The fox has been in the financial henhouse all along

Contemplating the wreckage of the mutual fund from which my paltry savings are seeping into oblivion is not a cheerful exercise. I don't feel better for knowing there are millions of us in the same boat. Or for knowing that U.S. Treasury Secretary Henry Paulson is going to walk away as a still very, very wealthy man from the mess for which he is in part responsible and whose supposed cleanup he is spearheading. Paulson was an extremely wealthy man when he arrived in Washington in June 2006, summoned by that champion of capitalism, George W. Bush. Not since Nelson Rockefeller served as Gerald Ford's vice-president did someone so personally wealthy take up a high administration post, Daniel Gross pointed out in Slate. In 2006, his last year as CEO of Goldman Sachs, Paulson owned about 4.58 million shares in the investment bank, worth about $700 million. When he left the bank, in June, Goldman Sachs gave him a half-year bonus worth $18.7 million. That fell short of his last full-year bonus, for 2005, which was $38.3 million in salary, stock and options. During the years Paulson headed Goldman -- between 1998 and 2006 -- the bank underwrote junk mortgage issues at the same time as shorting them, according to U.S. media reports, including New York Times columnist Ben Stein, writing in 2007. Stein estimated Goldman might have sold about $100 billion of these issues over 2 1/2 years. Stein called these issues "truly toxic waste" that Goldman Sachs was "injecting" into the "world's commercial bloodstream for years." With the man who presided over this poisoning of the world's commercial arteries placed in charge of reviving the patient, critics are showing up all over the place. Late last month, Bloomberg reported that two of the biggest beneficiaries of the $700-billion U.S. plan to buy assets from financial companies might be -- what a surprise -- Goldman Sachs and investment bank Morgan Stanley. In a shift that was heralded as the "end of a Wall Street era," the two investment banks became bank holding companies, placing themselves under limited government supervision. The move seemed designed to get access to the Federal Reserve's emergency lending facilities. The $700-billion bailout plan, signed into law by Bush 10 days ago, allows the government to buy bad debts from banks on the verge of collapse. The banks, free of these debts, can start lending and, once again, credit will be flowing through the economy. That's the plan. But who will be administering it? The same people, it turns out, who were so enamoured of the financial instruments that led to the credit collapse. Paulson intends to hire men from Wall Street, and especially from Goldman Sachs, to decide which debts should be bought and which banks rescued. Since these are some of the same brilliant minds from which emerged the financial instruments that brought the credit market to the brink, this isn't a reassuring strategy. Paulson's No. 2 man for the bailout was introduced last week: Neel Kashkari, 35, a former Goldman Sachs vice-president, who followed Paulson to the Treasury in 2006. He has been named the interim head of the Office of Financial Stability, which will disburse the $700 billion. By Tuesday, Day 2 of the funding rollout, Bloomberg was headlining grave doubts about it. It quoted Edmund Phelps, winner of the 2006 Nobel Prize for economics, as saying, "There are lots of reasons to think the Paulson plan won't succeed in cleaning up banks' balance sheets any time soon. It may aggravate the second problem banks have, which is that they're quasi-insolvent." Back to the brink we go. Does it help to be told that this is the "logical conclusion and beyond" of the Thatcher-Reagan revolution? Gideon Rachman in last week's Financial Times traces the crisis to three Thatcher-Reagan-era ideas that were "pushed too far" -- promotion of home ownership, including among those who could not afford to buy a house; financial deregulation, and "fervent faith in the market." The market was never a magical place. Today that's painfully obvious. I would feel better if the person leading us out of the morass hadn't once believed that it was.