This is going to hurt

The $750 billion financial bailout is turning into a scam rivaled only by the practices of the financial sector that precipitated this signal disaster. The geniuses overseeing this "rescue" thought it would be dandy to save Bear, Sterns — but then let Lehman Brothers collapse. They pumped $45 billion into Citigroup — which went out and bought a $50 million corporate jet. Merrill's "savior" CEO was redecorating his office to the tune of more than $1 million while headed into a shotgun marriage with Bank of America — which is now begging for more bailout billions because of Merrill's disastrous bets. AIG and the rest of the gang handed out billions in bonuses while their hands were out for the taxpayers money. And the system is still sick, reeling afresh with any day's new shock.

Maybe $300 billion of the TARP money has been committed — maybe more. Then there are perhaps trillions in dollars printed out and essentially given to the big banks through Federal Reserve "lending facilities" — which the Fed is keeping secret. Behind the scenes, the big banks continue to lobby and squeeze members of Congress. In exchange for the taxpayer money, it's unclear what the taxpayers get in return, whether any of the bailout money will ever be paid back. These guys make Bernie Madoff look like the Better Business Bureau.

Now the cognoscenti are talking about nationalization as the answer — whatever "nationalization" means. As the New York Times reports,

That has already happened; taxpayers are now the biggest shareholders
in Bank of America, with about 6 percent of the stock, and in
Citigroup, with 7.8 percent. But the government’s influence is far
larger than those numbers suggest, because it has guaranteed to absorb
the losses of some of the two banks’ most toxic assets, a figure that
could run into the hundreds of billions of dollars.

As one of many who were punked by Paulson in the original panicked rush to pass the bailout, I say let's take a deep breath, stop, look and consider:

1. Analogies to the Resolution Trust Corp. and S&L scandal circa 1990 are deeply flawed. The S&L mess was relatively small and contained. It looked big at the time: more than 1,000 thrifts, with assets totaling $500 billion, failed. The old FSLIC regulatory system — bullied by John McCain and his buds — was overwhelmed. The federal government stepped in, backing the deposits and seizing the assets. Despite dire predictions, the crisis in the end cost taxpayers about $124 billion.

What happened? First, the government let the bad thrifts fail. It didn't try to recapitalize Charlie Keating and his co-kingpins with their worthless bonds. Nor did it merge sick institutions, creating sicker ones "too big to fail" Third, the government protected the depositors, not the executives who had engineered the disaster. Fourth, there were assets to seize: houses, office buildings, shopping strips, cash and real securities. These could then be sold by the RTC in an orderly manner as the market recovered. Finally, the bad guys were cleansed from the system and the system itself reformed.

2. Today's crisis is infinitely larger and more complex. Failed Washington Mutual alone had more than $300 billion in "assets." Troubled Citigroup has $1.9 trillion. How much of that is "toxic" — perhaps $300 billion, perhaps more. Then there's the whole "toxic assets" shorthand — as if it is kryptonite that can be pulled away and Superbank will revive. The trouble is most of these "toxic" assets are worthless. They are derivatives of kryptonite, or credit default swaps of kryptonite — sold repeatedly on a largely unregulated market allowing the players to keep racking up fees. But they're worthless. There's no there there. These swindles cut to the heart of the financial system — they're not the hicks from the S&L industry back in the 1980s.

3. The banks still have these swindles on the books as if they represent something of value. In many cases, lots of value. They are on the books at a price something close to what they were trading for in the bubble. The bankers want us to buy them at these prices, with Uncle Sam being the last Greater Fool in the Wall Street casino. Here is a clear, simple place to draw a line. No taxpayer money to pay speculative prices for assets.

4. Thus the government must begin a competent, transparent process of forcing these institutions to reveal what's on their books. If they want taxpayer money, the taxpayers must be rewarded with real collateral: property, gold, low-risk securities, cash, John Thain's rug. Other stakes, such as for preferred or common stock, do not reassure me because these institutions are beset by so much fraud.

5. It may be, as I have written before, that the government needs to let more institutions fail if they are genuinely insolvent. If they are "too big to fail," maybe they will be solvent if broken into pieces. If not, let them go. Use the taxpayer money to ease the pain for average people — and there will be pain — and provide liquidity for solvent, well-run institutions. Maybe the problem is so bad we also need a government bank to grease the credit markets: lending to genuinely productive activity. But the the trouble will never be past if we keep trying to feed the living dead. The pressures of the market will not go away because Ben Bernanke wears the equivalent of a Whip Inflation Now button as he props up insolvent institutions.

6. There must be real consequences. The leadership — and thinking — that caused this mess needs to be ousted, if not jailed, with their real assets seized. Find the dissident mid-level executives who thought the swindles were a bad idea and were forced out. Bring them back and put them in charge. Find some crusty old bankers and bring them out of retirement. Let loose an army of hungry accountants to dig through the loopholes, hidden sweetheart deals, etc. Meanwhile, regulation should be firm, smart, independent, transparent and predictable. The real assets are separated from the swindles. The productive business of lending and providing capital is rewarded. The swaps-and-derivatives casino is closed.

7. In sum, as with the S&L collapse, the rough justice of the marketplace must be allowed to work. It will be horribly painful but relatively brief, if tempered by the right government action.

So far, I am hearing little of this out of Washington.