BP: Reports of Top Kill Success 'Premature'

NPR is now reporting in detail that earlier claims in the Wall Street Journal and elsewhere that the 'Top Kill' had worked simply are not true. BP spokesman Tom Mueller "discounted" the reports, NPR claims, saying:

"We appreciate the optimism, but the top kill operation is continuing through the day today — that hasn't changed," he said Thursday morning. "We don't anticipate being able to say anything definitive on that until later today."

We expect to see a correction in the Wall Street Journal just as soon as sell-side brokers close their morning trades and the New York Stock Casino closes.

Naming Names: A Baker's Dozen of Financial Rogues

Late last week, in the penultimate edition of Bill Moyer's Journal (which ends forever this week) the best journalist in television interviewed Prof. William K. Black. Refreshingly, Prof. Black names names while discussing who should bear responsibility for bringing the world to the edge of financial collapse during the waning days of the Bush Administration.

It's a crowded, bi-partisan recitation of rogues, sociopaths, and bureaucratic nitwits. The list includes --

1. Federal regulators who did everything they could to subvert prudential financial regulations;
   
2. Alan Greenspan and other directors of the Federal Reserve;
   
3. Mortgage loan brokers who deliberately wrote and then palmed off on others "liar's loans;"
4. Corporate banking executives who fired whistle-blowers and promoted cheats and con-men;
   
5. Accountants who deliberately failed to call out liar's loans for fear of losing customers;
6. "Pathogenic" employee pay policies that rewarded fraud while punishing honesty;
   
7. Timothy Geithner, former head of the influential New York FED during the Bush Administration and now Obama's U.S. Treasury Secretary;
   
8. Bush appointees (former) SEC chairman Cris Cox and FED chairman Ben Bernanke;
9. The giant blood-sucking "vampire squid" known as Goldman Sachs;
   
10. "Top" Goldman Sachs executives from CEO Lloyd Blankfein on down the corporate chain of command;
    
11. The entire "Bush wrecking crew" of anti-regulation regulators who remain to this day embedded in the federal bureaucracy;
12. Goldman Sachs alum Robert Rubin's many "protégés" whom President Obama has named to virtually every choke-point in the financial regulatory system; and
    
13. As a bonus, the extremist ideologues in Academia and on the bench who teach and write that Wall Street doesn't need and shouldn't enforce anti-fraud laws because the system is "self-cleansing." Really. They teach that to young business students.

Undoubtedly, this is only a partial list. Prof. Black didn't even mention former Texas senator Phil (Mr. Enron") Gramm, or Wall Street's bond-rating agencies, or all of the Senators and Congressmen who voted to abolish Glass-Steagall. These self-dealing gamblers all played a major part in bringing about the near-collapse of the American economy, too.

The televised interview can be seen here. A written transcript is here.

Taking the Cure

"Governments... deemed it unwise to be sane at a time when sanity exposed one to ridicule, condemnation for spoiling the game, or the threat of severe political retribution."-- John Kenneth Galbraith, The Great Crash of 1929

President Obama's speech on Financial Reform at Cooper Union yesterday had the look of going through the motions. As a speech we thought it was uninspired, superficial, and largely toneless. His audience wasn't any better. The bankers and brokers applauded mechanically, grinned stiffly, and kept their justifiably cynical thoughts to themselves.

For Obama's part, "the president ... struck a note of conciliation with an industry that has contributed generously to his party, beseeching bankers to work with him to forge a new regulatory structure." Steve Benen says it was like a lawyer addressing a "skeptical jury."

We thought it more resembled what could pass these days for a TV reality Church Show: synthetic, choreographed piety from a Puritan pastor received by a congregation of sinning bankers with imperfect contrition and phony remorse. You could almost see the tycoons squirming impatiently in the pews and licking their chops in their eagerness to throw a few bucks in the collection plate and hurry back to their desks to resume their wicked ways.

Paul Krugman has it right: The financial reforms pending in the Senate, which come up for debate on Monday -- assuming near unanimous Republican opposition can be overcome -- are a necessary "first step." They would make investment financing "safer." But they won't shrink any of the investment firms who are "too big to fail."

