Stephen Foley: Never forget: the bailout was right

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The Independent Online

US Outlook: I have been going back and re-reading the newspaper coverage of those few days after Lehman Brothers collapsed in September 2008, and regretting a lot of things.

When Barack Obama said in his State of the Union address this week that the bailout of Wall Street was "about as popular as a root canal", it was a rather nervous little joke. The public anger is starting to threaten his presidency and, he must know, is also starting to threaten important tenets of how we keep a modern economy on the rails.

I am scared by the popular anger against the bailout of Wall Street, not because the public doesn't have every right to be enraged, but for this reason: I don't think people fully understood what happened that week after Lehman failed, I don't think they understood how important AIG was to the financial system, and I don't think a run on the money markets registered at all. The lay reader never had enough time or enough information to judge the potential consequences of these sudden and awful turns of events.

This is the root cause of a collective inability or refusal to believe how close to the brink the global economy came. Instead of praising the success of government intervention, first on Wall Street and then through an economic stimulus, there is a scepticism that it was even needed. The only economic movement that seems to be on the rise now is the "let them fail, end the Fed" philosophy of the libertarian right.

The harassed, imperfect actions of Tim Geithner, Hank Paulson, Ben Bernanke and all their officials were absolutely vital, but it's tough to argue a counter-factual. After all, how much worse could it be than what the US is saddled with now: 10 per cent unemployment and a $12trn national debt? Since the popular game now is to second guess the decisions of regulators and Treasury officials as they struggled night and day to contain a financial panic, I think we ought to do a little second guessing of the media, too.

What happened to Lehman was big, it was dramatic and visual and it had been a relatively long time coming. We were really very good at covering it, detailing the meetings of Wall Street's chief executives trying to save the firm and traders carrying their boxes out of Lehman HQ, and teeing up scores of experts to explain the momentousness of the event.

It was much harder to cover the much more important things that happened next. The scale of AIG's interconnection with the rest of the banking system was a shock even to the Treasury and the Federal Reserve. And the run on the money markets came without Great Depression-style queues around the block.

AIG's demise threatened to open up unpredictable billions of dollars of losses in impossible-to-predict parts of the financial system, as Lehman's bankruptcy did in the money markets. That was why the run began: money markets are so supposedly super-safe that they are used by millions of Americans to pay bills and they are the means by which big companies fund salaries and wages.

"I was scared," Hank Paulson, then Treasury Secretary, says in his forthcoming memoir. Paul Kanjorski, a Congressman, keeps trying to get Mr Paulson and others to put on the record the warnings they gave lawmakers about what might happen if the financial system unravelled – there was discussion about a breakdown of law and order – and what would happen if cash machines stopped working.

This is my personal regret from that week, that my stories did not emphasise enough what was happening in the money markets. The withdrawals came via computer from institutional investors, affecting an area of the capital markets never reported outside the business pages (if there). It was not conducive to headlines; we decided it was better to lead a story on something readers could quickly grasp, and explain the money markets lower down.

Other journalists have their own regrets. Almost as often as our readers, we could be learning obscure but crucial facts about the credit markets from a standing start. Meanwhile, politicians deliberately avoided discussing potential consequences in public, for fear of triggering the very panic they were trying to nip in the bud.

All the officials working throughout the remaining months of 2008 and into last year to repair the financial system had stared into the same abyss. This is the context in which they made the judgements now being second-guessed by Congress and the public.

Should AIG's counterparties have been paid 100 cents on the dollar when the Fed began trying to unpick its positions in November? This was the subject of the hearing on Capitol Hill this week, when Tim Geithner was called in to play his part in the political theatre. At a safe distance, lawmakers now demand that Wall Street and foreign banks ought to have been – what exactly? Corralled into a room and ordered to have a haircut? A single foreign bank saying no would have sent the system straight back to September.

Even if they had agreed for these specific positions, AIG would no longer be seen as a reliable counterparty, and it may well have been impossible to continue trading. Mr Geithner said he was "proud" of the decisions taken to save AIG, actually quite a bold thing to say in the current climate. Journalism, the first draft of history, has let him down. The second draft will vindicate him.

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