For a day, it seemed that interventions were over. The U.S. Treasury had allowed Lehman Brothers to file for Chapter 11 bankruptcy protection. The Federal Reserve tried to cajole the financial sector to extend a multibillion-dollar bridge loan to AIG, but no one wanted to – or could – step up. By midweek, as the world markets seemed on the verge of meltdown, U.S. taxpayers became owners of up to 79.9 percent of the giant insurance company, in exchange for a loan from the Fed that could reach $85 billion. Not enough, Treasury Secretary Henry M. Paulson and Fed chairman Ben Bernanke told Congressional leaders in a secret session. Treasury must now buy all of those nonperforming exotic securities gumming up U.S. financial institutions. And over the weekend he sent to Congress what could be described as a Mad-Lib, I’ll fill in the blanks proposal: No specifics, no detailed plan of execution, no limits on the secretary’s authority, and a carte blanche legal immunity. Give him $700 billion and Treasury will do the rest.
Paulson and President George W. Bush demanded that Congress act without delay and without altering the amorphous plan, or face responsibility for bringing down the global financial system. However, the world markets gyrated because Paulson’s proposal lacked specifics. Senate Democrats came up with their own version, adorned with CEO salary caps, regulatory imperatives, and oversight, along with aid to the foreclosed. Lurking in the hallways are all sorts of folks holding bad bets that they earnestly believe taxpayers should cover.