washingtonpost.com
Pearlstein: Bailout Legislation

Steven Pearlstein
Washington Post Columnist
Wednesday, September 24, 2008 11:00 AM

Washington Post columnist Steven Pearlstein was online Wednesday, Sept. 24 at 11 a.m. ET to discuss the Wall Street bailout legislation.

Read today's column: The Words Left Unspoken in the Bailout Debate.

A transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

Pearlstein was honored with the Pulitzer Prize for commentary for his columns about mounting problems in the financial markets. His award was one of six Pulitzer Prizes won by The Washington Post this year.

Read Pearlstein's latest columns.

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Weaverville, Calif.: I respect your unique big view perspective, therefore I would appreciate your reaction to the following idea. Perhaps the core problem facing the US is one of integrity. Capitalism with integrity is a win/win for everyone involved and leads to stability. Capitalism without integrity is a win lose affair and of course there is no stability (the loser wants out, maybe even payback, the first chance they get). People cashing in on real estate appreciation ; borrowers, builders, retail stores, mortgage brokers, banks and portfolio investors etc etc etc (almost everyone got something). No one really created anything in this scenario except a free lunch that would need to be paid for eventually. Is this capitalism with integrity? Is it in anyone's interest, long view? What would the landscape look like if we all worked with integrity. From the factory worker to the CEO to the Government? Sorry to be so long winded but I really do value your opinion. Thanks for your time. Roy

Steven Pearlstein: Long winded, perhaps, but very wise. Creating a slightly different form of capitalism that puts more emphasis on integrity and long-term stability and fairness a bit less, perhaps, in terms of efficiency and gee-whiz creativity and super-growth -- that's what the new model is. How to get there? That's what the debate will be for the next couple of years.

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Washington, D.C.: In the hunt for villains in the current financial crisis, I hear very little in the media about the responsibility of consumers for the problems in the housing market. Isn't the underlying issue the fact that consumers entered into contracts (mortgages) that they are now not honoring? If anything, the financial system was too optimistic about the intelligence and character of the consumers who were taking out these mortgages. They were too bullish on the capabilities (intelligence/character/cash flow) of the American consumer! That's not a populist message, but it seems like blaming all the players in the system - the financial intermediaries and their regulators - without assessing the culpability of consumers as a whole is a total dodge. Aren't there millions of Americans who have made bad decisions as borrowers? Aren't all homeowners participants in the price-setting that's gotten us in trouble? Where does that get factored into our collective assessment of who is at fault for this? It's depressing that the most common storyline makes consumers out to be victims in need of paternalistic care. Thoughts?

Steven Pearlstein: There's been a lot of populist resentment floating about the last few days, and with reason. But you are right: in the search for culprits, we all need to visit the mirror and look into the bathroom mirror. We've lived beyong our means for many years, and this is at the heart of the problem. And we got so caught up in the bubble that we forgot a lot of the basic lessons of household finance, in terms of how much we borrowed and how much we paid for assets. There's plenty of blame to go around.

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Corvallis, Ore.: I imagine that the $700B package will calm the markets and make things better in the short term. It is not the short term that concerns me, but the long term. The US is in this bad spot because of too much attention by most of us - individuals, companies, and the government - to the short term.

Question: Will the $700B package make things better or worse in the long term?

Steven Pearlstein: Better, if you believe, as I do, that it will help avoid a dangerous downward spiral that pulls the economy into a long and deep recession. We need to make some painful adjustments, no question. But we also need to avoid a dynamic that makes the market overshoot on the way down the same way it overshot on the way up.

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Burke, Va.: Do you have the answers to the common sense questions David Cay Johnston says responsible journalists should have before they just repeat Paulson's claims that failure to pass something like his plan quickly will result in an economic catastrophe? The majority of American voters supported Bush going into Iraq because they trusted him not to lie and they trusted the media to ask the right questions. Just because your big corporate employer got you on Hardball to persuade Chris Matthews and agree with Jim Cramer isn't enough for me this time. No proof of truth. No 700 billion dollars. Additionally, Krugman makes a great point about Paulson obviously lying about oversight. Stupid unnecessary lies will only make it that much harder to believe what he says later. At least he'll have his Goldman Sachs millions to go home with when he leaves Treasury. If the Washington Post and NBC forfeit their credibility...

Steven Pearlstein: I'll leave your gratutious insults aside and say that if you think we can do nothing and not have a financial meltdown, then its rational not to sign on to this idea. I'm glad you have better information and insight on that than, say, the secretary of the treasury, the chairman of the federal reserve, the president of the NY Fed, Warren Buffett, Bill Gross, the Wall Street Journal editors, etc.

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Bayside, N.Y.: If government buys at "high end of price" on bailout how much of a factor will inflated property be even if only percentage of total package? Not sure how prices will come down. Property values seem vastly inflated over true value (I'm an attorney and legal writer).

