Bailout or Bust

by John M. Curtis
(310) 204-8700

Copyright September 23, 2008
All Rights Reserved.                    

              Desperately seeking a fix to the nation’s financial meltdown, Federal Reserve Board Chairman Ben S. Bernanke warned the Senate Banking Committee Sept. 23 that without passing his $700 billion rescue plan the economy faced almost certain recession.  If there were ever an understatement, the former Princeton economics professor showed a gift for minimizing.  Whatever the technical definitions, Bernanke knows better than most the economy’s been in recession for some time.  “The financial markets are in quite fragile condition and I think absent a plan they will get worse,” Bernanke told committee Chairman Christopher Dodd (D-Conn,), urging swift approval of his extravagant bailout.  Both he and Treasury Secretary Hank Paulson came to Capitol Hill warning the Congress of dire consequences should the bailout not pass.  Years of failed regulation finally caused the day of reckoning.

            Paulson and Bernanke’s plan calls for the government to buy up bad securities and investments currently paralyzing capital markets.  “I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way,” said Bernanke, offering no guarantees.  What irks many skeptics is how U.S. credit markets faced imminent liquidation without the Fed’s unprecedented bailout.  Bailing out bad debt offers no guarantees to homeowners currently facing defaults and foreclosures.  Retiring bad debt benefits financial companies but doesn’t address taxpayers faced with exorbitant mortgage payments, unable to stop banks from foreclosing.  Paulson and Bernanke want Congress to approve a blank check without consequences to incompetent, venal or criminal CEOs.

            Neither Paulson nor Bernanke has offered any coherent rationale for why the nation’s financial markets collapsed.  Trusted Wall Street names like Bear Stearns, Lehman Bros., Merrill Lynch, Fannie Mae, Freedie Mac have all gone under, blaming the whole mess on bad real estate loans.  But bad real estate loans had little to do with Bear Stearns or Lehman Bros, or, for that matter, the collapse of American International Group insurance, recently given an $85 billion bailout.  No one really knows why Fannie Mae and Freddie Mac ran out of cash and closed their doors.  “What they have sent us is not acceptable,” said Dodd, asking Paulson and Bernanke for more protections taxpayers.  Without specific provisions for helping out troubled homeowners, the Fed’s plan offers little help for working families.  Taxpayers are expected to pay for Wall Street’s incompetence and indiscretions.

            Blaming the collapse of credit markets on mortgage defaults offers a good smokescreen but doesn’t address years of benign neglect, allowing CEOs to fleece otherwise profitable companies.  Many lessons were learned in the wake of the dot-com buddle, where some of the nation’s biggest companies bit the dust.  When Big-5 accounting firm Arthur Andersen closed its doors Aug. 31, 2002 in the wake of the Enron scandal, 80,000 employees lost their jobs.  Andersen was accused of cooking-the-books for Enron that eventually filed for bankruptcy Dec. 2, 2001.  When corporate titans like Enron, Global Crossing and Worldcom went down in 2002, executives were held accountable, resulting in prosecutions and convictions of upper management.  Paulson and Bernanke’s bailout plan places no restrictions on CEOs “golden parachutes,” not to mention prosecutions.

            Before Bernanke orders Paulson to print $700 billion there needs to be clear provisions for saving homeowners and prosecuting upper management of failed companies.  Real estate meltdowns can’t account for how high-flying companies recklessly manage investments and assets.  CEOs of Fannie Mae, Freddie Mac, AIG insurance, Lehaman Bros., etc. must be held accountable for wrong doing.  When Enron went under in 2002, the Congress passed new accountability laws to prevent future mishaps.  Today’s failures clearly show that the regulatory scheme is badly broken, protecting shareholders and bondholders from corporate mismanagement and malfeasance.  “We have to look at some alternatives,” said Sen. Richard Selby (R-Al.) the highest-ranking GOP member of the Senate Banking Committee. Congress can’t just approve $700 billion without some oversight.

            Paulson showed impatience with Senators seeking clarification or assurances for how his $700 billion rescue plan would work.  Despite the urgency, Paulson has a lot of nerve pressuring senators to hand over the cash.  Bernanke also played a less than neutral role warning of dire consequences without swift passage.  “I understand speed is important, but I’m far more interested in whether or not we get this right,” said Dodd, resisting Paulson and Bernanke’s strong-arm tactics.  Without some provision to deny CEOs their “golden parachutes,” or, more importantly, a commitment to investigate and prosecute CEO fraud and abuse, handing over $700 billion will not fix the problem.  Everyone wants the economy to thrive.  Differences exist whether to help distressed borrowers facing foreclosures or to hand the biggest government windfall in U.S. history over to corrupt corporations.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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