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Global Credit Crisis

Five lessons from Paulson, Bernanke hearings

By / September 23, 2008



Here are some of the things we learned at the Senate Banking Committee’s big hearing Tuesday on the Bush administration’s proposed bailout of the US finance system:

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1. Treasury Secretary Henry Paulson is fine with oversight after all. The three-page outline of proposed actions the White House sent Congress last weekend contained nothing of the sort. But that does not mean he wants to act as the unfettered bailout czar of America, Secretary Paulson hastened to tell senators. He had just thought it would be “presumptuous” to tell Congress how to do its oversight job.

“We need oversight . . . we need transparency. I want it, we all want it,” said Paulson.

2. Congress wants to ding some Wall Street executives, as an inspiration to the others. Paulson and Federal Reserve Chairman Ben Bernanke said they shared lawmakers’ outrage, but that punitive actions against Masters of the Universe might discourage them from joining the rescue program. Committee chairman Sen. Christopher Dodd (D) of Connecticut responded that that was just tough.

“Almost any plan we talk about is going to deal with executive compensation,” he said. “Count on it.”

3. The administration wants all its bailout money up front. At one point, Sen. Charles Schumer (D) of New York suggested that maybe it would be prudent for Congress to approve authority for bailout money in batches. Would Paulson be OK with just, say, $150 billion to start?

No, he would not. That would be a “grave mistake,” said the Treasury secretary. The markets might interpret a constrained bailout as no bailout at all.

4. Taxpayers may get a return of some sort on their $700 billion. The bailout fund will be used to buy distressed assets that are now trading at fire sale prices, said Bernanke and Paulson. In the end, the plan is to hold them and, once prices stabilize, sell them back into the private market.

“There’s going to be a substantial amount of recovery. Whether it’s the full amount is hard to know,” said Bernanke.

5. Nobody appears to know exactly how this is going to work. In particular, there’s as yet no specific plan about how to find the price the government should pay for assets that at the current moment no one else will touch.

If the US pays too little, the selling institution won’t get the support it needs, pointed out Sen. Robert Bennett (R) of Utah at one point. If it pays too much, there will not be any upside for taxpayers when the government itself finally sells them off.

“You have defined the problem,” said Paulson. “We believe we are going to get the right group of experts and come up with a solution.”

Any experts out there got their own solution?

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