Systemic Risk
I'm becoming increasingly skeptical of the notion that any single Wall Street bank or insurance company can really bring down the whole system by failing.
If we were to simply stop supporting AIG, what's the worst that would happen? Some hedge funds would go out of business because the counter-party risk they took by purchasing credit default swap contracts issued by AIG would cause some catastrophic losses. But who cares? The hedge fund managers took the risk and it didn't pay off. That happens all the time. Goldman Sachs and some other banks would lose money. Some banks might lose a lot and some might fail. But again, so what?
Only two things need to be preserved: customer access to insured deposits and the continued payment of consumder insurance obligations. The CDS market was never regulated and there was never any promise that the public would step in to make good on the promises of a failed CDS issuer.
The concept of "systemic risk" is really just the finance world's way of tricking the taxpayer into meeting obligations that were never ours. Yes, the credit markets did seize up after Lehman failed. But it wasn't actually the end of the world. Barclays bought whatever of Lehman was worthwhile and the only collateral damage was felt by money market fund managers who never should have owned Lehman debt in the first place.
I was as angry as anyone about the AIG bonuses but I'm more angry that we taxpayers are have been called on to save supposedly sophisticated banks like Goldman Sachs for risks that its bankers knew they were taking and understood fully.
We've been told that we have to keep on capitalizing AIG until all of its obligations to its swap customers are met or unwound. I don't believe it anymore. AIG is insolvent and needs to go to bankruptcy court. Its swap customers can get in line behind more senior creditors and they can try to recover whatever they can. Yes, some banks and hedge funds will blow up but finance will survive. It's not the financial system that's at stake here -- it's the futures of some politically well connected institutions. Enough.
If we were to simply stop supporting AIG, what's the worst that would happen? Some hedge funds would go out of business because the counter-party risk they took by purchasing credit default swap contracts issued by AIG would cause some catastrophic losses. But who cares? The hedge fund managers took the risk and it didn't pay off. That happens all the time. Goldman Sachs and some other banks would lose money. Some banks might lose a lot and some might fail. But again, so what?
Only two things need to be preserved: customer access to insured deposits and the continued payment of consumder insurance obligations. The CDS market was never regulated and there was never any promise that the public would step in to make good on the promises of a failed CDS issuer.
The concept of "systemic risk" is really just the finance world's way of tricking the taxpayer into meeting obligations that were never ours. Yes, the credit markets did seize up after Lehman failed. But it wasn't actually the end of the world. Barclays bought whatever of Lehman was worthwhile and the only collateral damage was felt by money market fund managers who never should have owned Lehman debt in the first place.
I was as angry as anyone about the AIG bonuses but I'm more angry that we taxpayers are have been called on to save supposedly sophisticated banks like Goldman Sachs for risks that its bankers knew they were taking and understood fully.
We've been told that we have to keep on capitalizing AIG until all of its obligations to its swap customers are met or unwound. I don't believe it anymore. AIG is insolvent and needs to go to bankruptcy court. Its swap customers can get in line behind more senior creditors and they can try to recover whatever they can. Yes, some banks and hedge funds will blow up but finance will survive. It's not the financial system that's at stake here -- it's the futures of some politically well connected institutions. Enough.
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I'm not sure I ever did. FREE THE MARKETS!! Let 'em fail.
That is what it is all about, no?
March 21, 2009 4:04 PM | Reply | Permalink
I actually agree with you guys. And if you're going to let a few bad corporate apples fail, why can't we do the same thing in the housing market?
Why do we need to have bankruptcy judges have the ability to cramdown the mortgages? Just let the banks decide which mortgages they try to fix and which ones they foreclose on.
I think I saw a headline today that 93% of Americans are still current on their mortgages
March 21, 2009 5:35 PM | Reply | Permalink
Presumably it's to sort out the speculators from the homeowners that are caught in the recession or are suffering from predatory loans. I'm not sure why that should bother you since it's clear that some lenders were indeed predatory. And it's not at all clear that banks will have the judgment to sort out one from the other - in fact, it's clear they don't.
