Daniel Davies, in one of the great blog posts of this era, laid down a key principle:

Good ideas do not need lots of lies told about them in order to gain public acceptance.

He was talking about the selling of the Iraq war, but it applies more generally.

So, this morning Hank Paulson told a whopper:

We gave you a simple, three-page legislative outline and I thought it would have been presumptuous for us on that outline to come up with an oversight mechanism. That’s the role of Congress, that’s something we’re going to work on together. So if any of you felt that I didn’t believe that we needed oversight: I believe we need oversight. We need oversight.

What the proposal actually did, of course, was explicitly rule out any oversight, plus grant immunity from future review:

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

I’m not playing gotcha here. This is telling: if Paulson can’t be honest about what he himself sent to Congress — if he not only made an incredible power grab, but is now engaged in black-is-white claims that he didn’t — there is no reason to trust him on anything related to his bailout plan.

I don't know about you, but I do not trust Comrade Paulson or anyone telling us that this rescue plan is good for the global financial system and the global economy. I know it is good for his net worth and that of his buddies at Goldman Sachs and other Wall Street firms but they are the crooks who made sure taxpayers "are already on the hook."

But despite the rumblings on Capitol Hill today, politicians will sign off on this rescue plan, holding their noses and praying to God that it works. (If it doesn't work, Paulson will come back in the near future to utter: "Tell them they can eat cake").

As I write this and reflect on today's hearings, Lord Acton's dire warning that "absolute power corrupts absolutely" keeps resonating in my head.


The FBI has just launched an investigation, probing bailout firms:

Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), Lehman Brothers Holdings Inc. (LEH, Fortune 500), and insurer American International Group Inc. (AIG, Fortune 500)

The inquiries, still in preliminary stages, will focus on the financial institutions and the individuals that ran them, a senior law enforcement official said.

Also, read Randall Forsyth's article in Barron's, Shock and Awe? Try Shockingly Awful:

This marks the final undoing of the Glass-Steagall Act, the Depression era law that separated commercial and investment banking. Its repeal in the early 1990s is blamed in some quarters for the crisis in which we find ourselves today.

This is puzzling. The hog-wild leverage took place outside the banks in what has come to be known as "The Shadow Banking System" of off-balance sheet assets funded in the money market, mostly outside the purview of regulation.

In the U.S., the firms that failed were Bear Stearns and Lehman Brothers, neither of which gained new powers under the repeal of Glass-Steagall. Nor was that a factor in Merrill's rush into the arms of BofA.

In the Shadow Banking System, mortgages were purchased, sliced and diced and packaged in incomprehensible instruments such as Structured Investment Vehicles funded by asset-backed commercial paper. Indeed, the SIVs got assets off the books of banks such as Citigroup (C), which let it avoid capital requirements that would be levied had the assets stayed on the balance sheet.

Nor do fans of Glass-Steagall acknowledge the law failed to prevent failures such as Continental Illinois in the 1980s or Franklin National in the 1970s. And any number of major money center banks were technically insolvent in the early 1990s after that real-estate bust.

Arguably, bringing more activities under the aegis of bank regulators would limit leverage and enhance stability of the financial system. It was going to happen anyway, so Goldman and Morgan decided they might as well have the advantage of a stable deposit base. Don't expect the top-tier banks to start opening branches and giving out toasters for new accounts, however. If anything, Goldman and Morgan would more likely look to acquire a bank than build one organically.

Yet, with all these historic changes in the financial system won't change the underlying fundamentals of house prices still declining and the economy contracting. And now the cost of the government's intervention is an added risk.