More Notes on the Bailout

| Tue Sep. 30, 2008 3:39 PM PDT

MORE NOTES ON THE BAILOUT....Nathan Newman has a pretty good post over at TPMCafe defending the bailout legislation. Take a look. Among other things, he notes that we're bailing out Wall Street on an ad hoc basis already and creating an exclusive troika of megabanks in the process. Whatever its weaknesses, the bailout legislation is probably a better deal than allowing this to continue.

And while we're on the subject, here's a question: assuming the bailout eventually passes, how good a deal are taxpayers likely to get when Henry Paulson starts doling out his $700 billion? The conventional wisdom across a remarkably wide ideological spectrum is that Paulson is a creature of Wall Street and will end up offering sweetheart deals to all his old pals when he begins buying up their troubled assets. But this deserves a closer look.

See, Paulson is a creature of Wall Street. And the way you become successful on the Street is not just by being the smartest guy in the room, but by being the toughest guy in the room; the guy who drives harder bargains than anyone else and always comes out on top. The top execs on Wall Street might be arrogant, they might be crazy, and they might be greedy, but they play a testosterone-fueled game to win. This is practically their religion.

Paulson now works for the United States Treasury, but his instincts are the same as always: even if for no other reason than to boost his own ego, he's going to want to drive the hardest bargains possible — and the weaker the opponent, the harder he'll push.

Don't believe it? Take a look at the Fed/Treasury actions so far. Was the Bear Stearns rescue a sweetheart deal? No. In fact, the original $2 per share terms were so onerous that JP Morgan, which bought Bear, eventually raised the offer voluntarily. And what about Lehman Brothers? Would a Wall Street crony have let Lehman fail? Nope. The next day AIG was rescued, but read this and tell me if you think AIG got any kind of break in return for its $85 billion loan. They didn't. AIG got hammered.

Now, these have been a combination of Fed and Treasury actions, and their track record on other bailouts has been mixed. And I'd be happier if the bailout bill had even more oversight and tighter restrictions on equity sharing than it does. But that aside, the evidence suggests that the Treasury and the Fed are hardly a bunch of pushovers. They deserve to be watched like hawks, but when everything is said and done, I wouldn't be surprised to see them demanding some pretty harsh terms.

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