ATLANTA — Nobody knows if a huge taxpayer-funded bailout of Wall Street will stave off financial disaster. But without it, the odds of a collapse rise significantly.
So it's not a question of whether to do it, but how to do it. And unfortunately, the proposal initially advanced by the Bush administration is seriously flawed, in large part because it reflects the same mind-set and attitude that helped cause the crisis.
For example, in his initial 3-page proposal, Treasury Secretary Henry Paulson advocated giving himself unchecked authority to spend $700 billion in taxpayers' money without any oversight or review whatsoever. The language of the proposal was stark:
"The Secretary is authorized to purchase ... on such terms and conditions as determined by the Secretary ..."
"The Secretary is authorized to take such actions as the Secretary deems necessary ..."
"Decisions by the Secretary pursuant to the authority of this Act are nonreviewable ... and may not be reviewed by any court of law or any administrative agency."
In other words, to cure a situation worsened or caused by a failure to exercise oversight, the Bush administration proposed a solution in which oversight would be abandoned altogether. Reaction against that power grab was harsh and bipartisan, and in comments to a Senate committee Tuesday, Paulson denied he had ever contemplated taking such powers without oversight.
So that issue is settled.
Paulson and others have also tried to block attempts to limit executive compensation in firms that take advantage of the bailout fund. Paulson, for example, warned that such limits might discourage CEOs from taking advantage of the bailout.
"If we design it so it's punitive and so institutions aren't going to participate, this won't work the way we need it to work," Paulson said.
If you think about it, that's a pretty incredible statement. The Treasury secretary — himself the former chairman and CEO of Goldman Sachs — is admitting that to preserve their exorbitant pay packages, corporate CEOs might bar their companies from participating in the bailout, even if doing so would endanger their companies' continued existence and the nation as a whole.
Whatever the source, that is a damning indictment of the Wall Street culture. But it is particularly striking coming from an insider such as Paulson, and it reflects Wall Street's belief that finance-industry executives have some God-granted right to extremely lucrative bonuses regardless of performance.
Just last year, Wall Street's top five financial firms — including names such as Lehman Brothers and Bear Stearns — awarded $39 billion in bonuses at a time when stockholder value in those companies fell by $74 billion.
And amazingly, this current crisis hasn't chastened the industry a bit. Over the weekend, news broke that eight former Lehman Brothers executives, along with 200 other "key" former Lehman employees, would be given $2.5 billion in bonuses from Barclay's in a deal to purchase part of the bankrupt Lehmans. So while Lehman stockholders get little or nothing, the executives who helped run the company into the ground get a whole new round of bonuses.
Even some conservatives now agree that compensation must be addressed in the bailout. "Severance packages should be at risk," the Heritage Foundation advises in its analysis of the bailout. "In order to ensure that incompetent executives do not benefit from their criminal mismanagement, the new RTC should be allowed to refer cases to the Justice Department for civil suits to recover bonuses or termination compensation received by those individuals."
With his opposition to compensation limits, it's clear that Paulson is seeing the crisis through the eyes of a Wall Street financier, which is only natural given his background. It was telling that in his prepared comments Tuesday, the Treasury secretary blamed the crisis on banks making bad loans and homeowners buying more house than they could afford, while saying nothing about the very considerable role that he and his former colleagues on Wall Street played.
That world view extends to Paulson's argument that taxpayers should not be allowed to share in any benefits that the bailout produces for financial firms. To Paulson's mind, that requirement might discourage firms from participating in the bailout.
However, if companies are healthy enough to decide not to participate, they didn't really need the bailout in the first place. Once again, Paulson's instincts betray him. As with the compensation question, he wants to protect Wall Street first, out of the mistaken if honest belief that by protecting Wall Street he protects the best interests of the country.
That is simply not true. If taxpayers are being required to cough up $2,300 for every man, woman and child in the country to finance this bailout, basic fairness requires that their direct interests be protected first. Fairness also requires that Wall Street be required to share in the pain.
In fact, we already have a useful and longstanding precedent for that approach. Under federal law, if you carelessly start a forest fire or range fire, the government has the right to bill you for the cost of bringing that fire under control. There's no reason that same logic shouldn't apply to those on Wall Street who have also been playing with fire for far too long.
Jay Bookman is the deputy editorial page editor of The Atlanta Journal-Constitution. E-mail: jbookman AT ajc.com.
