THE BAIL OUT: NEW RULES

I long to get back to discussing Los Angeles issues, but right now I don’t think we have the luxury. Not when Henry Paulson is asking the Congress to make him Emperor

Time to think clearly about this bailout, people (since it’s clear we can’t depend upon anybody else to do it for us.

To kick things off, I offer the following 3 NEW RULES. (Please feel free add your own. )

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RULE ONE: NO BLANK CHECK, AND NO RUSHING US.

Congress cannot give Henry Paulson the no-strings power he desires. . They can’t give him a slightly watered down version of it either.

Although there was much huffing and puffing in Congress yesterday, it is not clear that anyone intends, in the end, to do much more than tinker around the edges of Paulson’s proposal. (No golden parachutes, yadda, yadda, yadda.)

This has to change. Paulson isn’t stupid. He’ll make a few concessions (a little toothless oversight, that isn’t really oversight). But it is the fundamentals of the proposal need to be questioned.

Just because Paulson says the sky will fall if everybody doesn’t do what he says RIGHT NOW, doesn’t mean it will.

But don’t believe me. Here’s what Newt Gingrich said earlier this week on NPR. (It’s a dark day when we find ourselves nostalgic for the common sense of Newt Gingrich, but there you have it.)

Secretary [Henry] Paulson has shown almost no understanding of how a democracy operates. His initial draft would have given him $700 billion of your tax money with no oversight, no judicial review, no accountability. I mean, we’re not a dictatorship.

[SNIP]

Secretary Paulson has been consistently wrong for a year-and-a-half. He told us for a year-and-a-half this wasn’t a dire crisis; this wasn’t going to happen. So the very people who told us for a long time not to worry about it are — I know they’re panicked. Whether that means that we should be panicked, I’m not sure. And I think the purpose of the Congress, the purpose of the House and Senate, is to be a check and balance on the executive branch, not to automatically write blank checks.

RULE TWO: “HOLD TO MATURITY” DOESN’T WORK FOR US

Federal Reserve Board chairman Ben Bernanke said in his Tuesday testimony that criticism of the $700 billion plan proposed by Treasury Secretary Henry Paulson overlooked a “key ingredient.”

The proposal, Bernanke said cheerily, is designed to avoid forcing banks to sell or value their mortgage assets at a “fire-sale” price. Instead, he said, Paulson will buy them at “hold to maturity” prices.

Let me translate that for you. Bernanke means that Paulson intends—not to buy the assets at what they are worth today on the open market—but to buy what they might ideally be worth (if they were, like, worth more). Sound like gibberish? It is. In other words, Paulson intends to overpay.

“If the assets are purchased near the true hold to maturity prices, taxpayer losses should be minimal,” he added.

Minimal. Sure, Ben. Do Bernanke and Paulson have any concrete basis on which to make that prediction?

Of course not.

Here’s how Paul Krugman puts it:

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. The premise of the Paulson plan – though never stated bluntly – is that these assets are hugely underpriced, so that Uncle Sam can buy them at prices that help the financial industry a lot, without big losses for taxpayers. Are you prepared to bet $700 billion on that premise?

The bottom line is this: Congress cannot allow Paulson to overpay for assets without the taxpayer getting something in return—namely an equity position.

It we do this thing at all, it is an emergency measure, not a profit-making opportunity for the folks whose bad judgment, greed and willful blindness got us into this mess in the first place.

Here’s Krugman again.

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.

There is no, repeat no justification for refusing to grant equity warrants that provide some taxpayer protection. This is, for me, an absolute deal or no-deal point.

RULE THREE: THE PRESS HAS TO START DOING ITS JOB, LIKE, NOW

Yesterday, over at Poynter Online, Pulitzer Prize-winning journalist David Cay Johnston posted a bunch of questions that reporters need to be asking—but so far aren’t. Here are some samples:

*If the problem is toxic mortgages then how come they are still being offered all over the Internet?

*Why have both Goldman Sachs and Morgan Stanley made clear that they want IN on this deal? Get skeptical and ask the basic questions — who benefits, how much and what makes this plan so attractive that Goldman and MS want to participate? Ditto for GE. That they are others want to be included should prompt a great deal of skeptical questioning.

Another to question ask: What will all this bailing-out do to U.S. currency?

(cough…..buy gold….cough)

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(AP Photo/Susan Walsh)