End the Bailout

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.

Comments

[tompoe]

Why is the assumption that Paulson is improvising? From where I sit, the Paulson demand for entitlement of Bush's going away $1 trillion dollar present to his cronies is moving along according to script. That script demands there be no moratorium of foreclosures, which is the primary reason for the corporate welfare demand in the first place. Let's add in the lack of banning of derivatives, and life is going swimmingly, eh?

[JPHR]

Paulson:
1) let lehman fail causing the credit seizure
2) requires 700 billion without oversight immediately
3) intends to buy bad debt, which he later refrains from
4) forced to follow the European lead
5) first refrains from taking direct stake in banks, then he changes his mind, but still no European style recapitalization and as such still under capitalized banks.
6) the 700 billion may have seemed much, but for the US being at the epicenter it does not look that impressive in comparison with the amounts in the rest of the world especially now a big portion still has not been allocated
Looks to me that Paulson is not that successful

[PhilipTaylor]

BUSH&COMPANY CRISIS OF FINANCIAL FEES
(including salaries, bonuses, and parachutes)
by Paulson and his friends at GS, MS, C, and JPM.

FEE CRISIS by Banks and INVESTMENT BANKS:

1. $10's to $100's Million in salaries, bonuses, and other incomes (e.g., Paulson $400+ million)
2. Incrementally High "TRICKY" adjustable mortgage Fees for subsidiaries of Investment Banks
3. High Second Mortgage Fees above property values
4. "Fake" Appraisal Fees
5. Selling loans that exceed value of the property with MORE Fees added
6. Slice and Dice mortgages into packages (Derivatives) by Banks for "MASSIVE" Added Fees
7. Rating Agency Assigns "AAA" rating to High Risk Derivatives and takes Large Fees
8. Sell Derivatives to Customers including HIGH Fees
9. Front end and Back End Insurance Fees
10. Financial Product Maintenance and Customer Service Fees
11. Credit card Excessive Interest Rates and Fees

Note: The Reason Banks will not MARK TO MARKET and want that removed:

With decline in home values some products now would take a 80% to 90% write-off of the Fees paid by Derivatives Clients, showing the "degree of greed" in this FEE driven system.

At least this LEVEL of CORRUPTION has not hit the Auto Industry! So lets save millions of Blue, Green, and white collar jobs!

Regulate FEES and INCOMES to stop this Greed!

Add in illegal 30 to 1 or higher Leveraging and Illegal Naked Shorts!
Stir and you have a GREAT BIG CRISIS complements of the FREEEEEE Market!

[SShaw490]

Get over it, Schram. Congress isn't going to let those three businesses go out of business - they're going to get a detailed course of action for rehabbing the companies and then they're going to come up with money to get it done. And, if Congress has anything in the sack at all, they'll drag Hank Paulson up and make him explain, in detail, how it is that he was told to spend 250 billion dollars buying mortgage backed securities that had intrinsic value to the American taxpayer and he went out and bought 290 billion dollars worth of - what was it? Well, it wasn't what he was told to buy.

Give it up, Schram. You people are yesterday's news. Your time as the financial geniuses ended in September, when your reckless and irresponsible behavior drove the entire world into a recession. From here on out, the grown ups are going to run the show and you'll have to go back into your room and play with your toys quietly. America has bailed out its last Goldman Sachs.

[mcostello]

Don't be mad at the managers that were just pushing the envelope.
THERE WERE NO RULES!
We can all pat each other on the back for not paying attention, and being led to the slaughter by a bunch of Madison Avenue types.

[joebaggadonuts]

Wow. Thanks for saying this Alan. Unfortunately, it won't happen without Bush signing a bill that gets passed in the waning days of this Congress in special session. IOW, there ain't no way. It will have to wait until the next Congress or O puts someone in charge with a scruple if there is any money left at that point. Yep, market's down again today.

[gretchenart]

No plan. No oversight. Against the wishes of the American people. No problem.

[mcostello]

I sent a scathing letter to my liberal congress lady (degette) about how disappointed I was that she voted for this bail out.
She sent me a letter back explaining her position on energy.
I know this is her staff, and she has the safest seat in congress, but.......­. I cannot come up with anything to describe how frustrated that makes me.

[BigMac72]

Agreed ! when the financial houses were making money hand over fist the American taxpayer did not share in the wealth but as soon as the losses began to accrue these same greedy thieves decided it was time to create a pot-o-money to loot. This is the biggest broad daylight robbery in history and our oh so intelligent congress created oversight jobs that they never filled. So we have Hank "I've got all the answers" Paulson throwing our money at whoever his friends are! This is making me sick ! Remember it's the little secrets that have to be hidden because the big ones seem so ludicrous no one can believe them. YES they are stealing our money right in front of us and no one in congress seems to take notice, but America is watching and learning ! It has now begun to sink in that the Federal Reserve Bank is a PRIVATE company , about as Federal as Federal Express and we have been letting them call the shots for too long. CHANGE THE MONEY SYSTEM or this will continue to happen again and again !!! Thanks

[Firbolg]

I agree. But don't confuse "wealth" and "money". The financial sector folks certainly know the difference. Wealth is a matter of opinion or, more correctly, a matter of a lot of opinions. Money, even though its value is "faith-based" is more real. The way it works is that the public is manipulated to convince itself that things (like houses, stocks, dot.coms, artwork and so on) have a "value". They are them prepared to exchange money (earned or borrowed) to possess the things of their choice. The trick the financial sector has perfected is to come up with things that are perceived to be vastly more valueable than the cost of creating them (what I would call vapor-wealth) which they sell or pledge for gobs of money. What is galling is that, when their house of cards comes down, and no one will believe them anymore, they are the ones who get bailed out. So yes, as you say "CHANGE THE MONEY SYSTEM or this will continue to happen again and again !!! "