Not necessarily practicing what you used to preach …
Back in 1998, after Asia experienced a systemic banking crisis, the United States led a series of international working groups to develop best practices for handling future crises. One of the working group — the second working group — developed principles for managing a systemic banking crisis. The group’s recommendations included:
“Bank owners (holders of bank equity) should not be bailed out. They should lose their investments when banks are given public support, or their investment should be diluted through sales of equity (or some convertible instrument) to a government agency, which is then in a position to benefit and recover cots if the institution’s conditions improves.”
See p. 43-44 of the pdf of the Report on Strengthening Financial Systems.
“The extension of guarantees should be strictly limited, possibly by class of institution, instrument and agent;
“Guarantees should always be given in ways to reduce moral hazard risk. i.e. providing an upside risk to the guarantor.”
p. 41 of the pdf of the Report on Strengthening Financial Systems.
I doubt the Treasury’s recent guarantee of money market funds fully meets this criteria; very large investors in money market funds now have more protection than many depositors in banks. The US doesn’t seem to have been fully prepared for the contingency that the bankruptcy of a large investment bank would lead to a huge rise in the banks’ cost of funds and a run on money market funds — a key source of financing for the shadow financial system.
Another recommendation, from the final G-22 report:
“The working group recognises the role of government in protecting smaller deposits in the banking system and the overall integrity of the financial and payments system. However, preserving the stability of the financial and payments system does not require protecting individual banks, their managers or their equity owners from the risk of failure.”
See p. 8 of the pdf the Report on International Financial Crises.
These are difficult — and, as Secretary Paulson noted, humbling — times for the United States. But that doesn’t mean that existing equity investors in the financial system necessarily have to see their investment protected when the government injects additional funds into the system.
Full disclosure: I was part of the secretariat that helped to draft the Report on International Financial Crises, a working group the United States chaired. It was my first significant job at the US Treasury.
Matthew Dubuque
There was also a scathing internal IMF working paper published after the crisis that stated that letting Thai banks fail UNEXPECTEDLY exacerbated the crisis dramatically.
The CULTURAL impact of demanding a bank failure in a Confucian society contributed decisively to a run on ALL Thai banks generally.
The IMF before the crisis was demanding that bad banks fail.
AFTER the crisis, the IMF changed their tune.
Matthew Dubuque
bsetser: But that doesn’t mean that existing equity investors in the financial system necessarily have to see their investment protected when the government injects additional funds into the system.
The trouble is that if you don’t know what the size of the losses are, you can’t put in just enough to save the depositors because no one knows how much money that is, and if you have a bank run, then you need to put in huge amounts of capital to stop the bleeding.
One interesting thing about the list of recommendations is that it didn’t list the one important recommendation that probably help limit the crisis and that is that emerging markets should have fund huge currency reserves independent from the IMF which they can use to inject liquidity into the financial system in the middle of a crisis.
Twofishes:
“The trouble is that if you don’t know what the size of the losses are, you can’t put in just enough to save the depositors because no one knows how much money that is, and if you have a bank run, then you need to put in huge amounts of capital to stop the bleeding.”
Uncle Bruno tinks dat a problem wid da GOOMBAHS DAT CAN’TA COUNT too an’ dats why da Family has der own safe.
In de old country da Church used to do it, for a 10% fee in da collection pot, an’ dey keep it in gold, underneath da Vatican in da tunnels. Dat worked out well during da Big One and wid de lira afterwards too.
But thems was da good old days ana da Church no do that here in da US of A. So’s Uncle Bruno provides dat service for da Family. (we’s all in da “book”).
Mathew D, I saw your reply on ‘Naked capitalism’: “In order to make an INFORMED decision, we need NOT ONLY the BEST CASE SCENARIOS (i.e. where the taxpayer makes a profit) we need to have the COURAGE to examine the worst case scenarios.
Analyzing WORST CASE SCENARIOS is an essential component of effective crisis management.”
I agree. I wrote to that effect in my emails to select members of Congress today. Here in NC amongst people I have face2face contact with, there is a severe reluctance to articulate or acknowledge ‘worst case’ scenarios or to ’stress test’ plans. It is due to fear. Or should I say, too many people are unable to overcome their fears and refrain from clinging to false hopes as the preferred analytical m.o.
