Of Financials, Wine and Mattresses

by: Paul Kedrosky

I have had to explain the following to myriad people in recent days, so I might as well put it here.

Q:  If we can bail out Bear Stearns, Lehman (LEH), Fannie (FNM), Freddie (FRE), whatever, there is no way we can say no to  bailing out General Motors (NYSE:GM), American Airlines (AMR), or even an Oracle (NYSE:ORCL), should the occasion arise. After all, these are all big and important companies.

A: True, but false. Granted, those are all big companies, and some of them are even in as much trouble as the banks and brokers. Further, you are, in some abstract logical sense, correct in saying that once you start down the bailout slide it's as slippery as ever. There is an argument that bailout-seeking sorts can make outside financials, and there is a high and growing chance we'll intervene in more places in financials than we should.

2008-09-11_2213 But that still doesn't make non-financials such ready candidates for bailouts. I could go on and on about complex systems, tight coupling, leverage, and the like, but you need to think of it in terms of mattresses. Most companies are like wine glasses and their markets like Tempur-Pedic mattresses. You have seen the commercial: You can jump up and down like a mad thing (mostly), and the wine glass doesn't tip.

Financials aren't like that. If you jump up and down on the financials mattress, it's like pogo-ing on an "old, metal-spring mattress": the wine glass tips pretty much right away. And not only does it tip, the fluid jets across to the next mattress, where people were sleeping and generally minding their own business (think of it as the tech market, if you want), and it knocks them out of bed. The process continues, until the floor is covered in pissed-off people half-drowning in wine, which then seeps through to the ground floor and drowns the dog and ruins the central air conditioner. Financials are like that.

Does it mean there is something wrong with the financial sector? Of course it does. Any sector that alternates so readily between torpor and terror needs to be re-engineered for the real world. But that's a subject for another day.

Aren't financials fun? And just because I know you want to watch the Tempur-Pedic commercial, here it in all its glory: