http://www.newsday.com/news/opinion/ny-oppri235854039sep23,0,2527116.story
or http://www.commondreams.org/view/2008/09/23-0
September 23, 2008
New York Newsday
Bailout Plan Won't Be End of Wall Street Bailouts
by Nomi Prins
Sunday night meetings in Washington produce startling announcements:
In March, there was the Fed's $30- billion backing of Bear Stearns'
bad assets, as it was given to JPMorgan Chase; last week we had
Lehman Brothers' declaration of bankruptcy; this week it's Goldman
Sachs and Morgan Stanley, changing their status to one equivalent to
neighborhood banks, with all the emergency capital perks thrown in.
The shifting tides of Wall Street aren't over, and neither are the
government bailouts. If Treasury Secretary Henry Paulson's request
for a $700 billion bailout is approved, it will bring the total
government tab for saving Wall Street from itself to $1.25 trillion.
But, reading the fine print, that huge chunk of cash is just for
one-time purchases. If the government buys $700 billion worth of
assets whose value goes to zero, we could be on the hook for another
bailout round before you know it.
Paulson considers this latest plan, "decisive action to
fundamentally and comprehensively address the root cause of our
financial system."
But it does no such thing. That's because his persistent focus on
illiquid mortgage assets and the "housing correction" is not the
bigger problem. It's merely the catalyst that revealed the systemic
rot of overleveraged and reckless activities that define our
financial system.
Blaming irresponsible lending and borrowing is a slick way of
avoiding the deeper need for regulation. If the entire industry
(from small lenders through big trading firms) were more transparent
and less leveraged, a correction in housing wouldn't have brought
down three major investment banks. It wouldn't have triggered the
decision of the remaining two to become commercial banks, to gain
more access to desperately needed capital through citizens' deposits
and the Fed's emergency window.
That Goldman Sachs and Morgan Stanley positioned their request like
a plea for regulation is a joke - it was a plea for money.
Yes, we need stricter lending practices instead of the ones that
contributed to 5 million homeowners facing defaults or foreclosures.
But we also need to restructure Wall Street - not by creating
bigger, less-transparent entities, but by generating smaller ones
whose risks are clear, as was done in 1933.
Meanwhile, Democrats in Congress want more constraints on Paulson's
bailout package. They cite the need for independent oversight of the
fund that will purchase the assets, a cap on executive compensation,
and more help for borrowers through mortgage-debt reductions.
What's lacking, even from the Democrats' wish list, are demands to
overhaul and re-regulate the entire banking industry, and that all
financial institutions quantify their real credit losses - at the
moment, only commercial banks report their exposures.
The Commodity Futures Modernization Act of 2000, passed late one
December session by former Senate Banking Committee chairman Phil
Gramm (R-Texas), deregulated the privately traded credit derivatives
and swaps market. These derivatives have dangerously intertwined
with mortgage-backed securities, and require the creditworthiness of
the financial institutions that trade them to remain stable. (AIG is
an example of one that didn't, and we know how that turned out.)
Also, the Gramm-Leach-Bliley Act of 1999 - navigated by Gramm and
cheerled by former Treasury Secretary Robert Rubin, who served under
President Bill Clinton - repealed those 1933 protections and made it
possible for investment banks, insurance companies and commercial
banks to merge without requiring greater regulation.
Today's mess is a direct result of these two acts.
To steer this ship, Congress has to bone up on finance - if members
don't know what CDOs (collateralized debt obligations) and credit
derivatives really are, they can't understand the risk they have
incurred on behalf of American taxpayers, and they'll be
ill-prepared to evaluate Paulson's plan. And Congress must then
regulate credit derivatives and the banking industry.
The goliath Bank of America-Merrill Lynch will take months to
decipher. Goldman and Morgan's buying up smaller banking players -
which they will - will add to the murkiness. None of this stabilizes
the system. Instead, it sets it up as a bigger problem to solve
later.
If our representatives in Washington are serious about fixing the
problems that Wall Street has caused, they will shoot the roots of
deregulation, not just the messenger of subprime-lending
malpractice, or the toxic waste manufactured by Wall Street.
Congress also shouldn't let Paulson anywhere near the management of
the buyout fund - and frankly, shouldn't feel compelled to approve a
$700 billion bailout without strong regulatory protections for
American citizens. But that requires a deeper understanding of the
complicated mortgage and credit markets than Congress seems to have.
Meanwhile, stay tuned for more bank mergers and instability,
punctuated by rest periods where Wall Street inhales government
money. Or, I should say, our taxpayer money.
Copyright © 2008, Newsday Inc.
Nomi Prins, a former investment banker at Goldman Sachs, Bear
Stearns and Lehman Brothers, is a senior fellow at the public policy
organization Demos and the author of "Other People's Money: The
Corporate Mugging of America [1]."