by Frank James

Treasury Secretary Henry Paulson Jr., whose bald pate has become a fixture on our TV screens in recent weeks, has tapped his similarly bald protege Neel Kashkari as bailout czar.

Kashkari, like Paulson, is a former Goldman Sachs investment banker, as well. And it's impressive that so much trust is being placed in the 35 year old assistant Treasury secretary for international affairs.

Here's an excerpt from the Wall Street Journal's story on Kashkari:

Mr. Kashkari, 35 years old, a Treasury assistant secretary for international affairs and a former Goldman Sachs Group Inc. banker, is expected to be named interim head of Treasury's new Office of Financial Stability as early as Monday. The position confers substantial power on Mr. Kashkari, who will oversee Treasury's effort to buy bad loans and other distressed securities clogging the books of financial institutions and making them reluctant to lend...

Mr. Kashkari was part of the Treasury team that negotiated the asset-repurchase program with Congress, putting in marathon sessions along with Robert Hoyt, Treasury's general counsel, and Kevin Fromer, the head of legislative affairs. He was also one of the originators of the plan. Last year, he and Phillip Swagel, assistant secretary for economic policy, crafted a proposal called "break the glass" -- referring to the emergency nature of using such a tool -- which envisioned Treasury buying bad loans and other assets.

by Frank James

After nearly every disaster involving Americans, there's the usual investigation to figure out why the plane crashed or the ship sank and to affix blame. The difference between most calamities and the present financial-markets meltdown is that the investigation of the latter can actually occur while the disaster is still unfolding.

Stephen Labaton's New York Times story is part of the examination of how the financial markets were laid so low. After reading the piece, I predict many people will join Sen. John McCain in calling for Securities and Exchange Commission Chair Christopher Cox's firing. Treasury Secretary Henry Paulson Jr. will look a whole lot worse, too.

In a nutshell, in 2004 before Cox took over the SEC, in a public meeting that was largely ignored at the time, the commission responded to heavy lobbying by Wall Street's large investment banks by changing a critical rule that required Wall Street's big five investment banks to maintain large enough cash cushions in their brokerage units to withstand periods of market turmoil.

By jettisoning that requirement, the investment bank giants, including Goldman Sachs, run at that time by Paulson, were able to use the freed-up cash to buy many of the risky assets that are at the heart of the present crisis.

Bad enough, right? It gets worse.

In exchange for this liberalized cash-reserve requirement, the SEC was supposed to pay closer attention to the debt levels at the investment banks.

This is where Cox comes in. When he became SEC chairman in 2005, he not only didn't appear to care much about this enforcement responsibility, he actually reduced the number of SEC cops on the beat. Also, the investment banks were supposed to self-regulate. We all know how that went.

by James Oliphant

ABOARD THE AMTRAK ACELA--Okay, I always wanted to type one of those datelines.

Of course, I'm not on a battleship in Sea of Japan or anything like that. Your correspondent is aboard the Acela, rushing from Wilmington, Del. to Washington.

Sen. Joseph Biden is taking a break from prepping for Thursday night's debate with Sarah Palin to work his day job a little. He's heading for Capitol Hill to vote for "the rescue plan.'' (Didn't you get the memo? No one calls it a bailout anymore.)

Tuesday, Biden warned there would "real trouble" if Congress failed to pass a bill this week. Talking to diners at a restaurant in Wilmington, Biden said. "What people are going to do if they don't get this done, people are going to lose their jobs, their pensions."

"That why we've got to have this package," he told another voter. "This is not a $700 billion check we're writing out. We'll get this money back."

But nothing will come easy. Sen. Richard Shelby (R-Ala.), a fierce critic of the proposal, just announced his opposition to the bailou--er, the "Emergency Economic Stabilization Act of 2008.

The vote will come after sundown Wednesday in observance of the Jewish holiday Rosh Hashanah.

Biden spent the day preparing for the debate and held no public events.

by Frank James

The conventional wisdom in Washington is that one reason the Bush Administration's proposal to buy toxic assets from financial institutions failed in the House earlier this week is because of bad marketing. The administration allowed the plan to be described as a "bailout" and that word by itself outraged many Americans.

So the language has been changed. The proposal is now being described as an economic, financial or national "rescue plan."

Here's President Bush this afternoon:

I appreciate Senator Harry Reid's leadership in the United States Senate when it comes to the financial rescue plan. I also appreciate Mitch McConnell's leadership as well. The Senate will be voting on a very important measure tonight. It's -- the rescue plan bill has been improved by raising, by other things, raising, temporarily raising the cap of FDIC insurance.

