Week of 9.26.08
Transcript: Behind the Bailout
More From NOW: Behind the Bailout | Q & A: Your Personal Finances | Interview: David Cay Johnston | Feedback Forum | TranscriptBRANCACCIO: Masters of the universe. That's what author Tom Wolff once called the titans of Wall Street. Well, "Masters of Disaster" might be a more fitting term this week. We still don't know what the final Wall Street bailout will look like, but some things have become clear. We know it *won't* look like the $700 billion dollar blank check the treasury secretary was originally asking for, and how we got from there to here over the course of a week is a fascinating story in it's own right.
Here's a Washington insider's view of the mess we are in, and a search for a solution that would benefit working Americans as well as the denizens of Wall Street. Jennie Amias and Dan Logan produced our report.
It's like living through an extended earthquake, only we don't know yet if it's the big one or a foreshock of a big one to come. What is clear is that experts have to reach back a very long time to find the nearest comparison to the financial meltdown of 2008.
DAMON SILVERS: We've had—we've had bad financial episodes: the savings and loan crisis, the—long-term capital markets—f—meltdown in 1998. But, this is of a scale and severity that—I think most people agree has not been seen since the '30s.
BRANCACCIO: Damon Silvers is a key player in a network of organizations and political figures working furiously to make sure the bush administration's financial bailout does the least damage to the sort of hard-working Americans who may never have set foot in a place like Wall Street. Silvers is a corporate governance and pensions expert for the biggest federation of labor unions in America, the AFL-CIO. He's been monitoring and reacting to the developing bailout plan ever since the bombshell was dropped just over a week ago and gave us extraordinary access to watch his role in the process. The first stage of grief, they say, is anger and the AFL-CIO's initial public statement on the subject was testy indeed.
SILVERS: We were fairly angry about this. The first one was that, "Surely this must be the end of the notion that everybody sinks or swims on their own in our economy," that—if—if we're gonna bail out—the wealthiest and most powerful institutions in the economy, surely—with public money—with working people's money—that surely there ought to be some understanding that we're also gonna help—people who really need help—people who are unemployed, people without health insurance.
BRANCACCIO: By last Saturday, the reality of the u.s. treasury's 700 billion dollar estimate to buy toxic debt from banks and other teetering financial companies was sinking in.
SILVERS: We began to realize how much money we were talking about. And then we realized that really we're talking about the whole future of the economy and of our public—and a public policy for a decade, at least, right is—is suddenly on the table, right.
BRANCACCIO: Wall Street has its lobbyists who know the right phone numbers to call to get heard by the decision-makers in Washington. But who's looking out for people who might drive not a Lexus or a Beemmer but perhaps a Chevy Malibu that's seen better days? It may sound odd, given the steady erosion of union power in recent decades, but organized labor is trying to make the case that it represents lots of Americans whether or not they carry a union card.
It's what drives silvers, a Harvard-trained lawyer who once helped organize a union for Harvard faculty during his college days. He also was once in the running for a spot on the Securities and Exchange Commission.
SILVERS: If you talk about family members and retirees and so forth, we've got tens of millions. And we are at the center of a network of—a web of organizations and coalitions that represent many more, all right. And—so—you know, it's the—it—it's a solemn obligation—to—to make sure that those people's voices are heard in the decisions that shape the future of our country.
BRANCACCIO: Last weekend did not pass without another jaw-dropper. The first details of the Bush Administration's big plan. It wanted that $700 billion with no strings attached- with no congressional oversight, and to keep it beyond the jurisdiction of the courts.
SILVERS: The Treasury document shocked us.
BRANCACCIO: You were shocked.
SILVERS: Shocked, yes. The Treasury document is three pages long—and contemplates spending—giving the Treasury Secretary—complete authority to spend—initially $700 billion dollars, the largest peacetime expenditure in U.S. history.
BRANCACCIO: You were thinking, "I'd like to have that kind of power."
SILVERS: Well, you know—the whole point of Constitutional government is that there are checks and balances. There are checks and balances over petty things. Having no check or having no kind of oversight over 800—expenditure of $800 billion in the—to prop up private companies is just a—an extraordinary thing.
BRANCACCIO: By Monday the mother of bailouts had been up for discussion for four days. By a little after 10 am, the Dow Jones industrial average was trading down 130 points amid the uncertainty.
SILVERS: The first thing we did on Monday morning was brief—the labor movement—as to what was going on and asked all the unions to—all our member unions to—to get involved. The enormity of this, the seriousness of it for our—for the interests of working people, for working people's interest in an economy that works in the long term, for working people's interest in health care, for interest in infrastructure, for our interest in housing, for interest in basic fairness, couldn't—the stakes could not be higher here.
BRANCACCIO: In fact the head of the congressional budget office warned this week that there's no guarantee what the administration proposed will work and that there's a chance it could actually do harm.
