Tuesday, October 14, 2008

Steven Pearlstein Loses An Argument With Himself

After reading his column today, I have to disagree not just with Pearlstein, but with Josh Marshall.

Before I wade into this, let me say that I think Pearlstein's generally pretty sharp. It helps that he's on the business pages, rather than on the op-ed page; he hasn't been infected by the stupidity virus that's rampant in the opinion pages of the A section. But today's column is another story.

He starts off by giving Paulson an extended 'attaboy' for playing this crisis well and confounding his critics, particularly in the latest installment.

But then he turns around and dumps on the execs of the banks that received the biggest infusions of cash:

In putting several trillion dollars in government funds on the line, the country has now done just about everything that Wall Street could have asked to address the financial crisis. The question now, as John Kennedy might have put it, is what Wall Street is ready to do for its country. So far, the answer is not much.

After getting their closed-door briefing yesterday from Paulson on the government's latest initiatives, Wall Street's finest literally ran from the Treasury to their waiting limousines, bypassing a media scrum eager to convey any scrap of wisdom or insight.

Court reporters will tell you they can always tell the innocent from the guilty on these kinds of perp walks, and the Wall Street crowd yesterday looked particularly guilty, unable even to conjure up a soothing word to a nation fretting over its shrunken 401(k)s, or a simple thank you to taxpayers for having saved their bacon. Their silence and invisibility throughout this crisis attests to the moral and political bankruptcy of a financial elite that is the perfect match for the financial bankruptcy they have now visited upon their investors, their creditors and their customers.

After yesterday's "historic" meeting, we are told by industry apologists that we are supposed to be grateful to nine leading banks for having "volunteered" to accept additional capital from the Treasury, along with a government guarantee for newly issued bank debt, even if it means having to accept a dilution of existing shares and a few harmless restrictions on their operations.

Pardon me if I'm less than blown over by this munificent offer, but it hardly seems commensurate either with the severity of the current crisis or the depth of the banks' culpability in fomenting it.

If Wall Street were truly serious about convincing Main Street that we're all in this together, its top executives would have stepped before the cameras yesterday and promised not to cut lines of credits to long-standing business customers who have never missed a payment.

They would have committed themselves not to foreclose on any homeowner who is willing and able to refinance into a new, government-guaranteed, fixed-rate mortgage set at 85 percent of the current value of the property.

They would have offered to suspend dividend payments until capital levels had been restored to pre-crisis levels.

They would have given us their solemn promise not to advise clients to hold on to their own investments while quietly dumping whatever they can from their own portfolios and shorting every security in sight.

With the Treasury now desperate for help in managing its new rescue efforts, they would have volunteered, at no cost to taxpayers, the services of some of those investment bankers and financial wizards who now don't have much else to do.

And the maharajas of finance could have set a wonderful example if they had all gotten together and agreed to work for a dollar a year until the crisis has passed.

There's a word that captures the instinct to take these kind of bold moves in the midst of a national crisis -- it's called leadership. We've seen quite a bit of it these past few weeks from public officials like Hank Paulson, Ben Bernanke, Tim Geithner, Sheila Bair, Nancy Pelosi, Barney Frank, John Boehner -- even George Bush. Wall Street, by contrast, has served up a nothing sandwich, a lack of leadership that's been stunning.

When he's right, he's right - but what did he expect? These guys are paid to be greedy, to get the best deals possible. What Pearlstein's rant demonstrates is that Paulson was a lousy bargainer, and negotiated a really, really sucky deal on our behalf.

Paulson could have extracted that commitment about maintaining lines of credit to good customers. He could have gotten that nonforeclosure commitment. He could have demanded and received their commitment to suspend dividends until the crisis was clearly history. (In fact, Paulson went the opposite direction here by taking preferred rather than common stock, since the value of preferred stock is almost entirely a function of its first claim on dividends, rather than a function of the success of the company.) Paulson could have required that the execs of these firms keep their total compensation packages in the six-figure range, at least until the emergency has passed. And so forth.

He did none of these things. He drove a lousy bargain. Anyone who expects the lords of Wall Street to do these things out of generosity or patriotism or public-spiritedness, has got to be crazy. They're in it for the bottom line. If they aren't required to do good by law or contract or clear self-interest, they almost invariably won't.

And those who were telling us, a couple weeks back, just what a ferocious bargainer Paulson would be (I'm looking at you, Brad DeLong and Kevin Drum) - guess we found out otherwise.

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