It seems a quaint memory that Merrill Lynch was once bullish on America and that Bear Stearns was among the world’s “most admired” companies. Wall Street is a shell of what it was, both in terms of financial stability and public trust. Trying to restore a semblance of each, trying to inject a whisper of confidence back into the financial system so that credit can once again flow, that’s what congressional leaders spent a nearly sleepless weekend trying to do.
A bipartisan package emerged on Sunday for approval or rejection today by the House rank-and-file. If approved, the Senate would vote later this week.
Despite outrage from voters across the country over the proposed $700 billion bailout, despite deep anger over the greed, betrayal and naiveté that led to the worst financial crisis since the 1930s, there seems little choice but to apply taxpayers’ money to try to clean up the mess. Unless the tide of toxic housing loans are sucked out of the system, credit will be hard to come by — and without credit, jobs will be shed by the millions and the economy will head faster into the tank.
That was the essence of President Bush’s sober remarks this morning. “A vote for this bill is a vote to prevent economic damage to you and your community,” he said in urging members of both parties to rally around the plan. The rescue, the largest in U.S. history, was put forward by Bush’s Treasury secretary, Henry Paulson, then substantially amended by Democrats, who insisted that government oversight of the financial markets be restored, that firms getting government help be prevented from lavishly compensating their executives, and that taxpayers be protected if the plan falters.
For conservatives, a particularly difficult vote
Still, with an election fast approaching, the bailout will be an extremely difficult vote for members of Congress, especially for conservative Republicans whose ideology resists government interference in economic matters. Rep. Connie Mack, R-Fla., spoke for many in criticizing a “huge bailout of the financial sector that will snuff out the free-market system.”
Democrats complained, too, about helping an administration that had done nothing to rein in irresponsible executives on Wall Street. Rep. Marcy Kaptur, D-Ohio, said, “Financial crimes have been committed. Now Congress is being asked to bail out the culprits.”
Indeed, the political/economic overtones have been palpable. It’s not too strong to suggest that having to nationalize this sea of bad debt brings into serious question the whole legitimacy of unfettered markets.
As the New York Times editorialized on Sunday: “It was in the Bush years that anti-regulation and deregulation found full expression, fueled by an ideology that markets know best, government hampers markets, and problems will magically fix themselves. This nation is now painfully relearning that the opposite is true.”
‘Ideology run amok’
Said Rep. Rahm Emanuel, D-Ill.: “We’re paying a big price for ideology run amok; that’s what’s happening here.”
Loosed by a wave of deregulation, the financial-services industry has fallen into a culture of corruption, hubris and sharp dealing. The once-stellar lineup of Wall Street giants has few survivors. The aforementioned Merrill Lynch, for example, has been folded into the Bank of America, and Bear Stearns, after collapsing, was absorbed by JP Morgan Chase at an enormous discount. Lehman Brothers has vanished. The last two big investment banks, Goldman Sachs and Morgan Stanley, have remade themselves as bank holding companies as a way to survive. In a business-page summary, the New York Times declared in a Sunday headline: “Wall Street, R.I.P.”
Even large commercial banks have begun to crumble. Today Citygroup agreed to buy struggling Wachovia in a deal backed up to taxpayers and brokered by the Federal Deposit Insurance Corporation.
But looking back it seems inevitable that something like this would happen. Take these three ingredients: an economy in which incomes for three-fifths of Americans have been essentially flat for 30 years; a belief that, despite stagnant incomes and mushrooming consumer debt, home ownership for nearly everyone was a wise thing to pursue, and a deregulated financial industry looking to make a fast buck. Those three ingredients look like a recipe for destruction.
The package unveiled on Sunday represents a significant compromise among the negotiators. Democrats did not get the bankruptcy and affordable-housing provisions many had hoped for, and Republicans had to swallow oversight and executive pay limits. Their efforts to have the government merely insure rather than purchase the debt were also rejected. Regulation of “innovations” like the credit-default swaps that prompted a separate bailout of AIG, the giant insurer, is not addressed in the legislation.
The core of the plan is that the U.S. Treasury would buy impaired mortgage-related assets from financial firms, giving them cash to replace bad debts that have dissuaded them from lending. The aim is to help firms restore their capital bases so that borrowing and lending at reasonable terms can again proceed. Not only banks could line up receive welfare checks, but other financial entities — pension funds and credit unions, for example — would be eligible.
Three stages to the plan
Money would be available in three stages: $250 billion immediately; an additional $100 billion if the President certifies its need, and a last $350 billion if again certified by the president and passed by Congress.
A detailed description of the bill is offered here by Forbes. The Wall Street Journal published a substantial tick-tock of the weekend’s negotiations.
U.S. stocks, meanwhile, opened sharply lower today, on the Wachovia news and on the uncertainty surrounding passage of the bailout plan, according to Business Week. European stocks were sharply lower Monday, while bonds rose.
Both presidential candidates support the bailout. Republican John McCain said he would “swallow hard and go forward.” He told ABC, “Let’s get this deal done, signed by the president, and get moving because the real effort of this is going to restore some confidence.’ “
Barack Obama called the bailout “an outrage,” but necessary. “When taxpayers are asked to take such an extraordinary step because of the irresponsibility of a relative few, it is not a cause for celebration,” he said, criticizing both Wall Street and Washington’s lax regulation.
What’s still missing in all of this are the votes for passage and an apology from the perpetrators. Expect the votes to come before the apology.
Steve Berg reports on a variety of topics for MinnPost, including urban design, transportation, national politics and world affairs. He can be reached at sberg [at] minnpost [dot] com.