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Crisis Managers vs. Naysayers

Treasury Secretary Timothy Geithner and other government officials deserve plaudits for their deft handling of the financial crisis.
Treasury Secretary Timothy Geithner and other government officials deserve plaudits for their deft handling of the financial crisis. (By Jay Mallin -- Bloomberg News)

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By Steven Pearlstein
Friday, June 12, 2009

Last fall, during the darkest days of the financial crisis, if you'd predicted that by the middle of this year, 10 of the biggest banks would have paid back all $68 billion of their bailout money and begun to raise private capital again, that General Motors and Chrysler would have been run through a dramatic bankruptcy restructuring and that the stock market would be up 35 percent from its lows, I probably would have given you 10-to-1 odds that you were wrong.

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Now that it's all come to pass, you might think we'd take a moment and offer a pat on the back to the people who helped to engineer this little miracle -- folks like Hank Paulson, Ben Bernanke, Tim Geithner, Neel Kashkari, Sheila Bair, Barney Frank and so forth. There was nothing preordained about this fortuitous outcome. Nor, given the extraordinary amount of government intervention, can most of the credit go to the free market's natural self-correcting process.

Instead of celebrating this feat of economic policy, however, there are those who seem more in the mood for second-guessing and recrimination.

A House subcommittee yesterday worked itself into a self-righteous lather over the strong-arm tactics used by then-Treasury secretary Paulson and Bernanke to persuade Bank of America to go through with its purchase of Merrill Lynch after the bank discovered, long after it should have, that the firm known for being bullish on America had a balance sheet full of manure.

Committee members were shocked that regulators would threaten to use their supervisory powers to remove Bank of America's directors and chief executive if they backed out of the transaction at the last minute.

Never mind that if the deal had collapsed, the federal government would have had to step in with tens of billions of additional taxpayer dollars to prevent Merrill from collapsing and taking the already wounded financial system down with it.

And never mind that confidential Federal Reserve documents obtained by the committee showed that Bank of America itself -- with its own mounting losses and thinly capitalized balance sheet -- would have been the first and biggest casualty in such a meltdown.

Now that the deal has gone through and crisis has been averted, committee members were only too willing to summon a full measure of self-righteousness to denounce what they saw as a market-distorting abuse of governmental authority.

You could see echoes of the same indignation after word leaked this weak that Bair, chairman of the government's bank insurance fund, was demanding that Citigroup shake up its top executive team. In recent years, the geniuses running Citi have come from its investment bank, its trading desk and the "structured finance" department that churned out all of those collateralized debt obligations and credit-default swaps that, until they drove the company to the brink of insolvency, generated a disproportionate share of its profits. Bair is now demanding that if her agency is to continue guaranteeing Citi's debt, deposits and a good chunk of its trading portfolio, there ought to be at least a few old-fashioned bankers in the mix who can actually tell a good risk from a bad one. Wall Street is up in arms at this radical notion and this latest government intrusion into its affairs.

For sheer hypocrisy, however, you can't beat Republican Sen. Bob Corker of Tennessee. Last November, Corker took to the Senate floor to denounce the Bush administration's proposal for bailing out domestic auto manufacturers, saying it didn't force the companies to do enough to restructure their costs and their operations. Among his big concerns: oversize dealer networks that prevented even the strongest dealerships from making a decent profit.

Fast forward to today, as Chrysler and GM are finally undergoing the radical downsizing and restructuring that Corker had long demanded. And what does Corker have to say about that? He's outraged at the way the discontinued dealers have been treated and is pushing legislation to ensure that they get at least six months to wind down their operations and receive full refunds from the automakers for any unsold cars or parts.

And let's not forget Richard Mourdock, the crusading Indiana state treasurer, who took his challenge of the Chrysler bankruptcy deal all the way to the U.S. Supreme Court.

Several years ago a number of Indiana's state pension funds decided to invest $17 million in Chrysler debt at what looked to be the bargain price of 43 cents on the dollar. Unfortunately, things didn't work out and Chrysler slipped into bankruptcy court, where Indiana was offered $12.2 million as part of a final settlement of its claim. That was only $1.5 million less than Mourdock had previously said he was willing to accept, but for reasons that are still unexplained, he was suddenly seized with an overwhelming sense of fiduciary duty and constitutional responsibility -- so much so that he was willing to spend another $2 million of his pensioners' money to hire a fancy Wall Street law firm and pursue his quixotic legal challenge. If he had succeeded and forced Chrysler into liquidation, it would have almost surely cost many hundreds of lost jobs at Indiana factories and dealerships and millions of dollars of lost revenues for the Hoosier state.

Every crisis generates its own set of leaders willing to take risks, twist arms and even bend a few rules to get us through it. Every crisis also generates its own set of political ankle-biters. It's not hard to tell the two apart.

Steven Pearlstein can be reached at pearlsteins@washpost.com.


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