The idea is for the government to buy huge amounts of bad debt from companies, especially mortgage-backed securities. If the government buys the debt, hopefully, those companies could stay in business. Good for them, but what about everybody else?
By that afternoon, the AFL-CIO had settled on some key points—any bailout has to help people facing foreclosure, has to provide strict oversight of the process, has to strengthen existing financial regulations, and has to provide some sort economic stimulus.
SILVERS: We've been working with—community organizations, with vast coalition of civil rights groups—and we've been working with—with economists—with—people who are expert in the financial markets. Part of that is making sure that we're—that—that we're doing the right thing here—that—that it's not—that—that—that we're—taking positions that are responsible and are gonna be in the public interest and that are well informed.
BRANCACCIO: By Tuesday morning, Silvers has already had a full day on email and on the phone, with senate and house offices and beyond. Meanwhile the Dow is hovering barely above its previous day's close and nearly 700 points below its high of the last month. The argument that either congress adopts the treasury plan or certain doom befalls civilization is being greeted with skepticism out in the real world. Skepticism and defiance. Silvers goes into a meeting with his senior colleague, AFL-CIO secretary-treasurer Rich Trumka.
TRUMKA: We found the money to—to fight a war in Iraq. We found the money to bail out Bear Stearns. We found the money to bail out AIG. We found the money to bail out the rest of Wall Street. But we can't find the money to pay for health care. We can't find the money to invest in jobs or education or pay our loans. We can't find any of that stuff. People are just outraged, and they've run out of string with it. They're not going to allow—these corporations to have a party, expect us to pay for it, and then have another party on top of the party they just had. It just won't work.
BRANCACCIO: Now, over the weekend, the treasury secretary said he wasn't interested in the bill encompassing that direct aid to—to American families. He was looking for more of a pure bill.
TRUMKA: Why? Why wasn't he interested? He's not been interested forever. We're gonna make him interested in it.
BRANCACCIO: Over on Capitol Hill, the affordable housing group called ACORN has pulled in people who may not have spent time in corporate boardrooms but who've been affected by decisions therein. People like Venus Williams, not the tennis star of the same name, but a struggling Washington, dc mother of two teenagers.
WILLIAMS: After my husband died, I found out that the mortgage—company that I refinanced with lied to me. Lied, because all the time I'm askin' 'em, "Is this a fixed rate," they sayin', "Yes, this is a fixed rate."
BRANCACCIO: It turned out that she had been sold an adjustable rate mortgage. She's skeptical about bailing out Wall Street.
WILLIAMS: I don't see where that's gon—that's gonna help. That's gon—not gonna help the economy. It's not, because we gonna have more people in foreclosure. We got a lot o' people losing they—homes, they—income.
BRANCACCIO: The folks from acorn had questions, and so did the committee. If treasury secretary Henry Paulson was expecting an easy ride, he did not get it in front of senators. Senators like Richard Shelby, the committee's ranking republican.
SEN. RICHARD SHELBY: What does it do to the homeowner who's losing their home?
SECT. HENRY PAULSON: Well, I would say, regrettably, there's not every homeowner that's going to save their home. As —as you well know, even in normal times, in good times, there are many foreclosures. There's some people that can't afford to stay in their home.
BRANCACCIO: Democrats were also not in the mood to be railroaded. We caught up with North Dakota Senator Byron Dorgan in the hallway outside his office.
DORGAN: I don't think that we should be stampeded. I think it's much more important to get this right than to get it done. There's a lot riding on this. And—what I see is a powerful, powerful set of influences to come to Congress to say, "Make sure you bailout all the big interests here." Well, you know what? America is made up of a whole lot more than just big interests.
BRANCACCIO: Democrats had alternate plans in the works, both on the House side, led in part by Barney Frank of Massachusetts and in the Senate by Christopher Dodd of Connecticut, chair of the Senate Banking Committee.
SILVERS: I'm feeling better today than certainly I felt on Saturday night, when I saw—what Hank Paulson had in mind. I think that—we've seen—Harry Reid, Senate Majority Leader Nancy Pelosi, the House Speaker, Senator Obama—all basically articulate this same set of concerns and demands. And now we've seen a concrete proposal that is a responsible one. It's not a perfect one, but it's a responsible one, from Senator Dodd.
You—you know, you can't fight something with nothing. We now have something. Those are both—those are all encouraging things. And we've also seen a universal—chorus of criticism for this idea of giving the Bush administration in its last days in office, essentially an open checking account on our money with no oversight. No one seems to like that. And that's a good thing.
BRANCACCIO: But even as Silvers was working his angles, the financial lobbyists were working theirs. Steve Bartlett is with a powerful group in Washington called the Financial Services Roundtable.
