Treasury Secretary Henry Paulson must have thought Wall Street was a tough crowd. But then he and Federal Reserve Chairman Ben Bernanke took their act to Capitol Hill, where, apparently, there are no restrictions on hecklers.<p>Through a series long weekends and sleepless nights, Paulson and his team have labored mightily to prop up the nation's financial system.</p><p>First came the shot-gun wedding of Bear Stearns to JPMorgan Chase, and few tears were shed for the loss of what the street considered a cowboy firm. Then came the conservatorship of Fannie Mae and Freddie Mac. A shrug of relief and resignation that something had to be done ruled the day. Paulson allowed Lehman to collapse into bankruptcy, and free-market thinkers applauded, while others considered it just desserts for an arrogant, clueless CEO.</p><p>Then on Sept. 16 came the unprecedented nationalization of American International Group. The Federal Reserve spent $85 billion to gain an 80% stake in the giant, teetering insurer. And the next day the markets swooned.</p><p>The Dow Jones Industrial Average plunged 449 points. Fear, approaching terror, gripped other markets. Some investors sought shelter by buying gold. And a rampage of investors ran, as if their hair were on fire, to Treasuries. The herd drove down the yield on three-month bills to five basis points above zero. A Financial Times headline called it "The End of American Capitalism," and even that seemed like an understatement.</p><p>The credit market froze that day, and, as banks refused even to lend to one another, the market came perilously close to total collapse.</p><p>Meanwhile, the muted calls for less one-off actions by government officials and more aggressive and "comprehensive" solutions began to take center stage.</p><p>House Financial Services Committee Chairman Barney Frank lashed out.</p><p>"It was kind of odd to have this unelected official, the chairman of the Federal Reserve, sort of going around deciding when he would extend the loan and when he wouldn't with the Secretary of the Treasury cheering him on," he said in an interview with C-SPAN on Sept. 19. He called Fed Chairman Ben Bernanke "the Lone Ranger," but pulled back from completing the analogy by referring to "his faithful companion Paulson" rather than Tonto.</p><p>Later Frank said he would hold hearings on the formation of a Resolution Trust-type funding agency that could buy up the toxic securities that lard the books of the nation's financial institutions.</p><p>Paulson saw the writing on the wall and that same day said he might back the creation of a new Resolution Trust Corp. In addition, he, Bernanke and Securities and Exchange Commission Chairman Christopher Cox trekked to Capitol Hill to discuss a range of measures and possible legislation. So, the trial balloon was successfully launched and the stock and capital markets stepped back from the abyss.</p><p>Having bought himself and the markets some time, Paulson and his team spent the next two days transforming a nebulous proposal into a sketchy, three-page plan. In the process word leaked out that the Treasury secretary would seek authority to spend $150 billion on busted securities. Later, the price tag grew to $300 billion and would only bail out U.S. banks. Still later, the price jumped to $700 billion and could include the near-worthless bonds and instruments held by the U.S. units of foreign banks. No one from the Treasury or the Federal Reserve could be enticed to use the T-word (trillion).</p><p>Surely, Paulson believes in his savvy political skills. No one rises to be chief of Goldman Sachs without being a player. Now it was time for Paulson to show his political chops.</p><p>Just in time for the Sunday morning talk fests, Paulson was ready, willing and able to hawk his plan.</p><p>And he decided to go for broke.</p><p>Paulson insisted that he did not need to set up a new agency to spend the $700 billion; his Treasury and the Federal Reserve could handle it themselves, with a little help from private investment bankers. His plan called for no oversight of this massive operation, no means for participating institutions to repay taxpayers for their "loans" and no new regulations on financial companies. Perhaps most stunningly, Paulson's plan also included a provision intended to prevent any kind of judicial review.</p><p>On the TV talk shows, Paulson called his request for $700 billion carte blanche legislation a "clean" bill.</p><p>That was a slick move. If giving Paulson and his team unfettered authority was "clean," then any and all restrictions that Congress tacked onto the bill would make it "dirty."</p><p>When Paulson, Bernanke and Cox appeared before the Senate Banking Committee last Tuesday, they did not appear prepared for the catcalls that rained down on them.