Steven Pearlstein: The fact that property prices continue to drift down is not a disaster for the financial sector -- I disagree with that analysis. If the adjustment is reasonably orderly, and financing continues to flow into the housing market for new purchases and refinancings, and if housing prices get down to levels that are consistent with incomes and rental prices, then that is a good thing. As to the price the government will pay for mortgage backed securities, these are deeply discounted right now because of the dearth of buyers, and one would expect the government would pay more than the current market price but equal to or less than the longterm hold-till-maturity value if a good auction is structured. Smart people will be assigned to this task, and ther is no reason to believe that they will grossly screw it up.

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Cheverly, Md.: I recently read how Japan lends based on cash flow while America lends against assets. Is it time for the US to review its business model? the borrowing in the market to maintain cash flow and payments is startling. How does this US collapse relate to the Japanese collapse in the 90's, if at all?

Steven Pearlstein: Yes, asset based lending went too far, particularly when loan to value ratios went above 90 percent.

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Devon, Pa.: Steve, I heard you this evening on Hardball with Chris Matthews tryng to explain the bailout to Matthews. You did an excellent job of explaining the implications if Congress does not act soon and get this passed. They just don't get it in Washington. It always comes down to politics and looking good in front of the voters. Matthews lack of understanding of the issues and the implications of not getting this bailout accomplished is typical of the political press. This not about bailing out Wall Sreet, it is about preventing a financial disaster. Hopefully some the ignorant members of Congress were watching and will realize this no time for political gamesmanship. Once agian great job and thanks.

Steven Pearlstein: Well, Chris doesn't claim to be any expert on these matters and in his questions he reflected the questions lots of people have about this thing. So don't be too hard on the hardball meister. When he heard the explanation, he was open minded enough to admit he might have been wrong.

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Chicago, Ill.: Congrats on your Chris Mathews appearance.

Your point that Wall Street is the vehicle for us to save ourselves and that the very title of this Qand A in the Post (Wallstreet Bailout) is the worst way to think about this is "spot on."

Would not a better way to think be: "How can we run a car (the real economy) without oil (credit) in the crankcase?

Lowell

Steven Pearlstein: Right. And thanks.

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Potomac, Md.: There is no question. I am a CPA and I think I understand the problems we currently have. THANK YOU!!! I watched you on Chris Matthews and you seem to be the only person who understands what is going on. We are not going to lose $700 Billion. We may even make money.

THANK YOU!!!!

I wish every "talking head" would have the understanding you have. The country is in trouble but it would be certainly better off.

Steven Pearlstein: Thanks.

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Houston, Texas: Steve, I just saw you on Hardball (Tuesday evening) and your comments raised some questions. You stated that the securities to be purchased by the Treasury are not worthless and that taxpayers won't lose all $700B. Fair enough. BUT, you guessed that the net result of this would be +/- $200B. How could there be that much profit? In Tuesday's testimony Bernanke or Paulson talked about purchasing the securities at 'near the hold-to-maturity value'. If we pay that much for them, where is there any possible upside? It looks like there's only downside risk for the Treasury. Will you please explain your thoughts?

Given that the whole idea seems to be that the Treasury pays more than private market will for these securities and removes risk from the banks' balance sheet, we've got to have exposure to the upside through some sort of equity stake.

Steven Pearlstein: Look, nobody knows the hold to maturity value. That's the problem. We don't know how many mortgages in each package will default and, even more importantly, how much of a recovery of principal there will be on those defaulted loans. Right now, the best guess is that the market, such as it exists, is discounting those securities too much. So if we wind up paying a little more than today's prices, we could make a profit on the early sales. Once the prices start to rise, there might be private investors who return to the market, in which case the price will rise even more and then the government won't have to run the auctions and won't have to use the full $700 billion. And if the private money doesn't return, and the auctions continue, then the price paid will be relatively low with upside potential.

Hope that helps.

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Costa Mesa, Calif.: Why should we trust the guys that lied, said we didn't have a problem, that the economy was great etc. etc. etc, to loan them money and actually use it for good, instead of enriching themselves at the expense of everyone else as they have been doing for their entire lives?

I wouldn't trust these guys with money to go to Starbucks, why would anyone trust them with 700 billion dollars? Is this another Bush scam? Why the artifical deadline ala Iraq, the Patriot Act, etc etc.

This thing stinks.

Steven Pearlstein: All I can say is that this isn't a Bush scame. This is a Paulson-Bernanke-Geithner deal, and these are people that I have come to know pretty well and trust. This isn't political, this isn't a game -- and by the way, they didn't lie and say everything was great. They underestimated the damage done when the credit bubble burst, just as they underestimated the size of the bubble (actually, that's not true of Geithner). But people make mistakes and you should be careful not to confuse their mistakes with bad intentions. That's the sort of attitude that helps to poison our political debate. Maybe Bush deserves that treatment, but not these guys. And in this case, Bush is doing what they tell him to do, not the other way around. Trust me on that one.

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Pleasant Plains, Ill.: If the government had taken a more proactive approach to the housing crisis last year, would we be facing all of these bailouts now? Government intervention that forced mortgage holders to restructure mortgages so that the monthly payments stayed the same would have allowed most people to stay in their homes.

