Well That Could Have Gone Better
I watched almost all of the hearings in front of the Senate Banking Committee, and I have to say that the mood I gauged from the public comments of the Senators is extremely damaging to President Paulson's hopes of a quick pick-up of $700 billion. Chris Dodd came out and called the Paulson plan unacceptable. Richard Shelby, the Republican ranking member, is skeptical that the plan would even work. I didn't hear really any positive comments, and Sherrod Brown's were pretty representative:
To Bernanke: "I haven't received one phone call from a constituent that's been positive. I don't think people making $50,000 a year are interested in bailouts out executives whose country club fees are many times that. Does Wall Street owe the American people an apology?"
The anger in the Dirksen Senate office building reflects the anger in the country at the prospect of giving a significant portion of the Federal treaasury away, no-strings-attached, to those rich people who created the problem in the first place. The CEO compensation issue may be somewhat irrelevant, but if ordinary Americans see the through-line between their wallets and billionaire executives' luxury racing craft then the deal is politically impossible and will face a great revolt. What's more, the big banks are threatening not to participate in the bailout if their bonuses are taken away, so it is a factor, and I think Senator Obama is exactly right:
First, the plan must include protections to ensure that taxpayer dollars are not used to further reward the bad behavior of irresponsible CEOs on Wall Street. There has been talk that some CEOs may refuse to cooperate with this plan if they have to forgo multi-million-dollar salaries. I cannot imagine a position more selfish and greedy at a time of national crisis. And I would like to speak directly to those CEOs right now: Do not make that mistake. You are stewards for workers and communities all across our country who have put their trust in you. With the enormous rewards you have reaped come responsibilities, and we expect and demand that you to live up to them. This plan cannot be a welfare program for Wall Street executives.
There are bigger issues, however, and that's whether or not taxpayers get equity stakes in these banks who are relieving their distressed assets. In arguing against that, Ben Bernanke gave the game away.
"I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.
First, banks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down …"
This should be read in the context of Brad Setser’s calculations: he finds that if Treasury pays a price that seems appropriate given the poor quality of the assets, “The hit to the banks balance sheet might be too big” — the losses would be much larger than the amounts banks have already acknowledged, so that their capital position would be severely weakened.
So the plan only helps the financial situation if Treasury pays prices well above market — that is, if it is in effect injecting capital into financial firms, at taxpayers’ expense.
What possible justification can there be for doing this without acquiring an equity stake?
The Wall Street Journal sees the same issue. And Markos finds a key quote that connects the executive pay issue and the equity stake issue and proves that this is really about making rich people richer.
Straight from the horses' mouth, the White House's press lackey:
"With respect to executive pay, again, I'm not going to get into specific, point-by-point details on what our views are on that, other than the Secretary of Treasury said it would make more difficult to make this plan work and effective if you provide disincentives for companies and firms out there who are holding mortgage-backed securities and other securities from participating in the program. You have to remember, these are not all weak or troubled firms that own mortgage-backed securities. A lot of them are very successful banks and investment houses that have done very well, have been responsible, are holding performing assets that have value. They were not necessarily irresponsible players, and so you have to be careful about how you deal with them."
Careful how you deal with them? How about you LET THE FUCKING FREE MARKET HANDLE IT then? If they want taxpayer funds to bail out their incompetence, they give up equity, they accept limits on executive compensation. If they don't want those conditions imposed on them, they don't take our money.
Simple, right? And if they don't take our money, who cares? They are strong and successful! And the taxpayers don't have to give up a dime. Everyone wins!
I am now certain that this is all a giveaway to the GOP's friends on Wall Street and an effort to financially handcuff the next administration. It has little to do with saving the economy. Otherwise, Treasury and White House officials wouldn't be talking about bribing and arm twisting these banks into taking government handouts.
Not to mention the fact that Paulson flat-out lied about wanting oversight in the bill when he presented a plan that stated his actions would be "non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."
I don't quite know where this is going to go - the Congress and the White House have ignored the entreaties of the American people before. But the movement is away from the stick-up and toward something with an upside for the taxpayer. Chuck Schumer talked about a short-term plan to test the system and waiting until the next Presidency to make a full solution, so that may be where this is going. Chris Dodd is doing a great job so far, and I don't think that even Democrats are lunk-headed enough to go this alone with Republicans opposed. This doesn't totally feel like a steamroll right now, but of course that's subject to change.
UPDATE: Hilarious. The Republican Study Group - basically hard-right conservatives - have released their counter-proposal for the bailout. It includes suspending the capital gains tax for two years, privatizing Fannie and Freddie, and repealing the Humphrey-Hawkins Full Employment Act. In case you thought that the GOP suddenly got religion on economics and wanted to move forward without throwing money at rich people at the expense of the poor.