The blank-check buyout

September 23, 2008

WHEN CONGRESS makes laws at gunpoint, good policy is rarely the result. Consider the crush of legislation after the Sept. 11 terrorist attacks, which produced an unwieldy Transportation Security Administration and misallocated antiterrorism grants. Now the Bush administration, in its understandable haste to calm the markets amid a meltdown on Wall Street, is pushing lawmakers to approve a three-page, $700 billion bailout plan for ailing financial institutions - and right away.

Not so fast. While Congress shouldn't drag its feet in formulating a systematic response to the financial crisis, neither should members abdicate their responsibility to protect taxpayers' interests. Maybe, just maybe, companies that allocated their money recklessly shouldn't be rewarded by simply having the government take soured investments off their hands.

A central question is what, if anything, financial institutions will have to give up in return for help from Washington. Mortgage giants Fannie Mae and Freddie Mac and insurer AIG got an infusion of capital from the federal government, but had to submit to government control. Lawmakers need to consider making similar demands of companies that take part in a broader buyout.

The Bush administration's proposal does not offer enough safeguards. Over the weekend, the administration asked Congress to give the Treasury almost unlimited authority to buy up soured debt. But Capitol Hill Democrats are right to insist on independent oversight of any bailout program. Should the Treasury bail out foreign firms that own securities based on US mortgages? Should it buy up a broad variety of financial instruments, or just mortgage-backed debt? Financial firms will surely try to fob off as much of their bad investments as possible, so scrutiny of the Treasury's work by Congress, the Government Accountability Office, or other quarters will be vital.

Bush's team is already bristling at some ideas coming out of Congress, including limits on compensation to executives of failing firms. In fact, such a rule might do little to shrink the pricetag of the bailout. But the provision would be a sign of seriousness from Wall Street. For when a failing firm comes begging for help, the least it can do is skip any multimillion-dollar severance payments to the executives who have run it into the ground.

Even Morgan Stanley and Goldman Sachs, the only two major US investment banks left standing, are now clawing their way onto the safer ground of well-regulated commercial banking. And ultimately, no one's future will be more secure if Congress rushes into a bailout plan without thinking it through.