ThefinancialcatastropheandtheWaMucollapserevealthatWashingtonbureaucratscanhandleanemergencybutpoliticianscan't.ByDanielGrossPostedFriday,Sept.26,2008,at9:52AMET
Lastnight,thetroubledfinancialsystemhadtoabsorbtwofreshblows:thefailureofWashingtonMutualandthefailureoftheWhiteHouseandCongresstoreachaconsensusonaproposedbailoutpackageforbankslikeWashingtonMutual.Thebigirony?Thefailureofabankwith$307billioninassets,thelargestbankfailureeverbyfar,iscausingthetiniestofripples,whilethefailureofbusinessasusual—whocouldhaveimaginedthattheBushadministrationwouldbeunabletobringalongitsalliesintheHouseandSenate?—isinducingrageandpanicamongCNBCtalkingheads.
Itisataleoftwosystems.Onesystem,theoneusedtoprocessfailedandfalteringbanks,worksreallywell.It'sbeeninplaceandevolvingfor75years,sincetheFederalDepositInsuranceCorp.wasfounded(overtheoppositionofbankers,itmustbeadded).Sincethen,notapennyofdepositors'moneyhasbeenlost,andthebankscontinuetoinsurethemselvesagainsttheirownincompetence.TheFDICinsurancefundcontainsabout$45billion,andanalystshadfearedthatthefailureofabankthesizeofWaMu(ithad$188billionindeposits)wouldswampthefund.ButtheFDIChasaprofessionalstaff,runbyahighlycompetentandintelligentmanager,SheilaBair.Havingalreadyhandledabaker'sdozenoffailuresthisyear,theFDIChasthedrilldown.Therearealso,thankfully,afewcompetentbankersleftintheworld.ManyofthemworkatJ.P.MorganChase,whichhasagreedtoacquireWaMu'sbusiness.WaMu'sfailurewillcauserealdislocation—stockholdersandmanybold-holdersarelikelytobewipedout.ButWaMu'sdepositorswillbemadewhole.TheFDICwon'thavetodipintotheinsurancefund.J.P.MorganChaseisassumingWaMu'stroubledmortgagebusiness.Itwilltakeachargeforthosebaddebtsandraisenewcapitalfromtheprivatesectortodeal.It'sabigheadlineandabigstory,butintheschemeofthings,ablip.Alargeboatslippingsilentlybelowtheseawhileallthepassengersescapewiththeirlives.Thissystemisaforcefororder.
Theothersystem—theprocessbywhichCongressandtheWhiteHousemakelegislation—isanOKsysteminthebestoftimesandacompletelyFUBARoneattheworst.Ithasmanycompetentandwell-meaningprofessionalsinit.Butitalsohasabunchofincompetentmalefactors.Forthepastweek,thissystemhasbeenlurchingtowardaproposaltobailoutbanksbyraisingtaxpayerfundstopurchasebadassets.Theplan,releasedlastFriday,wasthebrainchildofTreasurySecretaryHenryPaulsonandwasinstantlyendorsedbyPresidentBushandFederalReserveChairmanBenBernanke.Lastweekend,Congressgotinvolved.Andthroughouttheweek,allpartiesinvolvedgavetheoutwardimpressionthattheyweremovingtowardanagreement.OnWednesday,aseniorofficialinvolvedinthetalksassuredagroupofjournaliststhatthegrownupswereincharge.Onlytheyweren't.Democrats,whocontrolCongress,wereunwillingtopasswhatamountstoamassivetaxincreaseontheirown.SenateRepublicanssignaledtheirwillingnesstogoalong,butHouseRepublicanssaidtheywouldn'tprovideanyvotes.Nonetheless,WednesdaynightPresidentBushaddressedthenation,warningofdireconsequencesunlessthebailoutplanwaspassed.Heproclaimedaneraofgoodfeeling—"thereisaspiritofcooperationbetweenDemocratsandRepublicansandbetweenCongressandthisadministration"—butdidn'tseemtoexpendmucheffortwhippingHouseRepublicansinline.JohnMcCainsuspendedhiscampaignandparachutedintoWashington,forcingObamatoattendastagedmeetingattheWhiteHouse.ThroughoutThursday,wordwasleakedthatthecontoursofadealhadbeenagreedupon.Themarketsrallied.Lastnight,thewordcamethattherewastobenodeal.TheeveningendedwithTreasurySecretaryHenryPaulsonbeggingHouseSpeakerNancyPelositosavetheeconomybutconcedingthattherealproblemwashisfellowRepublicans.Thismorning,themarketswereemittingaprimalscream.Thissystemisaforceforchaos.
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