To be sure, the secretary did not make his accusation in such stark prose. Instead he implied it when he predicted darkly that, were Congress to impose limits on the humungous compensation packages these Wall Street CEOs have come to expect, they might in a personal pique refuse to let the federal government help them clean up their firms' rickety balance sheets, a measure that President Bush, Paulson and Federal Reserve Chairman Ben Bernanke declared absolutely essential to restoring our nation's economy to good health.
As a personal friend of some of these CEOs, I simply cannot imagine that they would put their personal wealth over our nation's best interests in so disgraceful a way, especially at a time when America's men and women in uniform daily put their bodies in harm's way to protect our nation, at an annual pay far below what CEOs have been paid per day in recent times.
But I do believe that the Wall Street executives whose reckless behavior has helped push our nation to the current economic precipice owe the nation an explicit apology, in place of efforts now underway to place blame for the current fiasco mainly on government - the usual scapegoat for such snafus.
To be sure, the Federal Reserve can arguably be accused of having injected too much liquidity into the financial system during the past several years. Congress - especially Democrats - did encourage the financial system during the 1990s to make subprime mortgage loans in the name of social equity. Congress - especially Republicans - can be blamed for having placed too much faith in the self-regulating power of free markets. Finally, the executive branch probably did exercise lax oversight of Wall Street firms under already existing regulations in a misplaced faith in the integrity of free markets.
But government did not force the Wall Street's major investment banks to concoct, sell to others or invest their own money in derivatives of such complexity that neither they nor the outside investors fully understood any more the economic properties of these synthetic securities.
Government did not force major investment banks to load up their firms' balance sheets with $30 to $40 of debt per dollar of shareholders' equity, a perilous leverage ratio that can most politely be described as "nuts" when that debt is used to invest in assets of unknown properties. Surely somewhere in their academic or professional careers Wall Street's CEOs must have been taught that high financial leverage is highly profitable only when rates of return on assets bought on credit exceed the cost of that credit, but that high leverage can be financially lethal when the opposite is true.
Finally, no one forced large financial institutions to sell insurance with a notional value of some $65 trillion on often risky bonds through so-called Credit Default Swaps, in a way that can severely impair the balance sheets of major financial firms, including Goldman Sachs, should the seller of such bond insurance go bankrupt and be unable to pay claims on that insurance - as evidently happened to AIG.
If Wall Street CEOs wish to prove Paulson wrong in his harsh judgment of their personal integrity, they might do three things. First, they might volunteer to forego their traditionally humungous bonuses and agree to work as hard and judiciously as they can for their shareholders, employees and the nation, at the salary paid the president of the United States, at least until health has been restored to our economy. Second, they might return to the federal bailout fund some or all of the huge bonuses their boards of directors have paid them in recent years on what turns out to be phony profits. Finally, they might take out full-page ads in major newspapers to apologize to the nation for their misuse of the trust that the nation had reposed in them. In such an ad, a special paragraph should be reserved for our brave warriors in Iraq and Afghanistan who take such huge personal risks, at so little pay, for the nation that these bankers helped trash.
Uwe E. Reinhardt is the James Madison Professor of Political Economy and a professor in the Wilson School. He can be reached at reinhardt@princeton.edu.
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