By Don Bauder
Published Wednesday, Oct. 15, 2008

'I don't think the American taxpayer needs to be stepping in," Treasury
Secretary Henry Paulson assured the citizenry on February 27 of this
year. Half a month later, the Federal Reserve bailed out Wall Street by
financing a shotgun marriage of Bear Stearns to a larger firm, JPMorgan
Chase. Nonetheless, on May 6, Paulson declared, "The worst is likely to
be behind us." Then on July 20, he exuded confidence: "It's a safe
banking system, a sound banking system," quoth he. "Our regulators are
on top of it." Then on September 18 - after the Fannie Mae, Freddie Mac,
and American International Group rescues - Paulson begged for a $700
billion taxpayer bailout of Wall Street, warning that if the
banking-welfare package didn't pass, "Heaven help us all."

Paulson wasn't alone in his dead-wrong pronouncements. On March 11,
Christopher Cox, chairman of the Securities and Exchange Commission,
declared, "We have a good deal of comfort about the capital cushions at
these [Wall Street] firms at the moment." His agency was making
"constant," sometimes daily reviews of financial institutions, declared
Cox. Three days later, Bear Stearns was saved via the shotgun.

Then there is Ben Bernanke, chairman of the Federal Reserve, the
nation's central bank. Early in the current financial crisis, he had to
be educated about the quadrillion dollars of derivatives threatening to
send the world's banking system into a tailspin. During a recent
congressional hearing, Bernanke and Paulson were asked if Wall Street
owed Main Street an apology. Both waffled.

Get this: these three people will be key among those spearheading the
$700 billion bailout package. Paulson and aides will have
near-dictatorial powers. Cox and Bernanke will be on the Financial
Stability Oversight Board.

As Paulson said, "Heaven help us all." Now, as governments essentially
take over the world's banking system, guaranteeing deposits and lending
among banks, Paulson's quote is more apt than ever, although he hardly
meant it that way, having been a cheerleader for the nationalization of
formerly private banks.

I asked some prominent San Diego financial experts about this state of
affairs. "These guys [did not] understand the derivatives problem or,
more important, its magnitude," says retired banker Peter Q. Davis.
Derivatives with no regulation or oversight "took on a life of their
own. [They were] out-and-out gambles."

Says former Wall Street veteran Arthur Lipper III, "With someone as
intelligent and experienced as Paulson is, I find it hard to believe he
failed to understand" the explosive possibilities of a derivatives chain
reaction.

Maybe, like some on Wall Street, Paulson knew that an explosion could
take place, but he was making too much money to fret about it.
Derivatives came to dominate the financial world because the commissions
are so high for those peddling them. Wall Street is all about greed and
mendacity - two reasons its practitioners are unfit for government
positions.

In May of 2006, San Diegan Gary Aguirre warned the Senate Banking
Committee that Wall Street was re-creating 1929, piling up multiple
layers of financial leverage that could crash. After the Bear Stearns
collapse this year, he reminded the committee that the Securities and
Exchange Commission had failed to foresee this calamity and would
probably fail to foresee further disasters. Aguirre, brother of City
Attorney Mike Aguirre, was right on target.

Springfield, New Jersey-based economist A. Gary Shilling says, "Perhaps
the least credible of all the Washington players has been the SEC." In
2006, the agency's staff identified the risks of the subprime mortgage
crisis but didn't exert influence over Bear Stearns to plan for a
subprime meltdown. The agency permitted the firm to use its own
auditors, instead of independent ones, in assessing Bear Stearns'
risk-management policies. Then the SEC botched its attempt to shore up
financial shares. It banned new short selling on 1000 financial issues,
but it put nonfinancial stocks, such as IBM, GM, and Ford, on the list,
while ignoring authentic financial institutions.

"They [SEC staff] don't know what they are doing now," says Aguirre. "It
is panic over there."

"The SEC could require regulated firms to disclose on an ongoing basis
their current debt-to-capital ratio so those considering trading with
the firms could make a decision as to risk," says Lipper. Such
disclosure would have helped in the Bear Stearns disaster.

Playing politics trumps telling the truth these days. "Paulson allowed
the wish to become the parent of the thought in his quest to serve the
Bush administration," says Lipper. "It appears that he was part of the
decision-making which resulted in there being few, if any, independent
economists testifying before Congress in the bailout-plan deliberations.

"Of course, Bernanke, as chairman of the [Federal Reserve], also sought
and seeks to serve the Bush administration," says Lipper.

"Bernanke loves to tell folks he is an expert on the Depression - thus,
I think he sees all roads leading to one," says Davis. "As the old
saying goes, 'When the only tool you have is a hammer, every problem
begins to look like a nail.' "

Paulson's " 'Trust me' three-page proposal and request that he not be
liable to judicial review or punishment was simply offensive and
probably a violation of federal law," says Davis.

What about the bailout plan? "What Paulson did was an ambush," says
Aguirre. "In March, after Bear Stearns collapsed, everyone should have
known that Bear was a sign of what was coming. Paulson should have
convened the Senate Banking Committee, conducted highly public hearings,
explained what was going on with Bear Stearns to garner public support."
Instead, Paulson kept insisting that all was well. After it was clear
the financial sector was on the brink, "The politicians were stampeded
by Paulson's warnings and passed a bill that is a complete disaster for
the public."

Among many things, the bill allows Paulson and his minions to purchase
toxic assets at whatever price they deem consistent with the purposes of
the act. They could pay above a reasonable price if they so desired -
supposedly as a way to pump liquidity into a bank. Doesn't Wall Street
proselytize "buy low and sell high"? Even Paulson, Cox, and Bernanke
should have learned that maxim. The bill permits Paulson's dragoons to
purchase credit default swaps and other derivatives that are at the root
of the problem. Such purchases would bail out Wall Street while screwing
Main Street.

The villains are institutional gambling with excessive debt and the
ideological insistence on nonregulation. And now officials who
encouraged such irresponsibility, or looked the other way while it
occurred, and never saw the possibility of a derivatives nuclear
reaction are in charge of steering the nation out of the crisis.

"Were there not institutional and public demand for ever-increasing
profits, the excesses would not have occurred," says Lipper. "As has
always been the case, leverage is dangerous, and without significant
minimum capital requirements it typically ends in disaster."

We may be at the edge of that disaster right now. The nationalizing
moves over the weekend will only lead to more inflation down the road,
says Lipper.