Calling Paulson's Bluff

Treasury Secretary Hank Paulson spent the past two weeks playing a game of chicken with firms like Lehman Brothers and A.I.G. Now he is playing even higher-stakes chicken with Congress and the economy.

Paulson's storyline is that the credit markets are frozen, and unless Congress passes a "clean bill" -- his way -- disaster lies ahead. He spent a busy Sunday morning on the talk shows ducking questions on what would happen if Congress didn't act -- and what might still happen if it did.

One senior Congressional Democrat told me, "They have a gun to our heads." Paulson behaved as if he held all the cards, but in fact the Democrats have a lot of cards, too. The question is whether they have the nerve to challenge major flaws in Paulson's plan as a condition of enacting it.

Paulson also faces serious defections in Republican ranks, with several key senators and congressmen resisting a bailout of this scale. Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, speaking on CBS's Face the Nation, flatly blamed the crisis on greed and deregulation, and questioned the terms of Paulson's plan.

Paulson's bill would give him carte blanche to spend up to $700 billion over the next 24 months to buy toxic securities from financial firms. This presumably would "unclog" capital markets, the financial economy would begin functioning normally again, and then the government would recoup what it could.

The plan is outrageous on several levels. It demands nothing from these firms in return. It holds the Treasury Secretary accountable to no one. And it extends the most generous terms to Wall Street while offering nothing to Main Street.

House Financial Services Chairman Barney Frank, speaking Sunday morning on "Face the Nation," gave the flavor of what Democrats will demand, if they hang tough: An economic stimulus to go with the Wall Street bailout; more refinancing help for borrowers; and some limits on windfall gains to corporate executives. These provisions would improve the bill, and Democrats would win either way: if they were included, more help would be on the way to working families. If they lost, and the bill passed without these provisions, it would make crystal clear the difference between the parties.

Ideally, the Democrats should go even further.

The bailout bill should be explicitly tied to a commitment to re-regulate all types of financial institutions. The bill's authority should expire after six months, so that when the next Congress re-authorizes any bailout authority it would be combined with tough comprehensive regulation.

Any private company that sells assets to the Treasury should be subjected to stringent limits on executive windfalls.

The government should get an equity position in the firms it helps, proportional to the help that it gives.

Treasury should be authorized and directed to take controlling interest in some firms, and take over their management, if of course that provides the greatest potential savings to taxpayers. For example, when an FDIC-insured bank goes broke, the FDIC either merges it into a healthy bank, or takes it over and runs it for a time while it pays off depositors, to make sure that it is run properly. It does not just bail out the incumbent management that created, and profited from, the mess.

There should be a recapture provision, so that if firms end up profiting from this bailout, the government gets its money back.

Part of the $700 billion should be for mortgage refinancing, and authority for cities and towns to acquire foreclosed properties and put buyers and renters back in them.

The package should include at least $200 billion of new economic stimulus, in the form of aid to states, cities, and towns, for infrastructure rebuilding, more generous unemployment and retraining benefits, and green investment.

The Democratic leadership should force Republicans to take votes on provisions like these. The early signs were that they would be pushing hard for a two or three.

Yesterday, a key lobbyist for the financial services roundtable, Scott Talbott, warned, "We're opposed to adding provisions that will affect [or] undermine the deal substantively," The Roundtable's members are banks, securities firms and insurance companies, the prime beneficiaries of Paulson's proposed bailout. He warned that any effort to attach other provisions would be a deal breaker.

But excuse me, it is the financial industry that is coming hat-in-hand to the government, not vice versa. The industry has no leverage here, except to the extent that Congress lets itself be intimidated. Paulson is insisting on a "clean" bill, but as Barney Frank put it, helping Main Street as well as Wall street does not dirty the bill.

The two precedents for large scale bailouts, Franklin Roosevelt's Reconstruction Finance Corporation, and the Resolution Trust Corporation of the 1980s, gave government much more authority over the firms that it bailed out.

Paulson is playing this more as the investment banker that he used to be, than as a steward of the public interest. This is a dubious deal, with all the gain going to Wall Street and all the risk going to taxpayers. Congress should not be intimated by his threats to hold his breath and turn blue of he doesn't get his way.

---
Robert Kuttner, co-editor of The American Prospect and Distinguished Senior Fellow at Demos, has just published Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency (Chelsea Green). He is blogging daily about the election and the economic crisis at www.obamaschallenge.com.

Comments

[WriterGuy]

If we are truly concerned about "unfreezing" the capital markets, why don't we enter them directly?

Instead of a bailout of a bunch of millionaires and billionaires, let's put aside, say, $100 billion to create our own government liquidity fund, managed by a bunch of community-based financial pros.

You want to expand a business in the U.S., we'll finance it -- at below-market rates. You want to do a leveraged buy-out? Sorry. We won't roll that way. You want to swallow up your competitor, even though it makes no sense financially? Look elsewhere for your financing.

Let the US government revive the market for car loans, mortgages and small business loans. Let the corporate behemoths die under their own weight.

[bogey12]

I have never heard of a more ridiculous proposal in all my life. Why on earth would "we" want to fund losses that others have created and even gained from. We tax payers should demand collateral, an analysis of repayment ability, and personal guarantees from those who caused this insane ordeal. I have restructured "problem" loans for 30 years. There is an old adage in lending..."your first loss is your least loss." I have seldom seen a problem loan improved by further injection of funds. Although, I have never fathomed restructuring "bad" debt on terms as generous as those suggested by Mr. Paulson...FREE MONEY...and lots of it.

