PRUDEN: Bonnie and Clyde, banking pioneers

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Tuesday, September 23, 2008

ANALYSIS/OPINION:

Now we see what Bonnie and Clyde could have made of themselves if only they had gone to Harvard Business School. Machine guns and fast getaway cars are not nearly as efficient as computers, lawyers and imaginative accounting.

Bonnie and Clyde relieved depositors of their savings at little banks in out of the way places, dealing only in retail. The Lehman brothers and their sisters, Bear Stearns and AIG, relieved investors of their money on Wall Street and now get to relieve taxpayers of their money from coast to coast, dealing in wholesale. The brothers and sisters have given "free markets" an entirely new meaning. They're free to take the money and run, with Hank Paulson driving the getaway car.

Bonnie and Clyde had to plan their robberies carefully. If they hit a bank in Joplin and the haul was too small to pay for groceries and gasoline, they worried about where and when to eat. Too many bad choices and they were hungry and out of cash with nothing to carry. The Lehman brothers and their greedy and ultimately incompetent ilk didn't have to worry. They were too big to fail, and government enablers would always be there.

But capitalism, with its winners and losers, risks and rewards, is only for the poor. The rich - the investment bankers, the high rollers and the croupiers at the Wall Street casino - get socialism, with never a worry about getting "shaken out" by the free market. So this is what George W.'s "compassionate conservatism" was all about. Who knew?

The business reporters at Reuters sat down over the weekend and did the math, to see who will pay for the nightmare on Wall Street. They reckon the rescue will eventually cost $1,800,000,000,000, when all the various rescue measures are counted. (Trillions are no longer exotic figures; our typesetters are running out of zeroes.) This sum is equal to 13 percent of the entire U.S. Gross Domestic Product and considerably more than twice the entire economic product of both Canada and Spain. If that's not scary enough, these measures will cost every American $6,000 in increased taxes, now or later, or about $15,500 for each household. That's only the average; since some taxpayers pay more (and you know who you are) and some pay less (and you know who they are), this will require sending for Bill Clinton to feel all that pain.

We're told that this is no time to play the blame game. But why not? Since we're all stockholders now in a vast Ponzi scheme, we should have some say in who gets thrown into the street and who doesn't. The Democrats are particularly eager to avoid the blame game. They fiercely opposed legislation in 2005 that would have imposed sanity on Fannie Mae and Freddie Mac, whence came this misery. The legislation was written by three senators, including, as it happens, John McCain. The senators who blocked it were, as it happens, Barack Obama, Hillary Clinton and Chris Dodd. This unholy trio took more than a quarter of a million dollars in campaign contributions from executives and employees of Fannie and Freddie. Just a coincidence, of course.

The men and women who blew up Wall Street, counting on the rest of us to clean up the debris, will now move on to other places where life will continue to be rich. For example, the average annual salary at Goldman Sachs, which has yet to go bust, is $521,000, including secretaries. The chairman took away $38 million last year, and bonuses of $2 million, $5 million and $10 million are the norm.

The New York employees of bankrupt Lehman Brothers will share a bonus pool of $2.5 billion - the "b" is correct - for their good work in assisting in the destruction of the company. Barclays Bank PLC of London, which is buying the rubble, says the New York staff will nevertheless get their bonuses. Barclays is even negotiating with 30 top Lehman executives to hire them for jobs at Barclays paying millions of dollars a year.

Bonnie and Clyde

Executive salaries in a private business are the legitimate concern only of the stockholders; if stockholders want to pay ridiculous salaries and bonuses instead of taking the profits as return on their investment, they're entitled. (Bonnie and Clyde would have been ashamed of such greed.) When taxpayers are abused by having to pay for a bailout, we're entitled to take charge, through our elected officials. So congratulations to all. We're all Wall Street bankers now.

Wesley Pruden is editor emeritus of The Washington Times.

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Comments 1 - 10 of 10

  • By: MickeyC

    Who has been in charge of the regulatory agencies for the last eight years?

    Who claimed the economy was sound until the bottom fell out?

    Whose administration was left to improvise over a weekend and come up with a plan to turn $700 billion over to the Secretary of the Treasury with no strings attached? Is this "the free market"?

    We had warnings before 9/11 as well, and the Bush administration did the same thing. They ignored the warnings, did nothing, and then when the catastrophy struck, they paniced, ran off in all directions, and in the end made matters worse.

    This is a disgarceful mess.

