No Skin in the Game

Congress and the Bush administration have agreed to terms on a $700 billion bailout package for Wall Street. Under the plan, the Treasury will purchase mortgage-backed securities that no one else wants to buy from banks. This infusion of cash will recapitalize the banks and hopefully stimulate inter-bank trading to resume at something close to normal levels.

For the taxpayer’s $700 billion, we get several things. First, the government gets the securities, which will hopefully be worth something. The idea is that the Treasury can get a better deal by waiting for the right buyer to come along. Right now, panic selling has these securities worth pennies on the dollar. By driving panic out of the market, the prices of these mortgage-backed assets will recover some of even most of their value. If they don’t recover in value, the taxpayer will eat the loss.

In addition to the bonds themselves, the government will get warrants that give the Treasury an equity stake in the companies that participate in the plan. So if the stocks of the banks go up, post rescue, the government (i.e., the taxpayers) will recover some value. Finally, there are some limits on senior executive compensation that go along with accepting the government’s largesse.

We have been assured that this bailout was necessary to prevent total collapse in the banking system. The end was near! If that had happened, consumers would have been unable to get mortgages or car loans, and businesses would have been cut off from lines of credit necessary to continue operations. If you accept that, congress and the administration had no choice but to act. The problem is, I’m not buying it.

I understand that the rates banks charge each other for short term loans have spiked in he last two weeks, and that trading in the credit markets has been at much lower volumes that usual. But nobody has connected the dots to show why the credit markets wouldn’t calm themselves without the largest government intervention in history. Nor has anyone made the case for why credit worthy borrowers would not have been able to get loans, even if the interest rate was higher than it would otherwise be.

Nobody in the banking industry has come forward to say: “I’ll take the hit. Passing this legislation is so important that I will forego salary and bonus for 2008.” Kenneth Lewis, the CEO of Bank of America, which just acquired Merrill Lynch, wrote an editorial in Friday’s Wall Street Journal urging passage of a bailout plan. But since Bank of America is in such good shape that they don’t need the help, I guess ol’ Ken doesn’t feel the need to sacrifice any of his hard earned compensation to convince Main Street voters that the crisis is as dire as portrayed.

When Lee Iacocca was brought in to turn around Chrysler in the early eighties, he asked congress for loan guarantees to help him raise money for the turnaround plan. In order to build credibility for the effort, he agreed to forego salary and bonus until the company returned to profitability. I sure would like to see some of the Wall Streeters volunteering to do something similar.

If the situation is as serious as it is reputed to be, that is the least that they could do. Of course, maybe the end wasn’t so near. Maybe the taxpayers just got played.