Waiting for all the shoes to drop
Editor’s note: This column was written last week; as of press time this week, Congress had failed by 13 votes to pass the bailout.
Bear Stearns, $30 billion; Fannie and Freddie, $200 billion; AIG, $85 billion.
In case you were waiting for the other shoe to drop, last week we learned that the nation’s two remaining independent investment companies, Morgan Stanley and Goldman Sachs, were seeking to throw in their lots with conventional banks. They applied to change their status to bank holding companies or regular banks. What they’re saying is that the business model of investment banks is too risky. Imagine that.
They want the protection of being able to access federal emergency money when necessary. That is, they accept deposits of cash that are insured by the FDIC. In return, they’re embracing the government regulation their industry has for so long, and with such vehemence, rejected.
This doesn’t mean they will actually be audited regularly or regulated in any meaningful way that would force transparency. Even the experts are saying regulation is a joke and the feds probably won’t be able to do that.
Treasury Secretary Henry Paulson is twisting arms to speed the proposed $700 billion buyout. Don’t waste time, Congress is being told. Fixes are happening with lightening speed. Commercial banks are in a nontransparent mess already, their books laden with toxic mortgages.
Politicians, even those who ideologically oppose regulation, are demanding safeguards written into the buyout legislation to help ensure more responsible financial behavior. The buyout, of course, widens the deficit, which in turn drives down the dollar.
Could it be the urgency has to do with the election? Paulson, of course, may be out of a job when the new administration takes over in January. Senators are saying they don’t want to bail out Wall Street but want help for Main Street. Sounds nice, but the way to do that would be to force lenders to renegotiate mortgages with individual borrowers. Republicans, who ordinarily resist regulation of markets, may be hedging on the chance that there will be a Democratic administration.
It’s amazing that the most reviled financial figures quite recently were the hedge fund managers. Now, by comparison, they seem to be paragons of responsibility, next to these huge investment companies that leveraged risk to increase their worth (read stock price).
But as buyouts weaken the dollar, they seem to be driving up the price of oil (not all that helpful to Main Street). Two weeks ago oil was traded at $90 a barrel, on Sept. 22 it bounced back up to $120.
Morgan Stanley has since offered 20 percent of its shares to Mitsubishi. By the time this sees print, Goldman Sachs may also be selling blocks of shares to some other bank or entity. The Chinese? Are they spreading the risk or muddying the waters in anticipation of investigations by congressional committees. Or is that too much to hope for?
Where, after all, was Congress when they were warned that Fannie Mae and Freddie Mac were getting way too big and, if the real estate bubble burst, as we knew it would, they might implode? Congress turned a collective blind eye to those warnings.
When Ronald Reagan talked about getting government off the backs of small business it sounded good to me. But it wasn’t long before the deregulated savings and loan industry was discovered to be seriously dirty. Hearings were held, the Keating Five were indicted and taxpayers were left holding the bag to the tune of somewhere between $125 billion and $150 billion. The government then created the Resolution Trust Corp. to oversee a terminally sick industry.
Deregulation of electricity didn’t work out too well either. After disastrous results in California, investigators discovered collusion by power company managers in shutting down plants at strategic times “for maintenance,” specifically to cause shortages and justify raising prices. By all accounts, a daring daylight robbery.
Now, in the rush to pass its bailout, the Bush administration has given Congress a proposal that will give sweeping authority to Paulson. This truncated document includes, however, the stipulation that anyone harmed by the deal could not seek recourse in the courts. It also contains no oversight of management, specifically no court review.
Isn’t that like giving a blank check to the very folks who allowed the mortgage meltdown to occur in the first place?
As for our presidential candidates, perhaps we will learn more during the debate this week. That is, if we can finally focus on the economy instead of the usual political silliness. So far, Sen. Obama has said any plan should include “independent accountability oversight,” and that the bailout should be aimed at Main Street rather than Wall Street.”
Sen. McCain got angry and called for the firing of SEC Chairman Chris Cox. McCain, who has acknowledged his strong association with savings and loan cheat Charles Keating to be the biggest mistake of his life, still says that regulation is the problem, not the solution. Markets should be free to regulate themselves. Good grief.