Most people would have stayed in their homes and continued to pay their mortgages even if its value had fallen below the amount they owe, because the house will eventually be worth more and they would not want to disrupt their families.

Now the White House wants to again exclude the core of the problem (the people whose mortgages are facing default) and just throw money at Wall Street. Isn't that like bailing the boat without plugging the hole?

Steven Pearlstein: I don't think you have that right, I'm afraid to say.

If the government had acted more aggressively at the end of 2006 and the beginning of 2007 to shut down the subprime mortgage machine, some damage could have been prevented. That pretty much happeened in the summer of 2007. But once the mortgages were written, there was not much that could have been done other than begin the cleanup and bailout efforts. I don't subscribe to the idea that HOPE NOW is a joke. It's not. And the servicing companies could still be doing more to renegotiate principal amounts on some loans. But there are still lots of mortgages that are so bad that there is nothing to do but foreclose, because there is no way the people in them can come anyway close to affording those homes. And that's the reality. The government has offered help, in the $300 billion housing bill, to people who could support a mortgage with a 15 percent reduction in principal. But beyond that, you have to say that the best solution is for homeowners to go back to being renters, and puttin the house back on the market. Nobody benefits from a foreclosure -- not the lenders, not the homeowners, not society. But that's part of the process of getting us back to a sound foundation for a housing market, where things are priced right and people meet their obligations, etc.

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Washington, DC: I just wanted to say that I really enjoy reading your columns. They've helped me make sense of this whole financial crisis. Thank you!

Steven Pearlstein: You're most welcome.

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Peachtree City, Ga.: Why do you think that the proposed bailout plan specifically prohibits congressional oversight and exempts any action taken under the plan from judicial review? That something so flagrantly unconstitutional could be proposed by the administration is shocking. Something does not smell right.

Steven Pearlstein: The no oversight by congress or courts things was out five minutes after arriving on Capitol Hill. Don't worry about that. There will be more oversight on this thing than a birthday party for 3 year olds.

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College Park, Md.: The premise of the bailout seems to be that the financial sector serves some important economic function that the rest of the economy is dependent on and the financial sector can't function because of a crisis of confidence. Now we are in a crisis because some substantial part of what the financial sector was doing was not serving an economic function or worse actively destroying economic value. How do we know that with the bailout they will just do the good part of the economic function and not the other part?

In your column today you say:

"Now markets are collapsing because investors realize they have been misled by corporate executives, investment banks, ratings agencies and regulators."

How does the bailout address the fact that we were misled?

Steven Pearlstein: Look, you know this just from living. When people make a huge mistake and they themselves take a huge hit from that mistake, they usually don't go right back and make the same mistakes. That's just human nature. They are chastened, they are embarrassed to a degree, they want to get back the money and respectability they had. They also know everyone is watching them, including regulators who also know they screwed up and don't want to make the same mistakes again. So this is probably the least risky time to rely on their behaving. Just look at what the rating agencies have been doing lately -- one bit of bad news and BAMM, a downgrade.

We can't recreate a financial system overnight with all new companies and people. We need a financial system to operate. So this is what we have to work with.

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Palo Alto, Calif.: Excuse my ignorance please. You may have written about this but I am only recently interested in matters of Wall Street. My question involves the credit default swap. This seems like an instrument made possible by the issuance of risky loans. Managers of hedge funds had their earnings taxed not as income tax rates but at capital gains rates. Trading in these smells to me like a private legalized gambling club that should be called a swap meet and should be outlawed. Can you justify them or tell me what I fail to understand?

Thanks, MB

Steven Pearlstein: Its not quite that simple, although your basic point that it is pure speculation that doesn't really add capital to capital markets is correct. When people insure a bond, say, that they don't own, that really doesn't contribute much to the liquidity and efficiency of markets. It is bare naked short selling.

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Silver Spring, Md.: In this morning's op-ed, you used a lot of language like, "you'll have to take it from me", and "this is what responsible, honorable people do". The rule of law (remember that quaint old concept?) was meant to ensure that we don't have to cross our fingers and hope that our leaders are responsible and honorable and will do the right thing. The rule of law gives ordinary citizens the means to hold their leaders' feet to the fire when they mess up. "I'm sorry" is a good start, but if you're going to spend my tax money, I'm going to want a say in how you do so. And any business-minded person will tell you that it ain't a real contract until you put it in writing and your lawyer makes sure it will stand up in court.

Steven Pearlstein: Yes, the rule of law and contracts provide an important foundation for society. But they really aren't enough. At the end of the day, a successful system system really requires a level of trust that goes beyond legal recourse, because if we always had to go to court to get our bills paid or get our paychecks or get suppliers to deliver what they are supposed to, then the whole thing would break down. And alot of transactions are done on the basis of a handshake or longterm relationships. Your view is that of the lawyer. Mine is more that of the sociologist.

