On the way towards a bailout

US politicians have been slow to pass the bailout plan because they don't want to make a decision that could see them get blamed for the financial mess.
On Monday when the US House of Representatives rejected the $700 billion Troubled Asset Relief Programme, or Tarp, triggering an historic 777-point drop in the Dow Jones Industrial Average, financial analysts around the world went into shock. And for good reason. They had been counting on the US politicians to act reasonably and responsibly.

That was a mistake. Most politicians act in a manner they perceive will best get them re-elected, which doesnÆt always involve reason. And this helps explain why on Tuesday the DJIA rose 485 points, regaining more than half of what it lost the day before û investors remembered that politicians may not always act reasonably, but they do respond to money. And the market nosedive caused investors who lost money in the decline to send a message to their congressmen: ôGet working on a new plan. Now.ö

No surprise then that the Senate approved approve a slightly revised bill on Wednesday night US time (early morning today Asia-time) in an 74-25 vote. DonÆt give the Senators credit for being smarter, they just had the benefit of watching the world respond to the HouseÆs failure to pass the bill two days earlier. They had a second chance.

Now we wait for the House of RepresentativesÆ vote later today.

HereÆs the irony. The politicians are damned either way. If they support the bill, their opponent in the next election will run a television ad showing a Wall Street banker living in ludicrous luxury with the caption: So-and-so bailed out the fat cats on Wall Street. If they oppose the bill, their opponent will show a destitute, single-mom put out of her house, with the caption: So-and-so failed to help save our economy.

Negative campaigning is rarely based on fact; itÆs based on the easy shot. And these shots are indeed easy.

But, if you canÆt win, you may as well do the right thing. And that is passing a plan that simply calls for the government to buy troubled mortgage assets from financial institutions, which would help get the mess off banksÆ books. The plan wonÆt stop write-downs. It wonÆt prevent more failures or mergers. But it could help us start to see our way out this crisis, which has resulted in the collapse of investment banks Bear Stearns and Lehman Brothers, a government takeover of mortgage giants Fannie Mae and Freddie Mac, and a massive rescue loan to insurer American International Group.

As President Bush said Tuesday when he urged Congress to push through a plan: "I recognise this is a difficult vote for members of Congress. The reality is that we are in an urgent situation, and the consequences will grow worse each day if we do not act."

So why didnÆt the politicians act fast in the first place?

Unfortunately, a stumbling block for some was that Treasury secretary Henry Paulson gave his idea a silly name. Tarp works at his former firm Goldman Sachs, where bankers would look past the acronym and actually read the fine print. Tarp doesnÆt work with radio shock jockeys in New York City who have 10 seconds to capture their listenersÆ attention before they change stations to catch sports results. They call it a bailout plan for Wall Street. And that just makes it an easy target for saying it is helping the rich and not the poor. Had Paulson named it the Save Americans Plan, he would have been known for his Sap, but it might have passed on the first round because politicians would have been afraid to vote against such a patriotically named programme.

But a bigger problem for the House politicians, who on Monday rejected the first plan in a 228-205 vote, was that this economic problem is beyond the scope of most of their experience and expertise, and has been spinning out of control so rapidly, that they have been left unprepared. Indeed, many of the politicians didnÆt want to deal with this just yet.

In mid-September lawmakers were saying they were unlikely to do anything this year û they wanted to delay any votes before their then planned adjournments, which were scheduled for September 26 for the House of Representatives and October 3 for the Senate. And many were signalling they didnÆt want to return after the November 4 presidential elections and would prefer to reconvene in 2009. Indeed, on September 18, Senate majority leader Harry Reid said the reason they didnÆt want to vote was because "no one knows what to do" at the moment. He was lambasted on financial and political blogs immediately following that statement, but he was, if nothing else, honest.

And it wasnÆt a Democrat thing. It was a bipartisan view. Consider Sherwood Boehlert, a former Republican congressman from New York, who weighed in with this view: "When you rush to judgment, you usually make mistakes."

They wanted to wait until next year. One would idealistically hope their plan was to spend the next few months studying the matter, but the truth is they would be going home from Washington DC to their constituents to rally votes for November 4 and attend holiday fundraising parties, not study financial data.

To be fair, many of the same pundits who were critical of the politicians for not wanting to vote on an emergency bailout plan, are also critical of CongressÆs Sarbanes-Oxley law, which set new corporate-governance rules. Keep in mind that Sarbanes-Oxley was passed (unanimously in the Senate and overwhelmingly in the House) in 2002, after accounting scandals forced Enron and WorldCom into bankruptcy.

We know from history that quickly produced legislation û especially on complicated banking matters û is never a good idea. But this never had to be complicated. As Stephen Roach, chairman of Morgan Stanley, told the Hong Kong Investment Funds AssociationÆs annual conference on Monday, PaulsonÆs three-page plan should get an A+ for simplicity, but the Congressional bill, at 110 pages with more than 42 sections, deserves a C- or a D+.

In an emergency û keep it simple. When you donÆt know what to do û keep it simple. Then if itÆs a complete mess in the end, at least you can say: we gave you a solution; you failed to implement it appropriately. If Congress had kept it simple, and then gone bank to Paulson and friends and said, ôyou work out the finer pointsö we would be in better shape than leaving it to the politicians whose majority leader has admitted to not knowing what to do.

But while simple may be a description of some politicians, it is rarely something they can do.

Two of the SenateÆs additions to the plan include tax breaks for businesses and alternative energy, which was part of a different proposal that has been a stumbling block in the House of Representatives (and may well be again later today). We can debate its value, but surely, this doesnÆt belong in the Tarp plan.

A second addition, raising the cap to $250,000 from $100,000 for insured bank deposits sought by the Federal Deposit Insurance Corp, is relevant, and may help pass the bill in the House.

Of course, nothing stops Congress from coming up with more than one law. As Representative Paul Kanjorski, a Democrat from Pennsylvania who chairs a House financial services subcommittee on capital markets, said in a statement urging fellow lawmakers to act quickly: "We can also consider additional provisions to improve the legislation, but I caution my colleagues that during this economic crisis is not the time to let the perfect become the enemy of the good.ö

He added: "While we do not have a perfect bill, we do have a perfect storm."

Indeed we do, and now, we wait to see if the House, which reconvenes at noon Eastern Standard time today (Thursday), will add thunder to that storm.
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