In a time when the restoration of confidence, perhaps more than even financial liquidity, is paramount in calming markets and providing stability, neither the Treasury secretary nor the chairman of the Fed acquitted themselves well this week.
As the war in Iraq unfolded, and then morphed into disaster in its first several years, the world discovered the consequences when what is given with absolute assurance as the urgent reason for taking action turns out not to be the case.
As the current economic crisis unraveled, the Bush administration claimed that it had spotted the greatest danger to the economy and the credit markets in generations. Toxic mortgage based assets held by financial institutions were cited as the threat and a $700 billion government intervention was needed to buy them up.
As President George W. Bush said in September:
Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system.
It had to be done immediately, he said, or a grave and gathering peril in the financial system would make its pain felt soon on Main Street. The President painted a bleak picture of what the world would look like without the bailout.
More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.
We expressed some skepticism on these pages as the President’s words were being digested. Portraying financial Armageddon if American taxpayers did not come up with the largest government expenditure in history struck us as not a very faint replay of the approach taken in Iraq, where the administration not only claimed that weapons of mass destruction posed an immediate threat but that it knew where they were.
So we posed the question nobody else it seemed was even considering:
Is America stumbling into a financial Iraq? … Are we dealing here with the financial equivalent of threatened mushroom clouds and weapons of mass destruction?
As it turned out, toxic assets, like weapons of mass destruction, were not the real problem. In the case of Iraq, they were never found. In the situation involving the credit crisis, none were ever bought under the government’s rescue plan. And a new solution was pursued instead: taking equity positions in financial institutions.
This week,Treasury secretary Henry M. Paulson Jr. announced that the original plan, the one upon which the $700 billion bailout was approved and which so many officials and commentators said was absolutely essential to financial stability, would be abandoned.
Even before the Bush-Paulson plan was approved by Congress, we had some doubts about its principal focus:
How the Bush bailout plan will be managed, what assets it will buy, how it will value and how long it will hold them are all undisclosed. It is hard not to be doubtful that the compromise proposal now being discussed will offer much more information. There is considerable dispute that the plan even addresses the fundamental problems in the banking sector.
And the astronomical $700 billion that Mr. Paulson initially insisted was needed in one fell swoop? Congress gave Mr. Paulson $350 billion and required reauthorization for the remaining amount. Mr. Paulson said he had no plans to ask for it now.
Elsewhere last week, the Fed refused requests by Bloomberg News and others to account for the more than two trillion dollars it has pushed out its lending window. It apparently believes the country is not entitled to know how much the Fed is lending, whom it is lending to, or details about the collateral that is being offered.
Both Fed chairman Ben S. Bernanke and Mr. Paulson have said that an absence of openness and transparency were factors that helped to create the current financial crisis in the first place. But transparency is something the Fed talks; it does not walk.
Last spring, we suggested what the Fed had said about the Bear Stearns collateral did not fully compute.
Actually, the Fed did not make a traditional $29 billion loan to JPMorgan Chase, as its official statements would have us believe. It was more of a wink-and-a-nudge deal to take on the poorer assets without going through the formality (and the barrage of questions that would follow) of actually purchasing them.
In a time when the restoration of confidence, perhaps more than even financial liquidity, is paramount in calming markets and providing stability, neither the Treasury secretary nor the chairman of the Fed acquitted themselves well this week. Mr. Paulson only added to the impression that what he and the administration say cannot be trusted or taken at face value. Mr. Bernanke showed his commitment to transparency is a one-way street. What the world needs from its leaders is candor, clarity and competency. It did not find these virtues in either man, which is why the actions of the secretary and the chairman are the Outrage of the Week.
The magnitude of the financial injury worldwide and the costs to repair it are breathtaking. But the loss of faith occasioned by what so many see as a colossal betrayal on the part of leaders and institutions may prove the most damaging of all.
The tenth month in the Gregorian calendar will go into history (please!) as the time when more money was lost by shareholders around the world and then found by governments to prop up the global financial system than any four-week period since civilization began. The amounts may well exceed ten thousand billion dollars when you consider the plunge in stock markets worldwide and the sums public treasuries are coming up with to bailout the banks and just about anything else that has a profit and loss statement.