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Baltimore, Md.: I've been watching you on MSNBC, trying to explain why the bailout is necessary, and what the potential consequences are for the economy if this doesn't work. Good job - you make things understandable.

However, I'm on the other side of the issue. And here's why: I don't use credit. I rent and I'm pretty sure my landlord can handle a recession, especially since I pay high rent. I work for a small nonprofit that has enough funding for the year ahead and some commitments beyond that. During this whole housing and credit bubble, nothing was done for me as a renter. If people bought too much house, too bad. If your property values go down because your neighbors have abandoned their houses, too bad - that's just life. Stay there and hope things improve. For years I've watched people get huge tax breaks because they own their home while I get nothing. Tough if things don't work out like they planned.

Now if the bailout money was used to create jobs and fix our infrastructure (take public transit outside the metro DC and NYC areas, I dare you.) or find new energy sources, that's a different story. I'd go into debt and let my children and grandchildren pay it off because infrastructure and investments in new energy will only help them.

Feel free to edit this in any way - I know it's long and a bit "screechy", but I think I represent the 40% of renters in this country who are always forgotten about.

Steven Pearlstein: Here's the problem. If the financial system crashes and you lose your job, then you won't be very happy. And the chances of that rise substantially if the crash occurs. Moreover, even if you don't lose your job, your neighbors will and that will mean your government up there in Baltimroew won't have the rvenue to deliver the services you depend on. So its not true that this doesn't concern you and you have no skin in the game. You may not feel responsible (although in a democracy you do have some responsibility for the persisitent federal deficits that contributed to the credit bubble). But you are impacted.

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Bethesda, Md.: Steven,

With all of the "solutions" that are being proposed and the band-aids being put forward, is there any impetus to have someone or some group do an honest, objective review of the major decisions and changes that have been made over the past 20-25 years (i.e. deregulating airlines, ending Glass-Steigel, etc.) to try and parse out what effect they have had, long term?

Steven Pearlstein: That's going on all the time, if you'd care to look at stuff being written by academics and think tanks, etc. No dearth of that.

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College Park, Md.: I still don't understand why the bail out is needed and why it has to happen this week as opposed to next week or next month or after the election. I hear Paulson use words like "financial meltdown" and "biggest financial crisis ever" but I don't understand specifically what they think is going to happen. It seems like Paulson has some specifics in mind that he is not telling us.

The closest answer I have heard to this is when you gave an example on Charlie Rose where you said that McDonalds is going to stop lending to it franchisees to upgrade the stores. How does this lead to economic collapse, even if it is repeated on a wide scale? You have said repeatedly that we need to live within our means. Wouldn't eating at crappier McDonalds be part of that living within our means?

Steven Pearlstein: Credit markets are freezing up as we speak. I know it seems technical, but it has real impact. It is getting harder and harder for households, businesses, banks, etc. to access normal sources of capital, even at higher prices. It is the natural consequence of an economy wide deleveraging -- people and institutions reducing their indebtedness. But it has real consequences for the rest of the economy.

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James (Arlington, Va.): I'm glad Congress is stalling on this plan. Writing a blank check for $700 billion or more is ridiculous. I saw many good comments from Congress yesterday that actually made me have faith in them again.

Ron Paul said it best: "I am afraid that policymakers today have not learned the lesson that prices must adjust to economic reality. The bailout of Fannie and Freddie, the purchase of AIG, and the latest multi-hundred billion dollar Treasury scheme all have one thing in common: They seek to prevent the liquidation of bad debt and worthless assets at market prices, and instead try to prop up those markets and keep those assets trading at prices far in excess of what any buyer would be willing to pay. Additionally, the government's actions encourage moral hazard of the worst sort."

Paulson and Bernanke have lost the faith of the people and Congress due to the events of the last few weeks, months, when every time they've thrown money at the problem, they've insisted the worse is over. "As much as I admire Secretary Paulson and Ben Bernanke, this administration has no credibility at all," said veteran liberal Democrat Rep. Jim McGovern of Massachusetts. "I wouldn't trust them to tell me the correct time."

As one senator said, "who's to say they won't be coming back in a week when the next crisis hits and ask for even more money" and another Senator said "I must tell you, there are those in the public debate who have said that we must act now. The last time I heard that, I was on a used-car lot," Another said

"It's time to stop the madness, sit back, figure out a solution that doesn't involve the taxpayers."

By the way, seems like the FBI thinks there is a lot of criminal activity involved. Good for them to go get these guys and hang them.

Steven Pearlstein: Again, if you think you can withstand the storm if the government does nothing, then doing nothing is the right course. But I'm telling you, that's a very big risk. Ben Bernanke has spent his life looking at similar situations -- in the US in the early 1930s, in Japan, in Sweden. And he thinks differently.

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Washington, D.C.: This is all over my head, especially the "golden parachutes" aspect. Could you please explain why the administration insists that firms will only "go along" with their bailout plan if the generous compensation packages remain intact? I honestly don't understand why those firms are in a negotiating position. I thought they'd have to take whatever deal is given them -- compensation package or no -- or die.

