Letting the Bank Robber Fix the Bank's Books
If Congress passes the bailout it will be demonstrating an extraordinary belief in the power of redemption. In the past, I have noted the fact that Secretary Paulson's failure to recognize the housing bubble, and the economic and financial havoc that would be created by its inevitable collapse, contributed to the disaster we now face.
It turns out that Secretary Paulson played an even more direct rule in bringing down our financial system. The NYT has a superbly timed piece reporting on how a 2004 change in an SEC rule allowed Bear Stearns, Lehman, and the other major investment banks to leverage themselves to unprecedented levels. Among the highlights of the story is the fact that Treasury Secretary Henry Paulson was one of the main people pushing for this change in SEC rules.
It is remarkable that Congress would be willing to give Secretary Paulson such enormous power in running this bailout given his advocacy of rule changes that played such an important role in this financial disaster, and the extent to which he personally profited from these changes. This would be like giving the bank robber who cleaned out the vaults the opportunity to set the banks finances in order -- and letting him keep the loot. Let's hear it for second chances!
This entire episode is rife with corruption, illogic and cronyism.
Top level persons at Treasury and the SEC should have been fired or given the opportunity to resign. It's impossible not to see that the policies of the administration and of these department heads were and are major contributors to what went wrong and will continue to be wrong until something changes. Paulson's original request for the bailout, ridiculously framed as it was, was a clear indication of how thoroughly misguided and corrupt these people are. He should have been booted right then and there along with Bernanke. Plain and simple Bush should not be running this country. His decisions and actions are in no way compatible with what is good for America. Never have been.
October 3, 2008 6:32 AM | Reply | Permalink
Sure, the next five months of Paulson having this power is unfortunate, but it is a necessary evil to keep our economy going right now. This is the opinion from people I trust a heckuva lot more than Paulson - namely Barack Obama and Warren Buffet.
Barack can take another look at this on January 20th and whomever his Treasury Secretary is will no doubt have different priorities than Paulson.
I totally understand the objections to this bill, but I fear the analogy would better be written as: "Letting the plumber fix the pipe he snapped off before firing him and hiring someone new." Or perhaps, "Letting the firemen put out your burning house before discovering one them is actually the arsonist."
Whatever the analogy, the point is that now is not the time or the place to make this argument. We can have accountability moments with a new Justice Department in place. Nothing in this legislation can replace Paulson or bring him up on charges of negligence or corruption, so why bother offering this blog as a criticism?
The bill that is making its way through Congress no longer has the Treasury Secretary as a star player, so I am not even sure the criticism is valid on its face.
October 3, 2008 8:28 AM | Reply | Permalink
N.B., Barry Ritholtz at The Big Picture had this story weeks ago.
October 3, 2008 9:21 AM | Reply | Permalink
Jason,
I disagree. It is definitely the appropriate time to be having this argument. The notion of fixing something that is broken necessarily must include all the factors that led to the breakage. Closing your eyes to this simple reality invites a 'fix' that will inevitably obscure the factors that caused the breakage and impede a relevant fix. This is especially applicable when the persons at the top, who were and are in the drivers seat, are the very ones who contributed significantly to the failure. This is common sense obvious.
October 3, 2008 9:24 AM | Reply | Permalink
You still dismiss the fact that nothing can be done to "punish" those responsible without fucking ourselves in the process at this moment in time.
We will not have accountability until we have a new president with a new cabinet, a larger progressive majority in the Congress and an engaged electorate. We are putting as much oversight in place as possible right now. This is a finger in the dike not a long-term solution.
That common sense seemed obvious.
October 3, 2008 12:30 PM | Reply | Permalink
I think Jason is wrong for a different reason -- this is like letting a doctor tell you what medicines to take when you just found out he was the one who shot you full of bacilli in the first place. Playing along with incompetence while you wait for the real grownups to arrive is one thing; letting someone who has clearly acted against the nation's interest in the past set the parameters for ostensibly fixing the consequences of his actions is another.
October 3, 2008 9:57 AM | Reply | Permalink
Your analogy is not quite right. It is accusing a whole new set of doctors of being in league with the first doctor because they proscribe the same cure for the disease he injected into you.
