Economic news has been bad; is a massive bailout the answer?

Don Stowers
Editor-OGFJ

The news from the financial markets has been staggering. Here are some of the recent headlines: Credit crunch worsening Government seizes WaMu 1,000 bank closures ahead Lehman Brothers in bankruptcy $85 billion rescue of AIG End of an era in finance $700 billion bailout looms

It’s hard to know where to start in considering what went wrong in the financial sector. But one thing is certain – the crisis didn’t happen overnight, and there is no quick fix. Personally, I’m very conflicted about Treasury Secretary Henry Paulson’s bailout plan. Even he and Federal Reserve Chairman Ben Bernanke don’t know if $700 billion is enough to stave off a collapse of many of our financial institutions. Neither inspires confidence.

Congress is equally skeptical, as demonstrated by the Sept. 29 rejection of their proposal by the House of Representatives. The negative vote was highly unusual in that President George W. Bush AND the leadership of both parties had urged Congress to pass the measure and suggested that the country would face economic meltdown if they did not. However, Congressmen had been inundated with letters, email, and phone calls from constituents that reportedly ran as much as 80 to 1 against the bailout. It would have been political suicide for many of them to vote in favor of the plan.

There are two main schools of thought about the bailout: One, favored by the Bush administration and top Democrats and Republicans, says that the federal government needs to reassure investors and the financial community by providing cash guarantees to lenders, possibly as high as $1 trillion. The details of such a program are yet to be hammered out, but some are insisting that any such bailout carry increased regulatory oversight over the financial sector. In addition, some are insisting that caps be put on executive pay, and the so-called “golden parachutes” that some CEOs currently have even when they are terminated for poor performance be eliminated.

The other side argues that this amounts to corporate socialism and that we need to let the markets work this out. Eventually, they say, there will be an adjustment or correction, and things will settle down. The downside of this is the question of how much pain and suffering this will cause Main Street America and how long it will take for the “correction” to happen.

There are genuine concerns that middle-class Americans who have worked and saved all their lives and have a little invested in the stock market and in their 401(k) plans may end up with nothing. Certainly the stockholders in Seattle-based Washington Mutual must have wished their company could have been rescued before that huge bank was seized by the federal government and had its assets sold to Citigroup for about $1 a share.

Regardless of the turmoil in the financial sector, my view is that we can’t afford to give the treasury secretary a $700 billion blank check. Although Paulson promised to protect taxpayers with his bailout plan, he did not explain how he would do that. In addition, we will have a new President and a new treasury secretary in less than four months, and whoever is in the White House may have different ideas on solving the crisis.

The only thing clear to me is that there has been a shocking failure of government regulation. Washington should have seen this coming long before now and taken steps to mitigate the damage. Instead, the administration kept insisting that the economy was strong. It’s really too bad this crisis came to a head in an election year when it is politically imprudent for the party in power to admit that mistakes have been made.

As this issue of Oil & Gas Financial Journal goes to press, we do not yet have a final decision from Congress about the bailout plan. It is to be hoped that a consensus can be reached that will trump partisan rhetoric coming from both sides of the aisle. But whether or not a deal is reached, the economic crisis is far from over and its repercussions are already being felt by businesses, including those searching for and producing oil and gas, that no longer have the ready access to credit and capital they had just a few short months ago.