Hopefully, once Congress finishes extracting a ‘pound-of-flesh’, cooler heads will confront that which they seek distractions from.
1) the conclusion of one downward trend chasing another downward trend: the home price deflation chasing a price-point affordable to workers at median wages for their housing & labor market, whose real wages are declining due to job-losses from recessionary pressures, and price inflation on energy & food. And workers who must meeet stringent downpayment rqmts (20% down = $50k for a $250k house).
2. Persistent valuation deflation on a widening number of financial instrumentals securitized by deflatinng real estate;
3. persistent pressures on bank’s capital requirements contributing to on-going credit contraction;
4. Virus-like jump by deflation from assets to wages, via job losses from an ‘L’-shaped recession;
5, The eventual reaching of an equilibrium that is not at all static by geography or by industry sector, of the above, at some point in the future.
rescue will come at cost of inflation going up.
With US savers, corporates and govt in deficit,
world central banks have to take all the bad debts indirectly.With oil in tight demand supply situation, the next round of inflation will be seen in the oil market.
Greg Sills:
Dat wad Uncle Bruno always says. But yous forgot one…rising mortgage interest rates come outta da hous’hold budget too.
Dat why de taxpayer never gonna see any money outta dis.
aaah, but at that time, equity investors were pretty much not resident in the western hemisphere or allies – big differences these days. Besides, let’s not forget this is an election year, karma and payback tend to be rather swift in such times
Heheheh..no more investment banks. Dats da good news.
Dey say da bill gonna come to $15,000 per family…meaning yous family.
Bet dey tell us wadda good idea da flat tax is now. Goombahs.
Bet it ain’ta over yet, neither. Double goombahs.
++++++++++++++++++++++++++++++++++++
Fed to regulate Goldman, M.Stanley; bailout takes shape
http://biz.yahoo.com/rb/080922/financial_bailout_fed.html?.v=1&.pf=career-work
Hi! I’m an editor for Seeking Alpha. Please contact me at your earliest convenience.
yous talk’n to me?
Brad,
My sympathies but once you start nationalizing the financial system, there is no end. However, it appears that all these non bank institutions, will have to become banks or submit to bank-like regulations. That means that the Greenspan-option-like things are being taken away (while they are temporarily worthless) and possibly many of these non-bank competitors will lose their competitive advantage.
That is a good thing from a stability point of view.
As to comparing the conditions that sparked the recommendations you refer to, those were fundamentally different. (a) most of these markets were not equipped with deep, state-of-the art financial systems. Links between banks, governments and family conglomerates would have made even excellently designed regulation a joke.(b) also, these were all markets with very high entry barriers (combination of gvt, business structure, informal regulation and information deficiencies) and one quid pro quo western gvts wanted was entry for their own firms. Just throwing money at a bunch of Ruritanian crony capitalists and their governments would not play very well with the folks back home. So eminently sensible things (that work poorly in ordinary criminology, why would it work in finance) like severe punishment for the bad guys was included.
In the current US case there is no western audience (with organizational capacity that is) that needs to be satisfied and the nationalist argument works in reverse. Probably no one wants the nation’s premier institutions to be bought on the cheap by some foreigner walking in with a sack of cash, like Lone Star did in Korea..
Well, perhaps the differences aren’t all that great.
“The United States has racked up another $3 trillion in debt in just 6 years. The US national debt now stands at $8.4 trillion dollars while the trade deficit has ballooned to $800 billion nearly 7% of GDP.
This is lunacy. No country, however powerful, can maintain these staggering numbers. The country is in hock up to its neck and has to borrow $2.5 billion per day just to stay above water. Presently, the Fed is expanding the money supply and buying back its own treasuries to hide the hemorrhaging from the public. It’s utter madness.
Last month the trade deficit climbed to $70 billion. More importantly, foreign central banks only purchased a meager $47 billion in treasuries to shore up our ravenous appetite for cheap junk from China.
