Republicans Get Suckered

By Liz PeekFinancial Columnist

Republicans are fighting the wrong battle, and they don't even know it. In one of the more unlikely political sleight-of-hands in memory, the Democrats have suckered the Right into pushing for the nationalization of banks and for government control over corporate compensation. Who would have thunk it?

During the campaign, one of the popular story lines, first created by the Democrats and then adopted by Republicans, was the failure of TARP. They excoriated Paulson for having changed directions as he maneuvered to shore up the crumbling financial sector.

[caption id="attachment_2901" align="aligncenter" width="300" caption="Treasury Secretary Henry Paulson (AP)"][/caption]

They also fomented popular outrage about the previously generous compensation of those in charge of the banks.

Bush administration

The reality is that Paulson's quarterbacking of the financial markets in the last four months of 2008 averted disaster. By the time Bush left office, credit markets had begun to thaw, bank lending was on the rise and new bond issuance was growing nicely.

Americans seem to suffer universal ADD.

Consider how quickly our hardened resolve to fight Al Qaeda after the 9/11 terrorist attacks vaporized into concerns about wiretapping or the rights of Guantanamo prisoners. Now we are as a country already forgetting the terrifying implosion of our financial institutions that took place last September. One of the scariest episodes began when Lehman's collapse triggered a run on a money market fund -- Reserve Primary Fund - which held worthless Lehman paper and which consequently "broke the buck." Panicky investors scurried to withdraw hundreds of billions from funds and banks, and would have shut down the financial markets but for Paulson's intervention. For a moment, it appeared that Lehman Brothers would not be the only financial giant to fail, and that Citigroup, AIG and Merrill Lynch would not be far behind. Imagine the devastation.

The truth is that Treasury Secretary Paulson's emergency scrambling prevented a complete collapse of our banking system. He wrested from Congress a huge amount of money -- $300 billion, and spent it as circumstances demanded, plugging holes here and shoring up walls there. He forced all the top banks to take TARP money, so as not to tee up the most needy for short-sellers to destroy. It was not pretty nor was it tidy, but it worked. No other major banks have failed, and the credit markets are improving.

In fact, it is now generally acknowledged that his biggest mistake was in letting Lehman go under. The ramifications of that firm's demise were greater than expected, but no one knew in advance just how extended the company's network of CDS products was, nor how interrelated its credits. Imagine if Merrill Lynch had failed as well.

Just as New York City would have taken years rather than months to recover should another Al Quaeda operative have blown himself up in Grand Central on 9/12, it would have been months if not years before our financial system could have recovered from a string of failures. Consider what is going on in Russia today. The New York Times recently carried a lengthy article about the growing role of commercial barter in that weakened country. The reason? A collapse in credit and credit institutions.

A particular source of criticism is that Paulson changed course early on, when the difficulty of buying the banks' troubled assets came into view. Big surprise! Our new Treasury Secretary has confronted and sidestepped the very same issue, after leaking an initial plan to set up a "bad bank." Valuing the toxic assets still weighing on bank balance sheets is not only complex but might prove fatal to Citigroup or others that have failed to mark their holdings down to emergency sale levels. So, even though Geithner has arguably had more than a year to study the situation (unlike Paulson) he too has changed course.

Paulson certainly made some missteps, and Wall Street executives made some bone-headed moves. They failed to heed the growing criticism from taxpayers who were rightly angry that their lives and livelihoods were potential victims of the credit meltdown. Snazzy wastebaskets and pricey jets became easy rallying points for talking heads on the left and the right.

Of course, it is hardly ever mentioned that Wall Street's compensation system is heavily skewed towards performance-related bonuses, and towards company shares. Many leading Wall Street figures took nearly all their compensation in stock and options over the past decade, which is nearly worthless today. In other words, many of these vilified financial leaders are now broke.

Instead, we have now the government determining pay for all those financial industry managers who have accessed government programs. Who will be next? Those working in other industries aided by the government - agriculture, homebuilding, airlines, ethanol production, pharmaceuticals, education, medicine, insurance ...had better watch out.