The ultimate costs both human and financial of this economic carnage and unprecedented public monetary infusion will not be known for many years. The impact on the economy and monetary stability from the “solution” may carry unforeseen repercussions, just as the problem it is designed to solve went under the radar for too long. Without doubt, the interaction between capitalism and government has fundamentally shifted, as has confidence on the part of millions of citizens in the institutions they once admired but, alas, no longer even wish to be seen associating with. It may well be that a generation of investors which has lost so much will choose to forsake the stock market for the rest of their lives. Many young people could be left with an indelible impression of a system that can never be trusted, except that is to work profitably for a handful at the top until their folly and greed reaches the point where even they become its victims, too. The seeds of individual bitterness and social unrest have often been sown when the whirlwind of momentous events unearths the land.
Here’s a question –call it the ten trillion-dollar question: If bankers had done the jobs expected of them in a diligent fashion; if boards of directors had taken an interest in debt and leverage ¾two subjects that didn’t seem to be part of their vocabularies, much less on their agendas; if regulators had been breathing and perhaps even conscious; if policy makers had had the vision to see the possibility of failure and not just the mirage of endless prosperity, do you think all this would have happened? And what does it say about institutions and leaders in the 21st century that so many seemed incapable of exercising sound judgment and common sense, even when some were receiving compensation on a scale never seen in the history of professional managers?
The magnitude of the financial injury worldwide and the costs to repair it are, indeed, breathtaking. But the loss of faith occasioned by what so many see as a colossal betrayal on the part of leaders and institutions who acted as though they had the wisdom of prophets, but in truth had not even the foresight of blind men, may prove the most damaging of all. It is a lesson that will be remembered long after this October of the fleeting trillions has faded.
The once powerful and still influential former Fed chairman took no lessons at all from the carnage of Enron and other scandals that occurred on his watch, where boards had shown themselves to be utterly incapable of monitoring the ethical and financial health of company after company, and management’s approach to risk was the financial equivalent of the three-pack-a-day cigarette smoker.
Alan Greenspan, who used to be called the voice of “God” when it came to financial matters, appeared before the U.S. House Committee on Oversight and Government Reform this week. But rather than delivering his testimony with heavenly authority, this one-time head of the Federal Reserve gave a performance more like Woody Allen doing an impression of Captain Renault of Casablanca fame. Dr. Greenspan said he was “shocked, shocked” to discover how far astray the markets and financial firms went in the past several years in their abuse of mortgage-related securities.
He put it this way:
I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.
This is not the first time Dr. G looked like he had just stuck his finger in a light socket. We thought his vision was a little clouded in March of 2007, when he was among a crowd -which included U.S. Treasury Secretary Henry M. Paulson Jr.- that was pushing for less regulation of business. He said at a conference then that he didn’t see a need for most of the Sarbanes-Oxley legislation of 2002. He joined a loud chorus of business heavyweights who argued that boardroom regulation was sapping the competitiveness of American business. Talk about a near-terminal case of myopia.
Yet it seems odd, with all the carnage from Enron and other scandals that occurred on Dr. Greenspan’s watch, where boards had shown themselves to be utterly incapable of monitoring the ethical and financial health of company after company, that he still would have relied upon management to protect shareholders. In business, as with most large organizations these days, the right thing does not happen by default or through auto pilot. It requires intricate and robust mechanisms to ensure the right thing is clearly identified and is the subject of constant internal checks. Shareholder protection as far as management is concerned has too often been reduced to the cliché of the fox guarding the hen house.
Here is what we said about Dr. Greenspan’s earlier, and now discredited, view that there was no need for regulation that raised boardroom standards:
If we are to take Dr. Greenspan at his word, during the time he headed the Fed he didn’t see the need for changes in governance when huge corporate icons were crashing down about him and taking the stock market with them. He didn’t see the need for codes of ethics that would have protected whistleblowers who tried to prevent Enrons from occurring. He didn’t see anything wrong with the hundreds of millions in loans boards were doling out to CEOs that were never repaid. He didn’t see anything wrong with audit committees that were meeting less frequently than compensation committees while permitting huge liabilities in “off book” arrangements. He wasn’t bothered by auditors who were making all kinds of fees from non-accounting jobs and were more interested in pleasing management than reporting on the true health of the books. He didn’t see a problem with paying CEOs hundreds of millions in stock options without expensing them on the company’s balance sheets.