</p><p>Committee Chairman Christopher Dodd began Tuesday's five-hour hearing by declaring, "I understand speed is important. But I am far more interested in whether or not we get this right. There is no second act to this." Then he proceeded to call the Paulson bailout plan "unprecedented in its scope and lack of details" and "unacceptable." </p><p>A pained Fed Chairman Bernanke, looking like a tenured professor forced to teach incoming freshmen, said, "This will be a major drag on the U.S. economy and greatly impede the ability of the economy to recover. I believe the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover."</p><p>After that dry, grim assessment, it was up to Paulson to rally the crowd with an impassioned plea.</p><p>"Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy," he said. "There is no way to stabilize the markets other than through government intervention."</p><p>Perhaps sensing the need to strike a populist pose, Mr. Paulson went on to say, "This is all about the American taxpayer. That's all we care about."</p><p>At that, the 21 members of the committee remained stoned-faced, but the visitors' section of the committee room did not even try to stifle a round of snickers.</p><p>The federal officials most responsible for the health of the nation's finances and economy were then treated to a withering round of brickbats from the left and the right of the political spectrum.</p><p>Republican Sen. Jim Bunning said, "This massive bailout is not a solution. It's financial socialism, and it's un-American." There has been no word at press time if Paulson, Bernanke, et al will be called before Congress to name names of fellow travelers.</p><p>"I think we're going down the road of France now. In all due respect for my French friends," said the ranking Republican on committee, Sen. Richard Shelby.</p><p>Later Sen. Shelby left Paulson stuttering to answer when he asked: "What if it doesn't work? You assume it will work, but you can't assure us that you know it's going to work because you thought some of the other plans were going to work."</p><p>Even outside the committee room, the anger and frustration among lawmakers was palpable. And resistance to the pressure to act by the end of the week was at the top of the list.</p><p>Rep. Joe L. Barton of Texas said, "Just because God created the world in seven days doesn't mean we have to pass this bill in seven days." (Note to Rep. Barton: Most copies of Genesis say God did it all in six days.)</p><p>Rep. Henry Waxman, chairman of the House Oversight Committee, also rejected the pressure to act within the week.</p><p>"While we need to move quickly," he said, "we should not be stampeded into enacting a flawed proposal at huge costs to the taxpayer."</p><p>The breadth and scope of Paulson's political failure became clear on Wednesday when President Bush decided it was time to address the nation during prime time. Earlier in the day, presidential candidate Sen. John McCain jumped into the spotlight by "suspending" his campaign, begging off Friday's scheduled debate with Sen. Barack Obama and vowing to return to Washington to lead his congressional colleagues in fashioning a bailout bill.</p><p>In his address, President Bush offered a bland, 12-minute primer on the housing market and mortgage-backed securities dynamics. He also summoned congressional leaders and the two presidential candidates to the White House in hopes of working out compromise legislation.</p><p>But forging a bipartisan bill seemed well under way on Capitol Hill earlier in the day. Paulson and Bernanke testified before the hostile lawmakers of the House Financial Services Committee. By then, Paulson had given up all hope of a "clean" bill. He seemed willing, even anxious, to cave–um, compromise. One by one, committee chairman Barney Frank, who is the lead negotiator for congressional Democrats, extracted major concessions. Paulson agreed to some form of foreclosure relief and major oversight of the bailout operation. He even conceded that an executive pay cap for those firms participating in the buy up of sour securities was now on the table. A host of other issues remain to be resolved, including changes in bankruptcy law and equity stakes in firms benefiting from the rescue.</p><p>One plot point stands out in the dramatic arc that unfolded last week. How could an erstwhile Wall Street Master of the Universe not realize the implications of demanding unrestrained assess to $700 billion? Paulson learned this week that, while he may serve at the pleasure of the president, his job description and performance review now resides with Congress.</p><p>–[email protected]</p>