Do the math! They’re not investing in America anymore.”
http://www.infowars.com/?p=4703
I think I just figured out a piece of the puzzle. All the Fed’s alphabet soup of emergency liquidity facilities were structured around repurchase agreements. Toxic waste securities were used as collateral for US Treasuries and dollar credit at 85 percent of face value. But as each facility expires, it has to be rolled over and increased to keep pace with the implosion of credit in the interbank markets.
The Paulson plan will provide a one off opportunity for banks to take their toxic collateral back and sell it at a Paulson-determined price for cash. He selectively decides winners and losers, of course, creating arbitrage opportunities and survivor bias in the process.
In the meanwhile, the removal of the toxic waste from the Fed balance sheet gets the Fed off the hook for having hypothecated all its Treasuries against worthless toxic waste at Enron-styled false valuations.
Any views?
The trouble is that not only the previous ‘consensus’ of what to do is out of the window, but with it the entire set of rules and interpretations of these rule of what is allowed is also out. Thus, in a way, the concept of ‘rules’ is questioned. See what happened to the Maastricht criteria, previously rigorously enforced, after France and Germany broke it, without real punishment.
http://globalstructures.blogspot.com/2008/09/rules-versus-discretion.html
Part of the problem is that the value of the ‘toxic assets’ is an increasing function of liquidity. If I buy a 30-year corporate bond
(or ARS, or super-senior-MBS thing) that has a _liquid_ market, then I can believe my money isn’t really locked up for 30 years — because I can sell the asset at any time. If liquidity dries up (where we are headed right now), then I have to hold to maturity, and the interest rate for 30-year money only retrievable at maturity is extremely high. With MBS assets, half the problem is that ‘we _now_ appreciate that our models are dreadful’, so there’s no liquidity, which makes the assets much less valuable even before you take into account the quality of the underlying cashflows.
On a foot note, I noticed on the portfolio asset listing of the T Rowe Price “prime reserve money market fund” that almost all of the funds were invested in short-term paper of European banks and industrial companies. Among the largest mutual fund companies in the US, T Rowe Price has completely avoided any MBS and CDOs of US investments banks or even financial services corporations including GE. T Rowe Price is among the most conservatively managed mutual funds. Several years ago, a Virginia US bank defaulted on a $40 million short-term bond: The T Rowe Price money market fund without demanding a government welfare bailout covered the financial losses at the company’s own expense. Not a single penny was lost by its money market fund customers.
It is an absolute disgrace that Hank Paulson requests a taxpayer bailout of US investment banks that were among the most irresponsible. Taxpayers that follow the laws, and corporations responsibly managed will be punished with punitive taxation to reward corrupt, politically-connected Wall Street firms.
Dollar May Get `Crushed’ as Traders Weigh Up Bailout
http://www.bloomberg.com/apps/news?pid=20601103&sid=arSYa87HCb9U&refer=us
Sept. 22 (Bloomberg) — Treasury Secretary Henry Paulson’s plan to end the rout in U.S. financial markets may derail the dollar’s three-month rally as investors weigh the costs of the rescue.
The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates.
“As we get to the other side of this, the dollar will get crushed,” said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world’s biggest currency hedge-fund firm, which manages about $15 billion.
The dollar fell against 14 of the world’s most-traded currencies on Sept. 19, including the euro, as Paulson unveiled the plan.
According to dpa, Germany and other G7 countries have said that they will not participate in the US bank bailout fund.
It seems that the US taxpayer is going to carry the can.
http://www.welt.de/politik/article2477722/Deutschland-erteilt-US-Rettungsplan-eine-Absage.html
RebelEconomist,
I agree with your analysis on the “scale of central bank …” post. Thanks.
Bernanke Federal Reserve “printing press” begins monetizing US debt problems
Latest from Bill Fleckstein,
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/whatever-we-do-it-will-be-wrong.aspx?page=2
In any case, the response to all of those problems finally caused Ben Bernanke to gas up the helicopters. Last Wednesday, it was announced that the Treasury plans a special series of bill auctions to help the Fed expand its balance sheet. Read: The Fed is going to print money to buy Treasurys so that the Treasury Department can lend money to all these institutions. In other words, the printing presses are setting about monetizing all of our problems.
