How sharper than a serpent’s tooth it is to have a thankless child! –King Lear.
When the U.S. House of Representatives rejected the $700 billion Wall Street bailout last week, stock markets promptly plunged. Advocates of the plan were quick to blame opponents for the record drop in the Dow. Dire warnings were issued that incalculable damage would be inflicted if the bill were not passed. It was portrayed as a rescue of Main Street and something that was absolutely essential to avoiding Armageddon in the credit markets. The fate of the economy and the ability of families to send their children to college were hanging in the balance, we were told.
When the House finally passed the Senate’s revised legislation on Friday, stock markets again promptly dropped. No recriminations were heard this time, only demands for more. And more. 
So it is with the largest single expenditure in the history of government, where nearly one trillion dollars was added to the taxpayer credit card with the stroke of a pen. Once again, Main Street has failed to satisfy Wall Street.
Aided by a battery of the best lobbying firms money can buy, Wall Street worked overtime to push for passage of the bill. And it worked. For its part, the Senate approved a bill on Wednesday with add-ons that were on an obvious equal footing with the emergency economic measure triggered by the most serious financial crisis since the Great Depression: $192 million for rum producers; $129 million for NASCAR tracks; $33 million for companies doing business in American Samoa and $6 million for toy arrow producers. Relief from the current crisis will come sooner for some than others, it appears.
Both before and during the House vote to approve the measure on Friday, the stock market soared. Only when it was passed did the Dow start to sink. By the close, it had erased all the day’s gains and finished down 157 points. Wall Street types, some from the floor of the New York Stock Exchange itself, were saying the bill wasn’t enough; more intervention was required. One analyst told CNBC “the idea of passing the bill was a lot better than passing the bill. The more time we had to digest it, the more we realized maybe it’s not such a great bill. Maybe it’s not going to rescue us.”
Another manager with more than $800 billion under management remarked “What we really need in addition to this now is a confidence booster from the Fed.” Don’t you just love Wall Street and its sense of gratitude?
President George W. Bush, who was quick to point out how much the Dow sank on the day the original House bill was rejected, had nothing to say this time about the Dow’s falling by over 300 points. And the bill that was so essential to getting things rolling for Main Street and freeing up those car loans? He said it would now take some time for the measures to have their impact. Why are we not surprised that what is revealed afterwards is not exactly as it was laid out in the case that was made for the bill in the first place? It is a familiar modus operandi for the Bush administration. Exhortations are issued like a thundering herd; equivocations follow soon on cats paws and in whispers.
Let’s be clear: the central purpose of the bill was to help Wall Street restore the glitter, glitz and gravy train to Wall Street. It is designed to help banks and bankers go back to the future and pretend that the mess they made never really happened. Nearly a trillion dollars can help rewrite a lot of history. It has much less to do with easing credit for Main Street, which will now require additional and more targeted government intervention if that problem is to be really solved. One more thing: The freezing of the credit markets was, in significant measure, the result of allowing Lehman Brothers to collapse without any steps being taken to mitigate the blow to other parties. That created anxiety in credit markets around the world. It is another example of how officials in the administration and at the Fed have misread significant signals on the road to this crisis and have taken many missteps along the way.
We expect the bailout will quickly rise to the status of the largest boondoggle of recent times. Huge sums will be misspent. Scandals, delays and ineptitude will emerge that hobble the plan, and it will become a great source of contention -even on Wall Street itself. Many will also manage to make fortunes for helping to “solve” the problems their industry created. It wouldn’t be Wall Street without the aforementioned trademarks.
The era that has culminated in the greatest economic crisis in several generations was the product of unchecked greed and excess on the part of those who have lost any sense of proportion regarding value and forgotten the respect the risk deserves. One might have expected greater due diligence on the part of lawmakers as to what the bill’s intentions were -and what it was actually capable of achieving. Instead, the country is being saddled with and called to underwrite a vague and half baked collection of untested ideas and untried schemes. It is bad enough when taxpayers can’t understand what Washington is proposing; it is a worry of considerably higher magnitude when it appears that Washington and its key players don’t understand it either.
Sill, the mother of all financial bailouts is what Wall Street wanted; what it demanded, what it lobbied for and what it got. It raised few doubts and insisted upon swift and immediate passage. Yet now it appears that even this is not enough for Wall Street. The crisis continues. The reason is simple: Wall Street is the crisis, which is why its disingenuous actions and those of its supporters leading to this thankless point are our choice for the Outrage of the Week.
The public rarely likes to be hoodwinked or dismissed; their ire is almost certain to be raised when they believe their pockets are being picked in the process.
