the Bailout Congress Forgot

The shameful failure of Congress to pass the bailout hurts an awful lot of Americans, not just wealthy bankers.

Have a retirement account? Own a home? Need a business loan? Whether or not you made any mistakes at all this year, you're getting pummeled by a fractured market and a government that is failing to help.

No one needs a handout - not even failing banks - but we do need restoration of confidence. It needs to be prompt, clear, and sufficient.

Remember the Mexican bailout under the Clinton administration? Maybe not, since it turned out so well. When Mexico was facing financial ruin in a deepening spiral, the Treasury stepped up to offer $40 billion in credit. The amount was considered huge, but that was intentional: it was meant to reassure the markets that more than enough was being done.

It worked. Creditors relaxed, and Mexico was able to get more loans from other sources. It needed little of the money offered by the Treasury and paid back all that it took.

But Congress voted against it, days after promising support. Dissenting Republicans said we couldn't spend our money helping an irresponsible nation, and they yanked their votes.

At that time, the Treasury exercised a little-known option to bypass Congress, and all went well. But Congress later passed a law to close that approach, so now we need their support.

And they've failed to give it.

This isn't about 'principle' or 'voting your conscience,' as  Rep. Jay Inslee (D-WA) claims. How did that kind of reasoning work in the 2000 election?

Whether or not you think we need protection for homeowners and tighter regulation of credit default swaps (as both Inslee and I do),  we need swift action, even if the bailout package is imperfect.

The longer we delay, the more it costs us. Look at the effects of  allowing Lehman to fail, which then hurt AIG, which then weakened Merrill Lynch, which led to a run on Washington Mutual, which increased worry about Wachovia.

Compare that to the swift and comprehensive protection during the Mexican bailout. By acting decisively, the crisis passed quickly and at less cost.

I know that some people feel banks deserve to fail - see my 'moral hazard' blog from last week, and several of the comments after the Inslee link above (and this  thoughtful response from blogger Ken Smith) -  but this is a market crisis that affects all of us.

I'm not out to punish any bank, or hedge fund, or C.E.O.  I don't care about them. I do care about my family, and my friends, and my neighbor, and the rest of Americans hurt by the crisis.

And we deserve a Congress that does, too.

The Phantom Moral Hazard

There are a thousand theories about why American markets are in such turmoil, and ten times as many about what we need to do. Here's one of the craziest.

Some economists and many conservative pundits say we should let financial giants fail, because if we save them, future executives will feel safe with even more risky behavior.

This so-called 'moral hazard' is a principle of economics that applies in some cases, but it's awfully hard to see it here. Let's see what's happened to the wealth of these executives as their firms prepare for bailout.

Stock value for CEO's of rescued firms ($ millions)

CEO	Firm	2007 value	Last Friday
Greenberg	AIG	1,250	50
Fuld	Lehman	827	2
Cayne	Bear Stearns	1,060	61
Sullivan	AIG (ex-CEO)	3	0.1
O'Neal	Merrill (ex)	128	40
Mudd	Fannie Mae	26	0.4
Syron	Freddie Mac	11	0.1

Look at, say, James Cayne, former head of Bear Stearns. I'm not asking you to feel sorry for him - he's still got $61 million in stock there - but note that up until last year, he was worth nearly a billion dollars.

Can you imagine a CEO saying, after the bailout, "I know I should do more to manage risk, or I might lose 95% of my personal worth, my job, my title, control of the company, and the respect of my peers, but at least the government will keep things from getting too bad" ?

Sounds silly, doesn't it? So is the argument that the government is doing too much.

No one is removing the risk from the financial markets. We're just taking steps to ensure that when Wall Street stumbles, the rest of us lose less than, say, some CEO's.

Wall Street's Fall Guy

The market isn't the only thing in turmoil this week; so is honesty in politics.

As recently as two months ago, the head of the Securities and Exchange Commission was considered a top contender for the Republican vice presidential nomination. Christopher Cox has been long appreciated by conservatives, and he'd done a surprisingly good job of reassuring liberals, who feared he would be too passive in his post. 

Cox reinvigorated the S.E.C. and the conservative American Spectator called him "the best [VP] choice, bar none."

Now John McCain is saying Cox "has betrayed the public trust," and "If I were president today, I'd fire him."

What happened?

Nothing that Cox did, or didn't do. He moved actively to address market problems, and weeks ago, increased criticism of "naked" short sellers seeking to profit from a falling market... the very problem that prompted McCain's comments. Cox's fault here was being in the line of fire.

The McCain criticism is all the more disingenuous because Republicans have been clamoring for less market intervention, not more. It's hard to pick up a newspaper - before today, at least - without reading about conservatives moaning about 'moral hazard' (the presumption firms will assume even more risk if they believe the government will save them. See my next blog entry for more on this canard). 

It's even worse when you consider how Cox arrived at the S.E.C.. The first Bush appointee, Harvey Pitt, resigned under universal criticism of his passive approach (called a "patsy for accounting firms," even the Wall Street Journal called on him to step down.) His replacement, William Webster, wasn't much better. Remember that when President Bush spoke on Wall Street during the first market crisis of his administration, markets fell on news that he wanted to reduce regulation.

Today's Republicans (my apologies to anyone who, like me, believed in the values of Goldwater or the early Reagan years) believe that government action is always bad. But Wall Street does not. When things are going well, firms want the government to keep a safe distance, but in times of crisis, they want America's safety net to be a strong one.

Cox has been the most forward-thinking S.E.C. chairman in several years. He's no Arthur Levitt (Clinton's brilliant appointee), but he's a huge step ahead of his immediate predecessors and a market supervisor who has played a more active role than most Republicans have endorsed.

And now they're attacking him for doing too little?