March 21, 2009 6:56 PM | Reply | Permalink
I've read nothing in the legislation that tells the judges to sort out the speculators from the "regular" homeowners. If the banks don't have the judgement to make the right decisions, and they go under because of their bad loans, that's fine with me. But the government shouldn't be getting involved with the banks decisions.
March 21, 2009 10:55 PM | Reply | Permalink
Right: and the homeowners who were deceived by the predator should suffer because they were stupid enough to not know they were being lied to.
You're a class act. And it ain't middle class.
March 22, 2009 12:05 AM | Reply | Permalink
Homeowners that were "deceived by the predator" is a very small percentage of the population. Victimus of fraud or abuse should be protected. But I think the vast majority of the people who will receive bailout money did not suffer from fraud or abuse.
Mortgage math isn't calculus and nobody held a gun to your head to take the mortgage. Lenders got greedy and borrowers got greedy. The banks shouldn't get a bailout and the borrowers shouldn't get a bailout
March 22, 2009 7:40 AM | Reply | Permalink
See the 'btw' in http://tpmcafe.talkingpointsmemo.com/talk/blogs/destor23/2009/03/systemic-risk.php#comment-3416235
I'd call such loans predatory regardless of whether or not the borrowers were greedy.
March 23, 2009 4:54 AM | Reply | Permalink
please stop replying to my posts
March 23, 2009 6:06 AM | Reply | Permalink
Why should I honor your request? This is a public forum and I'm not posting abusively.
March 23, 2009 4:53 PM | Reply | Permalink
Because I told you weeks ago that I was going to stop engaging in discussions with you. I'd appreciate it if you would not respond to my posts. Thank you
March 23, 2009 8:56 PM | Reply | Permalink
You are free to not read or reply when I make a comment for others to see. This isn't even your blog so you have no objective basis whatsoever (not that this would be sufficient reason either). I think you're being overtly anti-social, Bill. That's not healthy in a social environment.
Just skip the comments you decide to skip, silently. Or decide to engage rationally and reasonably with the topic and it's tangents, without silly preconditions beyond what the site calls for.
Over and out, here.
March 23, 2009 9:03 PM | Reply | Permalink
Please do not reply to my comments. If you feel compelled to comment on a blog, you can make it without replying to something that I say. This is not being anti-social. But based on my experience with your prior postings, I have decided to stop commenting on your posts. And I would greatly appreciate it if you would return the favor.
If you feel like you need to add to the conversation, please do so at the bottom of the discussion rather than responding to my post.
Thanks again for your understanding.
March 23, 2009 10:24 PM | Reply | Permalink
Oh, please, please Mr. Sir God! -- PLEASE tell me to not respond to your posts, so I can piss you off by doing so anyway!
March 24, 2009 3:15 PM | Reply | Permalink
Those who got loans they could not afford, and mortgages they could not meet, got them from financial gurus with greater economic expertise than they. Or at least the latter held themselves out as having that greater expertise.
Do you do surgery on yourself? Or do you trust those who have greater expertise (even if only a false front) to do it for you?
And if it turns out you trust a person who, though convincing as a "surgeon," isn't a surgeon after all, will you condemn that person -- or yourself?
Unlike those -- adn you -- who blame the victim, I don't conflate the Wall Street fuck-ups who are getting bailouts with those who got loans or mortgages they could not afford but who are not getting bailouts.
As I said: you're a class act. And it ain't middle class.
March 24, 2009 3:23 PM | Reply | Permalink
I am not blaming just the victim. People are smart enough to know if they can afford the loan or not. And banks should also know when they're making a good loan versus a bad one. Mortgage math is simple math. But both borrowers and lenders can get greedy. If a borrower makes a mistake they lose the house. If a lender makes a mistake they lose money if the value of the house falls below the mortgage amount. Neither one should get bailed out
March 24, 2009 8:18 PM | Reply | Permalink
No: Not all people are INFORMED enough to know whether they can afford a loan. They are not trained in the meaings of all that lengthy fine print legalease.
Research has shown that the monied are better able to handle money than the poor. The central reason for which is the fact that the monied have money, so in the using of it learn the risks and pitfalls.
