I understand Democrats have concluded they have to do something to bail out Wall Street before Wall Street’s impending crash freezes credit and devastates Main Street. They have to do something and hope it works.
But given the compromises they accepted from Republicans and Secretary Paulson (or imposed on themselves — e.g., giving up on bankruptcy protection), there’s no excuse for cheering for this pig of a bailout or making claims that aren’t justified.
Speaker Pelosi has released a summary of the bailout package, and you can view it here. Several components are improvements over the original Paulson plan.
But since many economists view the changes as half remedies at best, or at worst unworkable fixes focused on the wrong problem, it’s troubling to see Pelosi exaggerating the merits and the limited protection it provides.
For example, after initially stating that "[i]f the government loses money, the financial industry will pay back the taxpayers," Pelosi lists the following "Protection for taxpayers, ensuring THEY share IN ANY profits":
# Cuts the payment of $700 billion in half and conditions future payments on Congressional review
# Gives taxpayers an ownership stake and profit-making opportunities with participating companies
# Puts taxpayers first in line to recover assets if participating company fails
# Guarantees taxpayers are repaid in full — if other protections have not actually produced a profit
# Allows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families
First, while the initial outlay can be up to $350 billion, Congress would have to affirmatively pass legislation — and possibly override a Presidential veto — to stop the Treasury from utilitizing the entire $700 billion.
Second, it’s not clear how much of an ownership stake Government would get, because Treasury can choose to acquire toxic assets without taking an equity stake. Given Paulson’s preference for these other non-equity mechanisms, taxpayers could get little or no equity.
Third, unless the NYT article is wrong, it’s false to claim the proposal "guarantees taxpayers are repaid in full." The ability to recover losses after the fact is something the next President would have to get Congress’ approval to implement; the package includes only the idea of letting the President ask for this, a power he would have had in any event.
Indeed, on CNN this morning, Barney Frank complained that Republicans successfully opposed a Democratic proposal to impose a fee on Wall Street transactions to recover program losses if they persist after five years. While arguing for Wall Street insurance for all transactions — exposing Treasury to enormous risks later — Republicans refused to hold Wall Street accountable for losses in the meantime.
In other words, there’s no guarantee of any protection to taxpayers other than we’ve passed the buck — the current President and Congress do not have to take responsibility for paying for this mess, and neither does Wall Street.
If the Democratic leadership has concluded they have to gather support for an imperfect bailout because they think doing nothing is worse, let them say that. But there’s no excuse for misleading the American people while making them accept this mess.
Update: Since this post originally went up on Oxdown about noon Sunday, Speaker Pelosi’s office released a revised summary, and the actual bill language has also become available. The latter indicates that the provisions for requiring equity positions may be stronger than earlier reports suggested. See, e.g., comment 38 and NYT links to text (pdf).