Issue #69

Last Update October 31, 2010

Finance The Bailout by Gerry Krownstein November 12, 2008   Even when President Bush brings in a new team, as he did at Treasury, they can't seem to get it right. Secretary Paulson, a Goldman Sachs alumnus, came into office with the public hope that someone of competence at last held the economic reins. Whether he has been hobbled by free-market ideology, or constrained by political considerations, he has attacked the economic crisis with a level of dithering and a lack of common sense that I imagine is surprising to those who knew him as the successful chairman and CEO of America's foremost investment banking firm. His initial bailout plan was bizarre: authorize the Treasury Secretary to disburse huge amounts of money with no oversight, no transparancy and, thanks to the proposed immunity from court interference, no accountability. Congress wisely substituted its own plan which, flawed though it was, at least had the virtue of providing oversight and auditing mechanisms, accountability and public information. Then Paulson set about implementing the powers he was given, and we were back in a muddle. He loaned money to and invested in banks without extracting from them any concrete promises as to how the money would be used;  did not ask, as a quid pro quo, that Treasury have any say in the operation of the banks (when banks and venture capitalists advance large sums of money to a company in the normal course of business they usually get at least one seat on the company's board); done nothing to help the real victims of the banks' overreaching, the people who were persuaded to take out these mortgages; and now has stated that the bulk of the bailout money will not be used for banks, after all, but to prop up other ailing sectors of the economy, again with no thought to changing their methods of operation. He should have done five things instead:

1. Create a mortgage insurance agency that will guarantee consumer mortgages. The quid pro quo is that for a bank to participate, it must agree to convert all variable rate mortgages it holds to fixed rate mortgages at the teaser rate in force when the mortgage was written. Any bank refusing to do this is on its own, free to fail or suffer the consequences of defaults.

2. Any bank needing a federal investment to shore up its capital status must issue voting stock to the government in exchange and provide at least one seat on its board to a federal overseer. The people whose greed and ineptitude got their bank into a mess cannot be assumed to be able to get the bank out of the mess unaided. These shares can be redeemed by the bank, and the board member dropped, if the shares are bought back at the original loan rate or current market rate, whichever is higher.

3. For the duration of the government's involvement with the bank, incentive bonuses to senior management are forbidden, whether in the form of stock or cash, and senior management salaries are capped at the level they were at when the government involvement began.

4. Lending policies for banks making use of the mortgage guarantee feature or the capital infusion feature are to be reviewed by am office of the Treasury set up for that purpose. Loan terms and qualifications will be set, and a minimum loan volume will be mandated.

5. The Treasury will review the practises and activities of all banks making use of government bailout money. If incompetance, venality or crookedness was found to be a factor in the bank's distress, the senior executives involved must be replaced within 90 days, and any bonus moneys paid in the last three years must be recovered.

6. Aid to other industries, such as insurance, the automobile industry, etc., must follow similar guidelines. The government, in exchange for a bailout, must acquire the power to change the corporate policies that got the company (and industry) into the mess in the first place. The focus must be on stabilizing the industry, protecting worker's jobs, and making it possible for the government to recoup the moneys paid in, preferably at a profit.

One further provision: any new industry to be aided by the bailout money must be approved by Congress.

Although the economic crisis became acute in time to have impact on the election, the new president and his cabinet will not have the opportunity to work on its resolution for over two months. Since it can be assumed that President Bush will veto any departmental measure or legislation that would put accountability into the bailout mix, those three months will be a period of further drift. In the meantime, the public and the Congress must put pressure on Messrs. Paulson, Baranke and Bush to support the economy without givinbg away the store.

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