Add to those facts that there were innumerable decits and scams being played on the unsuspecting and vulnerable.
Yes: you are blaming the victim -- and that is typical of the monied, and the far-right lunatic fringe.
April 22, 2009 8:04 PM | Reply | Permalink
Thanks for replying to something that's almost a month old.
Once again, I will reiterate that I am not blaming just the borrower. The lenders made a lot of dumb mistakes and those companies should go bankrupt and their stakeholders should get wiped out.
But as for the borrowers, mortgage math isn't that complicated. The individual knows best about the level of debt expense they can afford. Someone who takes out a variable rate loan must understand that their interest rate can vary. And someone with a short-dated loan must understand that they are taking refinancing risk. Those are not complicated concepts. Maybe this will teach people that they need to read all that fine print and be more responsible with debt.
April 22, 2009 8:17 PM | Reply | Permalink
I'm with you, Destor. For AIG to have paid its counterparties 100¢ on the dollar when the banks themselves are offering it for 60¢ and the most the stuff is worth is 30¢ or less makes no sense. It was the difference of 30bn of our money that AIG was playing so loose and free with.
Goldman Sachs has two funds currently on the Watch List. I can't see where a systemic risk is at stake if those funds implode.
As Galbraith says about the latest plan from Geithner:
.March 21, 2009 6:50 PM | Reply | Permalink
Oh I am not too sure. I would take me six months of study to feel competent enough to make the decision.
But you make a good argument. But now we have this huge debt covered by warrants or notes or ious or something from AIG.
I think we have crossed the Rubicon.
March 21, 2009 7:02 PM | Reply | Permalink
Right on, Destor. Why was Goldman-Sachs CEO Blankfein in on the initial plans to bail out AIG with Paulson, Geithner and Bernanke? Why did we give Goldman-Sachs $25 billion when they were sitting on $100 billion?
If we're not using AIG as a pass-through, why did the $100 billion we've given them since the initial $80 for 80% stake not give us complete controlling interests?
Unfortunately, I think that $13 billion has already been passed though AIG to Goldman (maybe congress can slap a capital gains tax of 90% on it!). If the country were to have a real public debate (take it to the free market of ideas), I'm quite sure it would come to the conclusion that the big, toooo big, bank/securities/insurance/hedge-fund gambling houses need to go the way of the Robber Barrens of old.
March 21, 2009 7:15 PM | Reply | Permalink
Absolutely right. I think AIG is more than a pass through to Goldman. It's a pass through to hedge funds and to foreign banks including Deutsche Bank and Societe Generale -- institutions that, if they need to be bailed out, should be bailed out by the EU regulators.
March 21, 2009 8:28 PM | Reply | Permalink
I keep picturing a pickpocket ring. The pickpocket passes the mark, nimbly lifting his cash and slides it into a folded newspaper (say, the WSJ), then immediately passes it to a compadre and maybe another. The sucker (that'd be us) accosts the pickpocket but he doesn't have the cash. It's on its way to the boss, who'll pay the grifters a cut when they make their meet later.
March 21, 2009 8:48 PM | Reply | Permalink
I don't understand why everybody is so "surprised" that AIG passed through this money. AIG almost went under because it owed money to these counterparties that it didn't have and couldn't raise.
And like I've said above, I'm all for letting AIG go, but what did everybody think they were going to do with the money? Just sit on it? The government wasn't going to hand AIG billions and also say that you can rip up those CDS contracts.
And it's not surprising that Blankfein was involved in the discussions. Any time you have a company in trouble, you'll have a meeting with its creditors and its suppliers. Look at GM - is it surprising that the suppliers like Delphi are part of the discussions? Of course not. When Lehman was failing all the other banks that traded with Lehman were brought in to assess the situation because Lehman owed them money. Suppliers are often brought to the table in the hope that one or a group of them could try to rescue the troubled company and keep it in business.
And Goldman wasn't the only bank there, I know that at least JPM and MS were there too. And I would guess there were others.
