On Dennis Prager’s show, I heard a former Merril Lynch executive talk about compensation within ML. Essentially, brokers were paid for profit, but not penalized for losses. That’s fine under ordinary times, but in a bubble, it biases the thing upwards as risk is rewarded, but failure is not punished. At ML, they discussed the implications of this endlessly, but could never come to a different model because no one else was changing. Had ML changed their compensation model, they would have lost their brokers to another firm.

Finally, this whole thing was driven by the use of Fannie Mae and Freddie Mac as instruments of social equality. In an effort to help poor people buy homes, Fannie and Freddie became enormous consumers of risky loans. They bought the lousy loans from the lenders whose brokers were rewarded to selling them. In 2005, Fannie and Freddie survived attempts at regulation when they went through sever accounting scandals by buying off the politicians in DC. It’s more than just campaign contributions, too, although those helped. Chris Dodd and Barack Obama led the list of recipients. Fannie and Freddie gave high paying jobs to politicians who had left office or political hacks who left politics. It was one big family.

Ironically, it was a group of Republicans who tried to regulate Fannie and Freddie in 2005. Their bill made it out of the Senate committee, but never came to a vote because it was clear it wouldn’t pass. At the time, the Republicans controlled the Senate and could have passed the legislation, but did not. The bribery from Fannie and Freddie, while heavily focused on the Democrats, certainly crossed party lines. John McCain was one of the co-sponsors of that bill.

In short, we gave lousy money managers access to easy credit, rewarded brokers for making those loans and then hid the growing problem from regulators by buying off the politicians.

I’ve a bridge in Alaska to sell.

The real question about the mega-bailout is: who is accountable now and what will be done to prevent this in the future.

A radical idea: don’t give mere 700 billion dollar handouts for worthless paper: take a piece of of each institution you help save for Joe Taxpayer AND get Uncle Sam a seat on the board of these corrupt machines to assist in regulation…before things unravel next time.