What you call clear isn't clear or he would be under indictment. If we were so concerned with accountability, we would have turned out to vote at a level higher than 60.7 percent.
We allowed this shit to happen because of our own complacence.
October 3, 2008 12:33 PM | Reply | Permalink
Thieves, the whole lot of them. Been trying to tell you guys.... It was planned. When you accept that premise then you know what must be done.
October 3, 2008 10:49 AM | Reply | Permalink
Guess we shouldn't have kept sending the incumbents back to office then in record numbers over the last decade and turning out in record low numbers.
I am happy that we seem to still have a functioning system, such as it is. Congress built as many controls into this shit as possible, cut in half what the thieves said we needed and set it up for a review in five months.
Sometimes the harshest medicine is that which we must also ingest.
October 3, 2008 12:37 PM | Reply | Permalink
As we write, the House is moving to pass the bailout. This action serves to remind hopeful citizens that the rulers are still fully in charge and all of our Republican and Democratic representatives are complicit.
October 3, 2008 11:24 AM | Reply | Permalink
This may seem outrageeous but let me personlize the discussion.
Goldman Sachs was one of the major beneficiaries of the rescue of AIG. Could that have influenced Paulson? In two words "of course".
I can personally attest to an occasion when a Chairman of the SEC called the CEO of a company about to do a financing and requested that his- the SEC Chair's - former bank be made co-manager.
Which was then done.
The event was widely known , surprised no one on the Street, and never reported.
You go to the Street because you want to make a lot of money.Not just have a comfortable life- much more than that-the homes in the Hampton and Vail, a yacht in the Caribbean or the Med, travel almost exclusively by private jet.
You quickly find that there are a myriad of dishonest ways to achieve that- insider trading is only the easiest to describe. And no honest way.I consider it highly unlikely that anyone, repeat anyone-including well known liberals-, can reach Paulson's level of authority of income without having behaving in ways that are least immoral and often illegal.
Either Paulson, or whoever succeeds him as Secretary of Treasury , needs to have every one of his decisions examined in advance. We'd be doing him a favor by saving him from himself.
October 3, 2008 11:46 AM | Reply | Permalink
I briefly watched the House committee meeting yesterday, where Barney Frank was a "witness". It was clear to me that these people have no idea what should be done now. They are drowning in this problem and simply grabbing whatever looks like it might float. Paulson's bailout plan, and it is still basically the same plan he demanded from Congress, is likely to be too little, too late, and too irrelevant, but I have yet to see a proposed plan that seems to offer a much better chance of success.
I recall very clearly warning people in 2000 that there were consequences for putting a total dunce in office as President. But, we did it anyway, with a very major assist by the crooks on the US Supreme Court. Now we will find out if we can overcome this particular consequence. I admit that I am scared.
October 3, 2008 11:48 AM | Reply | Permalink
The NYT has a superbly timed piece reporting on how a 2004 change in an SEC rule . . . .
A bit off topic -- but "superbly timed"? A report filed after the bailout bill is a done deal?
We, here, were discussing Julie Satow's report in the NY Sun two weeks, ago.
How come it took the New York Times so long to get on this story? Bias in favor of Paulson's bailout bill? Or just The Times, as usual, a day late and a dollar short?
October 3, 2008 2:00 PM | Reply | Permalink
Cox testified before Dodd's committee 5 days after The Sun published the article.
Did anyone ask him about his responsibility in creating the "crisis"? How letting favored investment banks like Lehman Brothers gear up to 40-1 led to the reason he was there testifying?
Or would such questions have only served to increase Americans' suspicion that only the foxes were being invited to testify by their Wall Street enablers -- Dodd and Frank?
October 3, 2008 2:24 PM | Reply | Permalink
"A bit off topic -- but "superbly timed"? A report filed after the bailout bill is a done deal?"
Precisely. And...funny thing...the NYT has a bad habit of that after-the-fact-timing when it comes to anything that involves large amounts of the American taxpayers money being looted---similar to the way they handled the Iraq war (after that was a done deal).
