The Bush administration asked Congress on September 20, 2008 for $700 billion to bail out firms burdened with bad mortgage debt, seeking extraordinary unfettered authority for Treasury Secretary Henry Paulson as he tackles the worst financial crisis since the Great Depression.
This bailout plan follows a wrenching week that witnessed the fall of Wall Street with the spectacular failure of the nation's fourth largest investment bank, Lehman Brothers, the forced sale to Bank of America of Merrill Lynch & Co and the federal government's nationalisation of the country's biggest insurance company, American International Group Inc.
As Senate and House politicians were arguing and negotiating what form and substance the bailout bill should take, sending all kinds of mixed signals of ups and downs to the market, the biggest saving and loan bank, Washington Mutual went down last week. And who got the asset of that big bank? J.P. Morgan Chase picked it up at the fire sales price! The biggest securities house, Nomura of Japan bought Lehman Brothers' Asian operations and is still aiming at Lehman's European operations. Mitsubishi UFJ bought 20 percent of Morgan Stanley. As usual, at the fire site sales, there are some people who make lots of money at somebody's misery.
Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke explained in their joint decision the need to deal with the root cause of all the troubles, billions of dollars of bad mortgage debt sitting on the books of major financial companies. "We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses. The federal government must implement a programme to remove these illiquid assets that are weighing down our financial institutions and threatening our economy."
They rationalised that since this debt had triggered the worst credit crisis in decades, causing credit markets to essentially freeze up last week-notwithstanding the Fed's concerted efforts with major central banks around the globe to release billions of dollars into the financial systems of their respective countries. Therefore, they suggested the federal government should be allowed to buy up to $700 billion of the bad loans, taking them off the books of financial companies, so that those companies could resume normal lending operations without worrying about their bad loans. There was no mention of "accountability" and "corporate responsibility," let alone "good governance" in any of Secretary Paulson's statements. Worse, they were asking an absolute power with impunity!
This was a horrendous proposition that the Treasury Secretary and the Federal Reserve Bank Chairman were seeking an absolute power without giving anybody a day in a court. They asked whatever they would do should not be reviewed by any authority! They were literally flying back into the future! In the 21st century and the age of democracy, they were asking a blanket authorisation from Congress without accountability!
They push this 3-page proposal of absolute power with impunity with a threat of doomsday scenarios if Congress did not act on the proposal. The sense of "urgency" they urge carries no accountability. When the Bush Administration asks for Congressional approval with "urgency," nothing good has come out: the invasion of Iraq , the wiretapping of citizens in the name of war on terror, etc.
Cigar aficionados on Wall Street love smoking Cuban cigars. Now they've got smoked out by their own greed and Cubanized, I mean, nationalised by the federal government. The global bastion of free trade and free markets abandoned its own pretension and sought protection from the government in the name of "broader public interests." But those CEOs and top managers of failed financial institutions were rewarded millions and millions of remuneration for what they had done.
The world of Wall Street changed; Morgan Stanley and Goldman Sachs decided to convert themselves into commercial banks, subject to banking regulations. And so, in a single week, the era of the independent investment bank has ended. Six months ago there were five major investment banks. Two - Lehman Brothers and Bear Stearns - have failed, Merrill Lynch has been sold to Bank of America, and now the last two are becoming commercial banks.
There was a huge omission of corporate responsibility in the original bailout plan. Where did all these bad loans come from in the first place? Who made these bad decisions? At whose cost? Conveniently and without shame, it seems they are not held accountable for their misjudgement and greed.
Those investment banks incurred losses in hundreds of billions of dollars from reckless risks undertaken to make enormous profits, for which they were handsomely rewarded by enormous pay packages and bonuses, corresponding to their own greed. Why should taxpayers take over the bad assets created by corporate greed while those who are responsible are allowed to go scot free and get millions dollars more on the way out?
This so-called "comprehensive approach" was flawed in favour of Wall Street's interest as it did not address corporate responsibility of these financial companies on Wall Street and the plight of taxpayers on Main Street, who were squeezed out by irresponsible mortgage operators. As House Speaker Nancy Pelosi suggested, there must be the necessary safeguards such as "independent oversight, protections for homeowners and constraints on excessive compensation." The whole rescue plan would cost taxpayers $1 trillion when the cost of the government's take-overs of Fannie Mae and Freddie Mac and AIG were included.
Ordinary taxpayers are getting angry; they are now demonstrating on the street against this humongous $700 billion bailout! November 4 is not only the Presidential Election Day; it is also the Election Day for 35 Senators and all 435 House of Representatives.
They have to face their own constituencies' angry voters. Republican House of Representatives revolted against the government's bailout plan most ferociously. Democrats pressed hard for more oversight and protection of taxpayers' interest.
The end result of intense negotiations between the Bush Administration and the bipartisan Congressional leadership was the draft House Bill called "Emergency Economic Stabilisation Act of 2008" which spells out in detail how the money will be disbursed in stages, ie, with an initial $250 billion to get the bailout effort under way, followed by another $100 billion upon a report by President Bush to Congress.
Although Mr Bush could then request the balance of $350 billion at any time, it will be subject to a separate certification process and it is up to Congress to deny the Treasury the money. It includes the establishment of a Financial Stability Oversight Board; limitations on executive compensation and a ban on any golden parachute payment; judicial review of the Treasury Secretary's action; stringent reporting and monitoring measures and various measures of protection for taxpayers.
Nobody knows for certain that these bailout measures would work successfully, but as Nassim Nicholas Taleb said in The Black Swan, knowing that we cannot predict the future on the basis of the past knowledge, we can be prepared to meet the challenge in the future.
Just consider the Texas Governor George W. Bush stated forcefully during presidential debates against Vice President Al Gore back in 2000, that he was an advocate of less government and that he would not use the US military as an instrument of nation-building.
Now he has not only to intervene in the market by the unprecedented huge bailout of private financial institutions out of their own mistakes, but also to deploy US troops in Afghanistan and Iraq to help develop and safeguard new democracies.
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