Somewhere at the intersection of Wall Street greed and tone deaf political acumen you will find the shattered remains of the $700 billion Bush-Paulson bailout plan. It collided on Monday with outrage on Main Street. Whatever else the proposal -which was narrowly rejected by the House of Representatives- was intended to do, its first priority was clearly one of bailing out the banks and players who caused much of the current economic crisis. The value to Wall Street of the vaguely crafted plan to buy back securities would have been immediate and clearly defined. The benefit to Main Street would have been longer in coming and more circumspect in specifics.
Wall Street’s reaction was a predictable plunge in the Dow. It closed with the largest single point drop in its history. The NASDAQ lost more than nine percent of its value. The Canadian TSX plunged by an unheard of 840 points. Unnoticed in all of this mayhem was the fact that the U.S. dollar actually rose as the bill faltered. The next day, more than half the losses were gained back.
The legislation as drafted, even altered from its original sparse and accountability-challenged state, gave too much discretion to the administration and offered too little assurance that its provisions are what the stalled credit system actually needs. The so-called oversight board for the bailout included the same actors who presided over the explosion of the crisis, denied the obvious storm clouds that were brewing and brought to the American people the draft that wanted no accountability whatever. The architects of the plan, and the ones running it, effectively would have been overseeing themselves. The Treasury secretary, the chairman of the Fed and the head of the Securities and Exchange Commission were named to the board in the plan rejected by the House. Monthly meetings were all the legislation required of the board overseeing some $700 billion in taxpayer funds. This is governance, Wall Street style. It’s one of the reasons why calamity has struck so many institutions and befallen so many investors.
Rarely has such an important and costly public policy initiative been as bungled, or its authors and sponsors so tone deaf to an already disbelieving and angry public. It is as if ordinary citizens were not even in the picture for all the heed paid to their concerns or to crafting a plan that would appeal to their sense of fairness and prudence. Not a good approach when 435 lawmakers have to face the voters in 35 days.
Maybe if a few Wall Street CEOs apologized to the public for the excesses and misjudgments of recent headlines and gave back a good portion of last year’s multibillion-dollar bonuses, people would have some faith that there are real leaders in charge. They might also be more predisposed to a bailout. Maybe if the plan did not start off trying to turn Henry M. Paulson Jr. into a modern King George III, with powers that could not be reviewed by any court or authority, initial reaction to the rescue plan would have been more positive. A reasonable mind might even question whether Secretary Paulson -a former Wall Street titan himself, who for some time has been in denial as to the depth of the problem- is really the best person to be hovering over the financial sector in a helicopter shoving billions out the window to his friends and colleagues.
Speaking about pushing money out the window: Since the beginning of the year, more than a trillion dollars has been pumped into the banking system by the U.S. Federal Reserve. On Sunday, the Fed boosted its currency-swap facility with foreign central banks to a total of $620 billion. Hundreds of billions more have already been paid out or committed for the Bear Stearns takeover, the seizure of AIG, the nationalization of Fannie Mae and Freddie Mac and the housing rescue plan passed in July. If these trillion-dollar-plus steps have failed to smash the ice jam in the flow of credit, what assurance is there that another $700 billion will? Does anyone really have a handle on the problem and what needs to be done to fix it, or are policy makers and regulators just hoping that if they keep throwing money at the problem it will get solved? At least 228 Congressional districts appear to be asking the same questions.
No doubt there are serious problems in the financial system.But little certainty has been offered that buying up structured investment vehicles and bad car loans from distressed banks will achieve stabilization in the housing market, which is the controlling declining asset base that is central to the whole problem.
Funneling $700 billion into the hands of the very actors that caused the financial crisis without any hearings or public consultation, and against the advice of some of the top economic minds in the nation -including several Nobel laureates, was a clumsy way of achieving the consent of the governed. The public rarely likes to be hoodwinked or dismissed; their ire is almost certain to be raised when they believe their pockets are being picked in the process. I seem to recall that the relationship between citizens and those who tax them featured rather prominently in America’s founding.
A sensitive and prudent plan would not have started off with targeting $700 billion at Wall Street. This only magnified the public perception of the wealth and privilege gap that is consuming America and fueling its indignation, which rather notably has reached a point not seen since 1929. It would not have attempted to secure a blank check with little oversight and absolute unreviewable powers. That was too reminiscent of other costly bungles by the Bush administration that did not unfold as promised. The lack of vision that has hobbled policy makers and regulators in the past, which saw them proclaiming the subprime fallout would be contained and where each bailout along the way has been portrayed as what was necessary to prevent a wider meltdown, did not bode well for their ability to get it right this time. The outcome seems unsurprising when you really think about it.