We then asked the question:
What else can’t this man see?
The answers have been coming in battalions of destruction over the past couple of years. The landscape is littered with the ruins of the financial system, the deaths of century-old banking houses, withering consumer confidence in an era of spreading job losses and stock market decimation, and an avalanche of multi-trillion dollar government bailouts and interventions that few can fathom and whose eventual toll in monetary impact and taxpayer cost absolutely no one can accurately predict.
It is significant that one of the main features of the legislation he was telling high paying business audiences not long ago was unnecessary was a provision to make boards more responsible for overseeing financial risk. Risk, as everyone now knows, was the six-ton elephant that was running amok throughout Wall Street, creating disaster out of anything related to subprime mortgages.
We had a different vision of where the world was heading when Dr. Greenspan was trying to turn it back. Twenty months ago, we noted the following:
A global market that is becoming increasingly volatile and upon which so many depend for their livelihoods, their prosperity and very often their dreams, requires new rules for the road —not a free-for-all. In this complex environment that has too often in recent years experienced the consequences of those who play only by their own rules and tend to forget the trust from others they hold, a premium will flow to where the regulatory structure and corporate governance regime demand and produce transparency, integrity and ethics. Companies and markets that become synonymous with those values will enjoy a competitive edge. Those that do not will suffer.
Alan Greenspan is a poster child for an era that was too quick to raise up human beings to godly status and attribute to them, and countless CEOs who were thought to actually deserve the hundreds of millions they received, feats of vision and abilities that mere mortals could not begin to comprehend, much less imitate.
As it turns out, the Richard Fulds, Angelo Mozilos and James Cayneses could not even manage to keep their own companies –or their reputations- from falling into an abyss fashioned by an excess of greed, hubris and poor governance. No, it wasn’t what Dr Greenspan feared: too much regulation like Sarbanes-Oxley. It was exactly the opposite.
The greatest challenge to capitalism and economic stability since the 1930s is in no small measure the product of the unregulated and opaque actions of self-aggrandizing titans of excess, whose overweening ego and blinding greed seldom permitted them to see anything beyond more zeroes at the end of their next paychecks and whose approach to risk was the financial equivalent of the three-pack-a-day cigarette smoker. The boards that should have been the watchful stewards of shareholder interests, but failed thoroughly in that role -as they have in so many times of testing over the past 100 years- were happy to light the match as often as it was demanded.
And Alan Greenspan, it turns out, was somewhat less than the all-knowing font of wisdom he enjoyed portraying and the media and others delighted in extolling. His Congressional appearance was a testament to failure, or at least to the folly of heedless acceptance of a system that worked very well for a few at the top and gave little cause to its adherents, which included Dr. Greenspan, to consider anything else. Conventional wisdom can be such a pleasingly temperate island, especially when its most favored residents are the ones dispensing the wisdom and setting the conventions.
Dr. Greenspan’s testimony included this revealing note:
This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year.
That would be a revelation possible only for those in urgent need of a trip to the eye doctor. Normal vision, possessed by most ordinary men and women who have some experience seeing how the real world works and the costly recurring blunders of narcissistic and overrated leaders, would have advanced the conclusion by several years.
Alan Greenspan has been a gifted and erudite figure on the stage of American public policy for several decades. He has also made a number of mistakes. Far greater, however, has been the mistake of many observers who have tried to make of him more than the man of earth he really is. There have been occasions, we think, when he has taken those expectations a little too seriously.
Memo for the future: before society decides to elevate someone to godlike stature, make sure he can at least see beyond the next seven days.
How sharper than a serpent’s tooth it is to have a thankless child! –King Lear.
When the U.S. House of Representatives rejected the $700 billion Wall Street bailout last week, stock markets promptly plunged. Advocates of the plan were quick to blame opponents for the record drop in the Dow. Dire warnings were issued that incalculable damage would be inflicted if the bill were not passed. It was portrayed as a rescue of Main Street and something that was absolutely essential to avoiding Armageddon in the credit markets. The fate of the economy and the ability of families to send their children to college were hanging in the balance, we were told.