March 22, 2009 7:55 AM | Reply | Permalink
I think the problem here might be that many of these bespoke transactions are with nations and that is what they're really worried about - AIG defaulting on payment to these nations. That is what would cause the worldwide meltdown.
March 22, 2009 10:15 AM | Reply | Permalink
The credit boom was the result of dollars from the trade deficit being recycled back into US investments. AIG's insurance on the mortgage backed securities and other paper was critical in encouraging foreign banks to invest in these US debts.
Letting AIG fail would have stopped the inflow of dollars and probably reversed the flow, causing a greater decline in credit availability in the US.
AIG was not about domestic US consumer banking. It was about international finance. The main action was in London.
By the way, does anyone know what fraction of the $165 million in bonuses was paid to people subject to US income tax?
March 22, 2009 11:00 AM | Reply | Permalink
You really get this stuff, Merrill. But, look -- the international players knew the risks. They all knew that the CDS contracts were only worth what AIG could pay for them and it was clear from AIG's filings that the company had written contracts worth 44% of its assets and hadn't hedged its exposure at all. But they still said, "It's fine, AIG has a high credit rating." And now they get a bailout from me? And they dare lecture the American consumer about irresponsible borrowing? Sickening.
March 22, 2009 12:45 PM | Reply | Permalink
You really get this stuff, Merrill.
Ordinarily, he does but not this time.
The credit boom was the result of 1) an obscenely low Fed funds rate and a subsequent agonizingly slow and fully telegraphed increase in that rate and 2) permission given for the five investment banks (IIRC) to gear their investment (speculative) ratios to an obscene 30-1 level -- both leading to excess speculation and excess liquidity creation.*
N.B. The arrival on our shores of $100 billion doesn't require our "banks" to create $3 trillion of credit/debt. And if we didn't create it in the first place, we wouldn't have to sell it to greedy Yur-peons in the second place.
* Commercial banks using off-balance sheet SIVs and a whole host of other accounting devices added to the "credit boom," too.
March 22, 2009 1:23 PM | Reply | Permalink
It was the availability of the carry-trade based on extremely low Fed funds and BOJ rates and not the "global glut of savings" that caused the "credit boom."
March 22, 2009 1:27 PM | Reply | Permalink
Since the current account balance turned negative in 1992, the US has run a cumulative current account deficit of 6.5 trillion dollars.
While the use of 30 to 1 leverage exacerbated the debt creation, the current account deficit was the primary reason that there was a vast pool of investible dollars in the hands of overseas banks and investors. The 6.5 trillion either went to:
- increasing foreign reserves held by governments and sovereign funds,
- increasing Eurodollar accounts and other dollar-denominated investments abroads,
- increasing investment flows into US securities.
Without the immense current account deficit, the flow of funds into dodgy US mortgage paper would have been stifled by increasing US exchange rates.
Apparently the ghost of Smoot-Hawley has deterred everyone from addressing the trade deficit.
However, trade deficit has dropped from $59.16 billion in January 2008 to $36.03 billion in January 2009 so the problem is slowly resolving itself. As US government borrowing increases, the dollar should weaken versus other currencies, increasing the price of imports and decreasing the price of exports.
March 22, 2009 5:24 PM | Reply | Permalink
If all we had to be concerned about were a $6.5 trillion debt accumulated over 16 years, there wouldn't be a problem.
March 22, 2009 11:27 PM | Reply | Permalink
I don't get Ellen's remark at all.
re Merrill, yes, to some extent excess money chased assets driving up prices. But I wonder how much of the housing boom was foreign money, foreigners buying houses directly. I think you're skipping the simple essential factors in favor of an exotic and possibly marginal factor here.
March 23, 2009 4:28 AM | Reply | Permalink
I don't think that foreign buying of houses had much impact on house prices outside of New York, Miami, and parts of California. Foreign buying would have been mostly at the high end of the market.
The vast oversupply of mid-priced homes in places like Stockton, CA and Fort Myers, FL was stimulated by easy mortgage money enabled by foreign buying of mortgage backed securities and collateralized debt obligations. This flow went from foreign depositors, through foreign banks, US investment banks, US mortgage wholesalers, to US mortgage brokers peddling subprime mortgages. US commercial banks were not much involved in the flow -- it was mainly through non-bank mortgage lenders and investment banks not regulated by the Fed or insured by the FDIC.