Investors would not lay out $700 billion for an ill-defined and uncertain plan run by people with this kind of track record. It is not surprising that American taxpayers are no different.
Making bad investment decisions over risky products that people did not fully understand is what brought the United States and Wall Street to the brink. Is another terrible folly about to be repeated, even with echoes of the costs and misadventures of the Iraq war booming loudly across the land?
Investors generally like a few details before laying out their money. A knowledge of the investment’s business plan, its costs, its expected return and its risk –above all, its risk– are key to the decisions investors make. It should be no different for citizens when they are asked to put $700 billion on the line for the private sector.
In this case, however, basic rules for the informed citizen/stakeholder are being thrown out the window. How the Bush bailout plan will be managed, what assets it will buy, how it will value and how long it will hold them are all undisclosed. It is hard not to be doubtful that the compromise proposal now being discussed will offer much more information. There is considerable dispute that the plan even addresses the fundamental problems in the banking sector. A rare and impressive collection of more than 200 economists, including Nobel laureates from both the left and the right, have raised serious questions about the plan and have urged Congress to reject it and to hold hearings into alternatives.
Making bad investment decisions over risky products that people did not fully understand is what brought the United States and Wall Street to the brink. And the sums stagger the mind. When you make a decision involving this amount of money, every detail matters. Probably even the spin of the earth should be calculated in the analysis for good measure. But what utterly takes the breath away is the lack of transparency and specifics offered as they relate to the single largest expenditure by any government in the history of the world. There is no clear statement even as to the kind of weak assets the government proposes to buy, much less how they would be valued. I suspect it will soon work its way down to student loans, car loans and credit card debt. Given the desperate picture portrayed by Fed chairman Ben S. Bernanke –who claimed in testimony before Congress on Tuesday, “I believe if the credit markets are not functioning that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way…”– and Treasury Secretary Henry M. Paulson Jr. –who resorted to begging House Speaker Nancy Pelosi, on a bended knee, for her support– don’t be surprised to see some banks even scurrying to trade in the trashy boardroom artwork selected by the chairman’s wife for some quick government cash.
Then there is that convenient cash and carry discount window the Fed is providing on a 24/7 basis. In the course of less than a year, deposit taking and investment banking institutions have so far borrowed a record $262.34 billion. The amount doubled in just the course of one week, the Fed said in its September 25th report. Total average daily borrowing also jumped to $187 billion from $50 billion in the previous week.
This unheard of level of borrowing from the Fed has received nothing near the reporting it deserves. To some observers it suggests that bank liquidity problems may be even more serious than are being disclosed. How much more will the taxpayer be on the hook for in addition to the $700 billion now being sought by the administration, which in turn is on top of the hundreds of billions that are on the line for all the other bailouts to date? If ever there was a time when the voices of the best economic minds in the world needed to be heard by lawmakers and citizens alike, it is now. Yet there has been no organized forum for either informed debate or Congressional testimony. Not only is $700 billion at stake, but much more will be at risk if the wrong decisions are made or the wrong problem is attacked. And what does the government do if it gets it wrong? Will the administration’s massive proposal stabilize a weakening housing market, which is the driving force in the erosion of corporate balance sheets and the unraveling of debt obligations, or will it merely be a prisoner in an even faster moving express ride downwards?
Institutions are failing, to be sure. Just this week Washington Mutual became the largest failure of its kind in history. But if the $700 billion dollar fund had been up and running, it is unclear whether it would have made any difference. And no one from the administration or Congress has weighed in on that issue. Even before this deal was proposed, Fed and U.S. government commitments and costs related to this crisis totaled more than a trillion dollars. Still, we are told a credit market calamity unlike anything since the Great Depression is possibly hours away unless taxpayers pony up hundreds of billions more.
So what exactly is the problem this bailout is supposed to be addressing and is it the right one? What if banks, having sold off their bad loans to the government, decide not to lend any money, except to other banks and their wealthiest clients? What will be the costs to the economy and to small business owners as well as ordinary Americans? Taxpayers should not be left scratching their heads for the answers. Some may recall that, as noted on these pages, just after the $21 billion takeover of AIG, the White House admitted that taxpayers may not see their money returned.
