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The Words Left Unspoken in the Bailout Debate

By Steven Pearlstein
Wednesday, September 24, 2008

In all that's been said in recent days about the latest proposals to rescue the financial system, two words have been conspicuously absent.

They are the words that Americans need to hear before they commit $2,300 for every man, woman and child to rescue the financial system.

They are the words we need to hear before taxpayers are put in the position of rescuing arrogant and overpaid financiers from the full consequences of their bad bets and misguided decisions.

Most of all, they are the words that elected senators and representatives need to hear before they entrust the secretary of the Treasury with extraordinary power and discretion to spend public money and actively manage the markets and the economy:

"We're sorry."

As in, "We're sorry that those of us who were supposed to be stewards of the world's deepest and most trusted capital markets have violated that trust by putting our own interests ahead of those of our customers and the country."

We've now entered the political phase of this financial crisis, in which the outcome will be determined not by the fear and greed of investors but by the hopes and anxieties of the voters. Their decision won't be based on some collective assessment of the efficacy of reverse auctions in the price discovery process, or whether it is better to prop up the market for mortgage-backed securities or inject fresh capital into the banks that are holding them.

Their decision -- our decision -- will come down to a much simpler question: We've got one last chance to fix this thing. Are we willing to put our fate once again in the hands of financiers who have already abused our trust?

And that's where the two magic words come in. In Japan, great ritual accompanies such apologies, which are viewed as the first step in fixing a problem and restoring frayed relations. Here, by contrast, corporate apologies are viewed as unnecessary concessions to business and political adversaries and dangerous ammunition in the hands of prosecutors and plaintiffs lawyers.

You'll have to take it from me that it's probably not a good idea to put in legislation a requirement that any financial institution that wants to participate in the rescue program has to cap executive compensation at $400,000 a year -- the same as the president -- and eliminate all severance pay from executive contracts.

On the other hand, it would certainly capture people's attention if the heads of Citigroup, Goldman Sachs, Bank of America and Morgan Stanley were to stand before the cameras in the Capitol rotunda, apologize for letting down their investors and their employees and voluntarily offer to suspend their extravagant compensation schemes until the crisis has passed and new regulations are in place.

Because all financial institutions will benefit from a federal program to jump-start the markets in asset-backed securities, whether they participate in the program or not, it is hard to figure out which companies should be required to give taxpayers some of the "up side" if and when the markets recover.

But it would surely make it easier for members of Congress to defend this program to their angry constituents if the industry could express its appreciation for the government's extraordinary effort by voluntarily offering the Treasury an option to buy 5 percent of each company's stock at today's depressed prices at some time in the future.

Some Democrats are demanding that the bailout plan have a provision allowing any homeowner facing foreclosure to file for bankruptcy and get a bankruptcy judge to reduce the mortgage to whatever she can afford. Again, another bad idea. But what's to prevent the industry from agreeing to engage in a mediated workout process with any borrower facing foreclosure?

These are the kinds of things that responsible, honorable people do when they screw up and are forced to ask their neighbors for help. They don't point the finger at greedy short-sellers and misguided regulators for the disaster that occurred on their watch. They don't hire lobbyists to see how they can tweak the bailout to be even sweeter for them than it already is. And they certainly don't threaten to bring on financial Armageddon if people refuse to help them out.

What responsible, honorable people do is apologize for their mistakes, promise that it won't happen again and vow that they'll make it up to us once the crisis has passed. But in the past year, we've not heard any of that from the titans of Wall Street.

Political systems, communities, markets all share one common characteristic -- at their core, they all require a level of trust among the participants if they are going to work. In recent years, we have allowed that trust to erode to the point that our political system is paralyzed by partisan bickering and communities are fractured into enclaves of race and class. Now markets are collapsing because investors realize they have been misled by corporate executives, investment banks, ratings agencies and regulators.

As a country, there is an urgent need to rebuild that trust. In different ways, that is what both the McCain and Obama campaigns are all about. And it is the same challenge that now faces us in this financial crisis. At some level, we all know that we've driven the economy and the financial system into a ditch and that we're going to have to spend some money to get out of it. But until Wall Street can muster the decency, the humility and the good sense to acknowledge its colossal screw-up, it shouldn't be surprising that Americans are balking at writing the check.

Steven Pearlstein will host a Web discussion at 11 a.m. today at washingtonpost.com. He can be reached atpearlsteins@washpost.com.

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