -- an activity of no discernable social utility and, in fact, of some peril, but one that attracted a disproportionate share of our smartest college graduates, who clearly understood where the big money was. Reducing Wall Street's outsized incomes is not only a moral necessity, now that it's the public that will be putting up the funds but a national opportunity to redirect our best and brightest into actual productive enterprise.

There's no indication that Hank Paulson understands that. He is less Washington's man on Wall Street than he is Wall Street's man in Washington. And having endorsed the Street's version of socialism -- the American public picks up the tab for the financial sector's mistakes, no questions asked -- Paulson and the administration and the Republicans remain opposed to the more democratically socialist, or democratically capitalist, proposition that the public should get something for its investment. China, Singapore and the oil emirates cut a deal for their people. Why won't Hank Paulson cut one for his?

meyersonh@washpost.com

Paulson's Panic

By Robert J. SamuelsonWednesday, September 24, 2008; A23

Call it Paulson's Panic. That's both unfair and accurate. It's unfair because Treasury Secretary Hank Paulson didn't create the underlying conditions that led to today's financial turmoil, and the failure for not quelling it is shared by Federal Reserve Chairman Ben Bernanke. But it's also accurate, because as world financial markets verged on panic, Paulson himself panicked. He saw no remedy except a massive bailout: having the government buy up to $700 billion worth of risky bonds.

Historians will judge whether his outsized proposal was necessary, but the notion that its congressional enactment -- assuming that happens -- would magically end the crisis seems like wishful thinking. Americans often delude themselves that all problems can be "solved" if only government would act "boldly." This may be another example.

Contrary to much commentary, Paulson's plan would not be the largest government intervention in the private economy since World War II. That distinction still belongs to Richard Nixon's imposition of wage and price controls in August 1971. True, Paulson would socialize unprecedented amounts of private debt, but

Nixon asserted control over the entire economy. What's fascinating are the possible parallels between the two episodes, starting with a shared irony: Both came from administrations committed to "free markets."

When Nixon declared the wage-price freeze -- a complete surprise because he had consistently opposed controls -- the decision proved "wildly popular," Rice University historian Allen Matusow writes in his book "Nixon's Economy." By one survey, 75 percent of Americans supported it.

"There was widespread public rejoicing that at last the government was protecting the people," Herbert Stein, a Nixon economist, later observed. Consumer price inflation, which had been rising at a 4 percent annual rate, dropped toward 1 percent. People believed that by acting decisively government could outlaw inflationary psychology. It couldn't.

Inflationary pressures built up under the artificial lid of the controls. Moreover, the faulty economic doctrines that produced inflation -- easy-money policies aimed at maintaining "full employment" of 4 percent joblessness -- remained. When controls ended in 1974, inflation exploded to 12 percent. It averaged almost 9 percent from 1975 to 1981. Only the brutal 1981-82 recession, imposed by Paul Volcker's Fed and raising unemployment to 10.8 percent, ended the wage-price spiral.

Paulson argues that relieving banks of dubious mortgage-backed securities will "unclog" the financial system and encourage essential business and consumer lending. Maybe. It's true that these securities, because they cannot easily be valued, have created immense uncertainty. Banks and other financial institutions reduced routine lending to each other; everyone worried that the other bank might be in trouble. Having the Treasury buy these mortgage securities, on which losses have already been booked, might minimize these fears.

The trouble is that fears extend beyond mortgage securities. It wasn't just home mortgages that were bundled up into bonds and sold to institutional investors (pension funds, insurance companies, college endowments).

Auto loans, credit card debt and commercial real estate loans have been similarly packaged, $900 billion worth in 2007. Naturally, doubts about the value of these securities have also increased. "Securitization" may survive, but this lending is already down (80 percent in 2008), reports Thomson Reuters. Credit is tightening across the board; issuance of high-quality corporate bonds is down 22 percent, while riskier "high yield" bonds are down 65 percent.

What we are discovering is that all the complex securities, combined with ever-greater international investment flows, have created a global financial system "so arcane that few people can understand its workings," David Smick writes in "The World Is Curved: Hidden Dangers to the Global Economy." The difference between now and two years ago is that financial managers then thought they understood the system; now they know they don't. Ignorance breeds risk-aversion and fear.