March 23, 2009 8:42 AM | Reply | Permalink
And yet here we are, ostensibly bailing out commercial banks.
Crazy.
March 23, 2009 4:47 PM | Reply | Permalink
We are bailing out commercial banks because they had merged with non-banks: BofA with Countrywide and Merrill Lynch, JPMC with Bear Stearns and WaMu. Wells acquired Wachovia which had swallowed the poisonous Golden West. Its amazing that they didn't inflict IndyMac on someone.
Of the four major banks, CitiGroup was the one that did it to itself. The others had some degree of government encouragement to "rescue" the collapsing party.
March 23, 2009 5:38 PM | Reply | Permalink
Right. Crazy. Congress has no backbone and Bush/Paulson were just puppets working with Bernanke to protect the investor class.
Now Geithner is doing the same thing again in slightly new packaging.
Crazy. Immoral.
March 23, 2009 8:52 PM | Reply | Permalink
Yes, 30 to 1 was a problem in the collapse of some firms, but we should be careful about "create debt" and also remember that there was no magical multiplication of money going on. $1 had to find $29 which already existed, to make $30 of working capital.
Any debt "created" was balanced by a nominal asset (purchase, investment, gambling wager, ...).
Are you saying that 30 to 1 caused housing prices to bubble, or only saying that 30 to 1 caused some firms to be highly subject to volatility?
March 23, 2009 4:51 AM | Reply | Permalink
The 30 to 1 leverage was in Ellen's comment. However, I believe that it was true that investment banks leveraged capital up to 30 to 1.
Your math is correct. The problem is that the liabilities of the investment banks (their obligations to lenders) were fixed, while their assets declined in value (their receivables from mortgagees and other borrowers).
At 30 to 1 leverage, a 3.3% decline in asset values would wipe out the capital reserves of an investment bank. A 3.3% decline was easy to achieve using mark to market accounting in a dysfunctional market.
March 23, 2009 8:51 AM | Reply | Permalink
It wasn't dysfunctional as a market. The real assets on which the casino was built declined in value by more than 3.3%. The casino continued to function as various players hedged their long-shot bets for quite some time after the real asset prices were waaaay beyond 3.3% down. Now we're paying AIG to cover IOUs well after the fact.
The problem was that the market's role in reality was dysfunctional from the point of view of non-players.
March 23, 2009 4:45 PM | Reply | Permalink
What I am trying to get at re 30:1 is the two roles of leverage:
Building the bubble
Bubble collapse causing a secondary crisis (defaults)
I understand the latter well enough for now, but I don't yet understand the macro view of how that leverage was a direct factor in creating the bubble. Mortgages were not all that cheap, so it's not like 30:1 leveraged money was pouring into housing at 3% fixed rates 30 times more/faster. To think that you would have to believe the myth about banks creating money. Banks create debt, not money, except for the central bank.
March 23, 2009 4:52 PM | Reply | Permalink
I'd call it a debt boom not a credit boom, being picky here. It was a credit deficit.
The debt boom occurred partly because credit was ignored -- money was loaned based on faith (aka wishful thinking or fraud) instead of "faith and credit". [Credit includes not only history and empirical data, but also recourse - what you can do if your trust is violated.] That allowed homeowners (and consumers at most all levels generally as well as some producers) to take on huge debts. In a parallel move, Wall St. overrated the credit of MBS and derivatives parties or counterparties so junk was rated as AAA. This was also a credit deficit as well as effectively being bad faith.
The problem was financialization incl. what I call "assetization", treating rents as if they were fixed real assets and then building a house of cards on that.