Here’s an idea: Why don’t Wall Street and the private sector take a more prominent role in cleaning up the problem that was of their creation? We are told that trillions of dollars is sitting on the sidelines and is ready for the right opportunity. But little effort is being made to corral these resources into an overall plan. It is just another inexplicable piece of a puzzle that has been turned into a masterpiece of confusion and uncertainty. Another nagging item: If the world is hanging on by the finger nails over the abyss of financial collapse which can only be averted by the steps the Congress is being asked to take, and so much anxiety centers on how the Asian markets will react on Sunday night (EDT) if the deal is not approved, why have governments around the world not proposed their own contributions to global economic salvation? Why do we not see their lawmakers meeting around the clock and over the weekend to do something to appease the markets?
Is America stumbling into a financial Iraq? The rush to attack a problem that did not exist on the basis of costs and consequences that were not anticipated have already taken their toll on America, its brave young troops, their families and the reputation of the country. The financial price tag for the Iraq misadventure is also counted in the hundreds of billions. Some estimate that it will soar into the trillions. Are we dealing here with the financial equivalent of threatened mushroom clouds and weapons of mass destruction? Another echo from that lamentable miscalculation is the idea that government cash may wind up making money for taxpayers. And the Iraq war was supposed to be self-funding from that country’s extensive oil reserves. Americans are still waiting for that windfall.
This much is clear from that costly experience: When principles that affect public confidence are sacrificed for the expectation of immediate gain, both stand at risk of being lost.
What is worrisome is that few leaders in business and government have demonstrated any grasp of the larger picture. Not only is there an apparent inability on the part of both Democrat and Republican legislators to connect the dots between the Fed’s record loans, the costs of the recent torrent of bailouts, the extent of the subprime mortgage mess, the swelling deficit and shrinking U.S. dollar and this latest government proposal, it is unclear that they even see the dots at all. The lack of leadership in providing the public with clear answers was especially apparent in Friday’s first debate among presidential hopefuls John McCain and Barack Obama.
The way Wall Street has been working is no way to run a business. The way the Bush bailout plan is being decided is no way to run a government. We are already seeing the consequences of the first fiasco. One shudders to think of what might await in the mismanagement of the second.
“Our entire economy is in danger.”
Whether the threat to the economy is as it was portrayed with unprecedented grimness by President George W. Bush last night, or whether it is another version of the mushroom cloud scare that was used to force agreement over the ill-fated invasion of Iraq, American law makers will have to decide.
What adds to the trouble, if the economy now stands on the precipice of disaster, is that precisely the same policy makers, regulators and financial actors who allowed the crisis to reach this point now claim to have the answers. And Wall Street, which was central to the creation of the subprime problem, will now be key to its resolution, or so it is asserted. Skepticism is an appropriate litmus test for discovering reality.
Few -even its earliest critics- expected the war in Iraq to be so costly in lives and treasure. Are the seeds of similar folly being sewn in the staggering $700 billion bailout plan? Will the greed, shortsightedness and shortcomings in governance and oversight that are the hallmarks of this disaster also infect the plan for economic survival? And what will be done to ensure they do not?
On the correct answers the fate of countless millions depends.
The promise of this new era of market miracles has been shamefully betrayed by a self-serving collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week.
It was advertised as a sure path to wealth and prosperity for the world. If only American capitalism could be left unfettered. If only regulations would be loosened. If only CEOs could be incentivized with huge bonuses that would be paid out when their efforts resulted in a rise in stock. Just let the market work its magic, and the world would be changed forever. History will record that, in September of 2008, part of that promise was fulfilled. The world was changed, but not exactly in the way that was promoted. Over the course of a day or so, the world actually held its breath while the financial system glided Titanic-like ever so close to the iceberg that was Wall Street’s creation.
During the years leading up to the near calamity and the tsunami of disbelief that finally overtook Wall Street this week, more wealth was transferred by shareholders to CEOs than to any similar group or at any other time in history. Directors, too, made a huge cash grab to compensate, they claimed, for the heavy work load that was now being required of them. And regulators, like the Federal Reserve, were willing to do whatever Wall Street and the financial sector needed to keep the fees rolling in.
Wall Street and American business had pretty much all they wanted, except for those nagging requirements of the Sarbanes-Oxley Act of 2002. They, too, were well on the road to being blunted with the arrival on the job a couple of years ago of Henry M. Paulson, Jr. as the fresh-from-Wall Street Treasury secretary. Loosening the clutches of regulation was his first priority. “We must be careful not to kill the goose that lays the golden egg,” was the mantra of lobbyists, the Business Roundtable, right-wing think tanks, dark paneled boardrooms and not a few well-financed politicians.
But the promise of this new era of market miracles has been shamefully betrayed by a collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week. A few months ago, Secretary Paulson claimed we were closer to the end of the crisis than the beginning. Two weeks ago, he asserted that “the American people can remain confident in the soundness and resilience of the financial system.” His opinion seems to have changed with each of the crises he was incapable of foreseeing until it struck.