BARTLETT:It's extraordinarily urgent that we get the legislation in place and that Treasury start and that we actually start to stabilize the market. Last week—we really reached a point of—of—of crisis almost on the brink—where the market started to close down—
BRANCACCIO: I don't know if this is a big issue or a little issue, but a lotta talk right now of the government actually getting an equity stake in the companies that it takes on the bad debt of. In other words, we the taxpayer—essentially owned parts of that company after all is said and done. What's the round table's position on that?
BARTLETT: Well, that's not necessarily a bad—a bad thing, because you want the taxpayers to be reimbursed for their—for taking the risk. You don't really want the government to own private equities in private companies. You—that's really a bad thing philosophically. Now, maybe we'll end up doin' it, but it's not necessarily a good thing.
BRANCACCIO: What is the round table make about these efforts to—insure that executives whose companies get into trouble and the government has to bail 'em out, that the executives are not—don't walk away with big pay packages?
BARTLETT: Well, w—I mean, we agree with that. It's—it's some kind of an idea that somehow the government should set salaries of people that make more money than I do. And it's a bad idea. Now, it's political season and so people like, you know, e—executives are—fair—fair game as a target these days and so there's lots of shootin' at 'em. But, nevertheless it does—it really sh—is not related and shouldn't be a part of it. But, political season it is.
BRANCACCIO: David Cay Johnston knows all about how political decisions can have huge economic consequences. He's a former New York Times reporter who has documented ways the U.S. economy and tax system can be stacked against working families. He's doubtful any new rule limiting CEO pay would have much of an effect.
JOHNSTON: It's just window dressing. The—the government can't regulate compensation these guys, they're really smart. They understand money really well. They're gonna figure out a way to get paid. If the government has a rule, they just find a way around that rule. They're going to get paid what they're going to get paid.
BRANCACCIO: The title of Johnston's latest book would resonate with many on both sides of the political aisle these days: it's called "Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense and Stick You With the Bill". What could make a real difference, Johnston says, is not a bailout for industry, but this idea of letting bankruptcy judges help people stuck with bad mortgages.
JOHNSTON: If you give the bankruptcy judges the authority to rewrite these contracts, in effect, then those people who could stay in their homes at current rates will do so. And those people who are scallywags who were gaming the system will get thrown out.
BRANCACCIO: As the Dow closes down 161 on Tuesday, a drop of 540 points for the week so far, there's a concrete sign in front of AFL-CIO headquarters that it's also political season. Who's that walking in for a crisis talk? Joseph Biden, Democratic candidate for higher office.
Biden's boss, Barack Obama, has now announced four key recommendations of his own for the bailout bill, that are mighty similar to the four key points the AFL-CIO's silvers and his allies have been circulating.
SILVERS: This situation, like every situation that matters, requires some courage, all right. It requires the courage to do what's right for the country—and stare down this administration. And as we film this it is unclear whether that will happen.
BRANCACCIO: Another tense evening passes in Washington... and another hectic day starts for Damon Silvers.
SILVERS: It's Wednesday, right?
BRANCACCIO: They're beginning to blur together.
SILVERS: Overnight—the general situation on the Hill was very—confused and—a lot of anger, and—both from the left and the right—aimed at—aimed at the idea of a bailout.
BRANCACCIO: New York Senator Charles Schumer, a Democrat with a decent number of friends and supporters on Wall Street is talking about breaking the bailout into phases...not 700 billion dollars all at once but perhaps as little as 150 billion to start.
SILVERS: We are interested in that idea because of the fundamental problem here of breaking the bank. Right? And of destroying the ability of our society to respond to our—our fundamental—economic problems in terms of healthcare, infrastructure, education—the things that the American people need.
BRANCACCIO: It's a little before Wednesday noon and the Dow is rattling around its lows for the week so far. Silvers says he may go up to capitol hill later in the day and he's already been speaking with union leaders from all over the country.
And a phone call delivers word about something brewing in New York for Thursday...not in the buildings overlooking Wall Street but on the street itself.
SILVERS: —So here's the news for you. All right? The New York City Labor Council has called an emergency protest rally on Wall Street—over the bailout. President Sweeney is going. The—the—the—the headline is "No Blank Check for Wall Street." You know—you know help for Main Street. Accountability. That kind of thing.
BRANCACCIO: On Capitol Hill, it's the House of Representatives' turn to air its fury about the country being shoved into this predicament. Republican Steven LaTourette of Ohio urged the treasury secretary—with fed chairman Bernanke at his side—to stop talking over people's heads about what could happen if there's no bailout. Break it down, in other words, for you out there on the sofa.
LATOURETTE: My guy on the couch, he doesn't understand that. If we don't do this, is he going to have a job? Can he buy a car? If he goes to the ATM, is his credit card going to work?
