The Bailout Bust

Those who blame yesterday's dive in the stock market on the House of Representatives' failure to approve the Paulson-Pelosi bailout plan can consider that the market was down sharply yesterday even before the House vote, defying predictions that the agreement on a deal that was announced over the weekend would yield a rally. Half of the Wall Street adage — sell on Rosh Hashana, buy on Yom Kippur — was proven a day early.

Everyone is talking about how to revive the bailout plan, but at a certain point, the clamor from the financial industry or the stock market for a bailout is like a child crying in a crib. The parent can stay at the side of the crib rubbing the child's back and singing lullabies, but that's a recipe for staying up all night with a crying child. Eventually the parent has to leave the nursery and shut the door. It's time for the government to do that to Wall Street.

It's a tribute to the checks and balances that the Constitution created. It wasn't enough that Senators McCain and Obama, Secretary Paulson, Speaker Pelosi, President Bush, the Wall Street Journal, the New York Post, Mayor Bloomberg, Senator Clinton, and Rep. Barney Frank all supported the bailout. Congress needed to vote on it. And the votes weren't there in the chamber, the House of Representatives, that the founders intended to be the most democratic and in touch with the spirit of the people.

But it's a two-part adage — sell on Rosh Hashana, buy on Yom Kippur — and the second part of the adage is the buy side. Amid all the carnage in the stock market yesterday, there were at least a few hopeful signs for New York. New York-based Citigroup bought assets of Charlotte, North Carolina-based Wachovia, which will make Citi the largest bank in America as measured by deposits. Even after yesterday's slide, the Keefe, Bruyette & Woods bank index was up more than 25% from its July 15 low.

All the bailout talk was that Washington was going to replace New York City as the nation's financial capital; with the bailout not happening, New York and its financial institutions will have to figure out their way out their own problems. That's not a bad thing, either, and there may yet be more opportunity on the buy side. One of the reasons there is a lot of selling going on is the expectation that no matter who is president after President Bush the tax rates on capital gains will increase. People figure they might as well reap any gains now while the rates are lower. The best thing Congress and the Bush administration and the president could do now is to set some certainty on low tax rates going forward — and to set a national policy to establish a link between the dollar and something real.