Getting a Haircut and a Hotdog

Lawmakers are always looking for a fig leaf when it comes to presiding over a massive public bailout of their friends on Wall Street. So, for example, when Treasury Secretary Geithner appeared on Capitol Hill last March to explain why AIG got one hundred cents on the dollar, which it promptly turned around and handed over to Goldman Sachs and its other Wall Street partners, Republican Congressman Spencer Bachus wanted to know, “Was there any discussion over a haircut – [the Wall Street Banks] taking 95% or 90% as full payment?”

Five or ten cents on the dollar – that’s what Congressman Bachus and his colleagues on Capitol Hill think is a sufficient penalty for having hopped into bed with AIG? 

Reading about the exchange between Bachus and Geithner reminded me of what happened here in California during the so-called energy crisis of 2001, when the wholesale price of electricity, newly deregulated in California, rose exponentially over a few weeks, and the state’s three private utility companies went to California lawmakers to demand a public bailout.

Unable to pass through to consumers the higher electricity costs, the utilities, led by Southern California Edison, stopped paying the wholesale energy companies. So the Wall Street rating agencies and investment banks that were closely connected to the energy companies demanded that California taxpayers bail out the utilities by paying the obscene prices for electricity that, we later confirmed, were artificially manipulated by…Wall Street traders. When the legislature balked, the energy plants shut off the power. And then the state stepped in, paying exorbitant prices to keep the lights on.

Lawmakers, trying to look tough for the voters, demanded that the wholesale energy companies “take a haircut” – agree to cut how much they were owed for their vastly inflated electricity. But actually, it turned out that the firms were only willing to cut a few hairs.

Meanwhile, the President of the California Senate, John Burton, kept asking what was in it for the taxpayers. He wanted what he called “a hot dog” in exchange for the bailout – require the utility companies to give taxpayers the option to buy the electricity transmission lines – which would lower future rates substantially – in return for a bailout.

The utilities refused, and Burton blocked the Edison bailout.

California’s “energy crisis” was a foreshock of the financial catastrophe that our country is in today. Wall Street prospered through speculation that led to outrageous electricity prices, and prospered again when California had to float billions of dollars of bonds to pay off the state’s debt to the energy traders. California’s economy never really recovered from the fiscal impact of that debacle, and today, suffering from seemingly intractable financial problems, California has been described as the nation’s first “failed state.” The parallels to the present crisis are ominous.