29 September 2008
Henry “Hank” Paulson pitched it as a panacea for America’s financial woes. But, despite all the sabre-rattling and doom-mongering from US president George Bush, the people of America have not allowed themselves to be hoodwinked. Why should they take ownership of the very worst loans and other assets assembled by the former Masters of the Universe?
The House of Representatives today kicked out Hank Paulson’s $700 billion “toxic waste dump”, otherwise known as the Troubled Assets Relief Programme (Tarp), by a majority of 228 to 205. In my view, they were right to do so, at least the version that has been cobbled together so far.
If this ill-conceived project had gone ahead, it might have offered some temporary respite for the financial markets and might have delayed a few bank collapses. But the moral hazard would have been immense. I’m afraid this toxic lifeboat was far too hastily cobbled together to have any real chance of floating in a democracy like the USA. And as we know from Sarbanes-Oxley and even the UK’s ”combined code”, kneejerk responses to crises often create more problems than they solve.
Federal Reserve chairman Ben Bernanke and treasury secretary Hank Paulson had convinced themselves that the project was necessary in order to save the global financial system. It would have done this by taking duff assets off the hands of failed and failing banks at so-called “hold to maturity” levels rather than at their current “fire sale” prices. This would have given the bankers who screwed up an effective “get-out-of-jail-free” card. But why should American taxpayers pick up the tab for the folly of these bankers? If the taxpayer is to be forced to pay over the odds for their toxic waste, they are at the very least going to have to be offered a bigger share of any potential upside.
To the vast majority of Americans, who are getting used to seeing the values of their homes consistently slide for the first time since the Great Depression, Wall Street increasingly is a different planet, where grown men (and some women) are paid obscene amounts of money to shout at each other in trading pits, drive around in over-priced cars, party all summer in the Hamptons … and then come begging to the taxpayer when everything goes tits up.
On Monday, the begging became aggressive.
Wall Street investors reacted to Congress’s failure to wave through their bank rescue plan as only only they know how – by marking down shares like petulant schoolboys who’ve been denied access to the tuck shop. They hoped this would frighten the horses, and that Congress would review its decision. Overall the Dow Jones Industrial Average slumped by 7% to 10,365.45, while the Standard & Poor’s 500 plummeted by 8.8%, to 1106.42. The Nasdaq sank by 9.1% to 1983.73. Each of the 500 stocks within the S&P 500 finished the day lower, except for one – Campbell’s Soup.
Well, Andy Warhol, doesn’t that speak volumes about the power of iconography at a time of crisis?