Like wage-price controls, Paulson's plan is no panacea. Banks, hedge funds, private equity funds and others are trying to reduce risk by "deleveraging" -- selling stocks and bonds to raise cash, increase capital and cut their own debt. The rush to cash is a hallmark of financial crises. But what makes sense for one may be ruinous for all. Heavy selling depresses prices; lower prices then increase losses, deplete capital, prompt more selling and heighten fear. At best, Paulson's plan might preempt this spiral by allowing investors to unload their least attractive securities.

But it wouldn't automatically stimulate new lending, revitalize "securitization" or prevent more "deleveraging."

Time is needed. The rescue is being constructed so hastily that it may include all manner of flawed provisions: too much power for the Treasury secretary; authority for bankruptcy judges to modify mortgages. Congress faces a wrenching dilemma, imposed on it by financial markets and Paulson. If it dawdles, it may invite the panic that Paulson has brazenly predicted. But if it acts quickly, it may create a monster whose full implications emerge only with time.

I Come to You, Cashmere Hat in Hand . . .

By Dana MilbankWednesday, September 24, 2008; A03

"I don't like to be in this position, asking for things and, you know, answering to the American taxpayer," Treasury Secretary Hank Paulson informed the Senate banking committee yesterday.

His discomfiture was easily understood.

He left Goldman Sachs two years ago with hundreds of millions in his pocket and an invitation from President Bush to take over the U.S. Treasury. Now, after assuring lawmakers for the past two years that the markets would take care of themselves, he was asking Congress for perhaps $1 trillion in borrowed taxpayer money to bail out his former peers and colleagues on Wall Street. He wanted the money so desperately -- "quickly and cleanly . . . avoid slowing it down . . . immediate implementation . . . urgency . . . immediate need" -- that, if he had any hair, he probably would have set it on fire right there in the Dirksen Senate Office Building.

The senators were none too pleased to receive this panhandler. Though they've collectively accepted more than $33 million from Wall Street and related industries in this election cycle alone, the committee members took turns channeling their inner Huey Longs.

"This massive bailout is not a solution -- it is financial socialism, and it's un-American," fumed Jim Bunning (R-Ky.).

"It does not make any sense; it will reward the banks first, who got us in the financial mess," protested Mike Enzi (R-Wyo.).

The fury of Bob Menendez (D-N.J.) caused his metaphors to collide ("I am not going to be stampeded into rubber-stamping this proposal"), and even the demure Elizabeth Dole (R-N.C.) found the whole thing "infuriating."

Much of this was posturing, of course. Lawmakers, afraid of being blamed for the next Great Depression, have little choice but to give Paulson much of what he wants. But after the Bush administration railroaded them on other emergency measures that later turned out to be problematic -- the Iraq war, the Department of Homeland Security and the USA Patriot Act -- the bipartisan outrage suggests that, this time, Congress will make the administration squirm a bit.

Paulson, a college football star before his ascent on Wall Street, was unaccustomed to squirming, but he did his best. "I share your frustrations; I feel those frustrations," he told the senators. "Again, I'm frustrated the taxpayer is on the hook," he added moments later. He went on to remind them that "some of the frustrations here I share, you know," that "I did not want to find myself in the position of being here asking for these authorities," and that, truth be told, "I hate to be on this side of the table, because this is not something that I ever wanted to ask for." Indeed, said the author of the greatest market intervention in nearly a century, "I've never been a proponent of intervention."

But Paulson's conversion was okay, because the committee members were undertaking their own conversion, to Main Street populism.

"This legislation must be passed to help Main Street, not because the federal government is being held hostage by Wall Street," Enzi posited.

"We've tried to avoid propping up failed businesses on Main Street; we should not prop up failure, malfeasance and avarice on Wall Street," submitted Wayne Allard (R-Colo.).

"The bottom line to me is: How do we make sure that the connection between Main Street and Wall Street is understood?" said Mike Crapo (R-Idaho).

Answered Chuck Schumer (D-N.Y.): "While Wall Street caused the problems we face, unfortunately, if we do nothing, Main Street will also pay a severe price."

"I hope we can give Main Street a good bit more help and attention than we have to date," contributed Sherrod Brown (D-Ohio).

Paulson tried his hand at the Main Street game. "Even some Main Street non-financial institutions -- or, excuse me, some non-financial companies -- have trouble financing their normal business operations," he argued.

But mostly, the secretary stuck to his main point: that if Congress doesn't give him what he wants, and soon, the year will quickly become 1932. "There is a bipartisan consensus for an urgent legislative solution," he coaxed. "We need to build upon this spirit and enact this bill -- enact this bill quickly and cleanly and avoid slowing it down."

