Big Bailout Isn't a Slam Dunk

Late last week investors cheered the news that the federal government was racing to put together a massive $700 billion bailout package for the financial system. A huge two-day rally in the stock market nearly wiped out all of last week’s declines and almost made investors forget Lehman’s bankruptcy filing, Merrill’s shotgun marriage with Bank of America and the government’s defacto takeover of insurance giant AIG.

But now that the Bush administration has finally presented its plan for saving Wall Street from its past mistakes, there are some serious questions legislators need to ask themselves before rushing to enact the measure.

For starters, the plan would give unprecedented power to the Treasury Department with few obvious checks and balances. Tresaury can just about hire any money manager it wants to oversee all the ailing mortgage-related debt the government—at taxpayer expense—plans to buy-up.

It’s totally up to Treasury to determine the prices it will pay for those assets. Pricing of assets is critical because it determines how much in further mark downs Wall Street will have to take and whether taxpayers can expect to make any money off this deal down the road. If the prices set for the assets are too high that could be a great deal for the Wall Street banks but mean taxpayers won’t be able to recoup much of a profit when the assets are later resold.

The brief three-page outline of the plan also doesn’t require the banks to give anything up. There’s no talk of forcing them to bring leverage levels down to a specific level—a move that would limit the ability of banks to again pile into risky assets. The measure also doesn’t require any corporate governance changes at the banks to make them more accountable or transparent in dislosing risk levels.

Finally, if the taxpayers are doing all this to keep the banks solvent, shouldn’t the executives who run these entities be required to give something back. During the hey day of the mortgage boom, top executives on Wall Street at Goldman Sachs, Lehman, Bear, Morgan Stanley, Merrill and other firms took home hundreds of millions in compensation. Sure, many of those executives lost a lot when the share prices of their companies plunged. But they also banked a lot of cash on the way.

If taxpayer are going to be asked to pay-up to solve the crisis, what about the Wall Street bankers who caused this awful mess?

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