Robert Reich agrees. He -- and most other economists, left and right -- have been making a strong case that much remains to be done after the current bill is passed. "The Dodd bill now being considered in the Senate is a step in the right direction," he says. But three more steps are need to achieve truly effective Wall Street reform -- steps the President largely ignored in yesterday's address.

In Reich's words, Congress needs to pass additional laws that --

1. Require that trading of all derivatives be done on open exchanges where parties have to disclose what they’re buying and selling and have enough capital to pay up if their bets go wrong. The exception in the current bill for so-called “unique” derivatives opens up a loophole big enough for bankers to drive their Ferrari’s through.

2. Resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn’t go nearly far enough. Commercial banks should take deposits and lend money. Investment banks should be limited to the casino we call the stock market, helping companies issue new issues and making bets. Nothing good comes of mixing the two. We learned this after the Great Crash of 1929, and then forgot it in 1999 when Congress allowed financial supermarkets to do both.

3. Cap the size of big banks at $100 billion in assets. The current bill doesn’t limit the size of banks at all. It creates a process for winding down the operations of any bank that gets into trouble. But if several big banks are threatened, as they were when the housing bubble burst, their failure would pose a risk to the whole financial system, and Congress and the Fed would surely have to bail them out. The only way to ensure no bank is too big to fail is to make sure no bank is too big, period. Nobody has been able to show any scale efficiencies over $100 billion in assets, so that should be the limit.

If the past four years have taught us anything, it is that a Wall Street banker's greed is like an alcoholic's thirst: it is never slaked. The bankers and brokers almost drove the American economy off a cliff again, just as they did in 1929. Assuredly, they will do it again. Indeed, there are ample signs they've already resumed their sinful ways.

Every effective measure to stop them needs to be taken by Congress. Pious sermonizing and appeals to civic virtue just won't work with Wall Street, no more than they do with chronic drunks. The nation needs all of Wall Street to take the cure -- and, as always, cures can hurt.

As Krugman writes today, "[R]eform actually should hurt the bankers. A growing body of analysis suggests that an oversized financial industry is hurting the broader economy. Shrinking that oversized industry won’t make Wall Street happy, but what’s bad for Wall Street would be good for America."
minor edit 4-23 am

Suicide Alert!

Are U.S. Senate Republicans feeling suicidal? Steve Benen's latest report suggests they need some intervention to protect them from themselves: "As of this afternoon, it appears Republicans are prepared to link arms and take their chances, fighting to protect Wall Street from accountability."

Avoiding 'Nomadic Thievery'

"We live in a gangster state, and our days of laughing at other countries are over."
-- Matt Tabbi, Rolling Stone

In the latest issue of Rolling Stone, Matt Taibbi has a caustic summary of the Jefferson County sewer fiasco that has reduced Birmingham, Ala. to "the status of an African debtor state." Today, every single resident of Birmingham, from new-born babes to the oldest nursing home resident, now owes Wall Street $4,800. ["Looting Main Street: How the Nation's Biggest Banks are Ripping Off American Cities with the Same Predatory Deals that Brought Down Greece"].

In Birmingham --

Here you can see a trail that leads directly from a billion-dollar predatory swap deal cooked up at the highest levels of America's biggest banks, across a vast fruited plain of bribes and felonies — "the price of doing business," as one JP Morgan banker says on tape — all the way down to [Birmingham resident] Lisa Pack's sewer bill and the mass layoffs in Birmingham.

Once you follow that trail and understand what took place in Jefferson County, there's really no room left for illusions. We live in a gangster state, and our days of laughing at other countries are over. It's our turn to get laughed at. In Birmingham, lots of people have gone to jail for the crime: More than 20 local officials and businessmen have been convicted of corruption in federal court. Last October... Birmingham's mayor was convicted of fraud and money-laundering for taking bribes funneled to him by Wall Street bankers — everything from Rolex watches to Ferragamo suits to cash. But those who greenlighted the bribes and profited most from the scam remain largely untouched. "It never gets back to JP Morgan," says Pack.

At the root of the scandal one finds--

• ordinary city department heads unable to understand the impossible complexities of financing contracts cooked up by Wall Street
• a local politically-connected fixer paid by Wall Street to offer 'consultant' expertise who recommends those contracts to municipal officials
  
• criminal bribes handed out like Easter candy by Wall Street to greedy local politicians
• good-ol'-boy pay-offs by one Wall Street bank to another Wall Street bank to preserve the first bank's lucrative monopoly on farming Birmingham residents for every last nickle they own, and
• predatory lending practices that "at one point" left Birmingham holding more worthless toxic credit default swaps than New York City.

