I Like Ben Stein's Thinking on This One...

September 28, 2008

Everybody’s Business

In Financial Food Chains, Little Guys Can’t Win

By BEN STEIN

IMAGINE, if you will, that a man who had much to do with creating the present credit crisis now says he is the man to fix this giant problem, and that his work is so important that he will need a trillion dollars or so of your money. Then add that this man thinks he is so indispensable that he wants Congress to forbid any judicial or administrative questioning of anything he does with your dollars.

You might think of a latter-day Lenin or Fidel Castro, but you would be far afield. Instead, you should be thinking of Treasury Secretary Henry M. Paulson Jr. and the rapidly disintegrating United States of America, right here and now.

But I am getting ahead of myself. First, I am furious at what the traders, speculators, hedge funds and the government have done to everyone who is saving and investing for retirement and future security. Millions of us did nothing wrong, according to the accepted wisdom of the age. We saved. We put a large part of our money into the stock market, as we were urged to do. Because the market wasn’t at ridiculously high levels, it seemed prudent to invest in broad indexes, foreign indexes and small- and large-cap indexes.

Now we have had the rug pulled out from under us. Our retirements have been put into severe jeopardy. The “earnings” part of those price-to-earnings ratios turns out to have been fiction for some financial companies, which normally account for a big part of total corporate earnings. In fact, earnings of giant finance players were often wildly negative, creating a situation rarely seen since the Great Depression, when the aggregate earnings of the Dow 30 were negative.

The current negativity occurred because of wild, casino-type operations of big finance players, creating liabilities way beyond anything we could have reasonably expected. This looks a lot like theft on a spectacular scale — of our wallets, our peace of mind, our futures.

Second, according to what I hear from my betters in the world of finance, the most serious problems are not with the bundles of subprime mortgages themselves — a large but not lethal quantum as far as I can tell — but with derivatives contracts tied to subprime and other dicey debt. These contracts are superficially an attempt to “insure” against risks of default, hence the name “credit-default swaps.” In fact, they are an immense wager — which anyone with lots of money or borrowing ability can enter — about how mortgage-backed bonds, leveraged loan bonds, student loan bonds, credit card bonds and the like will perform.

These wagers entail amounts many times larger than the total of subprime loans. In fact, there are roughly $62 trillion in credit-default swap derivatives out there, compared with about $1 trillion of subprime mortgages. These derivatives are “weapons of financial mass destruction,” in the prophetic words of Warren E. Buffett. (Apparently believing that the worst is over, at least for one big investment bank, Mr. Buffett is now investing in Goldman Sachs.)

The swaps market has been unregulated. It has been just a lot of people making bets with one another. Some of them made incredibly fortunate payoff wagers against the mortgage bonds, using credit-default swaps as their wagering vehicle. I am not sure who the big winners are, but they are out there, and the gains were big enough to cripple the part of Wall Street on the losing side of the bets.

Almost no one (except Mr. Buffett) saw this coming, at least not on this scale. But let’s get back to the man of the hour. Why didn’t Mr. Paulson, the Treasury secretary, see it? He was once the head of Goldman Sachs, an immense player in the swaps world. Didn’t people at Treasury have a clue? If they didn’t, what was going on in their heads? If they did, why didn’t they do something about it a year ago, when saving the world would have been a lot cheaper?

If Mr. Paulson and Ben S. Bernanke, the chairman of the Federal Reserve, didn’t see this train coming, what else have they missed? What other freight train is barreling down the track at us?

All of this would be bad enough. But by far the most terrifying item I read in my morning paper last week was this: Mr. Paulson demanded that Congress forbid judicial review of his decisions on use of the money in the mortgage bailout. This would amount to an abrogation of the Constitution. Not only would his decisions be sacrosanct and above the law, but so would the actions of his pals in the banking world in connection with this bailout.

The people whose conduct got us into this catastrophe have not only taken our money, hopes and peace of mind, but they apparently also want a trillion or so more dollars to put into their Wall Street Buddy System Fund. This may be the most dangerous attack on the law in my lifetime. What anarchists even dared consider this plan? Thank heaven that minds more devoted to the Constitution on Capitol Hill are questioning this shocking request.

By the way, if we are actually thinking about tossing the Constitution out the window, why not simply annul these credit-default swap contracts? With that done, the incomprehensibly large liability of the banks would cease, and we wouldn’t need this staggering bailout. Shouldn’t we consider making the speculators pay some of the price?

WE have survived housing-price corrections before. Why is this one causing so much anguish? It must be the side bets, the credit-default swap bets, multiplying the effect of the housing downturn many times over. Maybe we should just get rid of these exotic bets and start again without them. “Insurance” on market moves is always a bad idea, because it does not tamp down market disruptions but instead greatly magnifies them — as in the disastrous effect of “portfolio insurance” in the 1987 crash.

Then there was Mr. Paulson’s insistence that there be no compensation caps for executives of companies being bailed out by the factory workers, the farmers, the schoolteachers and the medical doctors. He told a skeptical Congress on Tuesday that if these caps were put into place, bank executives simply wouldn’t participate in the bailout or sell us suckers their debts. Fine with me. If the banks are in good enough shape so that petulant executives can simply opt out rather than live on a few million a year, maybe we don’t need the bailout at all. Maybe we would be better off if those executives simply bailed out and were replaced by people with more sense and more patriotism.

