Credit Crunch I: How Not to Sell Public Policy
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Holmes Report

Credit Crunch I: How Not to Sell Public Policy

On the evening of Thursday September 18, United States Treasury Secretary Henry Paulson met with Congressional leaders to discuss the details of what would eventually turn out to be the largest government intervention in the U.S. economy since the Great Depression.

Paul Holmes

On the evening of Thursday September 18, United States Treasury Secretary Henry Paulson met with Congressional leaders to discuss the details of what would eventually turn out to be the largest government intervention in the U.S. economy since the Great Depression, a $700 billion plan to rescue American banks from their own recklessness and save ordinary citizens from paying an even steeper price for allowing regulators in Washington and speculators on Wall Street to conduct their business devoid of any adult supervision.


The plan that emerged, which would require an investment of approximately $700 billion and was accompanied by a demand that Paulson be allowed to distribute the money as he saw fit without any kind of government oversight, was deeply flawed. The efforts to sell that plan to the American public were beyond inept. And the frantic scramble that ensued when the plan was rejected first by outraged voters and then by the House of Representatives was a perfect illustration of how damaging the consequences can be when powerful institutions lose the trust and respect of the public.


For professional communicators, the crisis both provides valuable lessons—in how not to sell a complicated proposal to ordinary people and on the potentially disastrous consequences of severely corroded credibility—and raises serious questions: How do companies (in the financial realm and beyond) regain the trust of consumers and investors and employees in the wake of such a spectacular collective failure? And, not entirely incidentally, what does all this mean for the near-term future of the public relations business.


How Not to Sell a Public Policy Proposal


“From a communications perspective, this has been done about as wrong as is possible,” says Michael Petruzzello, chief executive of Washington, D.C., public affairs firm Qorvis Communications. “There have been no credible spokespeople, the messages about the plan have been wrong or incomplete, the plan's supporters failed to understand the different audiences that had to be reached, and few people validated the claim that the plan was needed.”

The first problem with the Paulson plan was the timing.


Less than 24 hours after his first meeting with Congressional leaders, Pauslon was presenting them with a plan that looked alarmingly like an ultimatum. They had to agree to his $700 billion bailout immediately, or risk a complete meltdown of the financial system. There was no time for discussion or debate; to consult independent economists; to consider alternative approaches.

For a long time, as this crisis developed, the administration and the Department of the Treasury were seeking to keep a lid on the just how bad things were to avoid making things even worse,” says Jonathan Winer, a senior vice president at international public affairs firm APCO Worldwide and a former United States deputy assistant secretary of state for international law enforcement. “As a result, when the bailout was announced, it came as a huge surprise to the American public. They hadn't been prepared. It came as a surprise to many in Congress as well.”


The urgency struck many as inappropriate, perhaps even contrived, especially since there had been no shortage of warning signs. Economists had been warning of the dire consequences of the housing bubble—no serious observer doubted that’s what it was—for several years, and the fact that there was a serious systemic problem had been evident (see timeline on the following page) for at least a year. In the intervening months several major lenders had either failed or been rescued by their governments. At best, the haste Paulson now demanded suggested insouciance bordering on incompetence; at worst, it appeared to be a deliberate strategy to rush Congress into ill-considered action.


Says Clive Crook, columnist for The Financial Times and The Atlantic: “The administration, in the first place, failed to prepare Congress for legislation of this kind. The possibility that something like TARP [Troubled Asset Relief Program] would be needed was easily foreseeable once Bear Stearns collapsed—which was months ago—if not long before. Yet the bailout plan was thrown together in a matter of hours and presented to Congress in an absurdly abbreviated form that said, in effect, authorize us to spend $700 billion as we see fit, or else.”

From a communications point of view, one consequence of the haste with which the deal was presented was that there was little attempt to build any kind of coalition around the Paulson plan. Leaders of Washington's most powerful political interest groups—business, labor and consumer groups—were ignored. There was no attempt to recruit key opinion leaders to support the bill. AFL-CIO president John Sweeney, the nation’s most powerful labor leader, was never consulted by the administration, according to union officials, despite the fact that Sweeney knows Paulson and has been consulted by him on other issues.

“Respected third parties were nowhere to be found for days,” says Joe Baerlein, chief executive of Boston-based corporate affairs firm Rasky Baerlein. “When Warren Buffet surfaced, it was too late. The Bush administration thought that getting Paul Gigot of the Wall Street Journal and Lawrence Kudlow of CNBC would be enough; little did they realize that Sean Hannity, their ally, called Paulson’s plan ‘a big tremendous rush to spend hundreds of billions of your dollars to buy out these bad loans from these banks’ and Rush Limbaugh said ‘this is a manufactured crisis.’”