It's a cautionary tale for any municipal board of modest talents with an ambitious development project that's spending oodles of money for nothing much visible in an effort to find financing from out-of-state sources who won't make their own financial statements public except to a limited number of insiders.

What you want to avoid is the Birmingham fiasco, where the bankers "find suckers in some municipal-finance department, corner them in complex lose-lose deals and flay them alive."

In a complete subversion of free-market principles, they take no risk, score deals based on political influence rather than competition, keep consumers in the dark — and walk away with big money. "It's not high finance," says Taylor, the former bond regulator. "It's low finance."

And even if the regulators manage to catch up with them billions of dollars later, the banks just pay a small fine and move on to the next scam. This isn't capitalism. It's nomadic thievery.

Bank of America Parties With $10 Million Bailout Money

Just weeks after nicking $45 billion in taxpayer bailout money, Bank of American blew $10 million of our money on "a five day carnival-like affair just outside the Super Bowl stadium," ABC News is reporting.

The bank's extravaganza for Super Bowl Week involved 850,000 square feet of "sports games" and "interactive entertainment" for football fans. The tents alone -- tents!, mind you, not houses with mortgages or the emergency shelters where some former homeowners are living -- cost over $800,000.

Willie Sutton ("That's where the money is") must be rolling in his grave.

Schrenker Embraces the Fish Monger's Defense

National news services report today that Indiana stock broker Marcus Schrenker is claiming amnesia. Schrenker is the financial advisor accused of bilking hundreds of thousands of dollars from customers and then crashing his private plane near Milton in a bizarre scheme to fake his own death.

Marcus Schrenker called The New York Post from the Escambia County Jail on Wednesday night and Thursday night and told the newspaper that he has no memory of the events of Jan. 11.
* * *
"I have no memory of any of it — not going to the airport, being in the air, nothing," the newspaper quoted him as saying.

The reason Schenker is in our midst is that he has been indicted by a Pensacola federal grand jury on charges related to sending a "false distress message." That's nothing, of course, compared to his legal problems back home in Indiana:

Investigators there compiled evidence and collected testimony that Schrenker had misappropriated hundreds of thousands of dollars in clients' money, forged client signatures and obtained licenses to sell insurance in several states, apparently in an effort to avoid prosecution.

The thing is, we have Schrenker here; they don't have him there.

His claim "not to recall the events of the day he bailed out" is an all-too-familiar defense in Pensacola. Frank Patti, the locally prominent fish monger, made a similarly preposterous claim when he crashed his vehicle at slow-mo speed into the historic locomotive on display along Garden Street six years ago, shortly after he was indicted on multi-million dollar tax evasion charges.

Never thought we'd say this: Frank Patti isn't the biggest dumbbell in Pensacola. At least his absurd claim of amnesia conveniently stretched back in time to the very same day he signed the first in a string of incriminating checks and documents.

Schrenker, according to news reports, only claims to have blanked out the day he went flying. That would mean he must still remember how he cheated all those customers of his.

Here's our medical prognosis: Shrenker's amnesia will get worse. As soon as he learns more details about the Frank Patti defense, and how gently Frank was treated after his conviction, the stock broker's memory will get worse -- all the way back to the first time he defrauded a customer.

Window on Wall Street

Jim Zarroli (NPR reporter), summarized: Former Merrill Lynch CEO/Bank of America executive John Thain --

• spent $1.2 million just to redecorate his office last year
• ran Merrill Lynch to bankruptcy's doorstep
• finagled $4 billion in early December bonuses for fellow execs
• initially demanded a "$10 million bonus for himself
• then came begging, twice, to the U.S. Treasury Dept. for a total of $30 billion in taxpayer money so Bank of America could buy the shitpile he'd made of Merrill Lynch
• which quickly ballooned to $115 billion
  

However, Jim Zarroli assures us, Thain is regarded by Wall Street as "smart"and "illustrious." Indeed, even today he is "well regarded" by his Wall Street peers.

That's all you need to know about Wall Street's standards.

