Paulson's and Congress's Bailout "Mistakes" (Updated)

by Deb Cupples |   Under the title "Provocation of the Day," Marc Ambinder states the following:

"Yes -- the Fed/Treasury have been changing their policy as conditions seemed to warrant.  No one really knew at the beginning what it would take to unlock the credit markets, or how much money it would cost to essentially recapitalize the banks. A lot of tough calls were made, and with them came many mistakes, both in execution and in communication. (Should Lehman have been saved by the government? Who first called it a "bailout"? Etc.)

"Here's the thing, though: in a crisis like this, maybe want policy makers to admit their mistakes quickly. We want flexibility.  That's not messing things up. That's making things work. A smart economist type pointed out to me that everyone and their brother thought the crisis would lead to a run on the dollar, and so a lot of the "canned" policy prescriptions would have centered around that. That didn't happen. Now, the Feds have more liberty to be creative. They're still a bit shy about it because the political environment is toxic: populist calls for tougher oversight mechanisms, the presidential transition, the administrative burdens are all factors...."

I suspect that Ambinder is playing devil's advocate.  I agree with Ambinder that Paulson's changing of strategies was not a bad thing.  Still, I have a different view of the bailouts.

The whole purpose of the bailouts was to unfreeze credit markets by sending cash to banks so they could start generating loans again (i.e., to businesses, people, and other banks).

What's been the result?  Bailout recipients have chosen to sit on the money -- instead of generating loans. (NY Times)  At the end of October, the Associated Press reported:

"[R]eports surfaced that bankers might instead use the [bailout] money to buy other  banks, pay dividends, give employees a raise and executives a bonus, or just sit on it."

In short, companies that received bailout funds are legally allowed to not use those funds to unfreeze credit markets and help our nation's economy.

Why?  Because Congress and the Bush Administration (and that includes Mr. Paulson) either failed or refused to legally require -- in writing -- the banks that get bailout funds to actually use the money to generate loans.

It would have been easy to do: a few sentences drafted by staff lawyers at Treasury or Congress  were all that was required.

I don't think we can chalk up that failure (or refusal) to haste or tiredness or stupidity. 

Mr. Paulson was CEO of Goldman Sachs before becoming Treasury Secretary in 2006.  He is savvy and sophisticated and knows how the folks running the banking firms operate.

Some of our representatives in Congress might not be the sharpest tools, but they all have access to staff lawyers (as do Mr. Paulson and other Bush Administration officials). 

Even I -- a lawyer who is not as savvy about federal legislative matters as federal staff lawyers are -- know this simple principle: if you give a party money and don't require in writing that the party spends it in certain ways, then the party is not legally required to spend the money in certain ways.

Period.  End of story.  First-year law students understand this.

I submit that our House members and Senators and Bush Administration officials -- including Mr. Paulson -- also understand this principle.

That leaves us with an important un-answered question: why did none of them insert a few sentences into the bailout legislation that required bailout fund recipients to spend at least some of our tax dollars on generating loans and unfreezing our credit markets?

The Polly-Anna answer would look like this: Oh, they just didn't have time -- it all happened so fast.

My response: within 10 days, the bailout plan went from a 3-page Treasury Department proposal to a 451-page bill, chock full of riders.  The first House bill (which got voted down), was about 100 pages, if memory serves me.

In other words, some officials or staff lawyers were very busy adding thousands of sentences to the bailout bill before both houses of Congress passed it.

If those bill drafters had time to insert 300+ pages of stuff into the bill, then they certainly had time to insert a few sentences to require companies that received bailout funds to spend some of that money on generating loans -- and within a specified time period, I might add.

And yet, such sensible sentences are conspicuously absent from the bailout bill -- as are sentences that would have ensured various forms of accountability.

With my mind-reading skills still in The Keys, dodging North Florida's cold front, I cannot tell you why officials in our executive and legislative branches decided to exclude simple and sensible sentences from the bailout bill.

I am firmly convinced, however, that the failure or refusal to include those sentences did not stem from lack of knowledge or time.

Incidentally, Yves Smith at Naked Capitalism points out that Mr. Paulson may be about to ask Congress for the other $350 billion and observes:

"1. Paulson got the bill passed (remember the timing: it was signed into law October 3) by threatening Congressional leaders that if he didn't have the funding, the result would be financial armageddon. October delivered that anyhow.

"2. Paulson first was going to buy troubled assets, and when that turned out not to be such a hot idea (observers saw it as a back door bank recapitalization, with the added advantage of creating phony inflated valuations for crappy paper, useful for those who did not avail themselves directly of the program), he switched gears and started recapitlizing banks directly and inefficiently, putting $125 billion into nine large banks, some of whom profess they didn't need it (and that was a feature, not a bug, with Paulson saying up front that he didn't want to stigmatize banks by singling out the bad ones). Oh, and virtually no strings attached, this was supposed to be user friendly

"3. Paulson then renounces the TARP version 1.0 "buy crappy assets" program. Crappy MBS go into a tailspin, necessitating creation of new Treasury/Fed programs to help shore up agency mortgages and asset backed securities, and rescue of Citi.

"4. New head of oversight panel, Elizabeth Warren, is already saying that the Treasury is failing about and lacks a strategy.

"Put more simply, what pray tell do we have to show for the $350 billion spent so far? Why would you trust this man with another penny, particularly when the terms of the bill put him above the law (although some readers contend that language is unconstitutional). Plus there is no pending emergency to warrant releasing the funds."

Update:  Let's not forget Tuesday's GAO report, whose title -- alone -- makes it obvious that the Treasury Department is not handling the bailouts very well: Troubled Asset Relief Program: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency.

Those are hyper-strong words for the hyper-diplomatic GAO report writers.  Oddly enough, the Treasury and Federal Reserve don't seem too keen on requiring firms that receive billions in bailout funds to systematically report how they're using our tax dollars. (Report, pp. 10-11)

I can think of better recipes for success.

Other Buck Naked Politics Posts:

* Someone Please Take the Economy Away from Mr. Paulson (Pt 2)

* Are Bailout Funds Being Misused?

* Cutting Executive Pay Would Save Jobs

* Lehman Execs Redistribute Shareholder Wealth (to Themselves)

* AIG Execs Redistribute Shareholder Wealth (to Themselves)

* Execs Made Millions While Driving Companies into Ditch

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