The Bailout Barracudas

The barracuda is a ray-finned fish with fearsome appearance and strong, fang-like teeth. It is dangerous to humans and extremely ruthless in its behavior – large barracudas have been known to eat small barracudas. They used to live only in the oceans but as they are quite attracted to glint and shine (jewelry), many of them are making a living on Wall Street. They cannot be caught by conventional angling methods and require specially scaled tackle.

I’ll start with Alan “Barracuda” Greenspan. In his recent testimony before Congress he conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.” In his 18-year tenure as chairman of the Federal Reserve, Greenspan placed too much faith in the self-correcting power of free markets. He repeatedly (with Congressional support) resisted calls for tighter regulation of subprime mortgages and other high-risk exotic mortgages which allowed people to borrow far more money than they could afford. His failure to anticipate the self-destructive power of such unjustifiable mortgage lending triggered the current financial crisis.

Greenspan’s successor, Ben “Barracuda” Bernanke, made the following remarks in November 2005 at his nomination hearing to head the Federal Reserve Board.

“Monetary policy at the Fed has been executed with both careful judgment and flexibility. To cite one prominent example, Chairman Greenspan's risk-management policy approach attempts to take into account the possible consequences of not only the most likely forecast outcomes but also of a range of lower-probability outcomes. . . . Under Chairman Greenspan, monetary policy has become increasingly transparent to the public. . . . Since its founding, the Federal Reserve has been given substantial responsibility for protecting the stability of the nation’s financial system . . . the Fed works closely with other regulators to ensure the safety and soundness of the U.S. banking system. . . . The Federal Reserve, along with other regulators, is also engaged in trying to ensure that consumers . . . are not subject to discriminatory or abusive lending practices.”

We know now that everything he uttered was simply false. In all likelihood, Bernanke was either very busy in his role as chairman of the Economics Department at Princeton, or he was trying to buy someone’s vote to get his nomination approved.

When the housing bubble burst, troubled financial institutions which incurred large losses tried to increase their capital by selling assets. This drove the price of assets down, reducing their capital even further. The logical thing to do would be to inject more capital into financial institutions in return for a share of the ownership.

Along came Henry “Barracuda” Paulson. Instead of implementing this idea suggested by Bernanke, Paulson rejected it, saying, “That’s what you do when you have failure.” What Paulson was more focused on was outright fiduciary control in the original bailout bill:

“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.”

Thankfully, this passage was read on time and removed from the bill which eventually got passed.

When the British Government and Gordon “heckuva job” Brownie announced a plan for major equity injections into British Banks, a plan that was widely embraced by the European Union, Hank Paulson got egg on his face and had to basically propose the same thing, a couple of weeks too late to control the skid on Wall Street.

The U.S system of Government is supposed to have many checks and balances and ordinary citizens are left to wonder how such things are permitted to happen. What do their representatives in Congress do to protect their interests? The answer, you may be surprised, is very little. In fact, they have aided and abetted such practices by not performing their oversight role with due diligence.

Senator Chris “Barracuda” Dodd of Connecticut, in his acceptance speech as Chairman of the Senate Banking Committee, said in January 2007:

“I am deeply troubled by what has happened in our economy over the past several years. . . . Many have become victims of unscrupulous lending practices that have stripped them of their equity and sometimes their entire homes. . . . It is my intention to make their cause the work of this Committee.”

In that same speech, Chris Dodd heaped lavish praise on the former chairman, Senator Richard Shelby of Alabama. As the Joker said in The Dark Knight, “Let’s wind the clock back a few years.”

When the stock market began its crash in 2000, trillions of dollars didn’t simply disappear – they changed hands from long-term investors to hedge funds and short sellers. Much of this money was moved by hedge fund managers and their multi-millionaire clients into offshore tax havens in Bermuda and the Cayman Islands. The practice of short selling affects nearly everyone who has ever bought or sold stock or invested in mutual funds and it poses a direct threat to the economic well being of small businesses and the entire community.

It was Senator Richard “Barracuda” Shelby, as Chairman of the Senate Banking Committee, who did nothing to ensure that our markets were fair and honest. While company after company filed for bankruptcy and private investors lost millions, Congress (under Shelby and the Banking Committee) and the SEC did nothing to prevent it. Congress was still doing nothing before the meltdown, and states were being forced to deal with such issues. I suspect that many congressmen and senators are clients of these hedge fund managers and have their private portfolios in offshore accounts.

It should come as no shocker, therefore, why these hedge fund managers will be definitely getting their hefty bonus checks from the $700 billion bailout package.

Save the Fat Cats

This blog is by my cousin, P. Ranganath Nayak.

A propos Nicholas Kristof's comment about CEO salaries (October 2, NY Times) – there is a straight line connecting these three dots: outsize executive pay, George Bush's tax cuts for the wealthy, and the sub-prime catastrophe. Because of the first two, money got concentrated in a few hands to the point that they did not know where to put it. There are just so many yachts and houses and fine wines and paintings you can buy. What did they do? They took their money to investment bankers, private equity firms, and hedge funds, and said, "Get us a terrific return on this." The rocket scientists and MBAs on Wall Street invented sub-prime lending with Adjustable Rate Mortgages for that purpose. The SEC and the Fed were conveniently looking the other way. Voila! We had a housing bubble that was like a bomb ready to explode. All that was needed to light the fuse was the oil price shock. And here we are, with the whole world's economy at risk.

The best way forward is to massively tax huge salaries and wealth, and redistribute it by cutting taxes for everyone else, so that ordinary people can put food on the table, get medical insurance, drive to work, pay their mortgages, and send their kids to college. Let's start by increasing the taxes paid by Henry Paulson, George Bush, and John McCain.

It's time to get mad and get even.

G. M. Prabhu: Makes perfect sense. What does not make sense, however, is that the economic pundits are waxing and waning about why "some measures won't work," but no one has proposed concrete steps to correct the excesses. It seems like we have accepted the paradigm of "privatisation of profits and socialization of losses" (Prof. Roubini of NYU). You can e-mail comments to pr.nayak@verizon.net

Reference:Wall Street and the Making of the Subprime Disaster

------