Wall Street Puts Another One Over On You

A reader of Josh Marshall's reports that Merrill Lynch paid $3-4 billion in early bonuses, just days before it was acquired by Bank of America, backstopped by $128 billion in taxpayer TARP funds.

John Thain, former head of Merrill and now formerly with BofA (fired today), paid the bonuses earlier than they are normally paid (late January, February) because he knew that once the BofA deal closed, he would be unable to "reward" all those hardworking Merrill bankers and traders who lost a mere $27 billion in 2008

The reader makes a larger point that Congress (and those of us who vote for congress persons) should keep in mind:

I worked on Wall Street for 15 years, and was laid off late last year. I can tell you this for sure: you don't need to pay a dime in bonus to anyone on Wall Street these days. I know this firsthand: there's nowhere to go!

Where would a Merrill banker unhappy with a donut for a bonus go? Lehman? Bear? Bank of America? There are no jobs on Wall Street, there are no jobs on Main Street (and certainly none that will even pay close to what these guys earn just in salary; my salary alone put me in the 99+ percentile in income).

These guys aren't going to leave Merrill because of no bonus to become CEOs, law firm partners, or MLB shortstops. They'll do what every single person I know on Wall Street that still has a job: they'll keep their heads down and hope the next round of layoffs doesn't include them.

Want to see some limits on executive compensation for federally-funded banks and brokerage houses, anyone?

May Day, May Day

That Hoosier stockbroker who radioed a distress call Monday and then put his plane down east of Milton turns out to be another fraudulent stockbroker on the run.

Marcus Schrenker, age 38, of Indianapolis has disappeared. The head of "Heritage Wealth Management" initially was feared hurt or dead from a mechanical failure of his airplane.

According to the police in Santa Rosa County in the Florida Panhandle, where the plane went down, Mr. Schrenker turned up safely about 220 miles north of there. And there is evidence that Mr. Schrenker was an experienced pilot who might have been trying to fake his own death. His life seemed to be unraveling. Court records show that Mr. Schrenker’s wife filed for divorce on Dec. 30. A Maryland court recently issued a judgment of more than $500,000 against one of three Indiana companies registered in his name — and all three are being investigated for securities fraud by the Indiana Secretary of State’s Office, a spokesman, Jim Gavin, said.

After the police kindly gave him a lift to a motel, he disappeared "into the woods" again. He was last known to be "wet from the knees down," wearing "a black toboggan cap," and carrying "what the police described as 'goggles that looked like they were made for flying.' "

Of course, that could have changed by now. But you can recognize him, we're pretty sure, by the planeload of cash he's carrying with him.

When the history of our era is written, stock brokers deservedly will rank as low as the "mostly coarse, brutal" knights of the fourteenth century, whose "chief passion, besides warfare and excessive drinking, was the unrestricted satisfaction of their sexual desires."

Substitute "money" for "sex" and you have a perfect picture of Wall Street at the opening of the 21st century.

Asian Markets Crash; U.S. Futures Down

Looks like the markets are crashing again this morning. Is Bush speaking on the TeeVee again?

Dept. of Amplification

Analysts "now say" the economic forecast is looking so bad the FED plans to cut interest rates by half a percentage point next week, thus lowering the federal funds overnight loan rate to a record-tying 1 percent. We say, wait to borrow until the FED reduces the rate to a minus level and starts paying you to borrow its money.

Bad Market Day

It's a bad day for little piggie to go to market. Bloomberg News:

"The panic levels are now quite unseen,'' said Christian Gattiker, Zurich-based head of equity research at Bank Julius Baer & Co. which manages about $307.6 billion globally. "It's difficult to have any words for this situation right now.''

The last months of the Bush administration are looking eerily similar to the last months of the Hoover administration. Sarah Palin says put your money in clothes.

Dept. of Investment Advice
10-24 am

... or cosmetics.

The Kucinich Credit Crisis Plan...

... because whatever Lola wants, Lola gets:

Heard Around Town - Financial Panic Edition

Pensacola area people are talking. Here are some of the remarks we've overheard this week.

(Middle-aged wife to husband, while standing in line at the grocery store ): "Be sure to get lots of cash for the weekend. They always close banks on Friday."

(Shop owner): "Business dropped off a cliff in April. I would sell but I'm not sure there are any buyers out there."

