‘High stakes game of political poker’ develops over rescue package

Congressional leaders, who last week seemed both in shock and in tune with the necessity of passing a financial rescue package urged by the Treasury secretary and Federal Reserve chairman, are now flexing muscles to use leverage of their own: In the same bill that would allow for spending some $700 billion to buy up bad debt, they want the Treasury to incorporate limits on executive compensation. Moreover, both presidential candidates favor some sort of compensation limits as part of the massive package.

David Rogers and Patrick O’Connor of Politico explain part of the emerging split:

“As markets reopen Monday, the issue is a surprising flashpoint between Treasury Secretary Henry Paulson and House Democrats, who have drafted a bill giving Paulson much of what he wants but requiring that Treasury also demand ‘appropriate standards for executive compensation.’

“Treasury argues that the requirements will make it harder to convince companies to sell their troubled assets to the government. But Democrats, who otherwise admire Paulson, say that the former Goldman Sachs chairman is blind to the politics of the situation and the huge divide between the average taxpayer and the financial world now seeking relief from bad debts that have clogged the credit system — and threaten the entire economy.”

That isn’t the only split. The Financial Times lays out another fault line between Paulson and congressional leadership:

“A high stakes game of political poker was under way in Washington on Sunday as Congress prepared to vote this week on a plan to create a $700bn fund to buy toxic assets from banks and thereby ease the credit squeeze.

“Democratic legislators pressed for a housing component to be added to the bill and demanded assurances that President George W. Bush would not veto a subsequent second stimulus bill.”

Still others question the wisdom of the package itself. Economist Paul Krugman writes in the New York Times, ” … the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

“That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.) But Mr. Paulson insists that he wants a ‘clean’ plan. ‘Clean,’ in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing?”

Federal Reserve chief Ben Bernanke and Treasury Secretary Henry Paulson will testify before Congress on Tuesday; members of Congress hope to wrap up the package before an election recess scheduled to begin at the end of the week.

Here are several articles that explore the emerging dynamics as the week begins:

U.S. News Political Bulletin: “Split emerging over financial bailout”

Politico: “CEO pay emerges as bailout barrier”

Financial times:
“Tensions mount over bail-out”

New York Times: “Democrats set terms as bailout debate begins”

Los Angeles Times:
“McCain and Obama trade accusations on the economy”

New York Times: “Big financiers start lobbying for wider aid”

MarketWatch:
“Treasuries retreat as weight of rescue plan emerges”

Comments (5)

  1. Submitted by Beryl John-Knudson on 09/23/2008 - 09:05 am.

    From Paul to Peter and back again to Paul?…Seems like a pretty incestuous relationship when Paulson makes his own, Goldman-Sachs, as holding company “picking up the financial wreckage”…”The Paulson-Bernanke Bailout Plan”, Michael Hudson, COUNTERPUNCH

  2. Submitted by stephen winnick on 09/22/2008 - 07:16 pm.

    As Dan said- the accountability issue has yet to be addressed as this emergency plan gets heated up. The existing criminal laws might provide enough traction if tough prosecutors are willing to take on the extreme complexities of the financing devices that caused the meltdown. For example, with all the hedging and protecting that these market gurus do by creating options on all sides, are these derivatives nothing more than a series of Ponzi schemes? And are the underlying mortgage portfolios being pledged for multiple piles of securities? What about the accounting profession, have they again been asleep while auditing,i.e. not requiring as a condition to their blessing a real marking down to market during the tumble?These are just a few of the basic issues, we need some smart, principled leaders to look carefully and seek accountability, transperancy and justice for the little people.

  3. Submitted by donald maxwell on 09/22/2008 - 09:52 pm.

    I see no discussion of consequences for the boards of directors of the failed companies being bailed out. The executives may have shown massive incompetence, but they were subject to the control of a board of directors who had a fiduciary duty to avoid the disasters that have occurred. Are all these directors covered by hold-harmless contracts with their respective corporations to protect the directors from any consequences of their gross lack of oversight?

    It seems to me that the bailout agreements should include clawbacks on the compensation of not only the executives but also the directors involved.

  4. Submitted by Dan Hoxworth on 09/22/2008 - 12:06 pm.

    Thank you for sharing these insightful analysis. It is always amazing how the financial issues of investment firms can pervade the media while the financial issues of hard-working Americans do not receive the same attention. The question of who benefits and who pays must be examined at every one of these decisions. If we, the American people are to take the risks in the bailout, then we want our Government’s Treasury and not private individuals whose poor decisions led to this crisis to reap the rewards.

    1)Why is it more effective to bail out firms than Americans who are defaulting on their mortgages? Wouldn’t a bail out of Americans in default on their mortgages solidify the economics of many households while preserving much of the assets on Bank and other mortgage lenders balance sheets?

    b) Given the economic downturn, what other actions are being taken to preserve the assets of middle and low income Americans who are facing higher unemployment, higher costs of living and stagnant wages?

    2)Who will pay for this massive bail out? It seems that the wealthiest Americans have benefited from this run up and now a major surcharge on Americans with incomes over a $1 million could be the source for much of this. Such a tax increase is long overdue given the exploding national debt under the current Republican administration and the widening gap of income inequality in our nation, the worst sense the “roaring 20’s.”

    3)How does Congress seize this opportunity to reignite productive investment in our nation’s infrastructure to strengthen our global competitiveness economically by enhancing our transportation system (rail, roads, bridges, etc), our alternative energy efforts, etc? While the financial crisis is most pressing, it is not the most important crisis facing our nation–global competitiveness or our lack of it right now is.

    4)How will those who led to this situation be held accountable for their actions and not reap rewards of their poor, if not illicit and unethical actions?

  5. Submitted by Bernice Vetsch on 09/22/2008 - 12:59 pm.

    Please add to your list of articles an op ed piece by Sebastian Mallaby that was published September 21 by the Washington Post (www.washingtonpost.com). He points out that several economists have offered alternatives to the “our plan or world wide chaos” non-choice that Mr. Paulson presented on the Sunday morning news shows.

    “Their core insight,” says Mallaby, “is that it is better to boost the banking system by increasing its capital than by reducing its loans. Given a fatter cushion, banks would have time to dispose of the bad loans in an orderly fashion. Taxpayers would be spared the experience of wandering into a bad- bazaar and being ripped off by every merchant.”

    That last sentence holds the key as far as I’m concerned — CONGRESS: PLEASE SPARE THE TAXPAYER JUST THIS ONCE. The Paulson-Bernanke plan seems designed to give them $700 billion with which to get their cohorts out of trouble, NOT to help the American people. Any add-ons the Democrats are able to achieve would be minimal in comparison to the $700 billion. Please read it and call your member of Congress, your senator, and the banking/finance companies of both the House and Senate.

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