This was quite a turnabout for Paulson, who earlier this year had promised that "the markets are going to work." Despite what he modestly termed a "housing correction," he assured lawmakers: "I have confidence in our markets."

Given that track record, lawmakers weren't inclined to be bullied by Paulson's demands for haste. "Speed is important, but I'm far more interested in whether or not we get this right," said Chairman Chris Dodd (D-Conn.).

"I'm very concerned that the express need to pass something now may prevent us from devising a plan that would actually work," agreed Richard Shelby (Ala.), the committee's top Republican.

And Schumer was moved to invoke Greek mythology, using the imagery of sea monsters to analyze the situation. "As we look forward in the week ahead, we face both a Scylla and a Charybdis, dangers on both sides," the oracle of New York said. In Schumer's telling, the Scylla monster represented the danger of not acting. "But there is also the Charybdis, the other danger of acting so quickly that we choose a bad solution," he said.

The noted classicist had planned to ask a follow-up question later, but an appearance on CNBC kept him from returning to the hearing room in time.

"We really do have to go," Paulson advised the committee.

On Wall Street, the stock market resumed its plunge

Dear Iraqi Friends (Thonas Friedman on "the bailout")

By THOMAS L. FRIEDMAN

From: President George W. Bush

To: President Jalal Talabani of Iraq, Prime Minister Nuri Kamal al-Maliki, Speaker Mahmoud al-Mashadani

Dear Sirs, I am writing you on a matter of grave importance. It’s hard for me to express to you how deep the economic crisis in America is today. We are discussing a $1 trillion bailout for our troubled banking system. This is a financial 9/11. As Americans lose their homes and sink into debt, they no longer understand why we are spending $1 billion a day to make Iraqis feel more secure in their homes.

For the past two years, there has been a debate in this country over whether to set a deadline for a U.S. withdrawal from Iraq. It seemed as if the resolution of that debate depended on who won the coming election. That is no longer the case. A deadline is coming. American taxpayers who would not let their money be used to subsidize their own companies — Lehman Brothers, Bear Stearns and Merrill Lynch — will not have their tax dollars used to subsidize your endless dithering over which Iraqi community dominates Kirkuk.

Don’t misunderstand me. Many Americans and me are relieved by the way you, the Iraqi people and Army have pulled back from your own brink of self-destruction. I originally launched this war in pursuit of weapons of mass destruction. I was wrong. But it quickly became apparent that Al Qaeda and its allies in Iraq were determined to make America fail in any attempt to build a decent Iraq and tilt the Middle East toward a more democratic track, no matter how many Iraqis had to be killed in the process. This was not the war we came for, but it was the one we found.

Al Qaeda understood that if it could defeat America in the heart of the Arab-Muslim world, that it would resonate throughout the region and put Al Qaeda and its allies in the ascendant. Conversely, we understood that if we could defeat Al Qaeda in Iraq, in collaboration with other Arabs and Muslims, that it would resonate throughout the region and pay dividends. Something very big was at stake here. We have gone a long way toward winning that war.

At the same time, I also came to realize that in helping Iraqis organize elections, we were facilitating the first ever attempt by the people of a modern Arab state to write their own social contract — rather than have one imposed on them by kings, dictators or colonial powers. If Iraqi Shiites, Sunnis and Kurds can forge your own social contract, then some form of a consensual government is possible in the Arab world. If you can’t, it is kings and dictators forever — with all the pathologies that come with that. Something very big is at stake there, too.

It’s not the stakes that have changed. It is the fact that you are now going to have to step up and finish this job.

You have presumed an endless American safety net to permit you to endlessly bargain and dicker over who gets what. I’ve been way, way too patient with you. That is over. We bought you time with the surge to reach a formal political settlement and you better use it fast, because it is a rapidly diminishing asset.

You Shiites have got to bring the Sunni tribes and Awakening groups, who fought the war against Al Qaeda of Iraq, into the government and Army. You Kurds have got to find a solution for Kirkuk and accept greater integration into the Iraqi state system, while maintaining your autonomy. You Sunnis in government have got to agree to elections so the newly emergent Sunni tribal and Awakening groups are able to run for office and become “institutionalized” into the Iraqi system.

So pass your election and oil laws, spend some of your oil profits to get Iraqi refugees resettled and institutionalize the recent security gains while you still have a substantial U.S. presence. Read my lips: It will not be there indefinitely — even if McCain wins.