Steven Pearlstein: That was a silly argument, to a degree. The big firms that really need these programs will do what they have to do to participate. But there will be lots of smaller banks and insurance companies that might not participate because they don't really have to participate. But if we can get them to participate in the auctions, what it will do is reduce the prices we pay for these assets. And so what you'll accomplish is that you'll feel better because you've gotten some revenge on the high paid plutocrats, and then you'll wind up spending extra billions of dollars to buy assets from participating banks and institutions. For my money, I'd rather the money than the satisfaction of revenge, but I admit some people might make a different choice.

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It's funny, in a way: Hey Steve,

considering all the publishable vitriol coming your way, you ever get the feeling we have a hate/hate relationship with capitalism?

because, you know, it's just not fair. some of us get paid for just breathing, while the rest, not so much?

just sayin'

Steven Pearlstein: Not exactly sure what you mean.

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Washington, D.C.: I second (or third?) the other participants who are grateful for your incisiveness and overview. Re the submitter who was pointing the finger at the consumer: I used to work on the Hill. We had many constituents who were "lower middle" to "lower class." The "system" in general is a great big, scary, largely incomprehensible entity to them. Their financial knowledge/sophistication was virtually nil. There is almost no financial eduction in this country. I am a well-off attorney with advanced degrees who often has a hard time finding time to do the research and analysis managing my financial affairs requires. Much of the media and even many Hill denizens are showing their ignorance right now. For the average Joe who would like a little of the "American Dream" understanding the "system" is beyond daunting.

Steven Pearlstein: Fair point.

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Los Angeles, Calif.: Thank you for taking questions, Steve. I heard a professor of econ from Carnegie Mellon (Meltzer) propose that if anything MUST be done to help Wall St., it should be in the form of govt loans with the provisions that no employee bonuses or shareholder dividends be paid until the loans are fully repaid with interest. Why hasn't there been more discussion of this as a possible solution? This seems fair and reasonable and mitigates taxpayer risk.

Steven Pearlstein: Actually, the bill as now drafted by the House would allow the Secretary to use some of that money to make loans or investments in financial institutions, so that possibility is there. There is a real debate among experts about whether it is better to buy the assets or take them as collateral for loans -- either way provides banks with fresh capital that they can use for new lending. But I think these are matters best left to people who are experts and know the situation with the banks and the markets. They shouldn't be decided by you, me or members of Congress, beyond setting broad parameters. We are on uncharted territory here and we just have to trust the Secretary and his people to make the best of a bad situation. Or else we have to do nothing. At some level, government can't operate in a situation like this if you don't trust the people in charge, just as you can't wage a war if you don't trust your generals. Oversight? Sure. But not micromanagement.

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Gaithersburg, Md.: Thanks Steve for taking this comment. I agree with your columns about 80% of the time, which is a much higher percentage than most financial columnists. In response to today's article, I agree that the American people would be swayed by public apologies by the top executives of these companies. I have a hard time understanding why that is. Can you explain to me how it is that the American people could see any sincerity in such statements?

Steven Pearlstein: The fact that they haven't been seen or heard from these last few months is a pretty good indication that making such an apology would actually be pretty hard for them, and they probably wouldn't be able to fake it. One of them asked me yesterday, when I floated the idea by him, "So you want us to grovel." And I said, Yeah, that's about it. These are rich, proud, arrogant people who are surrounded by people who kiss their butts all day long. For them to apologize and say please and thank you to the public will have an effect on their attitude going forward, which is what we all need in order to write the check.

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Boston, Mass.: What opportunities will the Paulson proposal make available to smaller commerical banks and thrifts (i.e., non-investment banks) who own CDO's and other mortgage backed securities?

Steven Pearlstein: Any regulated financial institution will be able to participate. Period.

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Fairfax, Va.: I am against the bailout unless it also bails out people like me.

I bought my house when it was overpriced with an adjustable loan. Now the house is upside and there is no way any banks would refinance the loan when it adjusts (by the way it's a seven year adjustable loan). I still have 5 more years to go before the adjustment but I am kind of worried right now because I may not be able to refinance the loan and pay a much higher monthly payment. I am currently able to pay the monthly payments so the bank won't even talk to me about helping me out.

The bailout should include a plan to bailout the real people! Make it easier for someone like me to convert the loan to a reasonable fixed-rate loan.

Thank you

Steven Pearlstein: You are being bailed out. That's the point. Not because the government will be paying off your mortgage, but the government could be buying your mortgage and will be more likely to refinance it on generous terms than your current servicer/lender. That's part of the program. Also, the economy might not go in the tank and so you'll have less chance of losing your job. And by keeping the flow of credit going into the housing market, there is a better chance you could refinance the loan even if the government doesn't wind up owning it.

This isn't a bailout for Wall Street, in the sense you think it is. It's a bailout for all of us.