Sen. Mitch McConnell, the Senate Minority Leader said:

I'm optimistic that we're going to have a significant bipartisan victory on the rescue plan here in the Senate tonight.

Speaking to the media outside the Senate chamber, Sen. Harry Reid, the Senate Majority Leader used the word bailout but tried to give it a different twist:

This is not a bailout for Wall Street. It's bailout for a country.

But later in the chamber, Reid was on message:

Senators Bennett, Corker and Gregg on the Republican side, as well as Senators Dodd, Baucus, Conrad, Durbin, Jack Reed and Schumer have done an exceptional bipartisan job to move the rescue legislation forward here in the Senate, and their work continues.

(Photo: SAUL LOEB/AFP/Getty Images)

by Frank James

As the fingerpointing continues following the House's failure to pass the $700 billion bailout, a lot of blame is going to Treasury Secretary Henry Paulson Jr. for first trying to run roughshod over Congress and the sensibilities of taxpayers until he realized that approach was doomed to failure.

Paulson is being singled out for crafting an initial proposal that was so offensive to many Americans and members of Congress in how it sought vast new and unreviewable powers for the Treasury Secretary.

With the controversial three-page proposal he dropped on Congress last week, he wound up creating a wave of outrage so huge it couldn't be overcome by the time yesterday's vote occured.

The very same hard-charging qualities that led him to be such major success and riches on Wall Street as investment bank Goldman Sachs' chairman and chief executive, it's thought, caused him to be insensitive to how consensus is formed in Washington and how major legislation must be marketed to the American people.

Interviewed on CNBC this morning, Steve Forbes, chairman and CEO of Forbes Inc., said "Paulson, with House Republicans, has been about as effective as an angry drill sergeant talking to raw recruits."

Meanwhile, Paulson is also being blamed for the worsening condition of the credit markets, especially in the short-term lending area called commercial-paper, resulting from the decision to allow Lehman Brothers to go belly up.

Here's an excerpt from yesterday's Wall Street Journal:

by Frank James

The Justice Department's Inspector General released a magnum opus of a report on the Bush Administration's controversial firings of nine U.S. attorneys.

Few people have had the chance to read the entire 356-page report. But if you read it from the back, you get the conclusions which sum up the findings.

The Justice Department investigators place much of the blame for the firings on Kyle Sampson, former Attorney General Alberto Gonzales's chief of staff, who conducted the firings pretty much on his own and apparently for no good reasons, according to the report.

But they don't let Gonzales and company off the hook. They blame Gonzales and his then Deputy Attorney General Paul McNulty for failing to oversee the process and then not telling the full truth about it.

The investigators do call for a special counsel to probe the firing of former U.S. Attorney David Iglesias saying that the circumstances of his firing, with allegations that he was fired for not pursuing voter fraud and public corruption charges against Democrats, requires an examination into whether criminal charges are required.

Attorney General Michael Mukasey announced that he was following the recommendation and naming the U.S. Attorney for Connecticut, Nora R. Dannehy, to run the investigation.

Mukasey said:

"Today's report is an important step toward acknowledging what happened, and holding the responsible officials to proper account. I hope the report provides a measure of relief to those U.S. Attorneys whose reputations were unfairly tainted by the removals and their aftermath. They did not deserve the treatment they received.

"The Report leaves some important questions unanswered and recommends that I appoint an attorney to assess the facts uncovered, to conduct further investigation as needed, and ultimately to determine whether any prosecutable offense was committed with regard to the removal of a U.S. Attorney or the testimony of any witness related to the U.S. Attorney removals. In the normal course, a report recommending further investigation would not be released until after the investigation and any resulting prosecution had been completed, for fear that disclosing publicly relevant facts and witness statements would hinder the investigation or prosecution. In this instance, the Offices of Inspector General and Professional Responsibility have made the judgment that the circumstances warrant a departure from this usual practice.

by Frank James

Used to be talking down the economy was something government officials weren't supposed to do, especially senior U.S. officials.

Conservatives often bashed liberals who they frequently perceived as trying to talk the economy into recession for political reasons. And on occasion liberals even attacked conservatives for allegedly cynically talking down the economy for the same reasons.

Now its open season on the economy. Everyone seems to be talking it down, particularly those top government officials who are usually so guarded in their public comments they won't even discuss in detail U.S. policy towards the value of the dollar for fear of affecting markets.

From President Bush, to Treasury Secretary Henry Paulson Jr. to Federal Reserve Chair Ben Bernanke, the message is the economy will essentially go down the tubes if Congress don't pass the $700 billion bailout "national rescue plan" quick, fast and in a hurry.

Republican vice presidential nominee Sarah Palin even raised the stakes yesterday when she warned the nation could slide into a "depression" if the Bush Administration package weren't passed. Think about that for a moment--a would-be vice president during a hotly contested presidential race raising the specter of the D word.

Question: Are top federal officials (and those who would like to join that group) exacerbating the problem with their doom and gloom warnings?

As many have said in recent weeks, trust or faith, as in "full faith and credit" is a big part of what makes the U.S. economy possible. So much of what makes the economy work, consumer spending, is psychological. The president understands this. That's why in the weekend after the 9/11 attacks, he told Americans to continue shopping.

It could be argued that in his push to stampede Congress into passing its proposal quickly, Bush and other officials are eroding much of any trust that may be left in the U.S. economy.

It's hard to have keep one's faith in the economy up and not think about going into survivalist mode with larder stocked and shotgun loaded when you've got the president of the U.S. on prime time TV saying:

As a result, our entire economy is in danger... More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.

This is clearly not a time for happy talk about the economy. But whatever happened to those fears about not talking down the economy? So much for we have nothing to fear but fear itself.

by Frank James

It's a safe bet that the legislative proposal by Treasury Secretary Henry Paulson Jr. to buy up bad Wall Street assets is going to undergo some fundamental revision.

Troubling to many critics is the breathtaking extraconstitutionality of the proposal which would give the Treasury secretary unusual powers that couldn't be countermanded by Congress or the courts.

That appears on its face to violate the Constitution's assertion of a balance of powers where no one branch is unchecked by the others.

On the Diane Rheem Show on public radio this morning, Alan Blinder, former Federal Reserve vice chair and normally a mild-mannered, live-and-let-live Princeton University economics professor, said Paulson should be fired for his proposal.

Here's Blinder from the program:

"I'm speaking now as one of the earliest advocates of creating an institution like this, many, many months ago. And it's a crying shame to see the way the Treasury has written this. I think the secretary of the Treasury should be dismissed, frankly. ... Asking for the authority to buy anything, with no review, with no court review, with no limits practically as to quantity or scope, with almost no congressional oversight. We have something more precious at stake than our precious financial system and that's our precious Constitution. And frankly, if I were a member of Congress, having advocated for this for nine or ten months, I would vote against this unless it's changed, dramatically..."

The administration should know its proposal is in deep trouble when both Paul Krugman and William Kristol agree the plan goes too far.

by Frank James

The not-so-invisible-hand of Washington reached out on Sunday and snatched the last two remaining big Wall Street investment banking firms into the world of increased federal regulation with the announcement that Morgan Stanley and Goldman Sachs have decided to become commercial banks.

This is how the Federal Reserve announced it last night:

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.

Now they'll be able to go out and get deposits from people like you and me which will help to stabilize their capital base.

Those deposits will be federally insured by the Federal Deposit Insurance Corp. which will give the companies the kind of insulation from capital flight they've lacked until now.

We'll be keeping our eyes open for those new Morgan Stanley and Goldman Sachs bank branches.

by Frank James

The Bush Administration wants to get $700 billion, no strings attached, to buy up the bad assets of Wall Street financial institutions. Congress wants to attach strings.

That's pretty much where things stand as the week begins. The clash of the Washington titans, that is, Treasury Secretary Henry Paulson Jr. and the Democrats who control the Congress is about to begin in earnest.

On the Sunday talk shows, Paulson said the Bush Administration's rescue proposal is needed NOW, so Congress shouldn't bog things down by trying to expand the plan by adding direct relief for regular taxpayers.

Here's an exchange he had with Chris Wallace on Fox News Sunday:

MR. WALLACE: All right. Your immediate challenge now is to get this through Congress. And Democrats are saying, wait a minute. If you're going to bail out Wall Street, you've got to bail out Main Street.

We've had a lot of efforts, and I would sure -- I would be very, very surprised and disappointed if, at a time when the government owns a lot of these securities, we won't have more leverage to do that. And that should be a big focus.

by Frank James

When Treasury Secretary Henry Paulson was appointed by President Bush as his third and presumably last Treasury Secretary in 2006, a lot of observers assumed Paulson was coming in to be a mere caretaker.

That was a bad call.

Shakespeare has a line about some men being born great, some men achieving greatness and others having greatness thrust upon them. Paulson jumps out of that last category. When Wall Street was healthy, it made him very rich. Now that it's ailing, it's made him famous.

