Banking on Their Confidence
The confidence men were 15 minutes late to the Treasury's Cash Room yesterday, but this in no way diminished their self-assurance.
"We are a confident and optimistic people," Treasury Secretary Hank Paulson began. "Our confidence is born out of our long history of meeting every challenge we face."
"Americans can be confident that every resource is being brought to bear," added Fed Chairman Ben Bernanke, very much agreeing with his supremely confident president, who announced half an hour earlier in the Rose Garden that "the American people can have confidence about our long-term economic future."
The confidence men were joined in the Cash Room by confidence woman Sheila Bair of the FDIC, who contributed the sentiment that "the extraordinary steps we're taking today are intended to bolster public confidence."
This confidence-building exercise did not come cheap. The free marketeers of the Bush administration had just announced that they will use a quarter-trillion dollars to nationalize a good chunk of the banking system. It means the largest investor in the private sector is now the public sector.
For such a momentous parting with taxpayer cash, the event's organizers fittingly chose the Cash Room, once the Treasury's in-house bank. Built 140 years ago to look like an enclosed Italian palazzo, it was also the place where Ulysses Grant held his inaugural reception. A history of the room provided by the Treasury curator said that after the Grant reception, "there was a wild hunt for overcoats, as hats and overcoats had been jumbled together in the fourth-floor cloakroom without regard for a numbering system. Gentlemen had to wait in the corridors for hours to retrieve their garments. Others were forced to leave without wraps, only to return the next day to try again."
Treasury officials had things a bit more in hand yesterday morning. Aides put pieces of duct tape on the carpet showing where each of the eight participants should stand. Behind them, next to the American flag, were the official flags of the Treasury, the Federal Reserve and the FDIC, an agency not widely known to have a flag of its own. The officials entered silently in the assigned order, stood at attention while Paulson, Bernanke and Bair spoke, then filed out just as silently.
Still, all the choreography could not disguise the fact that this huge new investor still looks a lot like the old federal government. The Treasury didn't recognize the badges of the Fed and FDIC officials coming for the event, so these officials had to wait in a long line full of reporters and visitors that snaked through the Treasury lobby. At the end, a single Treasury official handed out visitor passes at a deliberate pace, which ensured that participants were still filing into the Cash Room well after the scheduled start time.
"We regret having to take these actions," announced a somber Paulson, his blue suit jacket covering a blue shirt and a bluer tie. "Today's actions are not what we ever wanted to do."
That's for sure. Last month, Paulson adamantly rejected the idea of taking equity stakes in banks. "I've also heard conversations about taking equity stakes, various other things, and I just believe very strongly if you impose these kinds of conditions . . . this program won't work and we'll all lose," he told the Senate banking committee. "If we have to have companies grant equity stakes, grant options, that would render this ineffective." Further, he informed the senators, "putting capital in institutions is about failure."
But Paulson's equity-free plan received a vote of no confidence in the markets. Banks continued to lose confidence in one another. Investors lost confidence in the banks. Traders lost confidence in the markets. People lost confidence in the government. And Paulson lost confidence in his resistance to government ownership of the banks.
And so Paulson, a former Goldman Sachs chairman, found himself in the Cash Room yesterday, trying to buy the previously intangible notion of confidence for $250 billion.
"Today, there is a lack of confidence in our financial system, a lack of confidence that must be conquered," he said. "Without confidence that their most basic financial needs will be met, Americans lose confidence in our economy, and this is unacceptable." Therefore, he went on, "President Bush has directed me to consider all necessary steps to restore confidence," and "today's actions are what we must do to restore confidence."
Luckily for Paulson, Bernanke and Bair "have also taken extraordinary actions to support investor confidence," the secretary said, which means "market participants here and around the world can take great confidence from the powerful action taken today." This, he repeated yet again, will "secure the confidence of the future of our markets."
There was nothing confidential about this talking point; it was repeated 23 times during the 16-minute announcement. But would the markets accept the Cash Room's cash-for-confidence offer? The stock market mulled the confidence men's proposal and, after a brief rally, closed slightly lower for the day. Full confidence, it seems, carries a higher price tag.