American Civility

The Treasury’s plan to bail out investment banks not only institutionalizes a remarkably liberal use of taxpayer’s funds, it seems to pierce any concept of checks and balances designed into our system of government.

According to The Wall Street Journal Online today, the bill before Congress will authorize Paulson to spend up to $700 billion (1.5 times the entire budget of the Defense Department) to buy financial assets the investment banks created but no longer want. It raises the national debt by $1 trillion. Our children and grandchildren will now be burdened with over $11 trillion of debt to their government.

Meanwhile, the Fed has committed to buy $10 billion in Fannie and Freddie bonds, effectively injecting those nationalized companies with operating funds, but further burdening the taxpayer with debt that might be described as … sub-prime!

And, that is not all … the Fed has committed $230 billion in loans to the money market funds industry. But wait: commercial banks are not happy because they feel investors will shift money from savings accounts to money market funds under a false sense of security. This may put pressure on your local bank, which will cause … I think you see the picture. It’s tough managing a command economy.

Confused? Don’t worry, so is Congress. Democrats are tripping over themselves to insure that the emergency Treasury bill includes bailouts for homeowners to protect them against foreclosures. So that $700 billion? … could be much more by the time Congress is through.

Republicans have completely lost their philosophical or moral compass and are tripping over Democrats to rush approval on this bill that “ … would give the Treasury secretary significant leeway in buying, selling and holding residential or commercial mortgages, as well as ‘any securities, obligations or other instruments that are based on or related to such mortgages.’ ”  If Mr. Paulson wants to run a hedge fund ahe ought not do it with taxpayer money.

Now here is the part that stuns regarding checks and balances: “The plan offered to Congress also gives the Treasury legal immunity from any lawsuits. ‘Decisions by the secretary pursuant to the authority are non-reviewable … and may not be reviewed by any court of law or any administrative agency.’ ”

Among the Sunday talk shows today, only George Will, on This Week, had the guts to call this what it is and to be appalled at the sudden expansion of power invested in one man in one department under this President: socialism.

So now that you know the bad news, what possibly can be done to make the Treasury’s proposed emergency bill better?

1) Remove the immunity from lawsuits and review that Treasury is seeking. Besides the possible unconstitutionality of such a categorical transfer of power from the legislature to the executive branch, it is bad business. Why is the media not reminding us that just a short time ago Paulson was heading Goldman Sachs, one of the culprits in this fiasco that his bill purports to save? Perhaps good judgment by Bush and Paulson would have obligated Paulson to recuse himself from decisions regarding the funds sought.

2) Break the fund into tranches, so there is not a massive infusion of capital into banks with taxpayer money. In that pile there will be a pony, somewhere, but the bigger the pile … the bigger the pile.

3) Hedge the bet. Why should the good people of the United States of America hold financial instruments that the banks can’t or won’t hold? Put the top hedge fund managers and Warren Buffet, Jack Welch, Peter Lynch, Lou Gerstner, and some other heavy hitters in a room to devise a plan to protect the taxpayer. The private sector would not make a naked bet like this, why should we be asked to? The hedge may look something like this:

• Treasury buys the best assets first (if such a thing exists!) at a 50% discount.
• The investment banks, Freddie, Fannie, Chase (Bear), Bank of America (Merrill), Barclays (Lehman), form an electronic market for such assets into which buyers from all over the world are invited to bid.
• If the asset sells at the full price or above, the bank keeps another 25% and the government (us) keeps the rest. Between 50% and full price, government keeps it all. Below the 50% mark, the bank must reimburse the government for its loss. In other words, shift the downside risk to the banks, and share the upside potential.
• If the government makes a quarterly loss on the project, then banks must reimbursement the government with cash, cash equivalents (high grade bonds), or marketable securities from their own balance sheets.
• Some of the reimbursement must come from Freddie and Fannie.
• While this operation is going on, banks are prohibited from any new derivatives trading unless reviewed and approved by SEC.