When the House finally passed the Senate’s revised legislation on Friday, stock markets again promptly dropped. No recriminations were heard this time, only demands for more. And more.
So it is with the largest single expenditure in the history of government, where nearly one trillion dollars was added to the taxpayer credit card with the stroke of a pen. Once again, Main Street has failed to satisfy Wall Street.
Aided by a battery of the best lobbying firms money can buy, Wall Street worked overtime to push for passage of the bill. And it worked. For its part, the Senate approved a bill on Wednesday with add-ons that were on an obvious equal footing with the emergency economic measure triggered by the most serious financial crisis since the Great Depression: $192 million for rum producers; $129 million for NASCAR tracks; $33 million for companies doing business in American Samoa and $6 million for toy arrow producers. Relief from the current crisis will come sooner for some than others, it appears.
Both before and during the House vote to approve the measure on Friday, the stock market soared. Only when it was passed did the Dow start to sink. By the close, it had erased all the day’s gains and finished down 157 points. Wall Street types, some from the floor of the New York Stock Exchange itself, were saying the bill wasn’t enough; more intervention was required. One analyst told CNBC “the idea of passing the bill was a lot better than passing the bill. The more time we had to digest it, the more we realized maybe it’s not such a great bill. Maybe it’s not going to rescue us.”
Another manager with more than $800 billion under management remarked “What we really need in addition to this now is a confidence booster from the Fed.” Don’t you just love Wall Street and its sense of gratitude?
President George W. Bush, who was quick to point out how much the Dow sank on the day the original House bill was rejected, had nothing to say this time about the Dow’s falling by over 300 points. And the bill that was so essential to getting things rolling for Main Street and freeing up those car loans? He said it would now take some time for the measures to have their impact. Why are we not surprised that what is revealed afterwards is not exactly as it was laid out in the case that was made for the bill in the first place? It is a familiar modus operandi for the Bush administration. Exhortations are issued like a thundering herd; equivocations follow soon on cats paws and in whispers.
Let’s be clear: the central purpose of the bill was to help Wall Street restore the glitter, glitz and gravy train to Wall Street. It is designed to help banks and bankers go back to the future and pretend that the mess they made never really happened. Nearly a trillion dollars can help rewrite a lot of history. It has much less to do with easing credit for Main Street, which will now require additional and more targeted government intervention if that problem is to be really solved. One more thing: The freezing of the credit markets was, in significant measure, the result of allowing Lehman Brothers to collapse without any steps being taken to mitigate the blow to other parties. That created anxiety in credit markets around the world. It is another example of how officials in the administration and at the Fed have misread significant signals on the road to this crisis and have taken many missteps along the way.
We expect the bailout will quickly rise to the status of the largest boondoggle of recent times. Huge sums will be misspent. Scandals, delays and ineptitude will emerge that hobble the plan, and it will become a great source of contention -even on Wall Street itself. Many will also manage to make fortunes for helping to “solve” the problems their industry created. It wouldn’t be Wall Street without the aforementioned trademarks.
The era that has culminated in the greatest economic crisis in several generations was the product of unchecked greed and excess on the part of those who have lost any sense of proportion regarding value and forgotten the respect the risk deserves. One might have expected greater due diligence on the part of lawmakers as to what the bill’s intentions were -and what it was actually capable of achieving. Instead, the country is being saddled with and called to underwrite a vague and half baked collection of untested ideas and untried schemes. It is bad enough when taxpayers can’t understand what Washington is proposing; it is a worry of considerably higher magnitude when it appears that Washington and its key players don’t understand it either.
Sill, the mother of all financial bailouts is what Wall Street wanted; what it demanded, what it lobbied for and what it got. It raised few doubts and insisted upon swift and immediate passage. Yet now it appears that even this is not enough for Wall Street. The crisis continues. The reason is simple: Wall Street is the crisis, which is why its disingenuous actions and those of its supporters leading to this thankless point are our choice for the Outrage of the Week.
Making bad investment decisions over risky products that people did not fully understand is what brought the United States and Wall Street to the brink. Is another terrible folly about to be repeated, even with echoes of the costs and misadventures of the Iraq war booming loudly across the land?
