Despondency returned to Wall Street last night, as the smoke began to clear from last week’s riot.
We are left with two furious debates and a growing moral malaise — grief over the death of American capitalism.
One debate is about US Treasury Secretary Hank Paulson’s $US700 billion bail-out plan and the other is about the bans on short selling. In the middle, battle-scarred investors are quietly tip-toeing towards the exits, hoping to get their money out before being noticed.
Opposition to the Paulson Plan coalesced around the issues we raised yesterday in Business Spectator, that in order to work it will have to involve buying mortgage assets at above market value, thus leaving taxpayers in the hole, and that so much new government debt would have to be issued to support it that it would drive down bond prices and the US dollar.
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In fact the bond yields are rapidly rising now and the dollar is tanking, pushing up the oil price up $US25. It’s fair to say that markets are voting against the bail-out.
For a while it seemed that despite getting a thumbs down from commentators and analysts, Paulson’s bail-out would quickly pass Congress despite energetic opposition.
But in the last few hours US Senate banking committee chairman, Christopher Dodd, has been circulating an alternative draft bill of his own that will put a lot of pressure on Hank Paulson.
The big difference is that his proposal would give the US government a stake in the companies from which it buys distressed assets, rather than just the assets themselves, which would create a disincentive for the vehicle to be used as dumping ground and would put a break on the prices being paid (the higher the price, the more equity handed over).
Dodd is also proposing to whack executives. His bill would penalise those who take “inappropriate or excessive risks”, executive compensation and severance packages would be reduced if that is in the “public interest” and it would force executives to give back money they earned that was based on accounting measures later found to be wrong.
There is likely to be plenty support for this sort of tougher stance against those who caused this mess, but whether it translates into Congress rejecting the Paulson Bill is another matter — no American politician wants to be known as the one who caused a financial system meltdown and Depression.
In general, anger is growing about the extent of the taxpayer bail-outs needed to stop the greed of Wall Street bringing down the world economy.
It’s not just the $US700 billion, no strings attached, that former Wall Streeter Hank Paulson is asking for. It’s bail-outs all round.
Allowing Goldman Sachs and Morgan Stanley to switch to being commercial banks is another bail-out: they get to stop marking their assets to market and instead assume in their books that they will be held to maturity, which means they can rebuild their shattered equity through accounting smoke rather than cash.
The ban on short selling is another one. Short sellers are the predator regulators who expose deception as well as weakness. By protecting companies from shorting, regulators are interfering in the marketplace to limit the impact of poor decisions by managers and bailing them out.
It has become a battle to keep the economic effect of the US housing bust and credit crunch to something approaching a normal recession, rather something that history denotes with a capital letter.
In the chaotic flurry, investment banking – one of the foundations of American triumphalism — has been taken out and shot, the US Treasury has been turned into a junkyard and the US dollar has been thrown to the wolves.
The real battle perhaps, will be to stop the grief over the death of American capitalism from turning into total despair.