by Denis Campbell

Toto (John McCain and Barack Obama) grabbed at his pants leg as his voice boomed, “I am the Great and Powerful Financial Oz!” Or so Hank Paulson, former CEO of Goldman Sachs wanted to say while his puppet, still President George W. Bush made a 2-minute appearance and his surrogates warned Democrats to not dare touch his £700 billion bailout bill. 

In an extraordinary Sunday morning, Paulson basically said that our regulatory system was screwed and unless you appoint me economy Czar, markets will melt into a sea of blood. And why you’re at it, you need to merge into Treasury the powers of the SEC and the Federal Reserve, giving me supreme power to create and raise capital to bailout the banking system. Or something to that effect… 

In a stunning financial coup d’état, what he did say is that without action this week, nothing can be done to avoid a complete financial meltdown/collapse.

The former CEO of Goldman Sachs, as of this morning now a proud regulated bank holding company, is cowing Congress into believing a solution is required now, now as my friends in South Africa would say to prevent global financial meltdown. Here is a man who oversaw the creation of many of the instruments asking us now to “trust him.” What was really funny was him lecturing a group of people, US Congressmen and women, who wouldn’t know a zero coupon yield curve from an accreting swap derivative (not to say that I would know without looking up on McCain’s “the Google” which he created on the 7th day after he finished inventing the Blackberry).

But here’s the deal. Congress may not know, but they and their lobbyist advisors sold their souls and our futures down the river on the backs of these deals and we’re left holding the bill. 

Economist Paul Krugman said today in his New York Times Op-Ed piece:

“The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description (4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”) Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place. 

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.”

And never before have two Presidential candidates so close to an election been so marginalised by an issue as this. Obama looked Presidential, McCain, as usual, blamed Obama. One of the panellists on a news show had a furious McCain surrogate on his Blackberry saying the Paulson plan is what McCain recommended last week. His reply, “nobody cares.” The candidates are on the sidelines and must wait to see what comes next and if they can live with it and pray they are not boxed in by either side in the debate.

On Friday’s Hardball with Mike Barnicle sitting in for Chris Matthews, he read a letter to the financial panel from a guy asking for a bailout of his $92,000 in student loans. The panel chuckled and said, “no chance fella” and therein lies the rub. We cannot afford to let AIG go under but we sit idly by and watch millions of folks lose their homes, jobs and investments.

And yet as my friend Charley James writes today, because some are afraid of a black man as President, the polls are close? Well BOHICA baby!

(Read Charley James’ piece to figure out what that means. Bend Over are the 1st two words.)