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It's Wall Street's Turn to Bolster Confidence

By Steven Pearlstein
Tuesday, October 14, 2008

Now, what was that about Hank Paulson having blown it?

How he foolishly let Lehman Brothers go under and started a chain reaction that quickly turned into a financial meltdown?

How he was so focused on his cockamamie plan to buy up distressed mortgages and mortgage-backed securities, instead of injecting capital into banks in exchange for shares?

How he and the other finance ministers were so way behind the curve this past weekend in failing to come up with a detailed and coordinated plan to restore confidence in financial markets?

The truth is we were going to have a serious financial crisis no matter what Paulson did or didn't do, thanks to the incredible ineptitude of Wall Street and the nation's financial regulators over the past few years, whether an insolvent and mismanaged investment bank was rescued or not. Lehman was the veritable straw that finally broke the back of the financial camel overloaded with debt. If it hadn't been Lehman, it would have been something else.

Since Lehman's failure, Paulson has moved faster, more aggressively and more deftly than any of his international counterparts in doing whatever was necessary to stabilize the financial system. Yesterday, he and his collaborators at the Fed and FDIC threw everything they had at it -- flooding the banking system with an unlimited supply of dollars, expanding deposit insurance, putting a guarantee on new bank debt, injecting capital into healthy banks, giving the Japanese the assurances they needed to rescue Morgan Stanley, and doing nothing to discourage free-spending Democrats from their plans to offer another big economic stimulus plan.

The result: the biggest one-day rally on stock markets in 70 years.

I hope you won't think it petty to point out that some of the people who this past weekend were complaining that the Treasury secretary was being too timid in his response to the financial crisis were some of the same people who, three weeks ago, were complaining about his audacity in demanding a "$700 billion blank check." I know I speak for Gov. Sarah Palin and Joe Six-Packs everywhere in pleading that, for Pete's sake, let's cut the guy a little slack.

In putting several trillion dollars in government funds on the line, the country has now done just about everything that Wall Street could have asked to address the financial crisis. The question now, as John Kennedy might have put it, is what Wall Street is ready to do for its country. So far, the answer is not much.

After getting their closed-door briefing yesterday from Paulson on the government's latest initiatives, Wall Street's finest literally ran from the Treasury to their waiting limousines, bypassing a media scrum eager to convey any scrap of wisdom or insight.

Court reporters will tell you they can always tell the innocent from the guilty on these kinds of perp walks, and the Wall Street crowd yesterday looked particularly guilty, unable even to conjure up a soothing word to a nation fretting over its shrunken 401(k)s, or a simple thank you to taxpayers for having saved their bacon. Their silence and invisibility throughout this crisis attests to the moral and political bankruptcy of a financial elite that is the perfect match for the financial bankruptcy they have now visited upon their investors, their creditors and their customers.

After yesterday's "historic" meeting, we are told by industry apologists that we are supposed to be grateful to nine leading banks for having "volunteered" to accept additional capital from the Treasury, along with a government guarantee for newly issued bank debt, even if it means having to accept a dilution of existing shares and a few harmless restrictions on their operations.

Pardon me if I'm less than blown over by this munificent offer, but it hardly seems commensurate either with the severity of the current crisis or the depth of the banks' culpability in fomenting it.

If Wall Street were truly serious about convincing Main Street that we're all in this together, its top executives would have stepped before the cameras yesterday and promised not to cut lines of credits to long-standing business customers who have never missed a payment.

They would have committed themselves not to foreclose on any homeowner who is willing and able to refinance into a new, government-guaranteed, fixed-rate mortgage set at 85 percent of the current value of the property.

They would have offered to suspend dividend payments until capital levels had been restored to pre-crisis levels.

They would have given us their solemn promise not to advise clients to hold on to their own investments while quietly dumping whatever they can from their own portfolios and shorting every security in sight.

With the Treasury now desperate for help in managing its new rescue efforts, they would have volunteered, at no cost to taxpayers, the services of some of those investment bankers and financial wizards who now don't have much else to do.

And the maharajas of finance could have set a wonderful example if they had all gotten together and agreed to work for a dollar a year until the crisis has passed.

There's a word that captures the instinct to take these kind of bold moves in the midst of a national crisis -- it's called leadership. We've seen quite a bit of it these past few weeks from public officials like Hank Paulson, Ben Bernanke, Tim Geithner, Sheila Bair, Nancy Pelosi, Barney Frank, John Boehner -- even George Bush. Wall Street, by contrast, has served up a nothing sandwich, a lack of leadership that's been stunning.

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