In ancient China, the execution of especially heinous criminals was achieved by the slow, painful torture known as death by a thousand cuts. My colleague Morgan Housel penned an essay that, while not exactly extolling the virtues of the financial industry bailout, obliquely defended it using arguments that remind me of this gruesome form of death.
In short, with the original arguments in favor of the bailout now revealed for the chimera they are, proponents are suggesting that things aren't as bad as they seem because Uncle Sam will eventually be repaid (well, at least we hope he will be) and he's not dumping the entire $700 billion at risk into the market all at once, but doling it out slowly in targeted dollops.
Friends of Paul
The fallacy of the argument is that it presupposes the government knows which investments are the smart ones to make, and won't be guided by any sort of favoritism, collusion, or political pressure. I know. That never happens. We might never know the real reason why Lehman Brothers was allowed to fail but others saved. We might not be allowed to understand why National City (NYSE: NCC) was denied TARP funds leading directly to PNC (NYSE: PNC) acquiring it on the cheap, but other similarly situated banks like Marshall & Ilsley and Comerica received money.
Paulson now admits the original idea to buy troubled assets was whack (guess we'll have to call the TARP something else), so suggesting they know which institutions will make good investments gives them more credit than they deserve.
Treasury's gear changing is somehow supposed to calm us because, as John Maynard Keynes once said, "When the facts change, I change my mind. What do you do, sir?"
How about it scares the bejesus out of bailout opponents because it really represents reckless bouncing about, pinging from one idea to the next, hoping something -- anything! -- will work. The passionate pleas made beforehand, Paulson getting down on one knee and begging, and assertions that the original plan was not only the right plan but the only plan that would work, was just so much high-school drama-club theatrics.
It ain't cheap
If there's one thing I agree with Morgan about is that assigning this bailout a "$700 billion" price tag is a misnomer. We'll be lucky if that's the final tab.
Let's not forget the $29 billion taxpayers are spending backing Bears Stearns portfolio so that JPMorgan Chase (NYSE: JPM) wouldn't have to shoulder any risk, or the $200 billion given to Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Let's also add in the $140 billion tax giveaway to banks like Wells Fargo (NYSE: WFC) to buy distressed rivals; the triple dip for American International Group (NYSE: AIG) totaling about $150 billion; the Fed holding more than $226 billion for the commercial paper market; the FHA's $300 billion Hope for Homeowners program; and $540 billion in loans for money markets funds.
$700 billion? Hah! Fellow Fool, Christopher Barker, came up with a number much closer to $4 trillion -- and that was last month!
Blind leading the blind
No, Paulson & Co. don't know what they're doing, but it is cold comfort to say that it doesn't appear that anyone does. That's certainly not a clarion call for opening the nation's purse strings, or for giving unprecedented authority to regulators to go on a spending spree. Instead it means we should wait to get some understanding before forging ahead blindly.
An amputation drastically reducing the bloated credit running loose in the system would be far more humane than the slow, painful cuts this bailout is inflicting.
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