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Alan Schram Headshot

End the Bailout

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Treasury Secretary Paulson is clearly improvising.

According to the Washington Post, at the time that Lehman Brothers was teetering on the verge of collapse, Secretary Paulson warned of the dangers of repeatedly offering government guarantees to companies. Just three days before Lehman failed, Paulson reinforced the point, telling reporters and Wall Street executives that no government money would be used to save the 158-year-old investment bank.

But shortly thereafter he engineered a series of massive federal intrusions into the markets. He started by announcing the government will acquire troubled mortgage securities en masse from weak banks. Then he abruptly said he no longer wants to buy those toxic assets and shelved the program altogether.

Once Paulson abandoned this plan, the values of the troubled securities he now abandoned plummeted, hurting financial firms and leaving confusion in its wake.

A few days later, following the Europeans' lead, Paulson decided that some of the money should be used to buy stock in banks. Effectively the Treasury partially nationalized some of the largest banks in the country, and many smaller ones. Secretary Paulson made this outrageous decision, carrying enormous long term consequences, apparently on his own. He gave the banks no choice, simply forcing them to "participate".

Shortly thereafter he decided to inject capital into a wider range of financial firms, in an effort to loosen the markets for general consumer loans.

Paulson is now on his third plan for how to spend the cash Congress gave him. Nobody knows what he will do next.

Some people say we need this kind of pragmatism -- he did what was necessary for the complicated financial system meltdown, even if this meant betraying his earlier convictions.

But there is obviously no road map. His actions are inconsistent, and his shifting views are startling.

Furthermore, this massive bailout gives Treasury unprecedented power and is therefore dangerous. Nobody in Congress understands what is happening, nobody knows who exactly the recipients of these huge sums are, and Henry Paulson is vested with massive authority, unchecked. Bureaucrats and politicians, once in power, rarely hand back the checkbook and relinquish their control.

I am also very skeptical of the efficacy of government meddling. The unintended consequences are mind boggling. For example, companies are motivated to take excessive risks because of the prospect of a government backstop, a problem known as moral hazard.

Take Genworth Financial, a troubled insurance and financial services company. It was too weak to survive so it recently decided to buy a weak bank just to be able to tap TARP funding. Many insurance companies are now buying small banks to be able to access government funds. This sort of policy distorts the market and uses capital inefficiently. That capital is needed elsewhere, and should not be allocated by Washington D.C.

As for the argument that the bailout saves jobs, where does this stop? We started with banks, then on to insurance companies and general financial services. Is manufacturing next? What about retail? Starbucks is closing stores, shouldn't we bail them out to save the jobs of the coffee makers?

All this enforced egalitarianism thwarts the meritocracy that America has always been, because the rewards for excellence are turned over to politicians and bureaucrats for distribution to the people upon whose votes they depend. Winston Churchill called this utopian notion "the philosophy of envy and gospel of greed", and all it ever produced was poverty, misery, bread lines and failed states.

This bailout plan is making things worse. End it now.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm.