Wall Street

The bailout crashed, and so did democracy.

Democracy is not perfect, and one of its many imperfections is that voters tend to be ignorant. I don't mean to be insulting. There are, after all, perfectly rational reasons for this ignorance. In a republic of 300 million, the chances of an individual vote affecting a national outcome are slim, and it makes little sense for the individual voter to invest scarce resources in learning about complicated issues, like health care or foreign policy or, just to pick another subject at random, the economy.

Why Barney Frank and Chris Dodd's plan to regulate executive compensation makes economic sense.

Treasury Secretary Hank Paulson spent the first half of this week warning us that the executive compensation regulations proposed by congressional Democrats will appear "punitive" and scare financial institutions away from participating in the federal bailout. The fact that Paulson has now given in should please, among others, Congressman Barney Frank, who spent the week arguing that such regulations were an issue of fundamental fairness. In Frank's words: "I don't want the federal taxpayer to be at risk for their bad debt and then the guy who incurred the debt gets tens of millions of dollars on the way out the door.''

The financial services industry is tanking. Here's what McCain and Obama won't tell you about the crisis.

When John McCain said last week that the "fundamentals of our economy are still strong," he was wrong twice. First, he was wrong to suggest that the annihilation of modern investment banking was something peripheral to economy. Second, when he claimed that "fundamentals" referred to the robust American workforce, he was wrong again to suggest that average Americans somehow represent a fortress of strength against the onslaught of the credit crisis. On the contrary, we've met the enemy, and the enemy is in our own purses and pockets.

As Lehman Brothers melts down, the economy comes up on the campaign trail.

In times of crisis, financial reportage has a tendency to slip into the apocalyptic style of Old-Testament prophecy. "They shall cast their silver in the streets, and their gold shall be removed: their silver and their gold shall not be able to deliver them in the day of the wrath of the LORD: they shall not satisfy their souls, neither fill their bowels: because it is the stumbling block of their iniquity." Ezekiel could have been writing for a major financial paper during any of half a dozen panics over the last two decades. As it happens, I was doing technology work on a trading floor during the Asian meltdown in 1998, and I heard a young trader ask a grizzled veteran whether this was the worst crisis ever. The older man shrugged.

"They're all the worst ones when they're happening."

This insight has calmed me through several subsequent panics. But when an op-ed in this morning's New York Times called the possibility of an AIG liquidation "as close to an extinction-level event as the financial markets have seen since the Great Depression," it wasn't hyperbole; it was a statement of fact. The world's largest insurer has its tendrils planted in every corner of the financial world, including insuring the remaining solvent financial institutions against defaulting mortgage bonds. A failure would send those institutions scrambling for new cover, while dumping billions of dollars of assets into already depressed markets. This, in turn, would weaken balance sheets, possibly pushing other institutions along the footsteps of Lehman and Merrill Lynch.

On Thursday, two Bear Stearns executives surrendered to federal agents over charges that they had misled investors about the state of Bear Stearns hedge funds.

As night follows day, arrests follow financial scandals. Investors in those funds can't be unhappy about seeing their managers doing the perp walk. And the evidence certainly seems damning. Days before they delivered an upbeat assessment to their investors, the two execs were exchanging worried e-mails about the state of the funds. "I think we should close the funds now," one wrote. Instead, they reassured their worried customers. Only a month later came the now-infamous meltdown that eventually led to the fire sale of their 85-year-old firm.

Wall Street greets the resignation of Eliot Spitzer.

Republicans are gleeful at Spitzer's downfall, but if you want to witness real ecstasy, visit Wall Street. As New York's attorney general, Spitzer made his political career on attention-grabbing settlements with banks, insurance companies, and mutual funds, positioning himself as the only man willing to clean up Wall Street's mess. To Wall Streeters, however, he was a bully and a boor, less a legal eagle than a rogue prosecutor and one-man Star Chamber.

Many of the abuses he attacked were real. He went after the tendency of equity research to serve investment-banking clients, rather than the retail investors who were reading it. And his inquiry into mutual funds who were letting big clients profit by trading shares after market close ended a scandalous practice.

But his methods were deeply troubling. MORE