(Woman friend, discussing the bailout bill): "To hell with that. They ought to make everyone who voted for Bush pay for it."

(Young lawyer acquaintance, on the phone): "I registered for a seminar in bankruptcy. It looks like that's where the business will be."

(Stranger at gas pump): "My grandmother went through the Depression. I wish I'd listened to her more closely."

(Escambia County process server): "It's terrible out there. So many people!"

(Woman): "It's going to be the Depression all over again. Bank failures, locusts, no potatoes."

McLobbyist McLie

Newsweek explodes another McCain campaign lie -- about McCain's campaign manager.

Unearthing Another McCain Lie

We get emails. This morning a reader asked us to address the meme making the rounds of right-wing fringe elements to the effect that famed de-regulator John McCain co-sponsored regulatory reform legislation in 2005 which would have prevented the current credit crisis by reigning in Freddie Mac and Fannie Mae, sometimes lumped together as "government-sponsored entities" or GSEs.

Only the big, bad Democrats stopped him, or so it is claimed.

Is this true? the reader asks.

The short answer is "no." It is a deeply dishonest, cynical distortion of the facts.

Where Do Wingnuts Get These Crazy Ideas?

Who knows how such craziness gets started? We've seen suggestions that Rush Limbaugh, whose knowledge of economics begins and ends with the street price of oxycodone, dreamed it up. Others say it was college-dropout Sean Hannity of Fox News.

The McCain campaign effectively juiced this deceptive meme the other day when Kevin Hassett -- a McCain campaign advisor whose major claim to fame is that he's one of the two idiots who predicted "Dow 36,000" -- repeated it in one of those we'll- print- any-old-opinion articles at Bloomberg.com.

Hassett's article is complete fiction. It has about as much truth as the latest caterwauling that Rick Davis, McCain's head campaign manager, really wasn't in the pay of Freddie Mac. In fact, as we now know, Davis's firm was paid $15,000 per month by Freddie Mac until last month (!) "because of Mr. Davis’s close ties to Mr. McCain, the Republican presidential nominee, who by 2006 was widely expected to run again for the White House."

As Steve Bennen points out:

Davis lobbied against federal regulations of Fannie Mae and Freddie Mac through the Homeownership Alliance, and once that was done, Davis asked Freddie Mac to put his firm on retainer, for $15,000 a month, for very little work.

Hi, Mom!

Alas, to get to the truth about McCain and Freddie Mac reform, as is so often the case, requires a tedious examination of the facts. Wingnuts don't do facts. We have to.

In this case, to answer our reader's question what's required is a long archeological expedition through the archives of the Congressional Record. Unearthing facts is never an exciting task and never ever something the right-wing wants to bother you with.

Moreover, to understand the facts in this instance requires some knowledge about the arcane legislative process, mortgage financing, executive branch regulatory oversight, and the shenanigans of Wall Street investment houses as they invented the nightmares of new slice-and-dice mortgage derivative instruments and CDOs in the late 1990's and early 2000's.

At the risk of boring the one or two other intrepid readers who have read this far (Hi, mom!) , here is what we need to tell our morning correspondent who asked us to look into the matter.

S. 190 (2005)

This much is true: On January 26, 2005, Nebraska senator Chuck Hegel (a Republican senator who has refused to back McCain) introduced S. 190 at the start of the 109th Congress. S. 190 was an executive branch reorganization bill that had been kicking around previous congresses for several years. Because all bills die at the end of every two-year Congress if they're not enacted as laws, sponsors had to re-introduce it after every two-year congressional election.

S. 190 would have transferred a number of mortgage loan regulatory and oversight functions traditionally given to the U.S. Housing and Urban Development Department (H.U.D.) to a new agency to be called the "Federal Housing Enterprise Regulatory Agency." Nothing in the text of the bill itself would have prevented the current credit crisis, although, obviously, there was hope that the new agency might better police Freddie Mac and Fannie Mae loan activities.

Co-Sponsors

Co-sponsors of S.190 when it was introduced in January 2005 were Elizabeth Dole (R-N.C.) and then-senator John Sununu (R-N.H.). Not John McCain.

McCain did not become a listed co-sponsor until May 25, 2006 -- a year and a half later, or almost one full year after the bill's short life came to an end. (see screenshot below).

This was two months after McCain's announcement on the David Letterman show that he would be running for president.