[JBS]

"Scott Talbott, warned, "We're opposed to adding provisions that will affect [or] undermine the deal substantively," The Roundtable's members are banks, securities firms and insurance companies, the prime beneficiaries of Paulson's proposed bailout. He warned that any effort to attach other provisions would be a deal breaker."

F^(& 'em. Liquidate 'em!

Forget the lawyers, start with the lobbyists.

[BernieBernie]

Hello People,

Please, I beg of you too contact your State representatives and pressure them to vote No on this fraudulent proposal. This is nothing more that fear tactic by the Bush administration to coverup the corruption in Washington and on Wall street. The money is not intended to be used for the mortgage crisis. The intent is to bailout mismanagement of Corporate banking executives failure to follows Federal Laws that governs our deposits and investments. The monies should and could be used to payback individuals who made earnest deposits and investments with their money.The crooks should be prison for the crime they have committed against our people. If this bill is passed. We will still be confronted with more problems in the near future. I urge you to contact your representatives to vote No. People this is the biggest coverup in American History! Don't Be Stupid, It's time for us to act Now!

[opinion123]

Judgenent day is upon us!

[research]

The Rapture won't take GOP.

[Formulaplot3]

Write your congressional rep an e-mail and let them know this dictatorial grab for power is intolerable.
Demand that Spkr Pelosi refuse to deal with these crooks! Demand that the Democrats grow a backbone!

This speaker has done enough to destroy this country by failing to PROTECT our Constitution from this crooked administration. I hope her infamous career is one long footnote in history about how she acquiesed to each and every engineered crisis that this administration put forward.

I wonder if this country can survive another 50 days of infamy! I have NO hope that this Congress will protect this Country!

At least let them know we can howl in protest.

PS: The Gulf Coast has been obliterated by Hurricane Ike! I see no attempt by our POTUS to come to the aid of this region. But, we must in all haste hand over the wealth of our nation for these crooks on Wall Street. No one has died on WALL STREET!!!

[Golfer59]

Hey Paulson,

Let me see if I got this right. You come to me and ask me the "Taxpayer" to float you a loan to help out your buddies on Wall Street who made some bad investment decisions. Correct? My question to you is simple, what do you think am *&^%$#@ NUTS!!!!?

[ranchobob]

I'll make a deal with the administration -
You can have what you're asking for, but no Republican can ever again say "this is the greatest democracy in the world."
Fair?

[deminmo]

If this passes as is, we and Congress have literally written a blank
check, with nothing in the bank to back it up. We have put one person
in control of further bailouts, and don't kid yourself, they will come. If people
fail to pay morgages, then this plan falls apart. This bailout doesn't include
past bailout costs, the loans for Iraq and Afghanistan. So the 1 trillion total
doesn't seem out of line. So, if there is no increase in taxes how will all of
this be paid for? Obama has said we will have to raise taxes. That is realistic.
The Republicans will not answer this question. And no regulations at all to
prevent more abuses. Campaigns seem more important.

[Biffmeister]

The Treasury Secretary had the gall to say limiting payouts to executives who created this mess would be a "deal breaker"

Deal breaker!? We no got no stinking deals.
These aren't their companies any more. How about we agree to limit their prison sentences for corruption, in return for...wait a minute, they have no say in this--they're out! Talk about a bunch of greedy control freaks in denial.
Paulson is nothing more than another inept manager made of the same cloth as those CEOs. If your guide gets you lost in the wilderness you don't rely on him to find your way back. That's just plain dangerous.

People you can leave a phone message with Reid, Pelosi, and your senators very easily. Be brief, be polite, but call. Google the names you want for the phone numbers. You don't have to talk to anybody--the lines are busy. Just leave a message. No blank check bailout. The focus must be on behalf of the American taxpayer. This is a defining moment in history. Seize the moment and take to the cyberspace streets. Yes, one voice (YOURS) does make a difference!

[PioneerKing]

Mr. Kuttner:

Sir you are very correct. The markets are doing pretty darn well considering what has transpired.
The Democratic Party needs to say lets step back and look at what we are signing on to before they make a move and give the republicans and Paulson everything they are demanding.

[abouttime]

Greed and deregulation!

"Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, speaking on CBS's Face the Nation, flatly blamed the crisis on greed and deregulation..."

Greed is what will pass Bush's insane reactionary, sick un-constitutioal give-away of our governement of "the people" to the fascists corporate Neo Con-artists!!

[NWNHNM]

I heard that Paulson himself is worth half a billion dollars. If this is so important to the country, I would invite him to poney up some money.

The Paulson plan would allow him to give his mother 50 billion dollars for an old pair of shoes and no one could ever challenge that expenditure. This is insanity.

[research]

The democrats hold ALL THE CARDS. so...

"One senior Congressional Democrat told me, "They have a gun to our heads."

Blackwater maybe?

[abouttime]

Seriously!

[cobobs]

What gun? Don't buy it.

[deminmo]

No gun....re-election.

[joebaggadonuts]

A CLEAN bill would not have any input from the Administration. They are dirty to the core.

[abouttime]

Impeach Now!
It could be done in a week!