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Cabin John, Md.: I don't care so much if the financial wizards are sorry; I want them to say, "We realize we were really STUPID in our blind greed, and we'll try really hard not to be so stupid with our investors' money again. Here's a quote from yesterday's article about hedge funds:

"As last week's events progressed, Jim Hille, the chief investment officer at Texas Christian University, recalibrated his expectations for returns on the school's hedge-fund investments, which total 22 percent of the university's $1.2 billion endowment. "The ability for hedge funds to maneuver around changing environments is part of the reason we invest in them," Hille said. "Their benchmark is a double-digit rate of return at a low level of risk..."

I'm no wizard, but even I know expecting a high rate of return with little or no risk is stupid. Fools like this need to be taught a lesson! If the only way to do so is no bailout, so that the chips fall where they may, then I say no bailout.

Steven Pearlstein: Thanks.

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Baltimore, Md.: Most accurately, do you see the Wall Street bail-out as being funded by deficit spending, and thus funded primarily by China, oil-rich Middle Eastern countries, and other, or by tax increases on U.S. citizens and businesses? Or is there some third way that I'm missing?

Steven Pearlstein: It is hard to say. So much money is now coming out of other investments it could be that it winds up being funded by American bondholders. But that means other things we do are financed by foreigners, since we still run a large current account deficit. So on a net basis, it is funded by foreigners, if that makes any sense to you.

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NYC: Mr. Pearlstein, I enjoy your columns and your considered thoughts on the box. Thank you.

Last night on PBS Allan Meltzer was rather direct in his opinion that the coming failure without a bailout is bull----. Let the market figure it out. That we should as a government loan these banks the money with interest, force them to not pay dividends, lower CEO bonuses etc. My questions are:

Is this a valid opinion and could it work? Is this 'sky is falling' hue and cry for real? Mr.Meltzer was a bit angry.

Also, could we offer options to the banks? Buy the 'toxic' assets at a deep discount or they can take a loan. Make the bailout an option plan.

Steven Pearlstein: Meltzer is not alone in believing that. But the people closest to the situation, who have credentials certainly equal to Prof. Meltzer, disagree.

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Steven Pearlstein: Once again we're out of time. I'm going to publish a number of other comments with little reply from me other than "thank you." See you all soon, I'm sure.

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Tucson, Ariz.: For years we have heard the cry from the right to get government off the backs of business, is this crisis not the result of government's failure to properly regulate the financial markets in this country? Lastly, why can't we find a way to preserve the financial integrity of institutions without rewarding those who have acted irresponsibly.

Steven Pearlstein: Thanks.

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New York:"... the US in the 1930s..."

OK, great, since you brought it up, let's talk about what really happened there, not the lying Republican revisionism you have bought into.

Pre-crash, the US was every Republican's dream. The Republican model crashed. What got us out of the Depression was -not- giving away our Treasury to the Robber Barons who put us there, but instead investing in our infrastructures.

Steven Pearlstein: Thanks.

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Princeton, N.J.: But in Japan things did not work out so hot and in Sweden they just didn't throw money at the crooks. I would support a Swedish style plan, but not this Hail Mary pass to a receiver with no hands.

Steven Pearlstein: Thanks.

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Falls Church, Va.:... "Ben Bernanke has spent his life looking at similar situations -- in the US in the early 1930s, in Japan, in Sweden. And he thinks differently."

Ok, lets run with that. What (historical) model is he following now, where a state successfully spent a large fraction of GDP buying crap financial instruments that were weighing down balance sheets and got a good result?

Steven Pearlstein: Thanks.

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Orlean, Va.: Steven - Read your column today. Wouldn't it be nice if those Wall Street CEOs voluntarily offered to amend their contracts as to golden parachutes and imposed on them-selves a reasonable salary cap so they could afford groceries and all the other perks of Wall Street-ism and said they were sorry. It might go a long way to taking the monkey off their backs.

Steven Pearlstein: Thanks.

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Falls Church, Va.:"It is the natural consequence of an economy wide deleveraging -- people and institutions reducing their indebtedness. But it has real consequences for the rest of the economy."

So if the deleveraging needs to happen why not let it? If taxpayer debt is substituted for bank debt how is leverage decreased? If we really want to deleverage why not just spin up the printing press to the tune of 50% inflation? Why not just send every taxpayer a check for $100k? I'll bet a lot of debts would get paid off asap.

Steven Pearlstein: Thanks.

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Former Derivative Trader: If I were in charge of the nuts and bolts of managing and unwinding this thing, I would set up a Resolution Trust type company and staff it with a bunch of young whiz kids who are going to lose their jobs or not get hired when they finish business school. I'd structure a long-term bonus program for them that would be generous but not like the CEO bonuses that have everyone so haired up. I'd appoint the finance equivalent of Patrick Fitzgerald to manage it and have a bipartisan oversight board to ensure that assets were being bought according to some rational criteria and not based on cronyism. Would that work?

Steven Pearlstein: Thanks.

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Sec'y Paulson: Steve,

Do you see Paulson as more of an asset or more of a liability?

It seems as though he has a clear handle on the situation, but he's likely to be gone in a few months.

Are the new powers relatively benign, or could they--in the wrong hands--be too much?

