Congress Is Resisting the Bailout Plan Now, But Wall Street Will Do Anything to Get Its Way
After a day of debate, a few bumps in the road to passing Paulson’s $700 billion bailout package emerged. Paulson and Bernanke want a rush job. Democrats want more oversight and Main Street oriented provisions. Republicans want assurances this bailout will actually work. Both sides are aware there’s an election around the corner. Neither side is wondering whether the bailout is necessary. So, even through the doubt, the question seems not if, but when and in what exact form, this bailout will be approved.
Sunday night meetings in Washington produce startling announcements: In March, there was the Fed’s $30- billion backing of Bear Stearns’ bad assets, as it was given to JPMorgan Chase; last week we had Lehman Brothers’ declaration of bankruptcy; this week it’s Goldman Sachs and Morgan Stanley, changing their status to one equivalent to neighborhood banks, with all the emergency capital perks thrown in.
The shifting tides of Wall Street aren’t over, and neither are the government bailouts. If Treasury Secretary Henry Paulson’s request for a $700 billion bailout is approved, it will bring the total government tab for saving Wall Street from itself to $1.25 trillion.
But, reading the fine print, that huge chunk of cash is just for one-time purchases. If the government buys $700 billion worth of assets whose value goes to zero, we could be on the hook for another bailout round before you know it.
Paulson considers this latest plan, “decisive action to fundamentally and comprehensively address the root cause of our financial system.”
But it does no such thing. That’s because his persistent focus on illiquid mortgage assets and the “housing correction” is not the bigger problem. It’s merely the catalyst that revealed the systemic rot of overleveraged and reckless activities that define our financial system.
Blaming irresponsible lending and borrowing is a slick way of avoiding the deeper need for regulation. If the entire industry (from small lenders through big trading firms) were more transparent and less leveraged, a correction in housing wouldn’t have brought down three major investment banks. It wouldn’t have triggered the decision of the remaining two to become commercial banks, to gain more access to desperately needed capital through citizens’ deposits and the Fed’s emergency window.
That Goldman Sachs and Morgan Stanley positioned their request like a plea for regulation is a joke - it was a plea for money.
Yes, we need stricter lending practices instead of the ones that contributed to 5 million homeowners facing defaults or foreclosures. But we also need to restructure Wall Street - not by creating bigger, less-transparent entities, but by generating smaller ones whose risks are clear, as was done in 1933.
Meanwhile, Democrats in Congress want more constraints on Paulson’s bailout package. They cite the need for independent oversight of the fund that will purchase the assets, a cap on executive compensation, and more help for borrowers through mortgage-debt reductions.