The nomenclature was another problem. Whoever decided to describe the plan as a “bailout” clearly had no understanding of the power of language. Surveys showed that when people were asked whether they supported the “bailout” or the “rescue,” as they were by pollster Rasmussen, they opposed it by two-to-one. When they were asked whether they favored “investing billions to try and keep financial institutions and markets secure,” as they were by the Pew Research Center, they were in favor by almost the same margin. There’s little doubt that if the plan had been positioned as an economic recovery plan rather than a Wall Street bailout, it would have garnered greater support.


“The first step should have been to show outrage over the gross irregularities of financial institutions,” says University of Southern California marketing professor Lars Perner.
But the administration also needed to make it clear how the credit crisis would have an impact beyond Wall Street, on ordinary consumers.
Says Crook: “The implications of the meltdown for ordinary Americans were not promptly or persuasively spelled out.” As a result, the Democratic revision of the plan was framed as an attempt to balance the assistance to Wall Street with some help for “Main Street,” as if Paulson’s initial proposal had no benefits beyond the financial industry.


“I think all would agree the government failed the ‘message’ and ‘frame’ test that we routinely advise our clients on,” says Baerlein. “Nowhere in any of the government’s messages did it ever show any sign of hope to the public, only desperation. It also never framed this problem as a credit crisis and let it be interpreted as a bailout for Wall Street. Once this got labeled as a ‘bailout,’ they were stuck with that label.”


Baerlein argues that advocates of the Paulson plan should have made the case more aggressively that punishing Wall Street by destroying the financial system would ham everyone.


Winer says he would have recommended a communications strategy that emphasized five key points:

·        The housing crisis was leading to banks cutting back their loans across the board, to everyone.

·        Consumers, small businesses, cities and states were finding they couldn't borrow money just to keep doing routine things like making payrolls.

·        The federal government must act to reduce the risk of harm to the vast majority of Americans who were at risk of becoming the victims of a crisis that they did not create.

·        The bailout will be designed so that the government will be able to recover as much as possible of the funds it puts out when the economy recovers. 

·        We are acting not to bailout Wall Street, but to protect our country and its people—so this is the right thing to do.


Petruzzello, meanwhile, is critical of Paulson’s decision to appear on four of the Sunday morning talk shows—none of which have a large audience beyond Wall Street and Washington opinion leaders. “Rather than the Sunday talk shows, a round of appearances on other programs with much broader audiences such as Today, Good Morning America, and even Oprah would have made more sense,” he says. “Interviews on a variety of national radio talk shows would have also reached the people who needed to be convinced that the plan was worth doing.”


Yoram Wind, professor of marketing at the University of Pennsylvania's Wharton School, adds: “You have to identify the main concerns of people and address them. Something like 50% of the public owns some type of stock market shares. You had to make clear what would happen to the markets. In terms of liquidity, it had to be explained that they would not be able to get a loan if they needed one, for a car or whatever.”

That problem was exacerbated by the headline-grabbing $700 billion price tag. The Bush administration had apparently made a decision to talk up the scale of the plan, a strategy designed to reassure Wall Street, while failing to communicate that the government expected to make some of that money back and that the final cost was likely to be much lower—although given the Bush administration’s estimates of the cost of its Iraqi adventure (Americans were promised it would pay for itself because of Iraqi oil revenues) there was always going to be some understandable skepticism. And that skepticism was clearly increased with a Treasury spokeswoman told Forbes how the administration had arrived at the $700 billion cost. “It’s not based on any particular data point. We just wanted to choose a really large number.”


In the light of all that, it’s hard to disagree with Rick Hohlt, a lobbyist for banking interests and prominent GOP fundraiser, who told reporters: “In the real world, nobody thought about how to sell this thing,” says


A Year of Living Dangerously


It’s a little over a year since the credit crisis began to make headlines. In August of last year, investment bank BNP Paribas told investors they would not be able to take money out of two of its funds because it could not value the assets in them, owing to a “complete evaporation of liquidity” in the market. A few weeks later, British mortgage lender Northern Rock asked for and was granted emergency financial support from the Bank of England, realizing it could no longer raise the necessary funds from the market. And in October, Swiss bank UBS became the first top-flight bank to announce losses—$3.4 billion—from sub-prime related investments.


It is about six months since leaders from the G7 group of industrialized nations warned that worldwide losses resulting from the collapse of the U.S. sub-prime mortgage market could reach $400 billion, since the British government announced that Northern Rock would be nationalized, since Wall Street's fifth-largest bank, Bear Stearns—which a year earlier had been worth around $36 billion—was acquired by rival JP Morgan Chase for $240 million in a deal backed by $30 billion of central bank loans.


In August, global banking giant HSBC warned that conditions were at their toughest “for several decades” after suffering a 28 percent fall in half-year profits. A few days later, building society Bradford & Bingley posted losses of £26.7 million for the first half of 2008.


On the other side of the Atlantic, meanwhile, the

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