As it had in earlier congressional sessions, the Republican majority in both the Senate and the House killed the bill outright within six months. It was never brought to a floor vote in either the House or the Senate. (Remember, this was after the 2004 elections when voters rewarded Bush and his fellow Republican congress-persons with a continuing majority in all three elective branches of government.)

Here's a screenshot from the non-partisan govtrack.gov describing the short life of the bill:

What's meant by the phrase "to be reported with an amendment in the nature of a substitute favorably"? Again, as govtrack.gov explains:

[A] substitute bill was drafted up, possibly by the highest committee members, that makes substantive changes to the original, and the bill has been replaced by this substitute. This substitute is actually drafted in the form of an amendment to the original that reads “strike all after the enacting clause and insert the following”, i.e. it’s an amendment that says start over with this. This is the substitute amendment.
* * *
As for the term favorably, this means that a majority of the members of a committee support the bill being reported.

So, in the instance of S. 190 in the 109th Congressional session it was the Republican majority committee that substituted another bill for Hegel's and reported a later version favorably. And it was the Republican-dominated House and Senate leadership that never got around to formally asking for a vote on the measure.

Johnny Come Lately

McCain, well behind the curve, was adding his name as a co-sponsor to Hegel's bill months and months after another bill had taken its place and even that substitute bill had been derailed by his own party.

Public records will never reveal this, but it's a good bet that lobbyists for Freddie Mac and Fannie Mae -- many of whom today are running John McCain's campaign under Rick Davis' leadership -- had a lot to do with killing the substitute bill once it was reported out of committee. Indeed, the man chosen by McCain to be his "transition team leader" should he win the White House, William Timmons Sr., has lobbied for Freddie Mac and Fanny Mae since the year 2000. Such people as Timmons and Davis are the most likely source for advising McCain to sign onto the bill when it no longer mattered.

It's one of the oldest deceptions in the legislative bag of tricks to pretend to sign on to a piece of legislation you know is dead in the water. Despicable lying? Yes. Bad legislating? Of course. But clever politics when you can pull the wool over the people's eyes.

But that's not the end of the story.

Regulatory Reform of the GSEs

Beginning with a series of House of Representative votes in mid 2007, Democratic leaders in the current 110th Congress eventually enacted the re-designated H.R. 3221 (over Republican party opposition from 163 of 202 House Republicans), now known as the Housing and Economic Recovery Act of 2008 (HERA). You can read a summary of the bill here [pdf] or the full text of the bill here.

On all recorded roll call votes in the Senate, John McCain was absent and not voting. So, too, was every other senatorial candidate for president, from both parties, except for Christopher Dodd (D-CT).

But a Democratic majority in the House passed the reform bill. And a bipartisan coalition of Democrats and Republicans passed it in the Senate.

Dept. of Amplification
10-3-08 om

In the wake of the vice presidential debate where Sarah Palin claimed that McCain "sounded a warning bell" in 2006 about Fannie Mae and Freddie Mac, New York Times fact-checkers agreed with our analysis: McCain was tardy in recognizing the issue, not a leader:

Ms. Palin was referring to Mr. McCain’s decision in 2006 to sign on as a co-sponsor of a Senate bill that would have overhauled regulations governing Fannie Mae and Freddie Mac. But the legislation was introduced more than 16 months earlier and the debate over the issue had been going on for some time. He also only added his name after an oversight agency issued a lengthy report condemning practices at Fannie Mae.

An Urgent Email

Dear American:

An urgent email addressed especially to your person by the Ministry of Treasury of the Republic of America is waiting in your inbox here. Please to be sure you read it as it will be to your great benefit and good fortune.

Bailout Bill's Sine Qua Non

After listening to the Paulson-Bernanke-Cox show at the Senate Banking Committee hearing this morning, Princeton economist Paul Krugman says on his daily blog that something very much like the N0. 1 condition listed by Robert Reich should be a sine qua non of any bailout bill:

[A]ny bank that wants to remove toxic assets from its balance sheet can do it at a stroke — just declare them worthless, and poof! they’re gone. But of course, that would reduce confidence and capital, not increase it — and that’s not what Hank and Ben are talking about. They’re talking about turning the assets over to Uncle Sam, and getting cold hard cash in return. And then the question is how much cash they get in return. It’s all about the price.