Because of his energetic and sweeping response to the Wall Street meltdown, Paulson has turned out to be one of the most powerful and activist Treasury secretaries in recent U.S. history.

If there were an Alexander Hamilton Award for using federal power vigorously in times of economic crisis, he would get it by acclamation. Only time will tell if the way he has seized and used the levers at his disposal was the right thing at the right time.

In times of crisis, however, humans like a take-charge guy and Paulson is certainly that. He is the antithesis of Michael "Heckuva Job" Brown.

Almost overnight, he has become one of the most nation's, better yet, the globe's most powerful people. With the bald pate and the penetrating eyes, he looks a bit like Julius Caeser and some would say is acting the part.

Newsweek portrays him as "King Henry" in its latest cover story:

Wielding much of this power over financial life and death is this tall, calm man. Paulson came to Washington from Wall Street in 2006 expecting to deal with issues like Social Security reform and trade agreements. But the economy had other ideas. At a time when President Bush seems to have largely checked out, the teetotaling 62-year-old has emerged as the nation's most powerful leader--the investment banker in chief. As he did on the Street, Paulson continues to advise CEOs on the best course of action, to arrange financing and to get the best terms possible for his clients. Only now his clients are American taxpayers, the president and the global financial system.

With the help of his counterparts at the Federal Reserve and the Securities and Exchange Commission, Ben Bernanke and Christopher Cox, Paulson has succeeded in fundamentally altering the relationship between Wall Street and Washington--almost to the point where D.C. is now the world's financial capital. "There's no doubt that he's in charge," says Roy Smith, a former partner with Paulson at Goldman and a professor at New York University. An indifferent orator--Paulson hunches his 6-foot-2 frame over lecterns and has a halting speaking style--the Eagle Scout has emerged as the pre-eminent market whisperer and cajoler of the American financial system. And yet Paulson has rankled some in Washington by conducting business like a Wall Street Master of the Universe: the marathon late nights and weekend meetings with a small group of people, followed by an unveiling of the result as a fait accompli.

by Bay Fang

Secretary of State Condoleezza Rice, answering widespread criticism that she had not stood up to Russia enough in the past month, talked tough to Moscow on Thursday, saying its invasion of Georgia had achieved no strategic objective, and that Russia's leaders were taking the country "on a one-way path to self-imposed isolation and international irrelevance."

Her speech, hosted by the German Marshall Fund, was meant both to warn Russia against further provocations, and to rally European allies to work with the US to oppose Russian aggression. She spoke directly to these allies in the speech, saying, "We cannot afford to validate the prejudices that some Russian leaders seem to have: that if you pressure free nations enough - if you bully, and threaten, and lash out - we will cave in, and forget, and eventually concede."

While rejecting the idea that the US and Russia were entering a new Cold War, Rice spelled out the consequences of Russian actions, saying that its bid to join the World Trade Organization and the Organization for Economic Cooperation and Development was in jeopardy, and its agreement with the US on civil nuclear cooperation had been put on hold. In answer to a question, she added that in the wake of the crisis over Georgia, more decisions were being made by the G-7 nations instead of the G-8, thus excluding Russia.

Rice, a former Soviet scholar, has been widely criticized for not personally taking a forceful enough stance against Moscow after Russia's invasion of Georgia last month.

by Frank James

CNBC reported this afternoon that Treasury Secretary Henry Paulson is shopping an idea around Capitol Hill whereby the feds would create a virtual landfill for the toxic assets now owned by financial institutions.

Such a move would allow institutions to dump those assets of dubious value -- mortgage-backed securities and the like -- onto taxpayers. The institutions would clear their books which should allow them to start lending again and free up the credit markets.

Anybody who didn't like the Bear Stearns, Fannie Mae, Freddie Mac and AIG bailouts will really hate this one. Arguably, this would be the ultimate in creating moral hazard. And once again the argument could be made that it's another example of profits being privatized while losses are socialized.

But there may be little alternative

Treasury Secretary Henry Paulson is working on a plan that would set up a government facility to take on bad debts from financial institutions, preventing a worsening of the global credit crisis, Wall Street sources have told CNBC.

In turn, that could allow the housing market to recover because it would restore banks willingness to lend.

by Laura Olson

Additional international support will be necessary to establish a lasting peace along the Georgian-Russian border, former Speaker of the Georgian Parliament Nino Burjanadze said Thursday.

Burjanadze spoke on the conflict at the Carnegie Endowment for International Peace as U.S. Vice President Dick Cheney began his visit to Georgia's capital.

Her talk comes after an announcement Wednesday of $1 billion in U.S. aid to help Georgia rebuild its infrastructure.