Greek Classics Revisited

For those of you who may think that the current financial crisis is unique, I would submit that this type of drama goes all the way back to ancient Greece.  In many ways, what we are seeing resembles the Iliad (minus the blood, gore and interventions by the gods, but otherwise pretty close).  Before you claim I’m totally off my rocker, consider the plot of the Iliad:

Agamemnon and Achilles quarrel over the distribution of riches; Achilles goes off to sulk in his tent; the war goes on without Achilles; Patroclus, Achilles friend, goes off to fight pretending to be Achilles; Hector slays Patroclus; Achilles slays Hector; Achilles and Priam, Hector’s father, weep together at Hector’s funeral.

Now consider the current financial crisis:

Congress and the Treasury Department quarrel over the distribution of the $700 billion rescue package; the House of Representatives goes off to sulk and refuses to pass a bill; the crisis goes on without Congress, with the equity markets declining by record amounts the day after Congress fails to pass the package; Paulson and Bernanke attempt to quell the financial markets without the backing of Congress; the markets collapse worldwide; Congress passes a rescue bill that limits some of the damage done and finally, Congress holds hearings and weeps over the failure of Allen Greenspan to warn of the dangers of the deregulation in the financial markets.

It almost makes you think that there may still be Greek gods out there staging all of this for their own amusement.

Just to top this analogy off, students of Greek literature will remember that the Iliad was followed by the Odyssey.  This means that we will still have to deal with the Sirens (think about all those pitches for alternative investments that could diversify your portfolio), witches that turn men into pigs (think about what’s happened to your 401(k) account lately) and navigating between Scylla and Charybdis (found any good place to put your money yet?).  Oh, and by the way, it took Odysseus ten years to get back home.

On that happy note I will bring this post to a close before I sound like a Greek chorus.

What Went Wrong With the Bailout

First of all, let me say that I have the utmost respect for Hank Paulson.  When I worked at Walgreens, Hank was the Goldman Sachs partner in charge of Chicago and I had the pleasure of dealing with him on a number of transactions.  He has a terrific knowledge of the financial markets and knows how to get things done on Wall Street.  However, that doesn’t necessarily mean that he knows how to get things done in Washington.  Herewith are a few modest suggestions that could have helped get the legislation through the halls of Congress, based on my years of dealing with communications issues, investors, and corporate management.

Naming

The people at Treasury never should have let this proposal see the light of day if it was going to be called a bailout.  They should have labeled their efforts the “Financial Securities Reform Act or, better yet, something that made a snappy acronym that highlighted the fact that they were going to take charge of the markets and wrestle down to earth all of these mortgage backed securities and collateralized debt obligations.  The agenda should have been reform, not bailout.

Offer Terms

Treasury treated Congress as if it were corporate management of a bank that was about to be seized by federal regulators.  The original proposal for legislation contained provisions that simply were not politically palatable to Congress – giving huge new powers to Treasury that were not reviewable by Congress or the Federal Courts and putting no limits on corporate compensation of executives of firms that benefited from the legislation.  Yet these were the same people who would have to vote on approving the funds, and are facing re-election in a month.  Then the people at Treasury proceeded to argue about it when Congress tried to make changes.  If the people at Treasury really wanted to get things done quickly, a more middle-of-the-road proposal that recognized some of the political realities would have worked much better.

Educating the Public

Your average American (and Congressman) does not understand the workings of the credit markets and how it affects them personally.  The perception of the legislation was that the U.S. taxpayer was going to buy all of these distressed securities from the big, bad banks leaving the banks free and clear and the taxpayer with the bill.  The reality is far more complex.  Banks are required to mark their securities to market. When fear grabs the credit markets and securities can’t trade, marking to market results in a cascade of lowering valuations that feeds on itself and erodes banks’ capital position.  With eroding capital, banks can’t lend and the economy grinds to a halt, and everybody from Wall Street to Main Street suffers. Treasury should have made it clear that their role was similar to that of a specialist or market maker.  They were going to step in, provide a market for the securities, initially as a buyer, but eventually as a seller as well. Banks, in selling to Treasury are going to take a loss, albeit not as big of a loss as if there were no buyer.  The point that needed to be made to the public was that banks were going to suffer here, not get off Scott free, and the ultimate beneficiaries are all people that borrow from banks, which is pretty much everyone in the U.S.

Treasury is not subject to mark to market accounting rules and can wait until the markets return to a semblance of order before selling.  In all probability, Treasury will probably make money on these trades as they can afford to wait the market out.  We may not know exactly what these mortgage backed securities are worth, but they clearly are not worthless and probably worth more than panicky sellers will unload them for.  One of the axioms of Wall Street is that you can make a lot of money if you can afford to be patient during a crisis.  So the second big educational point that needed to be made was that the intervention into the markets by Treasury would eventually be to the benefit of the U. S. taxpayer.

You can argue that the folks at Treasury and the Federal Reserve were in crisis mode and not thinking about communications issues, but if you want to get things done in Washington, communicating the story in the right way is half the battle.