Investors generally like a few details before laying out their money. A knowledge of the investment’s business plan, its costs, its expected return and its risk –above all, its risk– are key to the decisions investors make. It should be no different for citizens when they are asked to put $700 billion on the line for the private sector.
In this case, however, basic rules for the informed citizen/stakeholder are being thrown out the window. How the Bush bailout plan will be managed, what assets it will buy, how it will value and how long it will hold them are all undisclosed. It is hard not to be doubtful that the compromise proposal now being discussed will offer much more information. There is considerable dispute that the plan even addresses the fundamental problems in the banking sector. A rare and impressive collection of more than 200 economists, including Nobel laureates from both the left and the right, have raised serious questions about the plan and have urged Congress to reject it and to hold hearings into alternatives.
Making bad investment decisions over risky products that people did not fully understand is what brought the United States and Wall Street to the brink. And the sums stagger the mind. When you make a decision involving this amount of money, every detail matters. Probably even the spin of the earth should be calculated in the analysis for good measure. But what utterly takes the breath away is the lack of transparency and specifics offered as they relate to the single largest expenditure by any government in the history of the world. There is no clear statement even as to the kind of weak assets the government proposes to buy, much less how they would be valued. I suspect it will soon work its way down to student loans, car loans and credit card debt. Given the desperate picture portrayed by Fed chairman Ben S. Bernanke –who claimed in testimony before Congress on Tuesday, “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…”– and Treasury Secretary Henry M. Paulson Jr. –who resorted to begging House Speaker Nancy Pelosi, on a bended knee, for her support– don’t be surprised to see some banks even scurrying to trade in the trashy boardroom artwork selected by the chairman’s wife for some quick government cash.
Then there is that convenient cash and carry discount window the Fed is providing on a 24/7 basis. In the course of less than a year, deposit taking and investment banking institutions have so far borrowed a record $262.34 billion. The amount doubled in just the course of one week, the Fed said in its September 25th report. Total average daily borrowing also jumped to $187 billion from $50 billion in the previous week.
This unheard of level of borrowing from the Fed has received nothing near the reporting it deserves. To some observers it suggests that bank liquidity problems may be even more serious than are being disclosed. How much more will the taxpayer be on the hook for in addition to the $700 billion now being sought by the administration, which in turn is on top of the hundreds of billions that are on the line for all the other bailouts to date? If ever there was a time when the voices of the best economic minds in the world needed to be heard by lawmakers and citizens alike, it is now. Yet there has been no organized forum for either informed debate or Congressional testimony. Not only is $700 billion at stake, but much more will be at risk if the wrong decisions are made or the wrong problem is attacked. And what does the government do if it gets it wrong? Will the administration’s massive proposal stabilize a weakening housing market, which is the driving force in the erosion of corporate balance sheets and the unraveling of debt obligations, or will it merely be a prisoner in an even faster moving express ride downwards?
Institutions are failing, to be sure. Just this week Washington Mutual became the largest failure of its kind in history. But if the $700 billion dollar fund had been up and running, it is unclear whether it would have made any difference. And no one from the administration or Congress has weighed in on that issue. Even before this deal was proposed, Fed and U.S. government commitments and costs related to this crisis totaled more than a trillion dollars. Still, we are told a credit market calamity unlike anything since the Great Depression is possibly hours away unless taxpayers pony up hundreds of billions more.
So what exactly is the problem this bailout is supposed to be addressing and is it the right one? What if banks, having sold off their bad loans to the government, decide not to lend any money, except to other banks and their wealthiest clients? What will be the costs to the economy and to small business owners as well as ordinary Americans? Taxpayers should not be left scratching their heads for the answers. Some may recall that, as noted on these pages, just after the $21 billion takeover of AIG, the White House admitted that taxpayers may not see their money returned.