Now, if the price Treasury pays is very low — anything comparable to what financial institutions are able to sell the stuff for now — it’s going to do nothing for confidence and capital. If the price is high, confidence and capital will improve — but taxpayers may well take a big loss. * * *

But how can we help the financial situation without making that bet? By taking an equity stake. That way, if it turns out that the feds are pumping money in at above-fair prices, at least they get ownership, just as a private white knight would have.

In fact, Prof. Krugman says it twice:

[T]he plan only helps the financial situation if Treasury pays prices well above market — that is, if it is in effect injecting capital into financial firms, at taxpayers’ expense.

What possible justification can there be for doing this without acquiring an equity stake?

No equity stake, no deal.

There is precedent for this in Sweden's banking crisis of the early 1990's, as the International Tribune explains:

Financial deregulation in the 1980s fed a frenzy of real estate lending by Swedish banks, which spent too little time worrying whether the value of collateral might evaporate in tougher times. Property prices exploded.

The bubble deflated fast in 1991 and 1992. A vain effort to defend Sweden's currency, the krona, resulted in an incredible spike in overnight interest rates at one point to 500 percent. The Swedish economy contracted for two years straight after a long expansion, and unemployment, at 3 percent in 1990, quadrupled in three years.

After a series of bank failures led to ad hoc solutions, the moment of truth arrived in September 1992, when the government of Prime Minister Carl Bildt opted for a clear-the-decks solution.

With the full support of the opposition center-left, Bildt's conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation's 114 banks. Sweden formed an agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

The big difference between the Swedish solution and the Bush-Bernanke proposal is that "Sweden did not just bail out its financial institutions by having the government take over the bad debts. It also clawed its way back by pugnaciously extracting equity from bank shareholders before the state started writing checks."

By the end of the crisis, the Swedish government had seized vast swaths of the banking sector, and the agency had mostly fulfilled its tough mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again.
* * *
Looking back, Swedish official say the tough approach toward the banks paved the way for success. It eliminated "moral hazard," the problem of relieving investors of bad decisions. And, much as it might be a shock in the United States, the demise of shareholders also underpinned the political consensus that help restore stability to financial markets even before the bailout was truly under way.

To be sure, solving the banking crisis in Sweden took several years, during which the Swedish economy endured a recession, according to Bloomberg News. By now, however, it ought to be clear to all that a prolonged recession is the least we face under every scenario being seriously put forward in Washington.

The alternative of doing nothing is even worse. The proposal of the Bush administration, which involves a straight-forward give-away to Wall Street with no equity stake in anything, is likely to exacerbate the widening class divisions in contemporary U.S. society, just as Hooverism did nearly eighty years ago, with all that mankind's history teaches us this implies for the social order and domestic tranquility.

No equity stake, no bailout.

Cloudy Crystal Ball - 1929 Edition

From the Las Vegas Daily Optic, October 24, 1929 (subscription only):

The disaster today on Wall Street will have a most salutary effect. It will wipe out the petty gambler, who hoped to become suddenly rich by marginal trading. It should place Wall Street investments on a basis which will check the flood of money from the country banks to New York and restore the stable market for public bonds and other securities necessary for industrial development in the interior of the country.

Many a home is crushed by the collapse of the market today and the happiness of thousands will vanish with the realization of financial misfortune, but the general good is well served.

Sunlight on the Financial Crisis Legislation

You know, already, that Treasury Secretary Paulson's proposed Wall Street rescue bill is not quite three pages long. Basically, it gives him carte blanche to hand out over $700 billion of taxpayer money to whoever he may please, and further provides that his beneficence "may not be reviewed by any court of law or any administrative agency."

The leading alternative bill that seems to be emerging from congressional discussions is sponsored by Senator Christopher Dodd (D-CT), chairman of the Senate Banking Committee. The full text of what must be assumed to be an early draft of Dodd's bill is available in pdf format here.

Much more user-friendly versions of both bills can be found on PublicMarkup.org:

Click here for the Paulson/Bush administration bill.

Click here for the Senator Dodd bill.

There, you can read each bill section-by-section and, if you like, add your own thoughts or questions. The new web site, sponsored by the non-partisan Sunlight Foundation, also promises to post "amended and further drafts" as they become discoverable.