The real purpose behind the Bush Administration’s plan is not to help the victims of the subprime turmoil, but rather the perpetrators of the economic crime who unleashed it in the first place.
To justify their out-of-this-world bonuses, the titans of Wall Street and the kings of the home lending business, like Countrywide Financial’s Angelo Mozilo, claimed they were merely being compensated according to the dictates of the market. No mere mortal dare challenge or question the end result where many received $40- or $50- or $100-million paydays. It was the invisible hand that decided. And it was sacred.
But now the results of that invisible hand look more like a rubble of confusion and ruin, at least as they related to the subprime mortgage industry and the unsettling economic blunders created by Wall Street on a global scale. So it is government that is expected to intervene to bring stability to the market’s jittery hand. An ever-receding Fed interest rate has been one response, along with world central bankers flooding the market with cash. One wonders how the same low interest rates, which saw the concept of risk take a very long vacation, will improve over the long run a situation that was created substantially by low interest rates.
Yesterday, President George W. Bush and Secretary of the Treasury Henry M. Paulson Jr., who are generally advocates of the free market when it is more convenient than present circumstances permit, announced a plan that purports to help distressed home owners by bringing lenders and borrowers together to solve problems. Only a fraction of those expected to need help will benefit. A more realistic interpretation of what is at work here is an effort to bring stability to Wall Street’s largest institutions, which are facing giant losses, slumping share value and increasingly nervous clients.
As much as we admire the discipline and innovations a well (and we hope fair) functioning market can produce, the case for the constructive use of government policy and influence in that market is well established. Some argue that FDR did more to save capitalism than all the J.P. Morgans combined. What is galling is that Wall Street and American business are eager to accept the idea when it is in their own narrow interests, such as now, while at other times –and especially at bonus time– government is exhorted to stay out of the market. And don’t think for one moment that the big players do not see a considerable direct benefit in government efforts, supported by Fed accommodations, that help to stabilize the effects of the housing meltdown.
The plan announced yesterday is something in the nature of saving the financial community that created the ticking time bomb of subprime loans and syndications from itself. Offensive as that may be to some, the indignation pales in comparison to the fact that those who created this mess are the ones that have benefited most handsomely from it. The sting of that image is not reduced as some, like Merrill Lynch’s Stanley O’Neal, are seen making a fast exit with piles of money to ease their pain. We set out some of our views on the public stake in CEO compensation as it relates to the subprime meltdown in a recent guest column on the corporate governance blog of Harvard Law School.
What might have restored confidence in the moral underpinnings of this system–without which it cannot continue to function– would have been a statement from President Bush or Secretary Paulson that they have also worked out a plan whereby a substantial part of the compensation and bonuses that were derived from these toxic loan concoctions would be given back and placed into a fund to assist distressed homeowners. The symbolism would have been significant and a major boost to the idea that fairness, too, is a commodity that the marketplace values.
That did not happen because the real purpose behind the Administration’s plan is not to help the victims of the subprime turmoil, but rather the perpetrators of the economic crime who unleashed it in the first place.