Gut Check Time: Will Congress Stand up to Wall Street?

It's gut check time.

The attempt by Treasury Secretary Paulson to put a gun to the head of Congress and terrify them into forking over a $700 billion blank check to the Bush administration in 48 hours has failed. Now what?

Most Americans would just as soon the Masters of the Universe were allowed to sink in their own folly. They had the party; let them clean up the mess. But, looking at sinking housing values and shaken retirement accounts, most Americans know something has to get done.

Banks and investment houses carry weapons of financial mass destruction. Last week, they looked into the abyss. If nothing is done, the chances for a deep and long depression are very great. So stocks skied around the world when Paulson announced his support for a massive bailout of Wall Street. And stocks and the dollar plummeted, and oil and gold soared when it became clear on Monday that the Congress wouldn't simply salute and go along. Doing nothing is not an option.

Leaders from unions, consumer and citizen groups have weighed in, demanding strict conditions on any bailout. On Monday, Sen. Chris Dodd put forth a draft bill that called for an independent board to run the bailout, required that taxpayers get partial ownership in any firm bailed out, and mandated steps to forestall foreclosures and work out mortgages, helping to keep people in their homes. House Speaker Nancy Pelosi demands a kickstart for the real economy - extension of unemployment benefits, aid to states and localities, investment in green jobs and basic infrastructure. (But at only $50 billion, a relative pittance for the real economy compared to the sums demanded to rescue Wall Street). Rep. Barney Frank insists on limits on the compensation of executives of any firm that gets bailed out. Together, these conditions begin to make some sense out of a bad fix.

Initially, Bush and Paulson, backed by the slavish Republican leadership in Congress, resisted, calling for the bill to remain "simple and clear." Republican leaders denounced help for homeowners and Main Street as "political" and "partisan" as opposed to bailing out the Master's of the Universe which somehow is an emergency above politics.

But Paulson is a deal maker. As his testimony indicated today, he'll trade nominal oversight and a few bridges for the $700 billion. As someone who made half a billion on Wall Street, however, he's been unbending on limits on pay for his friends, on providing taxpayers with an equity stake in the firms that are helped, and on measures to force work outs of mortgages and a freeze on foreclosures. And he'll resist any detailed measures to regulate Wall Street to insure this doesn't happen again. For all the talk of bipartisan accord, this will be a face off. Democrats will have to stare him down.

With the financial markets reeling, who will blink first? Will the Democratic leadership insist on common sense? Will Paulson be able to panic Congress into folding? Will the financial firm lobbyists now swarming the Capitol like a plague of locusts be able to rent the votes they need?

The decisions will be made over the next few days. If you want to make your voice heard, go here to contact your legislator, or to get more information.

But this staggering bailout - as perilous and costly as it will be -is only a stop gap. Broader lessons need to be drawn; larger and more permanent reforms are needed. One thing should be clear: the conservative era is over. The theology of market fundamentalism has proven to be a false idol once more. As Joseph Stiglitz has argued, the collapse of Wall Street is to the market fundamentalists what the fall of the Berlin Wall was to communism. It's over. The right has proved once more that it cannot be trusted to run the government it scorns. A trillion dollar debacle in Iraq. A trillion dollar bust on Wall Street. Hundreds of billions pocketed by Big Pharma and Big Oil. It is time for a reckoning.

Comments

[gevan]

I simply wondering how all of this is supposed to work. Does the Treasury fill 700 suitcases with a billion dollars each and deliver them to Paulson's house? Would Paulson stow them in his garage and hang a shingle out front saying "Open for Business" then wait for the financial institutions to come "Trick or Treat"-ing to his house? After what period of time will all the money be gone and Paulson return 700 suitcases filled with bundled mortgages to the Treasury? Halloween? Thanksgiving? Christmas? Inauguration Day? Groundhog Day? Groundhog Day? Will the money be in the care of the next Secretary of the Treasury or does in stay with Paulson personally?

[JessJames]

Your guess is good as anyone's at this point. Paulson won't say anything except "trust me" and we got to have $700B by Friday or the sky will fall.

[PlanetKansas]

All the bail out promises is to flush Wall Street with more cash to create another speculative stock market. Since it is an election year, neither party is thinking clearly and each will accuse the other of betrayal for political gain instead of the best interests of the public. We need to wait this one out 4 months and revisit with a new president.

Yes, my 401K has taken a hammering, but I won't retire for another 15 years, so I see it as buying stock cheap and hope for the market to be back by then. I'd rather my investments be made in profitable companies instead of speculation, tricks and fads.