I'm concerned that Geithner is trying to refinancialize the burst financialization bubble.
btw -- Kevin Phillips citing Tipping Points in American Theocracy, says that in California in 2004, 47% of new mortgages were interest-only loans, 60% in 2005. I'd like to see the volume figures for RE sales to go with this. An interest-only loan makes the home buyer a renter paying way above market rates for rent in most cases (assuming very low downpayment). That's insane. The Bush Ownership Society was the dominant public driving force behind this, imho. Yes, on one measure money was cheap to borrow, but on another measure interest rates were not all that low, rather expectations were very high.
March 23, 2009 4:23 AM | Reply | Permalink
I am speaking of AIG only. Believe me, I know what got us into this mess and it wasn't just AIG. That still doesn't mean though, that we shouldn't deconstruct AIG.
The real problem is that we have failed to invest in anything - all we've done is shuffle paper around - that's what happens when what you're selling is knowledge, sooner or later everyone else has the same knowledge (or catches on that the knowledge is bad or wrong) and there is nothing left to sell. There are no jobs because no one is making anything and hasn't been for a long, long time.
We have a knowledge industry and a service industry that caters to the knowledge industry. In other words, the U.S. has become one big, fucking file cabinet.
March 22, 2009 2:41 PM | Reply | Permalink
Well, AIG is an insurance company, and the insurance business is essentially making book on whether various events will happen -- that you'll die, that your house will burn down, or that you'll be in a car accident.
It's only a small stretch for them to bet on whether homeowners will pay their mortgages or that corporations will go bankrupt.
The problem is that they didn't get their actuarial calculations right, since the financial products had too much correlated risks.
Edward Libby, the current CEO, was brought in specifically by the US Government September 2008 to unwind the Financial Products unit with as small a loss as possible, and to sell off the various domestic and international insurance units for the best price that can be had. Criticism of his work should be limited to the September 2008 and forward period. I think that he has been pilloried unfairly.
The previous CEOs were Robert Willumstad from June 15, 2008 to September 2008, and Martin Sullivan from February 2005 until June 2008.
Martin Sullivan and his predecessor, Hank Greenberg, are the people on whose watch the malfeasance happened at the Financial Products unit, which was headed by Joseph Cassano, the real culprit.
Note that since Martin Sullivan is a British subject and Officer of the Order of the British Empire, one cannot assume that he had the best interests of the United States at heart, or in any way discouraged the rogue operation of Financial Products in London.
March 22, 2009 7:01 PM | Reply | Permalink
Exactly... the Treasury can't politically get away witgh "Let's bail out Deutsche Bank" or the United Arab Emirates Sovereign Fund but they can do it through AIG. It's all American!
March 22, 2009 12:35 PM | Reply | Permalink
What "nations" are you talking about? Last I saw, AIG was entering into transactions with other private institutions.
March 23, 2009 10:26 PM | Reply | Permalink
A short while ago, everybody was clamoring for full take-over of AIG, Citibank and Bank of America.
Then the Congress passed a bunch of laws that covered the exec pay, among other things. The President signed them. AIG paid the bonuses.
A few days of hysterical witch-hunt later, we don't want nationalization anymore. Now we want AIG to fail.
This all is just so.... ironic?
March 22, 2009 12:33 PM | Reply | Permalink
AIG's not a bank so the same nationalization mechanisms don't exist. But maybe when I say "let it fail," I'm not being clear. I just mean let it seek bankruptcy protection and let its creditors line up in an orderly fashion.
There's really not a ton of difference between putting a bank under FDIC supervision and a different company seeking bankruptcy protection. Nationalization is just bankruptcy for banks. AIG can just have a nice, ordinary, orderly bankruptcy.
March 22, 2009 12:39 PM | Reply | Permalink
I assume, destor23, you're referring to the different laws applying to resolution of non-banking and banking insolvencies.
AIG is an odd bird. It is regulated by the OTS, because it owns a federal savings bank.
Are you sure that AIG would be handled under the Bankruptcy Code?*
* I agree that the FDIC would not be involved.
March 22, 2009 12:51 PM | Reply | Permalink
Maybe AIG would fall under some other regulatory framework. But in the end, bankruptcy is bankruptcy. Creditors make their claims and a trustee pays them out as best as possible.
To me, an AIG "failure" is fine so long as retail insurance customers and depositors are paid first.