Our ambassador, Ryan Crocker, has told me your problem: Iraqi Shiites are still afraid of the past, Iraqi Sunnis are still afraid of the future and Iraqi Kurds are still afraid of both.

Well, you want to see fear. Look in the eyes of Americans who are seeing their savings wiped out, their companies disappear, their homes foreclosed. We are a different country today. After a decade of the world being afraid of too much American power, it is now going to be treated to a world of too little American power, as we turn inward to get our house back in order.

I still believe a decent outcome in Iraq, if you achieve it, will have long-lasting, positive implications for you and the entire Arab world, although the price has been way too high. I will wait for history for my redemption, but the American people will not. They want nation-building in America now. They will not walk away from Iraq overnight, but they will not stay there in numbers over time. I repeat: Do not misread this moment. God be with you.

George W. Bush.

A Bailout or a Bonanza?

By Eugene Robinson
Tuesday, September 23, 2008; A21



The uber-capitalists of Wall Street are all socialists now. Free- market ideology, it turns out, doesn't pay the mortgage. That appears to be a job for, ahem, Big Government.

Let's be clear about why we're facing a crisis that could pull down the global financial system. The irresponsibility of individuals who bought houses they couldn't quite afford pales in comparison with the irresponsibility of the financial wizards who built on those shaky mortgages a towering edifice of irrational faith. Someone in the government should have looked at all those trillions of dollars' worth of mortgage-backed securities and collateralized debt obligations and credit default swaps and demanded that Wall Street prove that all, or even most, of this purported money was real. But we're in the eighth year of the Bush administration; adult supervision left the building long ago.

Now that the whole highly leveraged structure is threatening to fall, some kind of government bailout is necessary and inevitable. But Congress shouldn't approve Treasury Secretary Henry Paulson's $700 billion rescue plan without insisting on some measure of equity and accountability.

See, neglecting such details as equity -- in both senses of the word -- and accountability is what got us here in the first place.

Congress should have learned by now what happens when this administration is given a blank check. Unlike the run-up to the Iraq war, at least this time there's a genuine emergency -- we came within a whisker of a financial meltdown last week, and we're still way deep in the woods. No one thinks that delay is an option.

Not Barack Obama, who introduced legislation in 2006 to address lax mortgage lending and in March proposed a new regulatory framework for the financial markets. Not John McCain, who has been all over the map. Within one week, McCain has gone from saying the "fundamentals of the economy are strong" to declaring that "we are in the most serious crisis since World War II."

But first we need to be convinced that Paulson's proposal -- have the government purchase the bad debt -- is the best thing to do. Not all economists believe it is, although it's true that if you put six economists in a room, they'll come up with seven sharply differing, strongly held points of view about the time of day. Assuming that Paulson's plan is deemed workable, the "details" yet to be worked out involve staggering amounts of money. Hedge funds apparently don't qualify for relief, but what about insurance companies that branched out into exotic mortgage-backed investments? What about foreign banks with big U.S. operations?

Clearly there has to be some definition of just who is covered, and there has to be some oversight. And now that the government has nationalized Fannie Mae and Freddie Mac, who's going to run those still-vital institutions? Who's going to run the giant insurance company AIG, which was effectively nationalized last week?

Maybe Congress can insert a provision that broadly insists on the principle of oversight and leaves the particulars to be worked out later. But it would be unconscionable for Congress to absolve a bunch of wealthy financiers of the consequences of their bad decisions and not do the same for homeowners who showed similarly poor judgment. Paulson has indicated his awareness that this is, indeed, an election year -- and that members of Congress are not eager to go home to their districts and explain why Wall Street's pooh-bahs get to keep their mansions and their yachts while working-class families lose their modest homes.

The more contentious issue is the idea, supported thus far mostly by Democrats on Capitol Hill, that there should be salary caps for executives of companies that take advantage of the government bailout. Paulson complains that this will provide a disincentive for companies to participate in the program -- whatever the program turns out to be -- but it seems to me to be a reasonable idea, and a winner politically.

Why shouldn't the executives who put their companies at risk by making unwise investments pay a price for their lack of prudence?

We can't just let the system collapse -- nobody wins in that event. But I thought one of the fundamental tenets of capitalism was a direct relationship between risk and reward. The Masters of the Universe who created this mess ought to share the pain of cleaning it up.

eugenerobinson@washpost.com

Video Dog: Henry Paulson on How He'll Protect the Taxpayers

Cash for Trash

Hby Paul Krugman, NY Times
Sept. 22, 2008

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.