Of course, this will lead to other problems, and it’s why gold exploded by $80 an ounce last Wednesday. Which is the outcome that I’d always assumed would occur and is now here.
Foreigners are finally watching. Last Tuesday, China’s People’s Daily said that the world is “threatened by a financial tsunami.” In essence, the paper said, countries need to consider building a new financial and currency order that is not dependent on the United States and the dollar. After all, who wants to lend money to somebody who uses a printing press to pay you back? Obviously, the script you get paid in can easily become worthless.
No one knows the exact cost to rescue the financial industry, but if it cost $85 billion to bail AIG, I don’t think $700 billion will be nearly enough to bail everyone else out.
The argument that the cost may not be very high since the government may be able to profit from some of the purchases is ludicrous. The only way the plan works is if the bad debt is purchased at par or very close to par. The problem is the vast majority of the bad debt hasn’t been marked down. It’s on the books at par. if the government buys the debt at it’s market value, then the banks are insolvent. The only way for the plan to work is to offload almost all the losses on the government.
Also, I believe the national debt was raised to $10.6 trillion with the gse bailouts. The new plan must be pushing it to over $11 trillion.
«In the meanwhile, the removal of the toxic waste from the Fed balance sheet gets the Fed off the hook for having hypothecated all its Treasuries against worthless toxic waste at Enron-styled false valuations.»
I suspect that the Fed repos will be rolled on indefinitely, and the 700 billion purchases will be in addition to that, not replacing that.
Probably the worst stuff will be sold to the Treasury, and the slightly less worse, that might one day recovery some value, will continue to be repo’d by the Fed in the facilities.
Do you reckon that $700 billion is enough to transfer all the losses to the Treasury *and* recapitalize the financial system? I don’t think it even covers the losses.
«if the government buys the debt at it’s market value,»
it will be bought at “fair” value, and since Paulson has said that lack of liquidity is causing market prices to be too low, obviously the “fair” price will be above market price, as you suspect.
To DC: And if AIG had defaulted, the European banks would have been forced to sell the commercial paper on its books at fire sale prices. This would have caused money market funds to go under which would have killed the commercial paper market for manufacturing firms.
One issue with the financial system is that the innocent and the guilty are so intermixed, that problems in CDO’s and bad mortgages very quickly spread to conservative money market funds. They probably would have had huge problems if Paulson hadn’t agreed to insure money market funds.
charlie: The only way the plan works is if the bad debt is purchased at par or very close to par.
Also some of these assets are worth much much more if you hold them to maturity. One problem that I see is that if you are convinced that the assets are worthless then they will be sold very cheap, which will cause lots of interesting screaming if they end up being worth something.
The government needs to consider the possibility that the assets sold might be worth more than the price it bought them at needs to be considered, because otherwise, there will be lots of people making no-lose bets.
There is precedent for this. The government ended up making money off of LTCM, and RTC was nowhere near as costly as first thought.
Twofish,
Paulson is deliberately confusing saving the banks with saving people’s deposits. This bill is only intended to bail out the banksters and the deadbeats.
To Twofish:
“… in CDO’s and bad mortgages very quickly spread to conservative money market funds.”
The main problem is that CDOs are inherently illiquid financial instruments due to their lack of standards and transparency and no amount of government market manipulation will create an aftermarket for these products. The only way a bailout will work if the Treasury can disassemble the CDOs it buys into more acceptable marketable securities such as plain vanilla MBS. Unfortunately, only Wall Street has the expertise to carry out such a process and this is the reason Paulson is asking for lots of WS involvement in the bailout proposal. Of course this will create a lot of bargain hunting opportunities for Goldmans Sachs, etc and is one of the reasons they are seeking a banking status.
DC: Paulson is deliberately confusing saving the banks with saving people’s deposits. This bill is only intended to bail out the banksters and the deadbeats.
I was talking about last week and the Treasury bailout of AIG and the money market funds. Whether Paulson’s proposal is a good idea or not depends on the details, and those aren’t there yet largely because he probably doesn’t know what the details are.