But not to worry, polls have turned up showing that increasingly large numbers of Americans have caught on to the MSM and are beginning to use their own judgment.
WatchingAmerica.com had an article about these polls--maybe within the last 3 weeks.
October 3, 2008 2:51 PM | Reply | Permalink
Let me try those links, again:
TPM Cafe and NY Sun
October 3, 2008 2:04 PM | Reply | Permalink
To those with the doctor analogy:
You're having a heart attack, something needs to be done now.
You want me to start resuscitation now, or do you want to discuss what caused it.
How about to much bacon?
October 3, 2008 2:50 PM | Reply | Permalink
Buffet's worried his Omaha EMT crew will recall all those McDonald's burgers and those milk shakes he's been scarfing down these many years and wonder whether he's worth saving.
Hmm. If his ticker's on his mind, maybe I should be thinking about selling my Berkshire Hathaway.
October 3, 2008 3:22 PM | Reply | Permalink
On lighter note. Ellen I'd like to know, are those your eyes on the picture?
October 3, 2008 4:09 PM | Reply | Permalink
If the grand majority in Congress had even a slight interest in main street, they might have funded their "it's-going-to-save-the-little guy" baitout and switch this way:
-a massive collection of the hundreds of billions in taxes and penalties owed by "Americans" who hide their money in other countries to avoid paying their share of the taxes.
-they'd have nixed that 150 billion in pork and used just a fraction of that to pay people to go collect those hundreds of billions owed by the criminal tax evaders who live off the American taxPAYERS
But this Congress isn't busy making any law with teeth (and FUNDING it so it can be enforced) that mandates the IRS to collect this money. No, instead they go after the minimum wage guy who owes the IRS 100 and people who do well and don't hide their money. Then they pass an 850 bailout that further hawks the children of the many taxPAYERS for the bailout of a few. And they do it during a recession and at a time when we've got American soldiers coming home in tatters who will need all the help we can give them--and deserve much more.
The evidence that we need to vote for many, much better leaders in Congress is just staggering. Maybe this bailout is just what this country needed.
October 3, 2008 3:03 PM | Reply | Permalink
I think you'll see more of an effort to go after Tax dodgers and the like.
Can you imagine the pressure on employment when the soldiers return home? Especially with an ongoing recession.
October 3, 2008 4:16 PM | Reply | Permalink
If as Congress says this is the best we can do, then here’s something to ponder.
The bail out is a done deal and the president signed it within 12 minutes. But?!?!
Looking at market movements over the last few days ( and I’m just thinking out loud here ) the U.S. Senate negotiated the bill Wednesday evening. Word gets out around the world and the Asian markets nose dive on the news as does Europe reported by Bloomberg, and then the DOW bombs 355 points on Thursday.
The bill hasn’t changed much from the Senate to passage in the Congress. This time the announcement was made before the markets closed and the DOW was up just over 300 points. The news comes out, and bang, we see a 460 point turn around to close down about 160. So I ask, what do the US and International markets see which would cause them to drop first after the Senate passes this garbage and then the same thing happens after the Congress passes the bill today and it's signed into law in a record 12 minutes? The opening of the markets in Asia this Sunday evening may give us a clue. Something tells me we’re in for a bumpy ride. Something just smells in the market place and it must be stinking things up pretty bad if the markets are reacting the way they have been for the last few days every time this bill advanced. Something wicked this way comes? A bank holiday ala 1933?
October 4, 2008 12:12 AM | Reply | Permalink
Jason,
You will never fix something that is broken if you refuse to identify and acknowledge the reason and address it. I don't disagree that neither Bush nor the congress will do this but that doesn't change the circumstance of what should obviously be done. The bailout may well make sense but only in the context of a complete resolution. As can be seen by the public response to this it is clear people recognize the inadequacy of throwing money at this unaccompanied by other steps to assure the desired outcome. I don't care what controls congress places on the bailout. The persons in charge of why this occurred must be gone. They have conducted the business of the nation irresponsibly. The effective result is Paulson is being allowed to raid the treasury very much as he already has.
October 4, 2008 6:58 AM | Reply | Permalink