PAULSON: I should just say he should be angry and he should be scared, and the —and I think, right now, he's angrier than he is scared. And it puts us in a difficult position, because no one likes to be painting an overly dire picture and scaring people.but the fact is that if the financial markets are not stabilized, the situation can be very severe.
LATOURETTE: I get that he should be concerned about it and I know you don't want to scare people, but somebody has to say if we don't do this, you may not have a job, you may not have a car, your kid's not going to college.
BRANCACCIO: Back at the AFL-CIO headquarters, Silvers is awaiting details of both House and Senate versions of a bailout. Word is that a limit on executive compensation, an idea first considered a non-starter by Republicans, is now moving forward. Silvers big boss, John Sweeney comes through and is characteristically direct on this point.
SWEENEY: I just—had a phone call this afternoon from—an—an employer in New York. A very wealthy person who was asking me what our position was on—on these various issues. And stressing how important it was that CEO compensation be addressed in this. And—and that—that there be—some restrictions on the obscene situation that we have today.
BRANCACCIO: There have been other high level conversations for Sweeney, including a talk with no less than the Speaker of the House, Nancy Pelosi. Progress on the bill is slow.
SWEENEY: I don't know if they'll be able to move as quickly as they—as they would like to. Some would like to see something pass by Friday. It looks like it may take longer. Especially to go through both houses. But I—I would expect that—within the next two weeks it should all be—it should all be—accomplished.
BRANCACCIO: It's clear Sweeney, Silvers and their allies are struggling with how far to push their demands without pushing the financial markets over the edge. That night it's the president of the United States' turn to make the case, that now's not the time, he says, to let the "irresponsible actions of some undermine the financial security of all." The president uses conciliatory language, including some on CEO pay.
PRESIDENT BUSH FROM SPEECH: It would be designed to insure that taxpayers are protected. And it would make certain that failed executives don't receive a windfall from your dollars. And it should be enacted as soon as possible.
BRANCACCIO: It's now Thursday. There are two kinds of rallies that play out simultaneously on Wall Street this morning. First, the stock market rallies on predictions a deal on a bailout is congealing in congress. And there's the other kind of rally out on the pavement of Wall Street. The New York City labor movement gets hundreds of people to turn out. John Sweeney made it from DC. And we caught up with Diana Robinson from Union Local 1500.
ROBINSON: It's not just about the rich that have power that working class has power also and that we can come together when we are united.
BRANCACCIO: In Washington, Silvers remains worried that the bailout still does not focus enough on people at the lower end of the income scale. For instance, it's not clear at this stage if bankruptcy judges will be granted new latitude to lower mortgage payments to keep people out of foreclosure.
SILVERS: The way in which you get the economy moving—is to—is to—try to—is to try to infuse liquidity—and aid—in—into where the economy actually functions, as opposed to the finance people above the economy. And—that's what they're refusing to do. It's not just that it's immoral, it's bad economics.
BRANCACCIO: The word on the street is that key congressional players from both parties now agree on what the deal should look like. Senators McCain and Obama head to a meeting with the president and congressional leaders at the White House. A bid for bipartisan recognition that everybody had to get his hands dirty if such an ugly, expensive, and unpopular piece of legislation is to get passed.
SILVERS: Something may happen. Right? You see how cau—cautious I'm being. Something may happen. Will—will bills move through both houses of Congress, any bills—that we've been dealing with as we move through both houses of Congress
BRANCACCIO: But as Thursday night falls on Washington, the deal falls apart. The White House meeting ends in rancor as republicans reveal a new plan to have government-backed insurance pay for much of the bailout. And by Friday morning it's pretty clear the bailout will not be going anywhere this week. There's still heavy opposition, especially from some deeply conservative republicans who still can't stomach so much public sector money for what they see as a private sector catastrophe. Let industry do more to fix itself, is part of the strategy there. But as Johnston points out, that's how we got in this mess in the first place.
BRANCACCIO: So what's the plan then? Some of the greatest minds—who have been doing this for a while presented a plan. The political process has modified it, but we just have to accept the pain?
JOHNSTON: Well, we absolutely have to accept the pain. Assets have been artificially pushed up in value. They've been inflated. They have to deflate. They have to come back to earth fundamentally there's no escaping that there will be a lot of pain that's gonna endure for a long time because of these policies that said, "Oh, we can trust these unregulated institutions. They'll know what to do." You know, that would be the same as if we said, "You know, drivers are responsible. So let's get rid of stop signs, traffic lights, speed limits and drunk driving laws." We all know what would happen. Rules define a civilization. And we've allowed our civilization's economy to be controlled by a place that has no rules.
BRANCACCIO: What should you be doing with your money during these uncertain times? Ann Lee, a Pace University finance professor who worked on Wall Street for over a decade, answers questions about the country's economic mess and what it means for you. Find this and more on our website.
And that's it for NOW. From New York, I'm David Brancaccio. We'll see you next week.