There is a ton of money being made in the world and it is looking for someplace to park. New billionaires in Russia,China and India wouldn't dream of keeping money in their own countries, too unstable and corrupt, so they look to America and Europe for safe investments. The Dot-Com boom of the 1990's was a great ride, but when it went bust in 1999, they shifted to American Real Estate. The flood of money led to inflated pricing, speculators jumped into the market after watching "Flip My House" and the Real Estate Agents made a killing. Now the market is adjusting, and the money wants to go somewhere else lucrative. A bail-out keeps these bilionaires happy about their American havens, but where else would they go? No other world economy comes close to our size.

[littlepitcher]

Recall, also, that the dot-com bust followed close on the heels of a tax on oil, passed by Congress, and the punitive gas hike imposed by the oil companies upon the hapless taxpayer/consumer. Market chaos followed.

The quiet truth about the Great Depression is that it started as a simple market "adjustment" arranged by the heads of several steel companies, designed by them as a brake upon labor costs. I wouldn't be a bit surprised to find out that this recession was custom-engineered, and for the same reason, after Congress decided to restrict illegal immigration and impose penalties upon companies giving hiring preference to illegals over American citizens.

[deminmo]

To all those with investments, 401K ect:
Diversify!!!! That way you can control your
losses.

[scruples]

Do they think we're this stupid? Funny, how this has been going on for months and a week before congress goes on break, the economy is in crisis mode. And now another question to ponder. Could this just be a ploy to get McCain elected? He turns bailout down and nothing extreme happens before election. The administration had to know the situation. Why now is what I would like to know.

[rckayla]

I agree 100% with blogger Robert L. Borosage!! And I disagree with "AlexSpecht," who says Congress has no Guts. Obviously "AlexSpecht" is not aware that Congress is trying to protect the American people's money with their conditions to Wall Street's bailout and that King Bushie and his cronies don't give a crap about the American People one bit ,and that is why the Republicans in Congress are balking at signing the $700 billion bailout. Congress wants the American taxpayers to get a share of the profits in these companies we, the People, are bailing out. Another thing I have to say is: Isn't it ironic that the United States of America's government became "socialist" when it concerns the rich CEO's of investment firms, banks and mortgage lenders?!? Yet they are letting the American taxpayers drown in debt by not helping them one iota. Congress, on the other hand, wants to HELP the AMERICAN PEOPLE (taxpayer) but Bush's administration does not want to help us, only their rich buddies. Think about that everyone!

[LHoney]

Where have you been? Congress has NO GUTS! They voted for the war, they voted for the patriot act, and now they are showing guts by deciding HOW to give the bully all of our lunch money??? You have to be kidding!

[WhoneedsGoverment]

AHEM,My two cents.....­Oh damn where did it go?

[Herekitty]

7) A crony clause. This program must be run by people who are free of abusive conflicts of interest. To ensure this, the Treasury should require full financial disclosure for anyone hired to administer the program, and impose rules and a system to enforce a strict conflict code. Special note to Congress: John McCain personifies and embodies the crony system. Do not pass a bill that would give him, as president, unfettered control over how this program is run.

8) A modification and disposal clause. As foreclosures mount, Treasury will end up in control of physical properties, which degrade rapidly if not sold or rented and occupied. To prevent this, a new agency should be established to rapidly modify existing mortgage contracts, to manage rental conversions and to lease, sell or demolish vacated homes. This agency can be run as draft boards were in wartime, by citizens in each community under federal guidelines.


http://www.thenation.com/doc/2008100

[Herekitty]

5) An arbitrage clause. 1 big danger of Paulson's plan is that non-US institutions, hedge funds & others will seize the chance to sell their bad holdings to eligible US institutions, replenishing the swamp just as the Treasury seeks to drain it. All US financial institutions should be required to provide baseline information on their mortgage-backed securities and other eligible holdings as of 09/15/08

6) A transparency clause. Treasury operations under this plan, including communications and consultation with outside advisers, should be transparent to Congress, which should be get whatever information it wants, at regular intervals. No exceptions.

[Herekitty]

Congress must now impose conditions to protect the public, the national interest and, not least, the interests of the next administration. Herewith a short list:

1) A disclosure clause. Treasury should have immediate and complete access to information about portfolios, counterparties, the internal valuation methods used by financial firms, their proprietary models and the history of adjustments made to those models to recognize or conceal losses as the crisis unfolded.

2) A pricing clause. Treasury should establish a transparent mechanism to establish a before-the-bailout fair market value for mortgage-backed securities, set limits on the premium paid over that value and require that financial institutions value their full portfolios at the sale price. In other words, the practice of concealing losses--"accounting forbearanc­e"--should be prohibited.