However, whatever does get passed, however the deal does get structured, I’m pretty sure that Goldman-Sachs and Wall Street is going to make a huge amount of money off of it. This is going to be true whatever the rules end up being. Whatever rules that you set up, and whatever structures get created, someone on Wall Street will end up making lots of money.
My main concern is that when people figure out how much Wall Street makes out of this mess that their anger is muted by the fact that the average person got something out of this too, which is why I’m in favor of “soak the rich” taxes.
Twofish: “There is precedent for this. The government ended up making money off of LTCM, and RTC was nowhere near as costly as first thought.”
I thought we were told that LTCM was a private sector solution.
DC: Paulson is deliberately confusing saving the banks with saving people’s deposits.
Can you explain how you propose to do one without doing the other?
jkh,
Noted. Thanks for following up.
DC: Paulson is deliberately confusing saving the banks with saving people’s deposits.
Twofish: Can you explain how you propose to do one without doing the other?
DC: A decade ago, Sweden was faced with a similar financial collapse. The Swedish government promptly nationalized the bankrupt banks that completely wiped out the banks shareholders. The bank depositor accounts were transferred to healthy banks that revived Sweden’s economy with honest lending practices. Today Sweden retains a relatively healthy and vibrant economy.
Amazingly Paulson’s taxpayer bailout actually rewards those financial institutions that behaved recklessly, and punishes prudent investors. The $700 billion taxpayer bailout represents the ultimate “moral hazard” fiasco.
Whatever readers of this blog think of DC’s style, it has to be admitted that he has proved to be largely right!
On Wednesday, Forex.tv reported that the net long-term TIC flows came in well below the consensus forecast, totaling $6.1 billion in July, according to data released by the U.S. Treasury on Tuesday morning. Economists had been expecting net long-term flows to rise to $55.0 billion compared to the previous month’s previously reported figure of $53.4 billion.
$6.1 billion will not meet the requirements of our current account deficit of $700 billion. The US dollar is headed for a free fall. The shiny yellow metal is looking better by the day. It’s a vote of “No Confidence” in the fiat Dollar currency.
Twofish: However, whatever does get passed, however the deal does get structured, I’m pretty sure that Goldman-Sachs and Wall Street is going to make a huge amount of money off of it.
And you don’t find this morally reprehensible? Bankers at Goldman essentially stealing taxpayer dollars?
Twofish: “There is precedent for this. The government ended up making money off of LTCM,
Wrong. The govt neither lost nor made any money off LTCM. In any case since when did the voters authorize politicians to make investment decisions?
Twofish: and RTC was nowhere near as costly as first thought.”
And we are supposed to rejoice that they only took $200B instead of $400B??
DC: A decade ago, Sweden was faced with a similar financial collapse. The Swedish government promptly nationalized the bankrupt banks that completely wiped out the banks shareholders. The bank depositor accounts were transferred to healthy banks that revived Sweden’s economy with honest lending practices.
Actually you need to read about what Sweden (and Norway and Finland) actually did rather than look at the summary. They basically did a staged bailout and capital injections.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=883209
In any case equity holders were wiped out, but creditors weren’t.
pseudo: And you don’t find this morally reprehensible? Bankers at Goldman essentially stealing taxpayer dollars?
Regardless of how you set up the rules, Goldman-Sachs is going to find a way of making money off of it, so the trick is to set up the rules so that there is no way that GS or Wall Street can reasonably be accused of “stealing taxpayer money.”
If you increase taxes on people with high incomes and reduce taxes on poor and middle class people, then GS will be “stealing money from rich taxpayers” which I suppose isn’t a bad thing. The income distribution in the US is messed up anyway, and changes in the tax code would be a good thing to do even in the absence of this mess.
pseudo: Wrong. The govt neither lost nor made any money off LTCM.
I misread things, but the banks that engineered the LTCM bailout made a tidy profit from it. It’s likely that someone is going to make money from the bailout and we need to set things up so that the government as a claim on those profits if they put money into the system.
pseudo: In any case since when did the voters authorize politicians to make investment decisions?
Someone has got to do it.
Rebel: Whatever readers of this blog think of DC’s style, it has to be admitted that he has proved to be largely right!
I don’t think so.
Twofish: In any case equity holders were wiped out, but creditors weren’t.
