Which institutions will be allowed to benefit? The news is full of big names like Lehman Brothers, AIG, and Washington Mutual. But what about the smaller regional institutions, like Umpqua Bank, Bank of Montecito, and River City Bank, who specialize in providing banking and lending services to Small Town USA? Surely some of them are in financial trouble, being saddled with bad debt stemming from the housing boom. I haven't heard anyone speak up for them. Will they be allowed to go under while larger banks snap them up using bailout funds?
What about institutions with other kinds of debt, such as credit card debt? Will Citibank be allowed to write off billions of dollars in consumer debt and essentially start over with a zeroed balance book? Who decides what kinds of debt are covered under the bailout bill and which are not?
This bailout does nothing to fix the underlying problem.
President Bush went on the record last night to explain to the taxpayers how we got into this mess. The problem, as he stated, stems largely from the poorly-managed mortgages wrapped up into complex securities that buried the risk. This bailout is necessary, he said, to buy up the bad debt and allow banks to resume lending.
That's great, but it's like applying a Band-Aid to a patient with internal bleeding. The financial vehicles for this disaster still exist:
- It's still possible to create complex securities out of bad debt and sell it to unknowing investors.
- It's still possible to sell a house to someone who can't afford it.
- We'll still have greedy mortgage brokers pulling the wool over lenders' eyes. The broker gets paid when the mortgage is signed, and keeps the money even if the homeowner defaults.
- And we still have many homeowners teetering on the edge of delinquency whose defaults have yet to show up on banks' balance sheets.
Secretaries Paulson and Bernanke say the time to do the bailout is now; changing the regulatory laws will be done later, once the financial system has been stabilized. When is "later?"
"Later" is after the new year. We'll have a new President and a new Congress. Many of them will be new to Washington, new to the intense lobbying that comes with the job. You can bet that the Big Banking PACs, flush with $700 billion in cash, will really turn up the heat on our representatives to convince them that the regulatory laws which so desperately need changing should either be left alone or altered to benefit the banking industry.
Imagine the kind of influienc you could have on your representative if you had even one million dollars. Now imagine what you could do with $700 billion.
I'm not convinced that, once the dust settles, that anything will have changed at all. But I do know this: the Big Banks will be $700 billion richer and we taxpayers will be $700 billion poorer.