Steven Pearlstein: Thanks.

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John, West Des Moines: Look, you know this just from living. When people make a huge mistake and they themselves take a huge hit from that mistake, they usually don't go right back and make the same mistakes. That's just human nature.

This is awful similar to the thought that the Bush Administration "must know" something we don't on Iraq.

Also, I fail to see how "human nature" will work with these folks on so subjective a subject as "shame".

The "markets" are supposed to work because of the collective accumulation of human nature -- but somehow human nature en masse isn't too gosh darn easy to predict is it?

Steven Pearlstein: Thanks.

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Billings Montana: Steven -- Your comment that this "isn't political" is epically naive. This financial mess is a nightmare for Republicans, not only n terms of the presidential race; but in the upcoming governership elections. The Republicans stand to to set back decades if they lose those elections. Not political? EVERYTHING coming out of the White House right now is viewed through a political optic. The "urgency" is to get this story off of the front pages before it utterly sinks the Republican party.

Steven Pearlstein: Thanks.

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The whole "Another Bush Scam" thing: Seems from here that suspicion is so ingrained that we may never be able to go back to capitalism based on trust. Scary, or overwrought?

Steven Pearlstein: Thanks.

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McLean, Va.: One of the talking points circulating on the right is that the Clinton-era expansion of the Community Reinvestment Act is to blame here. The idea is that Clinton administration officials (esp. Secretary Rubin, I think) took an act that legitimately sought to prohibit redlining, and changed it into a virtual mandate to lend to the urban poor.

I don't think this is more than a small contributing factor, but I sense that there is actually something to this. Of all the places for the government to be sticking its nose in, a lender's determination of potential borrowers' creditworthiness is among the worst.

Steven Pearlstein: Thanks.

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Minneapolis, Minn.: Since the U.S. now owns 80% of AIG (insurance company), can we use it to get the millions of Americans health insurance? (I'm serious) Or is it not that kind of insurance company

Steven Pearlstein: Not that kind of insurance co.

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DP: Thanks for not taking the easy route and vilifying this as a $700 billion giveaway like so many are doing.

I think your point about the lack of contrition from the executives in the financial services industry is a good one. It seems to me that unless these guys are completely stupid and tone deaf that they'd huddle together and come forward with a proposal to limit pay, stock options, kick in some of their company's equity to the taxpayers as compensation for this package, etc. Instead, they sit back and wait on Congress to do it. How stupid.

Steven Pearlstein: Thanks.

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Alexandria, Va.: Why not the whole financial system crash and burn?

Regretably, a lot of innocents will suffer but so will the maggots who got us into mess also suffer. I'd be will to endure some pain to see those reaping the benefits of their ill gotten goods (i.e. golden parchutes, bonuses, etc.) also suffer.

For years we've been lectured about the wonders of the "free market" and capitalism. I say live by "free markets" then die by "free market."

Steven Pearlstein: Thanks.

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Houston, Texas: I'll back you up on what you're trying to express about the +/- $200B. I'm a lawyer who does business bankrupty work. We had a smaller scale problem like this after the securitizations ground to a halt in 1998. At that point, a handful of mortgage lenders ended up in the tank. They held several of the securitizations, which consisted of mortgages that would today be labeled subprime ("high loan to value"). We took the companies into bankruptcy with the assumption that the securitizations would be worth very little, but as time went on, the mortgage borrowers kept paying and paying. Ultimately, we managed to pay creditors a much better distribution than we ever expected, based on those payment rates. In my view, it's somewhat likely that the same thing happens here. The Treasury buys the CDOs at a price that is not quite fire sale-leve, but that anticipates a poor rate of payment on the underlying mortgages. That expectation is based on current market conditions, which are awful. The government holds the CDOs to maturity. Time passes, the economy improves, consumers feel more comfortable in their situations and keep paying their mortgages. Suddenly, the CDOs are worth far more than anyone expected.

I wouldn't guarantee it, but it wouldn't shock me at all.

Steven Pearlstein: Thanks.

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Great Falls, Va.: Of all the people in line to make the Pearlstein Apology, I'd most like to see the executives of the credit ratings agencies. How is it that we're still trusting these firms? We had the exact same problem with the implosion of energy firms seven years ago -- it became evident that the ratings agencies weren't doing their job until after it was too late. Same thing with the CDOs one year ago, same thing with all of the failing financial firms now. Lehman Brothers was still rated A-/A3 when it went into bankruptcy! Similar story with AIG, had the government let it go. If I'm a counterparty that relies on the ratings to make my credit decisions, I'm incensed at that failure. Sure, some pre-existing contracts are tied to credit ratings and nothing can be done about that. But why on earth would anyone be signing off on new contracts that rely on these canards?

Steven Pearlstein: hanks.

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Washington, DC: Steven: You indicated in your column today that it would be a bad idea to cap executive pay as part of this bailout. You didn't explain why. Can you explain why now?

