“Those Who Cannot Remember the Past . . . “

The Troubled Asset Relief Program — TARP — expired yesterday, having cost nowhere close to its original  sticker price of $700 billion.  (See, e.g., TARP Bailout to Cost Less Than Once Anticipated)  $700 billion was a guesstimate born of political expedience, more than the $500 billion Treasury officials targeted in their initial bailout plans but less than $1 trillion, which Treasury officials feared might be required to slow the economy’s September 2008 death spiral.  As the NYTimes reports in the linked article, taxpayers may even make money of the deal.  Maybe.

Remember September 2008?  25 months ago?  The government took over Fannie Mae and Freddie Mac, Lehman Brothers filed for bankruptcy, AIG and Merrill Lynch were going down, Morgan Stanley and Goldman feared they were days away from collapse?  Wall Street had gone off the rails and crashed into the world economy like the train in The Fugitive?  No?  Apparently you are not alone:

Fewer than three in 10 Americans say they believe [TARP] was necessary “to prevent the financial industry from failing and drastically hurting the U.S. economy,” according to a poll in July for Bloomberg News.  (NYTimes)

I understand the rage against Wall Street’s excesses, but denying that the U.S. and world economy were hanging by a thread in fall 2008 ignores the facts.  Which brings to mind Derek Bok’s quote:  If you think education is expensive, try ignorance. The gleeful embrace of ignorance is the political Special of the Season; look no farther than Sarah Palin and the Tea Party’s enthusiastic embrace of  Christine O’Donnell, the Republican nominee for Governor of Delaware.  Rage against Wall Street, rage against TARP, rage against Obama’s stimulus package brought us the Tea Party, a “populist” movement financed by billionaires.  If you deny the existence of evolution, it’s easy to deny the plain truth about the need for TARP.

No Leadership

A half-dozen students were in my office yesterday afternoon to talk about their exam today.  I put CNN.com on the monitor, refreshing the page every ten minutes or so.  Thus, as we discussed their exam-related questions we could also watch the unfolding consequences of the House of Representatives cratering the economic rescue bill.  The Dow down 700, then 500, then 650, then 770 . . . the failure of house leaders on both sides of the aisle to rally sufficient votes . . . the White House’s totally ineffectual pleas to pass the bill . . . the failure of Obama and McCain both to put themselves squarely in front of the bill and explain why it’s passage is important.  It was a total failure of political leadership, a verdict that is splashed across front pages and op-ed pages everywhere.

By Any Other Name

It may nothing more than that I’m a lawyer who believes Words Matter, but calling the bill pending before Congress to purchase mortgage-backed assets a bailout provides more heat than light.  Other than investment bankers and others clutching on to their jobs before they sink beneath the foam few people want to bail out Wall Street as an end in itself, which is what the term suggests the bill is for.  Many of those railing against its passage–40 opposed for every 1 in favor in this poll, 100 to 1 against in that Congressman’s constituent messages–think “Wall Street got us into this mess, so why should we taxpayers bail them out?”

Here’s why:  if this (take your pick) credit market relief/toxic asset superfund bill doesn’t pass then the credit conflagration will be apocaplyptic.  There will be no credit to buy new factory equipment or purchase inventory, no money to refinance mortgages, no credit at all.  Wachovia Bank is the latest victim, acquired by Citigroup today for ten cents on every dollar of Friday’s closing price.  Removing these toxic assets from balance sheets puts more money into the system and should ease fears of further bank collapses and help open credit flows.  It won’t solve our economic problems, but if it does not pass soon our economic problems will be far worse.

In a prior life I did workouts of non-performing loans.  One lesson I learned early is don’t take the borrower’s default personally.  Sometimes the borrowers were fraudsters and some of them went to jail, but I learned not to treat defaults as teachable moments for the borrower’s moral edification.  Our fund’s financial interest was in cutting our losses, getting our money out, and putting it to work again as soon as possible.  Sometimes that meant holding my nose and letting a defaulted borrower leave the table with some money in his pocket.  Distasteful, but if it meant we got our money back today instead of after months of legal fees and delay, it was the best decision financially.  I didn’t believe I served my client’s interest through punishment, and my client didn’t think so either. This financial relief bill involves much more complicated issues but it is still a workout.  A massive, critical, desperately essential workout.

I understand why Main Street wants to punish Wall Street (a binary distinction that obscures more about the nature of our financial problems than it reveals) but this week is not the time for head-hunting.  In Friday’s debate both Obama and McCain missed opportunities to educate and persuade why federal relief is essential. Passing this bill is probably not enough to calm the markets, but it’s the first step.