Deny Another Day

As investment banking collapsed, the dealmakers kept scrambling to make deals.

When Wall Street's final bacchanal shuddered to a halt, the most powerful intoxicant to the very end wasn't mortgage-backed securities but denial. Solutions to the enormous credit crisis seemed obsolete even as they were being proposed, mired as they were in the language and framework of the previous era-as though that era had not just died before our eyes.

In the rush to judgment day, Treasury Secretary Hank Paulson, for one, could not fathom the changed landscape that surrounded him. Paulson, the former Goldman Sachs C.E.O., had backed the biggest bailout in U.S. history. Yet he was still talking about solving the crisis with "market mechanisms." The last breath was gurgling out of this great experiment of having markets solve societal problems, yet here was Paulson, valiantly hoping to resuscitate the corpse.

Paulson was hardly alone in denying that investment banking as we know it has ceased to exist. As the system collapsed around them, Wall Street's bankers reacted the only way they knew how. The dealmakers were still desperate to make deals, and regulators and politicians were still acting as their handmaidens, arranging shotgun marriages in haste that might be regretted at leisure. Due diligence was abandoned as Bank of America snapped up Merrill Lynch; Barclays and Nomura bit off chunks of Lehman Brothers; Mitsubishi took a slug of Morgan Stanley. The government even enlisted mergers-and-acquisitions bankers to help it orchestrate the deprivatization of Fannie Mae and Freddie Mac. And Paulson, Federal Reserve chairman Ben Bernanke, and Securities and Exchange Commission regulators cheered them on, without having a clue where all that dealmaking was leading.

Paulson has never understood the origins of the crisis or its magnitude. He has insisted, from the moment the panic hit the markets, that it was contained. So it's no surprise that he and the Federal Reserve would suggest patchwork fixes and recklessly applied bailouts. The U.S. government helped bail out Bear Stearns but then sacrificed Lehman and reversed itself hours later to nationalize A.I.G. These efforts were fatally inadequate. The economy won't heal itself without time and the terrible societal pains of recession.

When the White House finally started taking the credit crisis seriously, it moved to shore up confidence in American financial markets by any means necessary-and wound up destroying confidence in the process. Paulson's initial plan called for no oversight: a classic power grab, in the Cheneyian mold. And S.E.C. head Christopher Cox attempted to quell fear in the markets by banning short-selling of many financial stocks, laying bare the Bush administration's attitude toward regulation: The rules are arbitrary, subject to change without warning.

Having failed to correctly diagnose the problem, calm the markets, or resolve the credit crisis, the administration then sought to initiate what could have been a $700 billion bailout. Paulson's plan was attacked, rightly, for failing to include any benefit for taxpayers. So Democratic lawmakers rushed to attach messy amendments, some calling correctly for more banking oversight, some calling for homeowner bailouts. Lobbyists wanted their pet projects attached, and banks wanted looser accounting and an assurance that the U.S. would buy their dodgy paper. House Republicans clung to their religion, killing the initial proposal and advocating a free-market solution to this market-generated problem-with lower taxes to boot.

Perhaps it's fitting that banking's collapse would be celebrated in one last great orgy. But the ritualistic wrangling reveals even more clearly that many are in denial about the finality of the era's closure.

The public, on the other hand, will have closure crammed down its throat. Some form of bailout will come eventually. The government might need to put up even more funding to shore up the Federal Deposit Insurance Corp., which guarantees bank deposits, and woefully underfunded state and local pension plans. But the real question isn't the size of the bill Wall Street has stuck us with, but this: Can we go back? Wall Street and Washington obviously think we can, given the worn-out solutions they have proposed to fix a crisis beyond their comprehension. But bankers and traders will not be pulling down mind-boggling bonuses for moving paper back and forth anytime soon. And beyond that, the government is going to have to stop conceiving market-based solutions for our economic problems.

Nobody seems ready to say goodbye to an age we've known since the 1980s-that idyll of yuppies, Gordon Gekko, and "Greed is good"-which continued defiantly through the crash of 1987, the savings-and-loan bailout, the collapse of Long-Term Capital Management, and the outbreak of false accounting at Enron and WorldCom. It took the credit crisis and various federal bailouts to snuff it all out. If Hank Paulson, Congress, and Wall Street haven't dealt with their grief, they will soon. What comes next is anyone's guess.

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