I understand your point about not being distracted by a minor point like executive pay when Rome is burning. But I don't buy Paulsen's point that if you cap executive pay for companies that participate in the bailout, companies might not participate. I think that's ridiculous. If a man is drowning and is so stupid that he will throw back the life preserver you just threw to him because you've attached a price to it, oh well, have fun swimming.

Steven Pearlstein: Thanks.

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Leesburg, VA: Hi! I have to say I'm very disappointed in the bailout plan. I don't like the idea of writing a blank check to these financial companies. Although I don't want the financial sector to implode, it's tough for me to swallow that the taxpayer needs to eat all the risk with no consequences to the companies.

A bailout plan should include an equity stake for the government, limits on tying executive compensation to various performance measures that would lead to such risky behavoir and help to the common American who seems to be being left out of the equation at the moment.

Steven Pearlstein: Thanks.

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McLean: You want them to say they're sorry? That's it? If you want to follow the Japanese cultural metaphor to its conclusion, you would have also included the immediate resignation of the perpetrators and their disbarment from any future activities of the sort that brought on the problems.

Asking the Masters of the Universe to say they are sorry is akin to asking a burglar with a 5-page rap sheet to say he's sorry for his past transgressions before you hand him the key to a mansion with no questions asked.

And would you mind explaining to use why limiting executive compensation is bad? If $400K a year is good enough for the POTUS, why is it insufficient for CEOs? Berkshire Hathaway limits executive compensation and that company seems to be weathering the storm better than most companies.

Steven Pearlstein: Thanks.

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Washington D.C.: Given that corporate greed and hefty bonuses has defined wall street for the past decade, while average working-class Americans have suffered, please explain why "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."

Why can't we require some equity back from at least the companies that without a bail-out would or under, whether as stocks to the treasury, or even deposits made into social security to benefit all Americans?

Its a little late to expect corporate America to do the right thing voluntarily-we're in an unbridled capitalist system, not a social democracy where there is at least a passing nod to the welfare of all.

Steven Pearlstein: Thanks.

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Washington, DC: Here is the big picture that I see: Everyone is to blame in different degrees. The consumers probably the least. I almost became a mortgage broker (I'm a retired stockbroker), but I realized they were hoodwinking their customers (this was 2004). Most consumers are not sophisticated enough to even know the terms of their mortgage. The mtg. brokers committed a great deal of fraud and that led us here. But lets not forget the voters who bought into the deregulation theories of the GOP and John McCain and Phil Gramm. This whole mess could have been avoided if proper oversight had been in place. SEC Chairman Donaldson tried to provide some oversight to the markets and was rebuffed. Cox has been a disaster, but his ideology matches the GOP.

What to do now? Buy the mortgages at a steep discount, like 50 to 60%. Give the borrowers the following choice. Lower the terms to either 5%/annum with amortization, 30-year term or 4%/annum interest only, 10 year term. All the new mortgages would be non-assumable. This gives the R.E. market and the home-owners time to come back. Steve

Steven Pearlstein: Thanks.

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"I'm glad you have better information...": Uh, with all due respect, isn't that the same tired hackneyed line we got on the start up of Iraq? You could have quoted your line back then, with a trivial amount of change while looking down your nose at the mouthy complainer.

The problem is that the "experts" you list were utterly wrong, and the annoying complainers who wouldn't shut up and take their medicine were right.

In fact, it's a bit of a travesty that the mouthy complainers are still sneered at today (ever see Scott Ritter with big money pundit gig?), while all the folks you name who've gotten it utterly wrong get to be on TV for big money sneering at us again.

Steven Pearlstein: Thanks.

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Pittsburgh, PA: I saw you on Hardball. You should either be a professor or a financial consultant to the govt. Your grasp of the picture, and more importantly, your ability to convey the essence to normal people is amazing.

Steven Pearlstein: Thanks.

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N ew York: Steve, I understand that Wall St. firms need a hand here, but wouldn't it also make sense to do something to stem the increasing tide of foreclosures as well? Then when the gov't goes to sell these bad investments, it can get a better price? Thanks.

Steven Pearlstein: Thanks.

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Falls Church, VA:"... secretary of the treasury, the chairman of the federal reserve, the president of the NY Fed, Warren Buffett, Bill Gross, the Wall Street Journal editors,..."

With the exception of Gross and Buffet aren't these the same crew that were stewards of the economy (or their cheerleaders) that is now in a mess? Are we to trust anyone that says we need a trillion and we need it in a week? Don't you think they should have laid the groundwork months ago? Would a more modest better thought out less exceutively-concentrated proposal suffice? Did their extrordinary actions before work? Why should we believe them now? What models are they using, and what are they trying to maximize?

Hasn't this adminsitration done the chicken little routine right infront of a recess one time to many? (If it's not chicken little but they are the boy tha cried wolf it's on their head).

How will assets be valued, which ones to buy, how will political influence be kept out of it, how to avoid moral hazzard while still being effective.

Don't you think taxpayers deserve good, credible answers to questions like these before a trillion dollar check is written?

Steven Pearlstein: Thanks.

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