Here’s an idea: Why don’t Wall Street and the private sector take a more prominent role in cleaning up the problem that was of their creation? We are told that trillions of dollars is sitting on the sidelines and is ready for the right opportunity. But little effort is being made to corral these resources into an overall plan. It is just another inexplicable piece of a puzzle that has been turned into a masterpiece of confusion and uncertainty. Another nagging item: If the world is hanging on by the finger nails over the abyss of financial collapse which can only be averted by the steps the Congress is being asked to take, and so much anxiety centers on how the Asian markets will react on Sunday night (EDT) if the deal is not approved, why have governments around the world not proposed their own contributions to global economic salvation? Why do we not see their lawmakers meeting around the clock and over the weekend to do something to appease the markets?
Is America stumbling into a financial Iraq? The rush to attack a problem that did not exist on the basis of costs and consequences that were not anticipated have already taken their toll on America, its brave young troops, their families and the reputation of the country. The financial price tag for the Iraq misadventure is also counted in the hundreds of billions. Some estimate that it will soar into the trillions. Are we dealing here with the financial equivalent of threatened mushroom clouds and weapons of mass destruction? Another echo from that lamentable miscalculation is the idea that government cash may wind up making money for taxpayers. And the Iraq war was supposed to be self-funding from that country’s extensive oil reserves. Americans are still waiting for that windfall.
This much is clear from that costly experience: When principles that affect public confidence are sacrificed for the expectation of immediate gain, both stand at risk of being lost.
What is worrisome is that few leaders in business and government have demonstrated any grasp of the larger picture. Not only is there an apparent inability on the part of both Democrat and Republican legislators to connect the dots between the Fed’s record loans, the costs of the recent torrent of bailouts, the extent of the subprime mortgage mess, the swelling deficit and shrinking U.S. dollar and this latest government proposal, it is unclear that they even see the dots at all. The lack of leadership in providing the public with clear answers was especially apparent in Friday’s first debate among presidential hopefuls John McCain and Barack Obama.
The way Wall Street has been working is no way to run a business. The way the Bush bailout plan is being decided is no way to run a government. We are already seeing the consequences of the first fiasco. One shudders to think of what might await in the mismanagement of the second.
The promise of this new era of market miracles has been shamefully betrayed by a self-serving collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week.
It was advertised as a sure path to wealth and prosperity for the world. If only American capitalism could be left unfettered. If only regulations would be loosened. If only CEOs could be incentivized with huge bonuses that would be paid out when their efforts resulted in a rise in stock. Just let the market work its magic, and the world would be changed forever. History will record that, in September of 2008, part of that promise was fulfilled. The world was changed, but not exactly in the way that was promoted. Over the course of a day or so, the world actually held its breath while the financial system glided Titanic-like ever so close to the iceberg that was Wall Street’s creation.
During the years leading up to the near calamity and the tsunami of disbelief that finally overtook Wall Street this week, more wealth was transferred by shareholders to CEOs than to any similar group or at any other time in history. Directors, too, made a huge cash grab to compensate, they claimed, for the heavy work load that was now being required of them. And regulators, like the Federal Reserve, were willing to do whatever Wall Street and the financial sector needed to keep the fees rolling in.
Wall Street and American business had pretty much all they wanted, except for those nagging requirements of the Sarbanes-Oxley Act of 2002. They, too, were well on the road to being blunted with the arrival on the job a couple of years ago of Henry M. Paulson, Jr. as the fresh-from-Wall Street Treasury secretary. Loosening the clutches of regulation was his first priority. “We must be careful not to kill the goose that lays the golden egg,” was the mantra of lobbyists, the Business Roundtable, right-wing think tanks, dark paneled boardrooms and not a few well-financed politicians.
But the promise of this new era of market miracles has been shamefully betrayed by a collection of greedy CEOs, disengaged directors and regulators who, far from envisioning the new frontier of the global economy, have shown themselves unable to see even into the next week. A few months ago, Secretary Paulson claimed we were closer to the end of the crisis than the beginning. Two weeks ago, he asserted that “the American people can remain confident in the soundness and resilience of the financial system.” His opinion seems to have changed with each of the crises he was incapable of foreseeing until it struck.
Rather than seeing itself transported to the promised land of a new prosperity, Main Street America finds itself today squarely plunked at the junction of Crisis Road and Bailout Boulevard. And those well-heeled CEOs who were trumpeted for their out-of-this-world skills with pay checks to match? They turn out to be as authentic and respectable as a third-rate circus act.
