[lbo-talk] Prins: Bailout Plan Won't Be End of Wall Street Bailouts

Michael Pollak mpollak at panix.com
Tue Sep 23 15:51:42 PDT 2008


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]."



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