3) A fraud clause. Securities purchased should be reviewed and those found to be based on fraudulent appraisals, inadequate documentation, predatory and other abusive practice should be kicked back to the lenders at a penalty rate.

4) An enforcement clause. Treasury should be required to establish a framework for investigations and criminal referrals and to prove that the framework is in aggressive use. Participating firms should be required to investigate and document past frauds, to establish internal anti-fraud controls and make criminal referrals as necessary. The FBI and Assistant US Attorneys should get "'blank check" authorization to pursue the crimes behind this debacle.

[Herekitty]

Congress must now impose conditions to protect the public, the national interest and, not least, the interests of the next administration. Herewith a short list:

1) A disclosure clause. Treasury should have immediate and complete access to information about portfolios, counterparties, the internal valuation methods used by financial firms, their proprietary models and the history of adjustments made to those models to recognize or conceal losses as the crisis unfolded.

2) A pricing clause. Treasury should establish a transparent mechanism to establish a before-the-bailout fair market value for mortgage-backed securities, set limits on the premium paid over that value and require that financial institutions value their full portfolios at the sale price. In other words, the practice of concealing losses--"accounting forbearanc­e"--should be prohibited.

3) A fraud clause. Securities purchased should be reviewed and those found to be based on fraudulent appraisals, inadequate documentation, predatory and other abusive practice should be kicked back to the lenders at a penalty rate.




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

[BubbaG]

I want to see the Democrats get smart about this and not play into the Republicans' hands. It was obvious yesterday during the hearing that the Republican Senators were lining up to vote NO on the proposal. It is absolutely essential that the Democrats get McCain's support on the bill, as well as 100% of the Republicans, before they approve this bill. If they don't, Democrats will be left holding the bag and the wrath of the American public will come down full force on them on November 4. If the Democrats vote for this proposal and the Republicans do not, there is a chance that come Nov. 5 we'll have not just McCain in the White House but a Republican majority in the House and Senate. This isn't an idle threat -- this is an insightful reading into the mood of the public. Democrats had better get their ducks in a row before they start voting. Make the Republicans vote first.

[WilhelmWundt54]

BushCo Rule number 1: Privatize profits, socialie risks.

Thank you, once more, Bush/Cheney.

[jaygirl]

Bush will make a speech tonight. As usual it will be filled with lies, fear mongering and Republican rhetoric. He will put on the pressure for speed in granting Congressional approval of the $700 BILLION dollars he has requested to "bail out" our financial institutions. It's basically like the no bid contracts in Iraq which had no restrictions and no way to expect that the job would get done. The result was crumbling walls, broken plumbing, and death by electric shock in the showers in the Green Zone. This $700 BILLION dollars would go to some unspecified places for unknown reasons. It would be in the hands of ONE person, Paulson, to distribute amongst his cronies and friends. The Republicans and the Democrats have known for years about the fragility of our financial system but chose to ignore the signs and kept on spending. They have given this administration all the money they asked for. Much of it just disappeared. Now workers are laid off, the jobs are gone, manufacturing is a thing of the past, our dollar is nearly worthless and falling every day. Shall we just hand over another $70 BILLION dollars to these guys? I DON'T THINK SO!

[WIpatriot]

Anybody naked shorting the Amero, yet??

[hu.man]

Fed should push down the interest rates as close to zero as possible. If they are concerned about inflation, then they should be fighting it in some other way than using the money supply. This isn't the time for that.

Can you imagine what would happen if congress just passed a 700 billion dollar economic stimulus plan? It can have a tremendously positive impact on the economy. Instead they are trying to hand the money to greedy corporations who made lousy choices and want the rest of us to pay for it under the guise of "everything will go down the toilet if we don't".

[hu.man]

To call this anything other than a handout is to be less than sincere.

If you listen to the testimony on the Hill, you will find out that the biggest problem that Paulson has right now is that the credit markets are illiquid. So the argument goes as such: "Take off the questionable financial instruments off the banks' hands, liquidity will return to the markets, banks will begin to loan again and then economy will get going again, housing prices will go up and then people will begin making their mortgage payments."

The last part of this argument does not wash. You can't predict markets with this kind of certainty. This thing is a handout to big banks who may be failing soon. It is primarily coverage for their stockholders who are going to lose big time. Deposits are insured so no problem there.

Federal Reserve has many tools to inject liquidity into the market. Fed can lower the discount rate. This kind of shenanigan is not necessary. Once you start trying to save people from the ill effects of their own greed, then you enter into this bottomless pit where you have to keep handing the cash out.