Monday, September 29, 2008

And Poof! There Goes $700 Billion

My working title for this blog entry was “Now Serving: a $700 Billion Entrée Garnished With Political Fig Leafs.” But that was a little too long.

The storyline of the Wall Street bailout: King Henry triumphed, while politicians harumphed and bloviated and found tiny fig leafs to cover their exposure before an irate electorate (voters go to the polls in a few weeks). Paulson essentially won what he wanted, as legislators skirmished in the margins of relevance. Some highlights of what we got:

1. The Democrats can crow that they clamped down on executive pay excesses for anyone receiving bailout funds. In truth, the provisions are pretty limited in scope and meek – and don’t always make sense. Example: the CEO of a company getting rescued gets to keep his existing golden parachute, but any new CEO hired won’t be entitled to one. Come again? So the CEO who presided over a financial firm that acquired a lethal amount of toxic waste gets off scot free, while a fresh leader who works to right the ship gets punished?

2. Not to be outdone, the Republicans inserted their own piece of idiocy. Seeking a free-market fix, they came up with an “insurance” idea. Financial firms could opt to keep their bad assets and guarantee their value by buying special insurance through the government. Sounds like someone was drinking the Wall Street Kool-Aid. The Street, if you recall, protested vigorously that their toxic waste has a “fair value” much higher than what they could get in today’s troubled markets. Taking out insurance only makes sense if you really, really believe that and think you won’t get a sweet price from the government. Move on, nothing to see here.

3. Anyone who gets more than $100 million of bailout funds MUST give the government preferred bonds or rights (known as warrants) to buy stock. That’s promising, as it allows the Treasury to claw back some profits. That will be especially critical if investments bought with the $700 billion turn out to be duds. The caveat: the language in this section is vague and if Paulson doesn’t support the concept (and I don’t think he does), he might not push too hard to get a good deal.