WASHINGTON — What are we taxpayers getting for our money, as we bail out the geniuses who have run some of our leading financial institutions into the ground? The Treasury is extending a reported $300-billion line of credit to Fannie Mae and Freddie Mac, but what do we receive in return?
The answer, I'm afraid, is very little — other than relief from the imminent threat of a much worse crisis. I'm glad that a systemic meltdown has been avoided again, temporarily. But these bailouts are the equivalent of "no document" loans to borrowers who are saying in effect, "Lend me billions right now or I'll destroy the international financial system."
I wish that Treasury and Federal Reserve officials would do a better job of bargaining — so taxpayers won't have to dig into their pockets again a few months from now to rescue yet another group of spendthrift financiers.
Another chapter of this slow-motion financial crackup is probably ahead. Eugene Ludwig, former comptroller of the currency, says we're "perhaps only 30 percent to 40 percent through the trough."
Next up are the banks. All you have to do is look at the numbers: As of Monday, Wachovia's stock had fallen over the past year by 81 percent, Citigroup's by 71 percent and SunTrust's by 69 percent. And the stock of Washington Mutual, the nation's largest savings and loan, had tumbled 92 percent.
If these ailing banks should veer toward failure, do they get free access to the Fed's discount window, like Bear Stearns did? Do they get their debt guaranteed and the offer of a capital infusion, like Fannie and Freddie did? The disturbing answer is that bailouts will probably be reserved for institutions big enough to do damage, but not for those small enough that their collapse would be relatively quiet.
A new financial architecture is being built this year, but it's a jury-rigged structure with new wings added every time there's an imminent catastrophe. The financial disasters of the 1930s created a regulatory framework that helped safeguard American prosperity for 50 years. This time around, we have a pell-mell fire brigade. Treasury and the Fed hose the financial markets with liquidity every time there's a new burst of flame and, as a result, the system is beginning to get soggy.
So before this goes any further, let's think of some principles that should guide the government as it makes promises in taxpayers' names.
The starting point is that this corporate socialism (even the Wall Street Journal editorial page is calling it that) should promote fairness, transparency and market stability. Under the system that has been coming apart this year, employees and stockholders got the upside, while taxpayers got the downside. That's wrong.
Congress is already calling for more regulation, but if it's not well planned, that could just make things worse. Fannie and Freddie had their own special regulator, the Office of Federal Housing Enterprise Oversight. It made lots of audits and studies over the past few years, but it didn't see many of the risks on Fannie's and Freddie's books. And when it did identify real problems, it was often rebuffed by Congress. The Sarbanes-Oxley reforms, enacted after the Enron scandal, created cumbersome paperwork but did nothing to check this crisis.
I like Ludwig's proposal for a new version of the Resolution Trust Corporation, which was created in 1989 to manage the savings and loan bailout. The RTC bought up distressed assets, creating a floor, and then resold them at prices that attracted new buyers — so that the markets could clear. As Ludwig says, an RTC-like mechanism may be a better approach now than the ad-hoc policy the Treasury and Fed have been following.
The best reform, in the end, is to make financial managers bear more of the risk of their actions. If a lender has to keep a big slice of the "B"-rated share of mortgages it has written, there's a greater likelihood it will lend only to borrowers who can repay. If capital and margin requirements are increased for lenders and borrowers, respectively, there's less chance of the crazy leveraging that has made this crisis so severe.
The lenders of last resort — meaning the taxpayers — have to get fair value for our money. As financial guru Warren Buffett likes to say, "Insanity consists in doing the same thing over and over and expecting a different result."
David Ignatius' e-mail address is email@example.com.
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