Rather than seeing itself transported to the promised land of a new prosperity, Main Street America finds itself today squarely plunked at the junction of Crisis Road and Bailout Boulevard. And those well-heeled CEOs who were trumpeted for their out-of-this-world skills with pay checks to match? They turn out to be as authentic and respectable as a third-rate circus act.
The tax-cutting Republican administration and Treasury secretary who were the biggest boosters of American business and free market capitalism have now become the biggest interventionists, writing the biggest bailout checks in American memory.
History will have much to say about the circumstances that led to this crisis. And it will ask with a decidedly more demanding voice than heard thus far among policy makers and commentators, how was it possible for American capitalism to have been permitted by its regulators, guardians and gatekeepers to have reached a point where decisions of CEOs and boards were so reckless that they ultimately brought the world’s financial system to the brink of collapse?
The answer will be seen, symbolically at least, through the prism of excessive CEO compensation, which some six years ago we described to the U.S. Senate Banking Committee as the most corrosive force in American business. We said then that the lure of huge bonuses tempted CEOs to take risks that cannot be sustained. The subprime meltdown is unsustainable risk writ large. It is another story of greed overcoming responsibility and of boards yet again, as they have in so many scandals in the past, acting more as a combination of cheerleader and ATM machine for overreaching CEOs instead of the wary sentries they are supposed to be.
As we predicted at the beginning of the year when it became apparent that Countrywide Financial would not survive on its own:
This is only the beginning of the bailout process that is unfolding…. Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.
Significantly, all the failures, bailouts, meltdowns and write-downs have carried with them the earmarks of high abuses in CEO pay. Over the past five years, when the faulty, risk-oblivious decisions that led to the present crisis were being made, the CEOs of Merrill Lynch, Citigroup, AIG, Lehman Brothers and Bear Stearns received an aggregate compensation in excess of one billion dollars. One only has to recall the antics of Bear Stearns’s James Cayne, the colossal greed of Contrywide’s Angelo Mozilo, the dissembling of Lehman’s Richard Fuld and the narcissistic actions of Merrill Lynch’s Stanley O’Neal -who waltzed off with more than $160 million after leaving investors stung with multi-billion dollar write-downs and losses- to be persuaded of the depths to which the leadership of Wall Street and the financial community has fallen. With captains like this, and the apparently vision-blind Henry “the American people can remain confident in the soundness and resilience of the financial system” Paulson at the helm, the surprise is not that the financial system has been teetering on the abyss, but that it has not fallen in more often.
Now the $700 billion price tag for the excesses and failures of those in charge has arrived at the doorstep of every American home with a gigantic thud. This is on top of the estimated $800 billion in federal commitments and outlays caused by the subprime debacle so far.
And a larger cost is yet to be calculated. It is in the form of a crumbling in the pillars of confidence necessary to the functioning of free markets and a collapse in respect for those who claimed they could be trusted to do the right thing. As we have noted before, in many cases boards could not even be trusted to meet regularly and assess the risks they were presiding over. Another consequence of the massive sums that will require mammoth increases in foreign borrowing: the United States will be thrown further into the embrace of China, a traditional major buyer of U.S. debt. What geopolitical ramifications may result from the U.S. becoming even more beholden to that communist regime do not appear to have found their way onto the radar of most American policy makers.
But the more lasting outcome of this crisis and the cost to extricate the financial system from it will be that American citizens will have to pay for it with their own well-being. It is difficult to imagine how any universal health care plan will be possible in a new administration; nor will the huge sums being committed to the bailout of Wall Street’s excesses permit major outlays for job creation or infrastructure support. Inflation and a lower dollar will be harsh taskmasters in this new American economy and will hurt most of the very citizens on Main Street the Bush/Paulson Wall Street bailout plan purports to help.
As the United States now comes to grips with this trillion-dollar-plus inflection point in its history and how close it has come once again to a Titanic-like collision with the financial system, the enormity of the betrayal will become even more painfully evident.
Part of the social covenant binding America, built up over generations of struggle, is that capitalism must serve the public good and not just the privileged few. A stable, functioning economy and the right to prosper in it is the birthright of every American. Both have been hijacked by the self-serving purveyors of subprime governance, leadership and regulation.
They are a fitting focus for the indignation and anger of millions of Americans who have lost so much in jobs, homes and hope, and will be called upon for still more. We join them in their outrage.
We will examine the bailout plan, and the bankruptcy of the vision and moral leadership that produced it and are now seeking to profit from it, in a future commentary.
