Bailout Now, Blueprint Later?

I may be too close to this subject, but today's bailout hearings in Washington that began today strike me as required viewing/reading for U.S. citizens. The situation is extremely complex (except at its root level, where it seems depressingly familiar), extremely important (the country's financial system and economy hangs in the balance), fascinating and, above all, necessary.

Watching the footage (thank you, Internet video) and reading the immediate reporting on the Senate Banking Committee hearings, several things strike me:

• Paulson and Bernanke no longer have the luxury of working out a plan in a political vacuum. I believe the two of them demonstrated leadership, of the perfectly timed and sorely needed variety, in their quick and clear response last week. Today, in the questions they fielded from members of Congress, it was clear that a host of seemingly unrelated issues and baggage -- including ill will between Democrats and the Administration left over from other crisis management collaboration, such as the decision to invade Iraq, and political grandstanding ("Wall Street is evil, taxpayers are good, so let's put the kibosh on this plan") -- will now influence the process of finalizing the bailout plan. Tax payers will be on the hook, not for the entire $700 billion, but for a good chunk of that unless these troubled assets suddenly soar in value. However, tax payers could suffer even more without government intervention -- an option reportedly being pursued by a large group of House Republicans.

• Paulson's testimony was clearly written to A) portray the plan as Main Street friendly (in correct anticipation of several pointed questions from committee members); and B) encourage Congress to act quickly. The market also seems to prefer a quick agreement on a plan that will reshape the U.S. financial system. Yes, that sounds absurd -- and so much of this is, if not absurd, intriguingly contradictory.

• Paulson also dusted off his regulatory blueprint for the first time in a few months, which definitely captured my attention. While he urged Congress to enact a bill "quickly and cleanly," he emphasized that the next step in our economic recovery is to "address the problems in our financial system through a reform program that fixes our outdated financial regulatory structure, and provides strong measures to address other flaws and excesses." And, he added, "I have already put forward my recommendations on the subject." I disagree with Paulson's description of the root cause of this turmoil (he blamed the housing correction); I blame the behavior that created the need for this correction.

• What is going on with SEC Chairman Christopher Cox? He seems to attract misguided blame, and he looks pained. Where does the SEC fit into this debate -- and, more important, where does it fit in the "reform program that fixes our outdated regulatory structure"?

• Bernanke began his testimony by stressing that "government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and consequently, the health of the broader economy is at risk." And then he invested most of the rest of his initial comments explaining why government assistance has been necessary so frequently and liberally in the past six months. Bernanke, more so than anyone else, crystallized the proposed bailout's intent: to reduce investor uncertainty about the current value and prospects of financial institutions (i.e., their balance sheets) by generously removing "impaired assets" from those balance sheets.

• I've never heard a disparaging word about Sen. Richard Shelby (R.-Ala.) from a wide range of sources and several sources I trust from both sides of the political aisle hold great respect for him. Shelby's comment to Paulson -- that the plan "merely codifies Treasury's ad-hoc approach" -- concerns me right now.

• I'm also surprised that Paulson initially seemed to call Sen. (and Senate Banking Committee Chair) Barney Frank's (D.- Mass.) bluff on the possible introduction of executive compensation limits.

After all, if we're all going to pay for misbehavior, shouldn't there be limits?