If Congress Agrees to This Rip-off Bailout, We'll Be Handing the Money to the People Who Got Us in This Mess

The Bush administration is infamous for handing over its responsibilities to the private sector -- often with disastrous results -- so it is no surprise that Treasury Secretary Henry Paulson wants to outsource the implementation of the Big Bailout he is now trying to ram through Congress.

Paulson has indicated he wants to hire private asset managers to carry out the purchase of some $700 billion in "troubled" securities. (That's after the federal government had already sunk a total of $900 billion into the housing and credit mess this year.) No restrictions are being placed, so far, on who these money mangers would be. This leaves open the possibility that some of the same firms that are being bailed out could be hired to oversee their own rescue. Institutions benefiting from a monumental giveaway of taxpayer money could turn around and earn yet more by acting as the government's brokers. Aside from the unseemliness of this double-dipping arrangement, there would be egregious conflicts of interest.

Paulson's original legislative proposal was oblivious to this danger. Senate Banking Committee Chairman Christopher Dodd put forth a competing plan that went along with the idea of contracting out the asset management, though he had the decency to include a provision on conflict of interest. Yet rather than stating what the ethical rules should be, Dodd's draft would leave it up to the Treasury secretary to decide.

Paulson's approach to the bailout, particularly the insistence that there be no punitive measures for banks, shows he is not the right party to oversee the ethical issues. Paulson apparently can't help himself. He still has the mindset of a man who spent more than 30 years working on Wall Street, at Goldman Sachs. He is a living example of the perils of the reverse revolving door: the appointment of a private-sector figure to a key policy-making position overseeing his or her former industry.

Paulson also has personal conflicts of interest. Although he sold his Goldman stock after taking office, that $600 million personal fortune was presumably transferred to other investments that the current bailout plan would help protect. Paulson's wealth came from lavish executive compensation linked to his decision to shift the firm into more dangerous forms of investing. A 2006 article in Business Week about "Wall Street's culture of risk" read, "Goldman Sachs' CEO Henry M. Paulson Jr. has led the charge." Goldman managed to avoid the worst excesses that brought down the likes of Bear Stearns and Lehman Brothers, but under Paulson it was betting in the same general casino.

Given his background, Paulson is not likely to impose very onerous conditions on the money managers he hires. Even if Treasury has the good sense not to choose firms that are getting bailed out, there remain serious pitfalls in having for-profit money managers handling the process. For example, there will be enormous temptations for those managers to use their inside knowledge to benefit their nongovernmental clients (and themselves) or collude with buyers to the detriment of the public.

There have been reports that a leading contender for a federal money management role is Laurence Fink and his firm BlackRock, which was involved in managing the portfolio of Bear Stearns when that firm was sold to JPMorgan Chase as part of an earlier bailout. In March, BlackRock -- which is 49 percent owned by Merrill Lynch (now part of Bank of America) -- announced it was forming a venture to "acquire and restructure distressed residential mortgage loans." Will Paulson see that as a conflict of interest -- or more likely as a credential?

Letting financial firms that have profited from the mortgage crisis manage the bailout puts the country even more tightly in the grip of Big Money. To Paulson's way of thinking, that's not a problem, but it could turn a bad plan into a total disaster.