March 22, 2009 2:13 PM | Reply | Permalink
Bankruptcy would not just affect AIG's creditors.
It would also trigger covenants in derivative contracts between other parties. Between whom, and for how much, is probably not knowable, since these are private contracts.
March 22, 2009 12:51 PM | Reply | Permalink
Okay, but all of those people could presumably be expected to analyze counter party risk too, right? There were no promises here. All of these counter parties were big kids who should bear the losses of the risks they knowingly took.
March 22, 2009 2:56 PM | Reply | Permalink
The distinction is between bankruptcy and some sort of receivership short of bankruptcy. Since the term "bankruptcy" is what is likely written into contracts and what likely triggers additional damage to the finanacial system, the better solution is to manage the resolution of AIG's financial problems using a means that falls short of the legal definition of bankruptcy.
This is particularly true if one believes that there are significant assets at AIG that can be held and sold later for substantially more than they would fetch during the current market disruptions.
March 22, 2009 5:33 PM | Reply | Permalink
Contracts which violate public policy can, and should, be declard null and void.
Gambling is not in the public interest (and while I personally oppose State lotteries on this basis, that's not the kind of gambling I'm talking about).
March 23, 2009 4:24 AM | Reply | Permalink
With all due respect, destor, the distinction between a bank and a financial institution is a rather weak and vague way of drawing a line. It comes from the meme of "too big to fail" that we lapped up when it was first unveiled.
The problem with allowing some financial institutions to fail while protecting others will inevitably lead to a maze of conditions, exceptions, caveats, inconsistencies, loopholes and confusion.
Any bankrupcy court would likely order the sale of assets first, which is the best way for the system to reset and correct itself, both in the US and worldwide.
In the beginning of this crisis, Barney Frank was talking about the failure to regulate new financial products as the key driver for the bubble that causes the credit crisis. Why wouldn't we want to address that systemic issue instead of creating a retro-active legistlation on bonuses?
The way Government has been running AIG until now is the best example of why it shouldn't be bailing out the auto or any other industry - its existence is driven purely by party poliitcs and winning the message war with the electorate.
March 22, 2009 1:05 PM | Reply | Permalink
I'm not sure that we're disagreeing, lalo. Not that we have to disagree, of course. But I think we're both in the "no bailout" camp. And that ain't where policy is now.
March 22, 2009 1:31 PM | Reply | Permalink
There's nothing inconsistent or contradictory, there. A "full takeover" implies that a failure occurred; indeed, it requires that a failure already have occurred.
What people were calling for a couple of weeks ago was for the Obama administration to recognize that AIG, C, and BAC had failed and should be administered as failures according to law.
March 22, 2009 1:01 PM | Reply | Permalink
Ellen, not to get bogged down in little details, but you're wrong.
People were calling for the Obama administration to DECLARE that AIG, Citi and BoFa had failed, based on the fact of them taking TARP money.
TARP was meant to address the issue of credit availability, essentially - cashflow. The fact that Citi has posted losses for a couple of quarters means nothing - Detroit has been posting losses for years now and nobody cared.
Nationalization on the pretext of TARP is what was going on a few weeks back. It was pure politics.
March 22, 2009 1:14 PM | Reply | Permalink
If there were such "people," then, I'd have to agree with you.
Can you attach any names to those "people"? And maybe, a few quotes from them?
March 22, 2009 1:40 PM | Reply | Permalink
Well, Ellen, that would include anybody who called on the Obama administration to "recognize" these failures, wouldn't it???
March 22, 2009 2:07 PM | Reply | Permalink
No; it wouldn't.
Which is exactly what's objectionable with your unsupported accusation directed at a genus whose members you refuse to identify; indeed, there may not be any members of your group of imaginary "people" at all.
March 22, 2009 3:07 PM | Reply | Permalink
The whole financial system is built like a house of cards with AIG on the bottom - pull it out - all fall down!
To put it another way AIG insures your house, in fact the whole town. The town burns down - AIG has no money to pay the claims - bye, bye town.
March 22, 2009 1:18 PM | Reply | Permalink