Big Bailout Questions Go Unanswered

Americans are really a pretty forgiving bunch, it seems. It was just a month ago that the entire country seemed ready to get out the tar, feathers and rail because ... well, what was it we were all so mad about? Seems to have slipped our minds recently. And that's really unfortunate.

Rage-based policy is a bad thing (remember the proposed confiscatory tax on AIG bonuses, which got tucked away about the same time we put back our pitchforks and torches). But rage tempered by reason can serve a genuine social purpose. And while the uproar over the bonuses was out of proportion, the real question underlying it -- was money intended to prop up the global credit system instead enriching people and companies that helped destabilize that system in the first place? -- is still hanging out there like a rotting flounder.

One reason the rage receded is that the immediate blood-pressure raiser, bonuses going to companies that got taxpayer handouts, was a legitimately infuriating but ultimately minor problem. However, it was an important symbol for what has gone wrong with bailouts. Back then I wrote that there was a real danger of the bonus flap obscuring far more serious issues, making it easy for potential scoundrels to walk off -- legally -- with their Gucci briefcases loaded with government-provided loot.

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The biggest questions then also involved AIG: What was all that money used for? Much of it went to huge banks here and abroad that had invested in AIG's credit default swaps, which amounted to insurance on mortgage-backed securities. But those banks, including the increasingly fat and happy Goldman Sachs, got 100 cents on the dollar even though only some of the loans they insured were bad. It's as if you had a serious kitchen fire but your insurance company reimbursed you for the whole house burning down.

Now, even more disturbing questions are starting to arise about Goldman Sachs -- and the firm is proving extremely adept at dodging them and is in the process of trying to pay back bailout funds it received from Washington, which would free it from considerable oversight and regulations. That shouldn't be allowed to happen until Goldman comes clean and shows that it has not benefited unfairly from taxpayer cash.

William Cohan, a writer at Forbes and author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, asked some of the most provocative questions about Goldman in an op-ed piece for The New York Times. Cohan points out that Goldman says it had "no material exposure to AIG" because of protective financial measures and counterbalances it had in place. Huh? So why did it get $13 billion from AIG after the government pumped the sagging insurance giant full of cash? And why did Goldman get $10 billion in government help last year if not at least for exposure to AIG? More disturbing, Cohan points out that Goldman is emerging from the crisis as one of the strongest financial institutions in the world because of moves that crippled its biggest competitors.

House Financial Services Committee Chairman Barney Frank, D-Mass., is gleeful that Goldman is trying to pay back the money it received from Washington. Well, seeing taxpayer money returned the Treasury is a good thing, but Congress shouldn't accept a dime until it learns more about Goldman's transactions and how help from Washington, intentional or not, may have helped its competitive advantage. For one thing, Cohan points out that returning the money would free Goldman of limits on bonuses. That means the company could hire talent away from competitors who could not match them -- which is most if not all of them. For another, Congress made great political hay out of the bonus issue, in part because it was such an easy target. Those bonuses are pocket change compared to the money Goldman made during the crisis. So instead of going for the cheap shot, lawmakers need to earn their keep and ask the tough questions -- why and how did Goldman prosper when so many others died out?