Britannia Radio

• Welcome to Wall Street’s cash machine

  Hank Paulson’s plan to save the banks could cost a trillion dollars, says Philip Delves Broughton

  It used to be a joke that Goldman Sachs was taking over America. Its former employees seemed to be everywhere, running the US Treasury, working behind the scenes at the White House and managing a startling number of financial institutions. But it's not a joke anymore.

  On the day Goldman seemed, very briefly, as if it was sliding towards the same fate as Lehman Brothers, its former CEO, Hank Paulson, now the Treasury Secretary, staged what amounts to a takeover of the US federal government by Wall Street.

  His "comprehensive plan" to buy up most of the toxic products gumming up the world's financial system will be the defining challenge for America's public finances for years to come. Forget about increased spending on health care or education. The federal budget has become Wall Street's cash machine,

  accessible day and night to bankers pleading liquidity problems.

  News of Paulson's dramatic meeting with Federal Reserve chairman Ben Bernanke and members of Congress emerged after the Federal Reserve unleashed $180bn onto the world's credit markets in just a few hours, only to see it sluice off the back of the crisis. Only after the markets learned of a possible "comprehensive plan" to deal with the problem did they shoot up (410 points on the Dow).

  The model being proposed is similar to the Resolution Trust Corporation (RTC), established in the late 1980s to mop up after the Savings and Loan crisis, when hundreds of small banks across America went bust because of bad loans. The RTC bought the bad loans, held them and sold them over time. Taxpayers eventually lost around $125bn on the deal.

  Will this be any different - other than on a much larger scale? This year's federal budget was estimated at $2.9tr. The Treasury has already been issuing bills at a head-spinning rate to pay for the nearly $300bn it has made available to bail out AIG, Freddie Mac and Fannie Mae and Bear Stearns. This new plan to seize control of all the illiquid assets out there could very quickly take the government's outlay beyond a trillion dollars.

  The Speaker of the House of Representatives, Nancy Pelosi, said last night she wanted to know "how these captains of the financial world could make millions of dollars in salary, and yet their companies fail and then we have to step in to bail them out".

  If he is to justify his coup, Secretary Paulson had better have an answer. 

  FIRST POSTED SEPTEMBER 19, 2008