The tax-cutting Republican administration and Treasury secretary who were the biggest boosters of American business and free market capitalism have now become the biggest interventionists, writing the biggest bailout checks in American memory.
History will have much to say about the circumstances that led to this crisis. And it will ask with a decidedly more demanding voice than heard thus far among policy makers and commentators, how was it possible for American capitalism to have been permitted by its regulators, guardians and gatekeepers to have reached a point where decisions of CEOs and boards were so reckless that they ultimately brought the world’s financial system to the brink of collapse?
The answer will be seen, symbolically at least, through the prism of excessive CEO compensation, which some six years ago we described to the U.S. Senate Banking Committee as the most corrosive force in American business. We said then that the lure of huge bonuses tempted CEOs to take risks that cannot be sustained. The subprime meltdown is unsustainable risk writ large. It is another story of greed overcoming responsibility and of boards yet again, as they have in so many scandals in the past, acting more as a combination of cheerleader and ATM machine for overreaching CEOs instead of the wary sentries they are supposed to be.
As we predicted at the beginning of the year when it became apparent that Countrywide Financial would not survive on its own:
This is only the beginning of the bailout process that is unfolding…. Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.
Significantly, all the failures, bailouts, meltdowns and write-downs have carried with them the earmarks of high abuses in CEO pay. Over the past five years, when the faulty, risk-oblivious decisions that led to the present crisis were being made, the CEOs of Merrill Lynch, Citigroup, AIG, Lehman Brothers and Bear Stearns received an aggregate compensation in excess of one billion dollars. One only has to recall the antics of Bear Stearns’s James Cayne, the colossal greed of Contrywide’s Angelo Mozilo, the dissembling of Lehman’s Richard Fuld and the narcissistic actions of Merrill Lynch’s Stanley O’Neal -who waltzed off with more than $160 million after leaving investors stung with multi-billion dollar write-downs and losses- to be persuaded of the depths to which the leadership of Wall Street and the financial community has fallen. With captains like this, and the apparently vision-blind Henry “the American people can remain confident in the soundness and resilience of the financial system” Paulson at the helm, the surprise is not that the financial system has been teetering on the abyss, but that it has not fallen in more often.
Now the $700 billion price tag for the excesses and failures of those in charge has arrived at the doorstep of every American home with a gigantic thud. This is on top of the estimated $800 billion in federal commitments and outlays caused by the subprime debacle so far.
And a larger cost is yet to be calculated. It is in the form of a crumbling in the pillars of confidence necessary to the functioning of free markets and a collapse in respect for those who claimed they could be trusted to do the right thing. As we have noted before, in many cases boards could not even be trusted to meet regularly and assess the risks they were presiding over. Another consequence of the massive sums that will require mammoth increases in foreign borrowing: the United States will be thrown further into the embrace of China, a traditional major buyer of U.S. debt. What geopolitical ramifications may result from the U.S. becoming even more beholden to that communist regime do not appear to have found their way onto the radar of most American policy makers.
But the more lasting outcome of this crisis and the cost to extricate the financial system from it will be that American citizens will have to pay for it with their own well-being. It is difficult to imagine how any universal health care plan will be possible in a new administration; nor will the huge sums being committed to the bailout of Wall Street’s excesses permit major outlays for job creation or infrastructure support. Inflation and a lower dollar will be harsh taskmasters in this new American economy and will hurt most of the very citizens on Main Street the Bush/Paulson Wall Street bailout plan purports to help.
As the United States now comes to grips with this trillion-dollar-plus inflection point in its history and how close it has come once again to a Titanic-like collision with the financial system, the enormity of the betrayal will become even more painfully evident.
Part of the social covenant binding America, built up over generations of struggle, is that capitalism must serve the public good and not just the privileged few. A stable, functioning economy and the right to prosper in it is the birthright of every American. Both have been hijacked by the self-serving purveyors of subprime governance, leadership and regulation.
They are a fitting focus for the indignation and anger of millions of Americans who have lost so much in jobs, homes and hope, and will be called upon for still more. We join them in their outrage.
We will examine the bailout plan, and the bankruptcy of the vision and moral leadership that produced it and are now seeking to profit from it, in a future commentary.