According to the NYT, Lloyd C. Blankfein, Goldman Sachs CEO, was in the room with Henry Paulson (former CEO of Goldman) when the decision to save AIG was made. Why does this matter? According to the NYT, AIG owed Goldman $20 billion. If AIG had been allowed to go bankrupt, Goldman would be in line with all the other creditors, hoping for a few dimes back on each dollar of debt. Because Henry Paulson decided to rescue AIG, Goldman gets paid in full.

Did Goldman's influence with their ex-CEO make a difference in Paulson's decision? I have no idea, but this thing stinks. Can you imagine if clerical workers losing their homes got to sit around with bankruptcy judges deciding the fate of their mortgages? It doesn't work that way where the rest of us live.

It is impossible to exaggerate the corruption of this Wall Street crowd.

Like many other economists I have been writing about the conditions under which the taxpayers should be willing to hand over vast sums to the Wall Street wrecking crew. This is inevitably involves a game of chicken to some extent. But a properly designed bailout turns it into a simple question of revealed preference.

We give Wall Street terms that require giving up so much equity that the banks really don't want to take the deal. They will take the deal because they have to take the deal, the alternative is bankruptcy.

There is a very simple way to determine whether the deal is the right deal.

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The Democrats have made good progress in getting the Bush administration to move from the $700 billion blank check proposal that we saw last weekend. The initial draft agreement provides for some real oversight, restrictions on executive compensation, and an equity stake for the government in exchange for taxpayer dollars. It is also includes language committing the government to seek workouts on mortgages that will allow people to stay in their homes.

This is all great progress, however there is still much that is missing.

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We are getting a lot of nonsense on this bank bailout deal and it's coming from all sides. In a largely reasonable editorial, the NYT added this line in support of changing the bankruptcy rules on home mortgages:

"And that would halt the downward slide in home prices, reduce the number of vacant homes -- and the blight that comes with them -- and help preserve equity for all homeowners."

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The NYT is spreading fear at a very bad time. It told readers that "Credit Enters a Lockdown." The information in the article doesn't back up the case.

Much of the story seems to rest on the experience of a mortgage broker in Cape Coral, Florida. According to the broker, "The underwriters are terrified and they're dragging their feet, and making more excuses not to close loans ... Basically, they just don't want the deals."

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Before anyone has any idea how much a bailout might cost, before we even know what the bailout will look like, the enemies of Social Security and Medicare are already using the bailout as a pretext to cut these and other essential programs. Earlier this week, the Washington Post ran a front page "news" article that essentially demanded that the presidential candidates put forward a schedule of spending cuts and tax increases to pay for the bailout. Peter Peterson's crew has also been banging the same drum.

The reality is that a bailout is likely to be expensive, but it does not create a whole new budget world.

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A friend recently sent a note reminding me that back in 2003, when some of us were warning about the dangers of the housing bubble, Alan Greenspan, the person most responsible for the housing bubble, was being knighted by the Queen of England. If we look at the list of banks and financial institutions that have crashed or now threaten to crash, we can find a long list of people who brought their companies and the economy to the brink of disaster and yet have received tens or hundreds of millions in compensation.

We can also find a long list of people in top policy positions, including the current Fed chairman, Treasury Secretary, and President, who celebrated the soaring house prices and loan excesses of the housing bubble. These people now expect to receive even greater authority due to the failure of their policy. This must stop.

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With all the urgency and frenzied debate around the Wall Street bailout, it is important that we not forget to still have some fun. With that thought in mind, let's take a moment to mark the sudden transformation of the Wall Street free trade crowd, led by several of the top figures in the Clinton administration, into the Wall Street protectionist crowd.

As Wall Street free traders, these folks argued that we should get the government out of the economy. They wanted to remove the trade barriers that obstructed the free flow of goods and services (especially goods). If this meant that workers had to lose their jobs, so be it. Because they were nice guys, they promised benefits like job training and wage insurance.

But now the Wall Street crew no longer wants to leave things to the market.

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The financial picture is changing by the hour. Remember way back to this morning when Treasury Secretary Henry Paulson said that if Congress didn't immediately give him a $700 billion blank check the financial system would collapse? He became upset because the Democrats didn't believe him and decided to include conditions like restrictions on CEO pay.

It turns out that the Democrats aren't the only ones who don't believe Paulson. According to the NYT, the financial industry doesn't believe him either. That is why they are seeking to expand the bailout to include a wide range of assets in addition to mortgage backed securities.

In addition to calling into question Paulson's threat, this points out another important problem with the bailout.

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