DC: If the Fed followed the Swedish model, then Bear Sterns shareholders should have received “zero”. Instead they were rewarded with a $10 per share with the taxpayers holding the bag on $30 billion of subprime garbage. AIG shareholders look to receive at least $10 per share. Taxpayers are holding the bag on a likely $85 billion default.
From rightwing Rush Limbough to leftwing Nation magazine, there is on-going national taxpayer revolt against Paulson’s corporate welfare bailout. Privatizing the profits, and socializing the losses to Goldman Sachs isn’t very popular to say the least.
Rebel: Whatever readers of this blog think of DC’s style, it has to be admitted that he has proved to be largely right!
Twofish: I don’t think so.
DC: If you took my investment advice for “free” alittle over 1 year ago, you would still be up 300% on Brazil Petrobras, up $200 per ounce on Gold, up 30% on China CNOOC. That’s alot better than the average Hedge Fund performance the past year of 4%, excluding the base 1.5% management fee and 20% skimmed off the top of profits. I don’t care about market fluctuations because I don’t use any leverage. LOL.
DC: Instead they were rewarded with a $10 per share with the taxpayers holding the bag on $30 billion of subprime garbage.
That $10/share came from JPMorgan, with Treasury agreeing not to fund the first $1 billion of losses. In any case, the $10/share meant that shareholders lost 90% of their money.
DC: AIG shareholders look to receive at least $10 per share.
AIG was trading at $60/share last year. The reason that it wasn’t wiped to zero was that if you had wiped out the shareholder equity, this would have pulled the trigger for the credit default swaps, and the bomb would have exploded.
Twofish: Someone has got to do it.
If the govt makes investment decisions it is called socialism. Maybe you like socialism but if so at least lets be clear about it and not pretend otherwise.
To DC: Reading over the details of the Swedish bank bailouts, the shareholders in the banks were not wiped to “zero” when the government took them over.
pseudo: If the govt makes investment decisions it is called socialism. Maybe you like socialism but if so at least lets be clear about it and not pretend otherwise.
I don’t care what you call it, but the problem with labels is that you end up making things simpler than they are. Socialism. Capitalism. Communism. I’m in favor of “what-ever-works-ism.”
Twofish: Regardless of how you set up the rules, Goldman-Sachs is going to find a way of making money off of it
Not if you make the rule that no one makes windfall profits out of Paulson’s bailout. There is a precedent for this too: FDR publicly announced after Pearl Harbor that no one is going to become a millionaire out of that War. For the most part he managed to achieve that. Contrast that with the Civil War where Lincoln was not nearly as firm with the bankers.
Goldman etc may be smart in looting from taxpayer bailouts but lets at least make it hard for them.
Twofish: If you increase taxes on people with high incomes and reduce taxes on poor and middle class people, then GS will be “stealing money from rich taxpayers” which I suppose isn’t a bad thing.
It is not, but it’d be even better if GS is not stealing from *anyone*.
Twofish,
AIG and Bear Sterns shareholders really deserve to receive a big fat “zero”. The $10/share from JPMorgan shotgun marriage was authorized by Paulson. Alittle over a decade ago in the telecom bust, I lost on Nortel from $60 to $7 per share. Then I should also apply for a federal taxpayer bailout. Why does Paulson only shed tears for Goldman Sachs and worthless stock options, but not for me? I’m simply broken hearted!!!! LOL.
The speculators have been kicked out of the main stock market and have migrated back to commodities. LOL.
2:00 pm : The major indices post steep losses, but have halted their recent decline.
Oil prices climb to a gain of 12.8% at $118.80 per barrel in very volatile trade. Energy stocks are up 1.7%.
The gains in oil prices are weighing on airline stocks (-9.7%) and transports (-3.6%) in general. Retailers are down 4.2%.DJ30 -221.42 NASDAQ -55.96 SP500 -27.58 NASDAQ Adv/Vol/Dec 701/1.10 bln/2024 NYSE Adv/Vol/Dec 755/670 mln/2365
pseudo: Not if you make the rule that no one makes windfall profits out of Paulson’s bailout.
