Five Reasons Why The Fed’s Bailout Plan Is A $700 Billion-Dollar Mistake
U.S. Treasury Secretary Henry Paulson is engaged in the fight of his life on Capitol Hill, as he tries to gain swift approval on the federal government’s $700 billion bailout plan for Wall Street. So far, the response from Democrats and Republicans has been lukewarm at best.
Here are a few reasons why:
1. The money behind the bailout is a band-aid solution.
Today it’s $700 billion, tomorrow who knows what the price will be. No one can predict if $700 billion is enough to bring stability back to the financial market. Unless Wall Street institutes greater checks and balances and improves its risk-management practices, investors’ confidence in the markets will never be fully restored.
Even more important, the historic bailout contains no oversight conditions on whom or what will be watching the federal government when it uses $700 billion of taxpayer money to buy distressed subprime loans and other toxic assets from various financial institutions. Instead, as the proposal currently reads, Paulson has unlimited power to decide how the $700 billion will be spent and on what.
Specifically, the bailout proposal states: “Decisions by the secretary pursuant to the authority of this act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
2. The plan smacks of ‘the good old boys’ mentality.
Henry Paulson is perhaps Wall Street’s most revered alumni. Before becoming U.S. Treasury Secretary, Paulson served as chairman and chief executive officer of Goldman Sachs. Paulson’s own past statements affirm his allegiance to his former stomping ground, and suggest that his current recommendations regarding the bailout might be based on the adverse impact the markets are having on his Wall Street buddies.
A few months ago, Paulson was quoted as saying that those who “gambled in real estate are nothing more than speculators.” He went on to say that, “while some in Washington are proposing big interventions, most of the proposals I’ve seen would do more harm than good.”
A short time later, Paulson told MSNBC that the unusually high number of home foreclosures was not preventable and that there is very “little that public policy makers can, or should, do to compensate for untenable financial decisions.”
3. Paulson’s past assessments - as well as those of Federal Reserve Chairman Ben Bernanke - of market conditions demonstrate serious errors in judgment.
• On March 28, 2007, Bernanke tells Congress that he believes the problem in subprime lending “is likely contained.”
• On April 20, 2007, Paulson says that he believes the housing market downturn has been reached or is nearly there.
• On July 26, 2007, Paulson says that the meltdown in the subprime mortgage market “doesn’t pose any threat to the overall economy.”
• On August 16, 2007, Paulson states that the “turmoil in the financial markets will “extract a penalty” on U.S growth, yet the economy looks strong enough to weather problems without falling into a recession”.
• On May 7, 2008, the Wall Street Journal quotes Paulson as saying “the credit crisis is waning” and that “the worst is likely behind us.”
4. The $700 billion taxpayer-funded plan lacks accountability and transparency.
The bailout plan is aimed at saving Wall Street - the same institutions and individuals responsible for getting us into this mess to begin with. Poor lending decisions, mismanagement, lack of transparency, corporate greed - all have contributed to the financial crisis engulfing the country today. Yet, Paulson wants to reward the perpetrators behind the crisis by putting taxpayers’ money on the line.
Where’s the bailout for homeowners? For small businesses? For the automobile industry? Each of these segments of commerce plays an important role in the day-to-day life of Main Street. Says Alan Meltzer, a former economic advisor to the late President Ronald Reagan, on the bailout plan: “This is a scare tactic to try to do something that is in the private, but not the public, interest.”
5. A weaker dollar could result from the bailout plan.
In early September, the U.S. dollar had rallied to a one-year high against the world’s currencies. Following the turmoil on Wall Street, however, it slowly began to fall. The bailout plan, which will push American debt in the $11.3 trillion range, is likely to increase fears about America’s fiscal health, sending the value of the dollar down even further.
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
