Paulson To Urge New Fed Powers
Bank Would Help Police Wall Street
By Neil Irwin
Washington Post Staff Writer
Thursday, June 19, 2008; D01
Treasury Secretary Henry M. Paulson
Jr. plans to call today for the Federal Reserve
to be given new, explicit powers to intervene in the workings of Wall Street
firms to protect the financial system, adapting his vision of how the financial world should be regulated to reflect the lessons of the collapse of Bear Stearns.
“Our nation has come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk,” Paulson plans to say in a speech today, according to prepared remarks obtained by The Washington Post
But the central bank “has neither the clear statutory authority nor the mandate to anticipate and deal with risks across our entire financial system.”
“We should quickly consider how to appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene in order to protect the system,” Paulson plans to say, “so they can carry out the role our nation has come to expect.”
Ol’ Henry, as ex-CEO of Goldman Sachs may have a different idea of what our nation expects in the way of interventions. Protecting the system, as recently-departed Fed Chairman Alan Greenspan practiced the art, is why markets have failed to regulate themselves in the natural process of bears and bulls.
Not to put too fine a point on it, but the Fed has consistently and unconscionably fed the bulls and made toothless the bears. Our reward has been twenties-style market exuberance without the balance of twenty-nine-style discipline for as long as most traders under the age of 80 or 90 have known. Henry Paulson has himself grown rich without the slightest possibility of going broke.
He’s played a fixed game and we are (if not poorer) certainly the weaker for it. All those who profited are begging not to have to pay for their sins–begging for the American taxpayer to take their loss. Henry will say later in the day;
the central bank “has neither the clear statutory authority nor the mandate to anticipate and deal with risks across our entire financial system.”
As if that were a shortfall, instead of a vital leg upon which the integrity of free financial markets place their weight. Risk, Henry, should you have failed to recognize it, is the price we pay for profit. Take away risk, as you and Bernanke and (particularly) Greenspan have conspired to do and you have a world in financial turmoil–a flywheel from which one weight has been removed, that is so unbalanced as to destroy itself and the machine to which it is connected.
We need not anticipate risks–that is the job of the investor–we need (and need desperately) to punish financial crime, so that markets can once again gain the trust of those who are the victims of manipulation, fraud, conspiracy and misrepresentation. Of financial crime there is evidence aplenty in this most recent meltdown and will be evidence aplenty more in the ensuing disintegration of credit-card, auto-loan and other consumer credit vehicles.
Decades ago, in a flim-flam of regulators that defies all economic principle, the hedge-fund industry was able to dodge the bullet of regulatory law by convincing (and paying well to convince) the Congress that it needed no oversight. Why? What made it so special as to be outside ordinary financial regulation? Because the investor entry fee was so high that the industry convinced Congress its participants could (and would) cover their own exposure.
The lie was put to that representation when Long Term Capital Management failed, a decade ago, some four scant years after its formation.
Side note: Henry Paulson’s Goldman Sachs tried to buy them out for pennies, just as he arranged the fire sale of Bear Stearns for pennies a decade later as Secretary of the Treasury. Good ol’ Paul, never one to miss an opportunity to turn disaster to profit.
LTCM secured a Fed intervention to the tune of $3.75 billion, simply in order that those who could afford to cover their losses would be saved from doing so. Yet no action came by way of the well-greased wheels of Congress, nor did it as a result of the dotcom bubble, nor is it because of the current sub-prime crime, nor will it ever if Henry Paulson has his way, preventing his buddies and himself from having their asses handed to them on a bankruptcy platter.
Lay off the intervention palaver, Henry. We need a massive investigation of the players in this fraud, including mortgage salesmen, mortgage bankers, investment bankers, bond-rating companies and (particularly) the hedge funds that obscurred and co-conspired to infect financial vehicles with crap loans offered as triple-A.
Interestingly, at nearly the very moment Paulson addressed a press-conference, two Bear Stearns’ executives were being hustled off in handcuffs. Ralph Cioffi and Matthew Tannin are the first executives to be charged criminally for their part in the sub-prime crime, but hardly the last. The game-plan usually calls for plea-bargains among the smaller fish, a sort of baiting-the-hook with bottom-feeders for larger sport fishing nearer the surface.
Paulson and Bernanke desperately want to keep the Dow-Jones head above the water and salvage what they can of Republican dealmakers in the few remaining months before their mentor sneaks back to the Crawford ranch. To paraphrase John Kennedy on a far more honorable call to action, they will have us pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to make that happen.
If, of course, we let them.