People are clever, people will figure out how to make windfall profits out of a “no windfall profits” rule. You find lawyers that create clever definitions of “windfall” and “profits.” For example, CEO salary, anything that increases CEO salaries will decrease profits.
pseudo: Goldman etc may be smart in looting from taxpayer bailouts but lets at least make it hard for them.
I think the thing to do is to set up the rules so that in order to get rich, you have to do socially productive things. Also, if you bash Goldman too much, you’ll likely find that the money ends up in someone else’s pocket.
pseudo: It is not, but it’d be even better if GS is not stealing from *anyone*.
If you write the laws, then you can redefine “theft.”
DC: AIG and Bear Sterns shareholders really deserve to receive a big fat “zero”
People don’t always get what they deserve. In fact, people usually *don’t* get what they deserve.
DC: Then I should also apply for a federal taxpayer bailout. Why does Paulson only shed tears for Goldman Sachs and worthless stock options, but not for me?
Because you can’t hold the world financial system hostage. Bear-Stearns and AIG could. Is it unfair? Yes. But the financial system is not particularly fair.
In any event, the reason Paulson wants to hurry is that now the Lehman is in bankruptcy, all of the closets are going to get opened up, and we are going to see how much toxic waste there is on the books.
Once that gets marked to market then everyone that holds those assets are going to have to market their books to market, and without the ability to pump money into the system, the dominoes are going to start falling again.
We’ve survived the first earthquake, but a second one is just about to come up, and everyone is preparing for the financial judgment day that is coming up.
More than meets the eye …
I believe that there are extremely deceptive Strauss neocon influences at work here that have intentionally encouraged the excesses in credit consumption so as to to create asset bubbles and turmoil in the economy, and, in addition, intentionally thwarted the use of any remedial regulation so as to grow the corruption.
Their goal (stated if you dig around for it) is to eliminate the expensive to maintain and threatening middle class and replace it with a less expensive to maintain and less threatening law enforcement class so as to produce a two tiered ruler and ruled world.
I would be interested to know what others though about any intentional shenanigans that might have contributed to the present crisis. Greenspan is a very smart man and in retrospect I think he knew exactly what he was doing?
Should he be in Rikers wearing a striped suit?
Twofish: People are clever, people will figure out how to make windfall profits out of a “no windfall profits” rule. You find lawyers that create clever definitions of “windfall” and “profits.” For example, CEO salary, anything that increases CEO salaries will decrease profits.
I don’t buy all this fatalism of “oh the Goldman guys are such geniuses they will employ lawyers and salesmen to beat any system so we might as well just give up and stop trying and let them do whatever they want”. Sure they will try but as FDR showed if the bankers know that someone is watching they won’t steal so brazenly and they won’t steal so much. Greed cannot be eliminated but it most certainly be restrained. It has been done before. Just takes some effort.
FDR: “Also, our present emergency and a common sense of decency make it imperative that no new group of war millionaires shall come into being in this nation as a result of the struggles abroad. The American people will not relish the idea of any American citizen growing rich and fat in an emergency of blood and slaughter and human suffering.”
http://www.presidency.ucsb.edu/ws/print.php?pid=15959
Twofish: If you write the laws, then you can redefine “theft.”
No need. Everyone knows theft when they see it i.e. when someone is making money without contributing anything.
Twofish: I don’t care what you call it, but the problem with labels is that you end up making things simpler than they are. Socialism. Capitalism. Communism. I’m in favor of “what-ever-works-ism.”
So just to be clear, you are in favor of the government actively making investment decisions, yes?
I am all for pragmatism, but I also care about fairness and consistency. I have no problem with the government making some investment decisions as long as the decisions are made transparently and in a democratically accountable way – instead of in a arbitrary and hypocritical way which is how Paulson is doing it right now.
Rebel: Whatever readers of this blog think of DC’s style, it has to be admitted that he has proved to be largely right!