One final little thought bubbles into my mind: Maybe the bailout should not be of the banks at all, but of homeowners themselves. Maybe if we make the government the buyer of last resort of homes, we will stabilize the markets, stabilize the debt associated with the markets and take the gain out of the credit-default swaps for the speculators. Yes, price would be a huge issue, but so it is for Mr. Paulson’s plan for buying debt from banks.

Why not? We do it for farmers. Why not for the individual homeowner? Oh, right. Because Treasury secretaries don’t know any of those people.

Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.

Copyright 2008 The New York Times Company

LA Times Editorial -- Bush's Arrogance

Editorial

Bush the arrogant

President Bush's latest permutation of crisis management is the last straw. But who best to roll back the excesses?

September 28, 2008

As the Bush administration attempts to stabilize the nation's economy, we are witness to the final chapter of a period of perverse and dishonest leadership that has used its own crises to justify the expansion of its own power. This was a president who came to office on promises of modesty -- who championed a "humble nation," scorned nation building and promised a more limited role for government in the lives of its citizens. Then he presided over a six-year attempt to tear down and rebuild the nations of Afghanistan and Iraq, and now has embarked on the most profound expansion of the federal government's role in the private economy since the Depression.

In both cases, the pattern is the same. Ineptitude led to crisis; crisis then became the argument for the radical expansion of executive power. The administration insisted that it exercise its new authority with a minimum of scrutiny by Congress, the courts or the public.

In the so-called war on terror, that has meant the abdication of our most basic American principles. We have forfeited privacy and honor -- the administration has monitored phones and e-mails without warrants and has secreted prisoners in foreign lands, arguing that they deserved none of our protections even while in our custody. As a nation, we have stooped to torture (while debating the meaning of the word) and refused to recognize one of our most basic Anglo-American notions, the principle of habeas corpus (thankfully, the Supreme Court, seven of whose members are Republicans, drew the line at that abomination). We have held prisoners in detention without trial, without charge, without end. In so doing, we have antagonized the world and debased America's moral authority to lead.

The same administration responsible for these catastrophes has over the last month nationalized the largest source of funding for mortgages and the largest insurance company on the planet. And it proposed to intervene even more dramatically in the nation's economy by having the Treasury Department -- with no court, congressional or public oversight -- relieve financial institutions of the troubled mortgages and related securities that have locked up the lending system.

There is no doubt about the depth and range of the crisis that provokes these calls for government action. The gyrations of the stock market have been dismaying, and the threat to the country's financial institutions -- and everyone who borrows from or invests in them -- is real. Still, the audacity of this administration demanding expanded powers and curtailed accountability is a wonder to behold. The bitter irony is that this crisis warrants dramatic intervention, but President Bush's record makes him difficult to trust even when he's right.

These troubles are about more than a president who is unfaithful to his word. Bush has transformed the balance of power in our government. We are seeing the erection of an imperial presidency, immune from oversight when it fights terrorists and when it rescues banks.

Politically, these developments raise two questions: Which candidate to succeed Bush benefits most by the events of recent weeks? And which candidate, if either, would have the strength to roll back these expansions of presidential power if elected?

To the first question, the answer seems to be Barack Obama, though only modestly. Obama's poll numbers have inched up in recent days as voters have taken stock of a frighteningly complex economic meltdown and been left to wonder what to think of John McCain's abrupt, halting responses -- as McCain saw it, the "fundamentals" of the economy were sound one moment, at risk the next.

Questions about McCain's judgment in recent days have only been deepened by the performances of Alaska Gov. Sarah Palin. She has struggled in her rare public appearances, and her selection risks appearing all the more reckless and cynical when held against the seriousness of this financial crisis. Even McCain's campaign "suspension" seemed like gamesmanship. He said he was rushing to Washington, but took his time, and the talks derailed soon after he arrived. He proclaimed that the situation was so dire he would not return to the stump until an agreement was reached, then did precisely what he said he wouldn't. It was not an impressive week for the Straight Talk Express.

Still, Obama has hardly run away with this issue, and the economic news exposes his weaknesses as well. He is, after all, untested by executive crisis and a freshman senator of limited achievement in government. Voters may well blanch at his relative inexperience, given the gravity of these times. Indeed, it is telling that in a week when his opponent flailed, Obama made scant headway in the polls.

On the matter of which candidate could be trusted to roll back the excessive powers that Bush has aggregated, Obama is vague and McCain is exasperating. McCain has properly condemned the U.S. detention facility at Guantanamo Bay and said he would close it, but when the court granted detainees there the rights of habeas corpus, McCain denounced the ruling as "one of the worst decisions in the history of this country." He condemned torture, but then, with the campaign underway, voted against legislation to limit the CIA's use of coercive interrogation. Those oscillations do not reassure.

Obama, meanwhile, is more consistent and encouraging but offers few specifics. He pledges to close Guantanamo, restore habeas corpus and end the invasions of privacy undertaken in the name of fighting terrorism. Those are welcome positions and provide some hope that he would roll back Bush's excesses. But while he pledges allegiance to the separation of powers, Obama has said little about how to honor that pledge. Rare is the politician who willingly cedes authority, and we have not heard enough from Obama to be convinced he's that rare person.

These are not abstractions. They are the legacy of this grim epoch, one that should be equally offensive to conservatives and liberals. George Bush promised humility and delivered arrogance. The next president must not.