Henry “Hank” Paulson pitched it as a panacea for America’s financial woes. But, despite the warnings from US president George Bush, the people of America have not been hoodwinked. Or at least their politicians haven’t.
The House of Representatives today kicked out Hank Paulson’s $700 billion Troubled Assets Relief Programme (Tarp), by a majority of 228 to 205. They were right to do so, at least the version that has been put together so far.
If this project had gone ahead, it might have offered 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 lifeboat 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 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 should at least have been 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 slide for the first time since the Great Depression, Wall Street increasingly is a different planet, where grown men and women are paid obscene amounts of money to yell 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 wrong.
On Monday, the begging became aggressive.
Wall Street investors reacted to Congress’s failure to wave through TARP 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 and the Nasdaq sank by 9.1% to 1983.73. Every single stock in the S&P 500 finished the day lower apart from one —Campbell’s Soup.
Perhaps that speaks of the power of iconography at a time of crisis?
This blog post was published on 29 September 2008