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Looking for answers in financial mess

One of the few things that may be as confusing as knowing whether the characters in ABC's "Lost" are in the past, present or future is figuring out how the world economy got into its current mess and whether the future can be any brighter.
But give the award-winning PBS series 'Frontline' credit. Tonight's edition, "Inside the Meltdown" (9 p.m., WNED-TV), does a fascinating, suspenseful job explaining the scary economic past, the complicated present and the uncertain future.

With the help of investment bankers, leading economists, business journalists and political leaders, "Meltdown" describes how the housing market became inflated. It also documents what the Bush administration tried to do too late to solve the problem and how difficult it is going to be to get out of the mess that President Obama is attacking with a stimulus package.
A compelling story told near the end of the hour seems like something right out of a mob movie.

The chief executive officers of the nation's nine largest banks are introduced one-by-one via black and white photos being snapped as they head to an October meeting at the office of then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.
The snapshots make the scene look like they are headed for a big mob confab. Then, we're told, they were all given an offer they couldn't refuse by Paulson. They had to accept billions of dollars in cash and allow the government to become a major stockholder in their banks to save the system. Some of them reportedly balked before giving in.
"It was called a 'take it or take it offer,' meaning you have no choice," said Mark Landler of the New York Times.
The incredible story should make viewers understand how scary the situation was back then and how scary it still might be if the latest stimulus package doesn't work.
The only thing missing was Paulson pulling a Laurel and Hardy and telling the bankers, "Here's another nice mess you've gotten me into." After the CEOs "accepted" the offer, Paulson announced the deal to the press.
"So Hank Paulson, the happy capitalist warrior, who spent his life pursuing and defending free markets, is now the biggest interventionist treasury secretary we've had since the Great Depression," noted Charles Duhigg, also of the New York Times.
In order to understand how and why Paulson radically changed his philosophy, an elementary understanding of how our complex economic system works or doesn't work would be helpful. Terms like "toxic assets," "repo market," "credit default swaps," "systemic risk," "the principle of moral hazard" and "capital injections" are tossed out to explain the depth of the crisis.
Most of the explanations are simple enough for non-economic majors to understand. Congressman Barney Frank explained early that in the good old days banks used to investigate potential mortgage holders well and expected them to pay the bank back.
"In 2005, a mortgage lender lends money to a lot of people and does not expect to be repaid by them, but bundles up the right to be repaid by them and sells it to a lot of other people," said Frank.
The flawed assumption was that housing prices would keep going up and everything and everyone would be fine. When it wasn't, investment banks like Bear Stearns and Lehman Brothers that had made a fortune now had so-called "toxic assets." They were destroyed when they needed to come up with cash at a time confidence in them was quickly deteriorating.
'Frontline' goes deep inside the mess, explaining why Paulson and Bernanke quickly moved to find a fire sale buyer for Bears Stearns but later told Lehman Brothers to take a hike.
The program comes close to suggesting that Paulson's competitive relationship with Lehman's Richard Fuld may have been a factor in letting Lehman fail. However, Paulson had warned Fuld earlier that he should have found a buyer well before his failed eleventh-hour decision to do so.
Paulson had been an advocate of "moral hazard," which essentially meant he believed companies that made dumb mistakes had to pay for them, even if it meant their extinction. However, after he learned that allowing Lehman to fail had a ripple effect on the security of insurance giant AIG, even the deregulatory-minded Paulson eventually had to concede that government had to be called in with bailouts for banks to save the day.
Now the mess is the hands of Obama and his treasury secretary, Tim Geithner, who is an early player in "Meltdown" as the man in charge of the Federal Reserve Bank in New York.
"He's 47 years old, he looks like he's about 32, universally liked and respected," explained Landler of the Times.
Geithner also is identified as the guy who saw "systemic risk" in Bear Stearns' books and told that to his boss, Bernanke, before Bernanke and Paulson found a buyer for Bear.
After the whole messy situation is explained by 'Frontline,' the scary thing is you get the sense that throwing all the billions of dollars at the problem now doesn't guarantee much of anything. In other words, "Meltdown" explains the crisis in confidence at the same time it could add to it.



>TV Review

"Inside the Meltdown"
9 p.m. today
Review: 3 1/2 stars (out of four)

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