[R-G] [BillTottenWeblog] Paulson Bailout Plan a Historic Swindle

[Bill Totten]

by William Greider

www.thenation.com (September 19 2008)


Financial-market wise guys, who had been seized with fear, are suddenly
drunk with hope. They are rallying explosively because they think they
have successfully stampeded Washington into accepting the Wall Street
Journal solution to the crisis: dump it all on the taxpayers. That is
the meaning of the massive bailout Treasury Secretary Henry Paulson has
shopped around Congress. It would relieve the major banks and investment
firms of their mountainous rotten assets and make the public swallow
their losses - many hundreds of billions, maybe much more. What's not to
like if you are a financial titan threatened with extinction?

If Wall Street gets away with this, it will represent an historic
swindle of the American public - all sugar for the villains, lasting
pain and damage for the victims. My advice to Washington politicians:
Stop, take a deep breath and examine what you are being told to do by
so-called "responsible opinion". If this deal succeeds, I predict it
will become a transforming event in American politics - exposing the
deep deformities in our democracy and launching a tidal wave of
righteous anger and popular rebellion. As I have been saying for several
months, this crisis has the potential to bring down one or both
political parties, take your choice.

Christopher Whalen of Institutional Risk Analytics, a brave conservative
critic, put it plainly: "The joyous reception from Congressional
Democrats to Paulson's latest massive bailout proposal smells an awful
lot like yet another corporatist lovefest between 	Washington's
one-party government and the Sell Side investment banks".

A kindred critic, Josh Rosner of Graham Fisher in New York, defined the
sponsors of this stampede to action: "Let us be clear, it is not citizen
groups, private investors, equity investors or institutional investors
broadly who are calling for this government purchase fund. It is almost
exclusively being lobbied for by precisely those institutions that
believed they were 'smarter than the rest of us', institutions who need
to get those assets off their balance sheet at an inflated value lest
they be at risk of large losses or worse".

Let me be clear. The scandal is not that government is acting. The
scandal is that government is not acting forcefully enough - using its
ultimate emergency powers to take full control of the financial system
and impose order on banks, firms and markets. Stop the music, so to
speak, instead of allowing individual financiers and traders to take
opportunistic moves to save themselves at the expense of the system. The
step-by-step rescues that the Federal Reserve and Treasury have executed
to date have failed utterly to reverse the flight of investors and banks
worldwide from lending or buying in doubtful times. There is no obvious
reason to assume this bailout proposal will change their minds, though
it will certainly feel good to the financial houses that get to dump
their bad paper on the government.

A serious intervention in which Washington takes charge would, first,
require a new central authority to supervise the financial institutions
and compel them to support the government's actions to stabilize the
system. Government can apply killer leverage to the financial players:
accept our objectives and follow our instructions or you are left on
your own - cut off from government lending spigots and ineligible for
any direct assistance. If they decline to cooperate, the money guys are
stuck with their own mess. If they resist the government's orders to
keep lending to the real economy of producers and consumers, banks and
brokers will be effectively isolated, therefore doomed.

Only with these conditions, and some others, should the federal
government be willing to take ownership - temporarily - of the rotten
financial assets that are dragging down funds, banks and brokerages.
Paulson and the Federal Reserve are trying to replay the bailout
approach used in the 1980s for the savings and loan crisis, but this
situation is utterly different. The failed S&Ls held real assets -
property, houses, shopping centers - that could be readily resold by the
Resolution Trust Corporation at bargain prices. This crisis involves
ethereal financial instruments of unknowable value - not just the
notorious mortgage securities but various derivative contracts and other
esoteric deals that may be virtually worthless.

Despite what the pols in Washington think, the RTC bailout was also a
Wall Street scandal. Many of the financial firms that had financed the
S&L industry's reckless lending got to buy back the same properties for
pennies from the RTC - profiting on the upside, then again on the
downside. Guess who picked up the tab? I suspect Wall Street is
envisioning a similar bonanza - the chance to harvest new profit from
their own fraud and criminal irresponsibility.

If government acts responsibly, it will impose some other conditions on
any broad rescue for the bankers. First, take due bills from any
financial firms that get to hand off their spoiled assets, that is, a
hard contract that repays government from any future profits once the
crisis is over. Second, when the politicians get around to reforming
financial regulations and dismantling the gimmicks and "too big to fail"
institutions, Wall Street firms must be prohibited from exercising their
usual manipulations of the political system. Call off their lobbyists,
bar them from the bribery disguised as campaign contributions. Any
contact or conversations between the assisted bankers and financial
houses with government agencies or elected politicians must be promptly
reported to the public, just as regulated industries are required to do
when they call on government regulars.

More important, if the taxpayers are compelled to refinance the villains
in this drama, then Americans at large are entitled to equivalent
treatment in their crisis. That means the suspension of home
foreclosures and personal bankruptcies for debt-soaked families during
the duration of this crisis. The debtors will not escape injury and loss
- their situation is too dire - but they deserve equal protection from
government, the chance to work out things gradually over some years on
reasonable terms.

The government, meanwhile, may have to create another emergency agency,
something like the New Deal, that lends directly to the real economy -
businesses, solvent banks, buyers and sellers in consumer markets. We
don't know how much damage has been done to economic growth or how long
the cold spell will last, but I don't trust the bankers in the meantime
to provide investment capital and credit. If necessary, Washington has
to fill that role, too.

Finally, the crisis is global, obviously, and requires concerted global
action. Robert A Johnson, a veteran of global finance now working with
the Campaign for America's Future, suggests that our global trading
partners may recognize the need for self-interested cooperation and can
negotiate temporary - maybe permanent - reforms to balance the trading
system and keep it functioning, while leading nations work to put the
global financial system back in business.

The agenda is staggering. The United States is ill equipped to deal with
it smartly, not to mention wisely. We have a brain-dead lame duck in the
White House. The two presidential candidates are trapped by events,
trying to say something relevant without getting blamed for the
disaster. The people should make themselves heard in Washington, even if
only to share their outrage.

_____

National affairs correspondent William Greider has been a political
journalist for more than thirty-five years. A former Rolling Stone and
Washington Post editor, he is the author of the national bestsellers One
World, Ready or Not (1998), Secrets of the Temple (1989), Who Will Tell
The People (1993), The Soul of Capitalism (2004)) and - due out in
February from Rodale - Come Home, America.

http://www.thenation.com/doc/20081006/greider


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