It takes a Harvard MBA to raze an economy. Perhaps that is too narrow a judgment given that a law degree from that institution or from Yale University seems to serve as well. But the Harvard MBA is the degree that George W. Bush and his last treasury secretary, Henry Paulson, had in common, and their shared ignorance as they presided over the collapse of the U.S. economy is on full display in the former president's newly published memoir.
Bush makes clear that the economic crisis came late to his attention and that it was not until March of 2008, as the Wall Street investment firm Bear Stearns was tottering, that it dawned on him that something was seriously amiss: "I was surprised by the sudden crisis. My focus had been kitchen-table economic issues like jobs and inflation. I assumed any major credit troubles would have been flagged by the regulators or rating agencies." He assumed that because he had signed off on the Sarbanes-Oxley Act "(i)n response to the Enron accounting fraud and other corporate scandals."
It is instructive that this is the only reference in the memoir to Enron, a company headed by his old friend Ken "Kenny Boy" Lay, who chaired Bush's presidential campaign finance committee the year before Enron collapsed. The grief caused by Enron's contrived electrical blackouts and the lost jobs and savings following its collapse did not make for one of the "Decision Points" worthy of examination by Bush in his book of that title. Had he done so he might have discovered that the primary problem with Enron was not its fraudulent accounting but rather the wild trading practices in derivatives and other suspect financial gimmicks that had brought the company to its knees and which the accounting trickery was designed to conceal.
Enron was the dead canary, ignored by Bush, that predicted the banking meltdown. The "Enron loophole" in the Commodity Futures Modernization Act that Republicans pushed through the Congress and Bill Clinton signed into law in the last months of his administration opened the door to the collateralized debt obligations and other financial devices that proved so toxic to Wall Street. The securitization of housing debt in such packages spiraled out of control throughout Bush's watch, but he was clearly unaware of the problem until that market collapsed.
Even then he did not have the foggiest idea of what the crisis was all about, any more than did Treasury Secretary Paulson, who admits in his own memoir that he did not know that mortgages were at the heart of the derivatives causing all of the trouble. Of course he should have known, since Goldman Sachs, the company he headed earlier, had been in the forefront of packaging and selling the assets that turned out to be malignant.
In his book, Bush indicates similar denial when he writes of Bear Stearns' impending collapse that "the problem was not a lack of regulation by government; it was a lack of judgment by Bear executives." But the problem in finding a buyer for Bear Stearns was those unregulated derivatives, as Bush writes: "Executives at JPMorgan Chase were interested in acquiring Bear Stearns, but were concerned about inheriting Bear's portfolio of risky mortgage-backed securities."
Bush goes on to justify the deal he and Hank Paulson concocted with Fed Chair Ben Bernanke, whom he had appointed, to guarantee the sale of Bear Stearns: "With Ben's approval, Hank and Tim Geithner, the president of the New York Fed (currently President Barack Obama's treasury secretary), devised a plan to address JPMorgan's concerns. The Fed would lend $30 billion against Bear's undesirable mortgage holdings," a development that cleared the way for the sale.
That was just a warm-up for the much larger deal to bail out AIG that the same cast of characters hatched when, as Bush writes, the firm with its tentacles spread wide in pension funds, municipal bonds and 401(k)s "was somehow on the brink of implosion," and had to be saved through a $180 billion infusion of government funds, leaving U.S. taxpayers today with 92 percent ownership of the company. "It was basically a nationalization of America's largest insurance company," writes the former leader of the political party that routinely labels the current occupant of the White House as a socialist. "My friends back home in Midland (Texas) are going to ask what happened to the free-market guy they knew," Bush laments. "They're going to wonder why we're spending their money to save the firms that created the crisis in the first place."
The answer to that question, raised far beyond the confines of Midland, is evidently the main thing Bush learned in the Harvard MBA program: "The well-being of Main Street was directly linked to the fate of Wall Street." Not exactly. They are linked -- but inversely.