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The $700 Billion Bailout Plan Is Neither!

It's really a rescue plan for America — and may even be a great investment for taxpayers, says acclaimed financial advisor Ric Edelman

A SPECIAL REPORT
September 30, 2008

Click here to download this special report » (PDF)

Until last week, we had applauded all the actions of U.S. Treasury Secretary Henry Paulson, Jr. His handling of the financial crisis had been flawless.

However, Secretary Paulson and Federal Reserve Chairman Ben Bernanke made a serious misstep last week when they presented their proposal to Congress. They called their plan a “bailout” and emphasized the need for $700 billion in funds.

This proved to be a public relations disaster and has been largely responsible for the delay in getting the proposal approved by Congress.

In fact, the proposal is neither a bailout nor $700 billion. Yet these are the words used by policymakers and the media when referring to the proposal. It is because of these words that so many Americans have opposed the plan, in the mistaken belief that it benefits only the Wall Street bigwigs who created the problem.

Here are the facts.

First, the proposal is a rescue plan. It does not “bail out”  Wall Street; rather it rescues the American consumer and taxpayer. Consumers must understand that “Wall Street,” as it has been known, is history, gone forever. The five major investment banks no longer exist as they once did: Bear Stearns and Lehman Brothers have gone bankrupt; Merrill Lynch has been acquired by Bank of America, and the remaining two — Morgan Stanley and Goldman Sachs — have been converted into commercial banks, where they now are under the jurisdiction of the Federal Reserve, which has far tighter rules than the Securities and Exchange Commission.

Many of Wall Street’s chief executives have been fired, along with their boards. The stocks and bonds of some of these firms are worthless or nearly so. (Case in point: Lehman Brothers CEO Richard Fuld last week sold three million shares of Lehman stock for $640,000; one year ago, those shares were worth $25 million.) And the FBI has launched more than 50 criminal investigations; dozens of people may find themselves in prison as a result of this fiasco. It is therefore absurd to suggest that the plan is a bailout for Wall Street.

If anyone is getting bailed out, it’s the American consumer and taxpayer. And the ultimate cost of our rescue may be nowhere near $700 billion. Instead, the government is simply acting as “the buyer of last resort.”

Here’s what this means. Wall Street has issued a variety of exotic products in recent years — auction-rate securities, structured investment vehicles, collateralized debt obligations and more — and nobody knows what these securities are worth. As a result, investors are unwilling to buy them — and this has created a lack of liquidity for the banks and other institutions who hold them.

So, the Paulson rescue plan will allow the government to buy these assets, and it will do so for pennies on the dollar. Later, when the markets stabilize and investors regain confidence that these assets are continuing to perform, the government will sell them back into the marketplace — and it could earn a potentially huge windfall in the process. In fact, it is reasonable to project that the government — and hence, American taxpayers — could earn $100 billion or more as a result of the rescue plan.

Therefore, Secretary Paulson’s rescue plan may not cost taxpayers substantial amounts of money, instead, we may stand to gain substantially. There is precedent for this: We earned a profit when we bailed out Chrysler, Lockheed, Mexico (during the peso crisis) and the S&Ls.

Without the plan, many banks will have difficulty lending money to American consumers and small businesses. Unable to make payroll, companies will struggle — and tens of millions of citizens may lose their jobs. If you think we’ve experienced a large number of foreclosures so far, just wait: without the rescue plan, you ain’t seen nuthin’ yet.

The plan must be approved by Congress immediately. And to make that happen, effort must begin immediately to correctly characterize The Paulson Plan for what it truly is: it is a Rescue Plan for America, not a bailout for Wall Street. The current roadblock is not due to the language of the legislation but due to the fact that millions of Americans have been fed an incorrect description of the program.

Americans are rightfully angry about this entire situation. We share their indignation and fury. But that does not address the fact that action is needed, and needed immediately. If Americans could learn the truth about the proposal — and the severe consequences of failing to implement it — they would happily encourage their representatives in Congress to approve it immediately. We therefore support efforts to help disseminate the facts to all Americans.

Ric Edelman is Chairman and CEO of Edelman Financial Services LLC. He is also President and Director of Sanders Morris Harris Group. Ric is an Investment Advisor Representative and offers advisory services through EFS an SEC-registered investment advisor. He is also a Registered Representative of and offers securities through Sanders Morris Harris Inc., an independent broker/dealer, member FINRA/SIPC.

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