Wall Street's Man in Washington
This past winter, when American banks were already scrambling for capital, foreign investors came to their rescue. Last November, the Abu Dhabi Investment Authority put $7.5 billion into Citigroup. One month later, Merrill Lynch sold $4.4 billion worth of new stock to Temasek Holdings of Singapore, and Morgan Stanley sold a $5 billion stake to China Investment Corp. In January, Merrill Lynch issued $6.6 billion of preferred stock to Korea Investment Corp. and the Kuwait Investment Authority, among others.
These far-flung buyers had one thing in common: They aren't private concerns. Each is a sovereign wealth fund, investing its national treasury's money -- its citizens' money -- in an effort to help out the hemorrhaging banks of Wall Street.
But these were not charitable outlays. The citizens of Abu Dhabi, Singapore, China, Korea and Kuwait got something in return for their treasuries' aid packages to American finance. They got stock. They got an equity interest in those banks.
These may not, just now, seem like the shrewdest investments ever made. Still, all those East Asian and petro-state citizens will probably reap some long-term profits if their treasuries hang on to those shares in Bank of America-Merrill, or Citigroup, or Morgan Stanley and Whomever It Merges With.
Which, sadly, is more than can be said for American citizens in the deal that Treasury Secretary Hank Paulson brought down from his Mount Sinai penthouse over the weekend. In Paulson's plan, the American public pours at least $700 billion of its money into purchasing the bad loans on Wall Street's books and gets -- well, it gets the thanks of a grateful Wall Street. It does not get any equity in return. To receive a return for their investment, Americans would have to become Chinese or Kuwaiti or Abu Dhabian; they would have to move to some country that accords a little more respect to the public's claim over its money.
During past financial crises, Americans did get something in return for the assistance their government proffered to Wall Street. As my American Prospect colleague Robert Kuttner has noted, when the Depression-era Reconstruction Finance Corp. (a bipartisan creation -- Herbert Hoover started it and Franklin Roosevelt continued it) poured $35 billion into American banks and corporations, it often became a preferred shareholder in those concerns and appointed members to those companies' boards to oversee their operations. Other quids offset the quos of the Resolution Trust Corp., which handled the savings and loan meltdown in the 1980s.
In Paulson's original proposal, by contrast, the Treasury secretary would write plenty of checks, unconstrained by any balances. Not surprisingly, Democrats in Congress have countered with a set of proposals to subject Treasury to stricter oversight and congressional accountability, to provide more direct relief to beleaguered homeowners, to restrict the pay of executives at companies that dump their bad deals on the Treasury, and to provide the public with an equity interest in the companies that taxpayers bail out. Paulson has reportedly acceded to more oversight and some more help for homeowners but is still defending the rights of CEOs to pay themselves astronomical sums and opposing efforts to give Americans a share of the companies whose bad loans they are assuming.
On one Sunday talk show, Paulson dismissed the idea of reining in top executives' pay. "If we design [the bailout] so it's punitive and so institutions aren't going to participate," he said, "this won't work the way we need it to work."
That depends on your definition of "we," does it not? In recent years, Wall Street salaries and bonuses have soared as investment banks peddled ever more profitable schemes that enabled Americans to take on debt -- an activity of no discernable social utility and, in fact, of some peril, but one that attracted a disproportionate share of our smartest college graduates, who clearly understood where the big money was. Reducing Wall Street's outsized incomes is not only a moral necessity, now that it's the public that will be putting up the funds but a national opportunity to redirect our best and brightest into actual productive enterprise.
There's no indication that Hank Paulson understands that. He is less Washington's man on Wall Street than he is Wall Street's man in Washington. And having endorsed the Street's version of socialism -- the American public picks up the tab for the financial sector's mistakes, no questions asked -- Paulson and the administration and the Republicans remain opposed to the more democratically socialist, or democratically capitalist, proposition that the public should get something for its investment. China, Singapore and the oil emirates cut a deal for their people. Why won't Hank Paulson cut one for his?