Market traders and investors around the world are closely following debate in the U.S. Congress over a Wall Street rescue plan proposed by U.S. Treasury Secretary Henry Paulson. The plan would allow the Treasury Department to commit hundreds of billions of dollars in taxpayer money to purchase bad loans from banks.
RFE/RL correspondent Ron Synovitz discusses the plan with Nicholas Dunbar, author of "Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It."
RFE/RL: What do you see as the roots of the turmoil on global financial markets, and what variables are you watching in order to predict how the markets will react in the future?
Nicholas Dunbar: The fundamental variable behind it has got to be the U.S. property market, the U.S. real estate market. We've seen context of quite loose financial regulation in the United States where it is a spaghetti of financial regulation. It is incredibly diverse and confusing who regulates what -- whether firms are federally regulated, whether they are banks, brokers, insurance companies.
It's incredibly confusing and it is the outcome of many years of often well-intentioned law making. It has led to huge amounts of financial innovation, which has created a bubble in real estate prices in the United States. That was unsustainable.
It is now coming down very fast in terms of prices. The question is whether the prices that are currently prevailing in the United States will flatten out, or whether there is going to be an additional recession -- an additional decline in the economy.
RFE/RL: How could the real estate market in the United States led to so much uncertainty -- even panic -- in the global marketplace?
Dunbar: The question that has created the uncertainty -- and the uncertainty has led to panic and has led to the Armageddon scenarios of the market in the last week -- has been "how much are the assets of banks actually worth?"
The bubble was created, really, on the basis that the whole market was geared toward this vision of increasing real estate prices -- residential real estate, commercial real estate, other assets like student loans, credit cards, etc, etc. The idea of secure financial assets. The rating agencies were convinced as well. All the gatekeepers of the financial system were lulled into this belief in the valuation of assets.
That's now been torpedoed below the waterline -- this idea that this ship could carry on floating. And as that uncertainty increased, the sense of panic about the writedowns of valuations has increased as well. So that's where we've currently got to.
Wall Street Vs. Main Street
RFE/RL: Treasury Secretary Paulson has proposed that the U.S. government should commit hundreds of billions of dollars in taxpayer money to purchasing those risky mortgage-related assets -- the nonperforming loans that were secured against real estate collateral that is now rapidly losing its resale value. What do you think about Paulson's proposal?
Dunbar: Paulson has tried to take some decisive action by saying effectively to the U.S. government, "We are going to borrow as much money as necessary to stop things getting any worse." The question is, does the political will exist for some difficult decisions to be made about whether people should be bailed out, whether there is a feeling of the need to punish the excesses of the financial markets, whether the U.S. economy is going to be able to recover simply because the U.S. taxpayers are digging into their pockets to try and stop the short-term declines.
RFE/RL: Some critics are asking whether a bailout of Wall Street is even necessary. Others complain that Paulson's plan lacks the necessary oversight. In fact, in its original language, the proposal would ban legal challenges to decisions by the Treasury Department on which bad loans would be purchased. Do you think there is any chance that Congress will pass such a plan?
Dunbar: I don't think Paulson's plan is going to survive unchanged into the rest of the week. You've got people in Congress already asking for additional oversight. I think it's going to be impossible for the Bush administration to get this proposal through Congress without some big changes being added to it by Democrats. That's a done deal in my view.
There's going to be some oversight for it. There's probably going to be some issues about how much money the U.S. taxpayer can make out of these deals. There's going to be a question about punishment for the excessive risk taking -- the excessive compensation of Wall Street.
That's a very popular mood. It's a mood that may well win [Democratic presidential candidate] Barack Obama the election. And I think people across the United States are going to jump on this idea of Wall Street versus Main Street. It's a very easy theme to tap into.
RFE/RL: Before Paulson became the U.S. treasury secretary, he was the CEO of Goldman Sachs, the powerful Wall Street banking group that engages in investment banking, securities, and investment management. Some critics already say his bailout plan is aimed at saving his elite Wall Street friends. How do you respond to those critics?
Dunbar: Paulson is effectively a lame duck treasury secretary -- just like the president. That said, he's trying to do his best.
If you look at the track record of the financial regulators in the United States, they have really been trying to improvise. It's improvised financial regulation. That's what we've had this year. It's like jazz. They've been trying to make it up as they go along, and whether the musician is skilled enough to play good music or cacophony is the key thing.
The real issue is the oversight -- the question of what the taxpayer is going to be requiring in return for this money. And that is going to be thrashed out in Congress during the next four days.
RFE/RL: What lessons are to be learned from the market turmoil of the past year?