    September 25, 2008 at 10:26 a.m.  | Mark as Offensive

  • By: yellowfin

    The Titanic was also fundamentaly sound. Was any body on the bridge STEERING THE SHIP. Any contingency plan = Bail out. To be lazy is not saying give me the money or else. It's saying put the money in my pocket. The definition of Managements is " to create a surplus" if you know anything about Management by objects. Aim high and land on target. Paulson is the new Powel. It's true Bush uses the Integrity of good peoples reputations to wag the dog. decoy, preemtive strike . bait and switch. 24 hours dead or alive, shock and ough. The alternative is supposed to be through competition the consumer ends up with a fair price balance supply and demand. With the banks and the oil FLUCTUATIONS we dont know anymore if production creates demand or if supply or demand creates price. God bless the free enterprise and our consumer. We dont know what the paper is worth so just give us a billion to start. This is a violation of all trust and fiduciary laws. No bail out and put them all in jail. $50,000 for 5 million forclosed homes is 250.bill. why are these guys asking for a Trillion if they dont even know the value of the paper. The Iraq war was a trillion six years at 10 billion per month. Printing funny money and guaranteening loans does not bail out anyone. Anybody who got a no doc loan knows its 25% up front and usually an ARM baloon in 2 years to refinance. When the bank takes they take all equity also Then they turn and sell the property. They already sold your repackaged mortgage. Now they want ro get paid again for the paper in a bail out. This is a dogs vomit. All these second mortages were designed to fail in the first place. All these loans were front loaded to fall off the tractor trailer as soon as the door opened. These loans were made to help us pay off our maxed out credit cards and aquire a new credit line second mortgage refinancing our jobs downsized and now we sleep in the car.. Did I say we now have to bail them out. This is the first time I ever saw Mr Pruden take a shot at Bush. I already voted for Barack Obama. GOD BLESS THE USA.

    September 24, 2008 at 1:24 p.m.  | Mark as Offensive

  • By: Gene44

    Harvard graduates ruining the banking system. Have you not heard that unless one is a graduate of the Harvard Business School of Economics you cannot get a job as a Banker? Leds one to wonder just what they teach? We also have a Harvard graduate who is a lawyer that they trained in Constitution Law, who became a Social Worker in Chicago, then a State Senator and now a U.S. Senator - does this not make one stop and think if they destroyed the banking system could type of teaching not also help destroy the Constitution?

    September 24, 2008 at 4:26 a.m.  | Mark as Offensive

  • By: Buzzog

    Good only as far as it goes........ The real plan will soon be exposed..... In order to protect the little guy(s), who got suckered into paying for the ultimate greed trip of The Wall Street Buckeroos, this nation will become a combination of the best parts of Cuba and North Korea, and will initiate a one party system unrivaled throughout the formerly free world. Political Correctness will replace the Constitution, and a new kind of re-education system awaits those who refuse to recognize the NEW WAY.

    Obama will become the FIRST MOMMA, and everyone will live in peace and prosperity. If that doesn't work out, not to worry, we'll just print more money, in ever bigger denominations.

    OK Folks. Let's hear it for Obama, our FIRST MOMMA!!!!!!!

    September 23, 2008 at 5:03 p.m.  | Mark as Offensive

  • By: RDH

    The lesson we should get out of this is that government sponsored entities whose mission became social instead of economic should not be allowed to exist.

    Years ago Alan Greenspan warned that Fannie and Freddie were distorting the market and "putting our entire financial system at peril". You can look it up.

    McCain and Republicans tried to head this off in 2005. As soxconn indicated the Democrats killed the bill that would have saved the finanical system.

    This was not a problem of deregulation, it was a problem of lax regulation and near-sighted oversight of Fannie and Freddie by Democrats who were more concerned with socializing the housing market than with the effects on the finanical system.

    Democrats and/or Liberals who want to claim that Fannie and Freddie don't originate loans and hence cannot be blamed as usual simply don't understand free-market economics.

    Banks had absolutely no risk by giving out sub-prime or Alt-A loans because Fannie and Freddie were buying up all the loans from the banks with the blessing of the Democrats who helped make that Fannie and Freddie's mission.

    Fannie and Freddie bundled the loans they bought and sold them to investment firms with the implicit backing of the Federal Government (they were after all "government sponsored entities").

    Now thanks to Fannie and Freddie and their Democratic creators and enablers, we the taxpayers are having to make good as that implicit backing has in reality become explicit.

    And how did Barney Frank respond to Greenspan's warning and McCain and the Republican's bill?

    He claimed that nothing was wrong at Fannie and Freddie and the taxpayers had nothing to worry about. He continued making this claim right up to the point that Fannie and Freddie failed.

    This gives a good account of how we got here: http://online.wsj.com/article/SB12221294...

    September 23, 2008 at 10:33 a.m.  | Mark as Offensive

  • By: soxconn

    Reaganonomics? Keynesian economics is the culprit, huh. The are two parts to the equation, the system and the oversight. As I recall, the Congress in charge of the oversight, the regulations. Therefore, Pruden is correct because Reagan may have initiated the system, but he didn't control the oversight. When we globalized our economy (I Bill Clinton takes credit for that) we pursued what is called positive feedback decisions. When we stabilized the growth, the economy went into an equilibrium, still pursuing those positive feedback parameters but using old out dated negative feedback parameters to control the system. The system was using a linear set of parameters when a nonlinear set of parameters was required because the impact would become exponential. You cannot accurately predict risk on a loan, you can only validate current assumptions because you cannot predict the economy one year from now much less 10 years. Compound that with investment housing loans, high risk subprimes, a globally integrated economy and a lack of energy independence and you have the makings for a 700 billion dollar economic brown out. Every time the loan was passed, a new set of assumptions should have been validated right down to the borrower. Fannie Mae and Freddie Mac were simply the point where the risk management (or lack) was the weakest and failed and the rest became overloaded network nodes. The fact that McCain recognized the issue in 2005 should be noted and the fact that he tried to do something about it with bill S-190 and was overriden by the likes of Obama, Clinton and Dodd should be significant enough to indicate he understands complexity and does something about it while they only understand campaign contributions and pursuit of power.

    September 23, 2008 at 4:32 a.m.  | Mark as Offensive





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