DC has been right about Wall St all along. But it is hard to take him seriously when he is constantly spouting jingoistic nonsense about how the Chinese state is better than everyone else.
pseudo: I don’t buy all this fatalism of “oh the Goldman guys are such geniuses they will employ lawyers and salesmen to beat any system so we might as well just give up and stop trying and let them do whatever they want”
I didn’t say that. I said that you should expect that Goldman-Sachs will make a huge amount of money from whatever rules come out of this. One consequence of this is that you shouldn’t care that much about what GS wants since they will end up OK regardless of what the rules are. You really should care about 1) what is good for society and 2) what is good for you.
pseudo: So just to be clear, you are in favor of the government actively making investment decisions, yes?
I don’t see any choice in the matter right now. I care a lot about fairness, but I’ve found that fairness in practice means “what is good for me is fair, what is good for you is not.” I don’t care very much for consistency.
pseudo: DC has been right about Wall St all along.
I don’t think he has been particularly right about Wall Street.
to i on the ball patriot:
Never attribute to malice what can be attributed to stupidity. On the other hand sufficiently large amounts of stupidity becomes difficult to separate from malice.
pseudo: No need. Everyone knows theft when they see it i.e. when someone is making money without contributing anything.
People are very easily fooled by ad campaigns and prevailing fashion. All I want people to do is to look at things deeply, watch their wallet, and listen to all sides of an issue. There are lots of people who want you to think or vote a certain way, and you have to look at things from your own self-interest.
The reason this came up was that people are screaming about a taxpayer bailout whereas if you look at things, a lot of the people screaming are hedge fund managers and quite wealthy people. Part of the reason things ended up so messed up was that tax rates were too low and structural problems like health care and the Iraq War were ignored.
For what it’s worth, I personally think that what Obama says makes a lot more sense than anything McCain has mentioned. Now is not the time for a tax cut, particularly against wealthy people that can afford it.
Trust no one, including the people that tell you to trust no one.
Twofish: I care a lot about fairness, but I’ve found that fairness in practice means “what is good for me is fair, what is good for you is not.”
Don’t know what you mean by “fairness in practice”. Fairness is an ethical principle. Like justice and compassion. Why should it mean something different “in practice”?
I certainly don’t care about fairness when it is distorted to mean its exact opposite.
Twofish: I don’t care very much for consistency.
You should. Consistency (aka “rule of law”) is a good thing as long as it is not taken to extremes. Governments that act consistently will have more credibility and moral authority than a capricious government.
Twofish: The reason this came up was that people are screaming about a taxpayer bailout whereas if you look at things, a lot of the people screaming are hedge fund managers and quite wealthy people.
Just because a hedge fund manager says something doesn’t mean it is necessarily wrong. In this case, purely by accident, some hedge fund managers have their interests temporarily aligned with ordinary citizens. As you said, everyone needs to think for themselves. I think most people are quite capable of doing this.
Twofish: Trust no one, including the people that tell you to trust no one.
Thats an extreme of cynicism. I’d simply say choose your friends wisely.
DC: “Amazingly Paulson’s taxpayer bailout actually rewards those financial institutions that behaved recklessly, and punishes prudent investors. The $700 billion taxpayer bailout represents the ultimate “moral hazard” fiasco.”
LOL! The Investment Banking sector of the US is virtually wiped out. What a great reward for the investment banks! Now, what we US taxpayers did for the Chinese by nationalizing Fannie and Freddie well that the “ultimate ‘moral hazard’ fiasco”!
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Mark Thoma’s comment on risk distribution from his latest FF post:
“But this effect – the concentration of risk in the US as the guaranteed assets issued by Fannie and Freddie went primarily to foreign central banks – is a consequence of our need to borrow from foreigners to finance our budget and trade deficits. Without those deficits, more of the safe assets stay home and the overall pool isn’t as risky. So to the extent that this concentration of risk is a factor in causing the problems (and I don’t know how important it was), it was caused by trade and budget deficits, not the actions of Fannie and Freddie.”
Since I was dumb enough to hold WAMU in the belief that someone would buy it, I am incensed that someone stole it instead. The government takes control, gives a favored institution (personal friend, perhaps) all the assets for a song after the world’s quickest “auction”, sticks the taxpayer with all the dreck, arranges a backdoor bailout of it’s own nearly bankrupt FDIC, and leaves the common sh**dholder with zero. Welcome to Amerika.