Sunday night meetings in Washington produce startling announcements: In March, there was the Fed's $30- billion backing of Bear Stearns' bad assets, as it was given to JPMorgan Chase; last week we had Lehman Brothers' declaration of bankruptcy; this week it's Goldman Sachs and Morgan Stanley, changing their status to one equivalent to neighborhood banks, with all the emergency capital perks thrown in.
The shifting tides of Wall Street aren't over, and neither are the government bailouts. If Treasury Secretary Henry Paulson's request for a $700 billion bailout is approved, it will bring the total government tab for saving Wall Street from itself to $1.25 trillion.
But, reading the fine print, that huge chunk of cash is just for one-time purchases. If the government buys $700 billion worth of assets whose value goes to zero, we could be on the hook for another bailout round before you know it.
Paulson considers this latest plan, "decisive action to fundamentally and comprehensively address the root cause of our financial system."
But it does no such thing. That's because his persistent focus on illiquid mortgage assets and the "housing correction" is not the bigger problem. It's merely the catalyst that revealed the systemic rot of overleveraged and reckless activities that define our financial system.
Blaming irresponsible lending and borrowing is a slick way of avoiding the deeper need for regulation. If the entire industry (from small lenders through big trading firms) were more transparent and less leveraged, a correction in housing wouldn't have brought down three major investment banks. It wouldn't have triggered the decision of the remaining two to become commercial banks, to gain more access to desperately needed capital through citizens' deposits and the Fed's emergency window.
That Goldman Sachs and Morgan Stanley positioned their request like a plea for regulation is a joke - it was a plea for money.
Yes, we need stricter lending practices instead of the ones that contributed to 5 million homeowners facing defaults or foreclosures. But we also need to restructure Wall Street - not by creating bigger, less-transparent entities, but by generating smaller ones whose risks are clear, as was done in 1933.
Meanwhile, Democrats in Congress want more constraints on Paulson's bailout package. They cite the need for independent oversight of the fund that will purchase the assets, a cap on executive compensation, and more help for borrowers through mortgage-debt reductions.
What's lacking, even from the Democrats' wish list, are demands to overhaul and re-regulate the entire banking industry, and that all financial institutions quantify their real credit losses - at the moment, only commercial banks report their exposures.
The Commodity Futures Modernization Act of 2000, passed late one December session by former Senate Banking Committee chairman Phil Gramm (R-Texas), deregulated the privately traded credit derivatives and swaps market. These derivatives have dangerously intertwined with mortgage-backed securities, and require the creditworthiness of the financial institutions that trade them to remain stable. (AIG is an example of one that didn't, and we know how that turned out.)
Also, the Gramm-Leach-Bliley Act of 1999 - navigated by Gramm and cheerled by former Treasury Secretary Robert Rubin, who served under President Bill Clinton - repealed those 1933 protections and made it possible for investment banks, insurance companies and commercial banks to merge without requiring greater regulation.
Today's mess is a direct result of these two acts.
To steer this ship, Congress has to bone up on finance - if members don't know what CDOs (collateralized debt obligations) and credit derivatives really are, they can't understand the risk they have incurred on behalf of American taxpayers, and they'll be ill-prepared to evaluate Paulson's plan. And Congress must then regulate credit derivatives and the banking industry.
The goliath Bank of America-Merrill Lynch will take months to decipher. Goldman and Morgan's buying up smaller banking players - which they will - will add to the murkiness. None of this stabilizes the system. Instead, it sets it up as a bigger problem to solve later.
If our representatives in Washington are serious about fixing the problems that Wall Street has caused, they will shoot the roots of deregulation, not just the messenger of subprime-lending malpractice, or the toxic waste manufactured by Wall Street.
Congress also shouldn't let Paulson anywhere near the management of the buyout fund - and frankly, shouldn't feel compelled to approve a $700 billion bailout without strong regulatory protections for American citizens. But that requires a deeper understanding of the complicated mortgage and credit markets than Congress seems to have.
Meanwhile, stay tuned for more bank mergers and instability, punctuated by rest periods where Wall Street inhales government money. Or, I should say, our taxpayer money.