Paulson’s Con

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The natural result of the federal government response that emerged over the weekend around the Lehman Brothers catastrophe is to place the venerable Federal Deposit Insurance Corporation, the government institution that insures the bank deposits of hundreds of millions of Americans, in grave jeopardy. While Treasury secretary Henry Paulson and others talk about not sinking taxpayers’ funds into saving Lehman, the real, unstated policy is just the opposite.

It is going to work like this: As it did with Merrill Lynch, the government’s approach to the crisis will force commercial banks to swallow troubled Wall Street investment companies, flooding the commercial banks with the lousy junk bonds and faulty mortgages that the investment companies own, and that started this mess to begin with. More and more commercial banks will find themselves on the edge, and they will turn to the FDIC. But the FDIC can’t possibly shoulder the growing burden. At that point, Congress will have to step in and shore up the FDIC. The deal doubtless will include some version of the S&L bailout, with the creation of a Resolution Trust Company type institution into which the banks can dump the sub-prime mortgages, junk bonds, and the like.

In other words, the public will end up paying for Wall Street’s financial binge. And the leaders of the financial community who got us into this expensive mess? They’ll get the traditional golden parachutes and lavish pension arrangements–huge payoffs for screwing the public.

It’s worth noting that Sheila Bair, a longtime Treasury Department official who is now head of the FDIC, was one of only a handful of people in Washington who repeatedly warned then Fed Chairman Alan Greenspan about the dangers of unregulated banking in general, and the growing housing bubble in particular–warnings that Greenspan roundly ignored. As French economist said of Greenspan last year, “He created four major crises: savings and loans, LTCM [Long-Term Capital Management], new-technology shares, and subprime mortgages,” and then won praise for his handling of these crises. “He’s congratulated for his role as fireman,” said Artus, “but he’s the one who started the fire.” Now its U.S. taxpayers who will get burned, through the very institution–the FDIC–that FDR created 75 years ago to protect them.

HERE ARE THE FACTS:

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As we wrote over the summer, traffic has been down at Mother Jones and a lot of sites with many people thinking news is less important now that Donald Trump is no longer president. But if you're reading this, you're not one of those people, and we're hoping we can rally support from folks like you who really get why our reporting matters right now. And that's how it's always worked: For 45 years now, a relatively small group of readers (compared to everyone we reach) who pitch in from time to time has allowed Mother Jones to do the type of journalism the moment demands and keep it free for everyone else.

Please pitch in with a donation during our fall fundraising drive if you can. We can't afford to come up short, and there's still a long way to go by November 5.

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