Dunbar: We're not only going through a de-leveraging of financial assets, but we are also going through a backlash against financial innovation and complexity. So that is really what the lesson is this year. The political masters of the financial markets know who they are now. And taxpayers know that they are ultimately in charge. And they are going to demand their pound of flesh.
RFE/RL correspondent Ron Synovitz discusses the plan with Nicholas Dunbar, author of "Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It."
RFE/RL: What do you see as the roots of the turmoil on global financial markets, and what variables are you watching in order to predict how the markets will react in the future?
Nicholas Dunbar: The fundamental variable behind it has got to be the U.S. property market, the U.S. real estate market. We've seen context of quite loose financial regulation in the United States where it is a spaghetti of financial regulation. It is incredibly diverse and confusing who regulates what -- whether firms are federally regulated, whether they are banks, brokers, insurance companies.
It's incredibly confusing and it is the outcome of many years of often well-intentioned law making. It has led to huge amounts of financial innovation, which has created a bubble in real estate prices in the United States. That was unsustainable.
It is now coming down very fast in terms of prices. The question is whether the prices that are currently prevailing in the United States will flatten out, or whether there is going to be an additional recession -- an additional decline in the economy.
RFE/RL: How could the real estate market in the United States led to so much uncertainty -- even panic -- in the global marketplace?
Dunbar: The question that has created the uncertainty -- and the uncertainty has led to panic and has led to the Armageddon scenarios of the market in the last week -- has been "how much are the assets of banks actually worth?"
The bubble was created, really, on the basis that the whole market was geared toward this vision of increasing real estate prices -- residential real estate, commercial real estate, other assets like student loans, credit cards, etc, etc. The idea of secure financial assets. The rating agencies were convinced as well. All the gatekeepers of the financial system were lulled into this belief in the valuation of assets.
That's now been torpedoed below the waterline -- this idea that this ship could carry on floating. And as that uncertainty increased, the sense of panic about the writedowns of valuations has increased as well. So that's where we've currently got to.
Wall Street Vs. Main Street
RFE/RL: Treasury Secretary Paulson has proposed that the U.S. government should commit hundreds of billions of dollars in taxpayer money to purchasing those risky mortgage-related assets -- the nonperforming loans that were secured against real estate collateral that is now rapidly losing its resale value. What do you think about Paulson's proposal?
Dunbar: Paulson has tried to take some decisive action by saying effectively to the U.S. government, "We are going to borrow as much money as necessary to stop things getting any worse." The question is, does the political will exist for some difficult decisions to be made about whether people should be bailed out, whether there is a feeling of the need to punish the excesses of the financial markets, whether the U.S. economy is going to be able to recover simply because the U.S. taxpayers are digging into their pockets to try and stop the short-term declines.
RFE/RL: Some critics are asking whether a bailout of Wall Street is even necessary. Others complain that Paulson's plan lacks the necessary oversight. In fact, in its original language, the proposal would ban legal challenges to decisions by the Treasury Department on which bad loans would be purchased. Do you think there is any chance that Congress will pass such a plan?
Dunbar: I don't think Paulson's plan is going to survive unchanged into the rest of the week. You've got people in Congress already asking for additional oversight. I think it's going to be impossible for the Bush administration to get this proposal through Congress without some big changes being added to it by Democrats. That's a done deal in my view.
There's going to be some oversight for it. There's probably going to be some issues about how much money the U.S. taxpayer can make out of these deals. There's going to be a question about punishment for the excessive risk taking -- the excessive compensation of Wall Street.
That's a very popular mood. It's a mood that may well win [Democratic presidential candidate] Barack Obama the election. And I think people across the United States are going to jump on this idea of Wall Street versus Main Street. It's a very easy theme to tap into.
RFE/RL: Before Paulson became the U.S. treasury secretary, he was the CEO of Goldman Sachs, the powerful Wall Street banking group that engages in investment banking, securities, and investment management. Some critics already say his bailout plan is aimed at saving his elite Wall Street friends. How do you respond to those critics?
Dunbar: Paulson is effectively a lame duck treasury secretary -- just like the president. That said, he's trying to do his best.
If you look at the track record of the financial regulators in the United States, they have really been trying to improvise. It's improvised financial regulation. That's what we've had this year. It's like jazz. They've been trying to make it up as they go along, and whether the musician is skilled enough to play good music or cacophony is the key thing.
The real issue is the oversight -- the question of what the taxpayer is going to be requiring in return for this money. And that is going to be thrashed out in Congress during the next four days.
RFE/RL: What lessons are to be learned from the market turmoil of the past year?
Dunbar: We're not only going through a de-leveraging of financial assets, but we are also going through a backlash against financial innovation and complexity. So that is really what the lesson is this year. The political masters of the financial markets know who they are now. And taxpayers know that they are ultimately in charge. And they are going to demand their pound of flesh.