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Trillion Dollar Baby

A Commentary By Debra J. Saunders

Tuesday, September 23, 2008

I understood the Bush administration's decision to promise up to $30 billion to facilitate the fire sale of Bear Stearns. I got the administration's decision to spend as much as $200 billion to stabilize mortgage giants Fannie Mae and Freddie Mac, which are worth about $5 trillion. Ditto the $85 billion federal bailout of AIG.

As for this Bush administration "troubled asset relief plan" to authorize Treasury Secretary Hank Paulson to spend another $700 billion bailing out investment firms, I am not sold.

Yes, I've talked to experts who believe the package is necessary to thaw an international credit freeze and the run on money markets. But it is difficult to assume that they really understand how to fix the credit mess when most experts didn't see this coming.

As it is, it also doesn't make much sense for the federal government to spend (which means borrow) as much as $700 billion -- or a total of $1 trillion, when you add in the other bailouts -- in order to stave off a credit crunch.

Alas, I do not see President Bush pushing a fiscally conservative bailout plan. At the very least, Bush should have opened with a smaller price tag, say, $100 billion.

Exhibit A: According to the Washington Post, Paulson has opposed House Democrats' proposal to force companies that sell their flailing assets to the government to "meet appropriate standards for executive compensation." Why? Also, Paulson fears that financial institutions won't participate if there is a compensation cap. As if that's a bad thing. Economist Chad Stone, of the nonpartisan but left-leaning Center on Budget and Policy Priorities, said the big question on the plan is price. If Paulson thinks that the underlying value of bad mortgages is 30 cents to the dollar, and the federal government has the spine to pay 30 cents on the dollar rather than 70 cents in order to close the deal, then "it's a viable solution."

But if Paulson wants to convince Washington he won't overpay, why has he let it be known that he is concerned about underpaying the feckless managers of failing funds? The Bush plan would give Paulson czar-like powers -- and I can't for the life of me figure out why. (Yeah, I know, it's because Paulson has to act quickly -- but quickly and dumbly? No.)

Former Comptroller-General David Walker, now president of the Peter G. Peterson Foundation, told me that the Bush package must come with "oversight, transparency and accountability."

Oversight, transparency and accountability -- these three words likely will replace the old trifecta of "waste, fraud and abuse." Of course, Washington should regulate Wall Street, but the fact is that Group Think will not go away, and whatever tight regulations might percolate in the next year will become watered down over time -- because they always have a persuasive argument to do so. That's what Washington does, and both parties have participated.

For his part, GOP nominee John McCain has stood against that tide of facilitating corporate misbehavior. The Washington Post editorialized last week against Barack Obama's campaign's charge that McCain is anti-regulation. Au contraire, if found on reviewing McCain' record, the Arizona senator was "a leader" in cleaning up shoddy accounting practices after the Enron scandal.

"In 2006," the Post editorialized, McCain "pushed for stronger regulation of Fannie Mae and Freddie Mac -- while Mr. Obama was notably silent. 'If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole,' McCain warned at the time."

At a Chronicle editorial board meeting Jan. 21, Obama had the foresight to call for an investigation of rating agencies (that overrated murky investment deals) and tougher conflict-of-interest regulation. Investors, he said, "think that they're investing in stuff that doesn't have a lot of risk, and they're wrong."

This Bush package could cost more than $2,000 per American. Bush should do what fiscally responsible American families do every day -- they find the cheapest, smartest way to fix the roof. They patch the hole. They don't construct a super-deluxe roof with borrowed funds.

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