Financials Bailouts, Tempur-Pedic and Wine

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/Fannie/Freddie/whatever, there is no way we can say no to  bailing out GM, American Airlines, or even an Oracle, should the occasion arise. After all, these are all big and important companies.

A: True-ish. Granted, those are all big companies, and some of them are 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 you have no real bright line test to separate the saved and the damned. That is an argument that bailout-seeking sorts can cheerfully make outside financials -- and even inside financials it's worth pointing out that there is a high and growing risk we'll intervene (read:bailout) more of them than we should anyway.

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 showroom-spaced 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. Sure, cross-mattress carnage is doable, but you have to really work at it.

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 straight 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 semi-regulated sector that alternates so readily between torpor and terror -- and that can screw so many unrelated sectors while doing it -- needs to be re-engineered for the real world. But that's a subject for another day.

And just because I know you want to watch the Tempur-Pedic commercial, here it in all its glory:

Comments

[Zignals:]

Marvellous...

2008 Sep 12 07:30 AM

[Insiderman:]

You don't think a GM failure would splash red wine on a few mattresses?

The first problem is that the value of GM's (and other companies') assets should fall to their true value. These companies long ago stopped trying to access their customers' value propositions. These companies are fixated on trying to play nice with government so that they can get contracts and perks. Therefore, the value of their assets as currently deployed is about $0, and the market is trying to represent this.

The second big problem is that government has big contracts and perks and legislation to reward or punish these companies.

Government screwed up the economy enough to create the Great Depression, they screwed up the economy enough to create the mortgage meltdown of the 80s (and FNMA and FHLMC are offshoots of this crisis), and they screwed up this economy by increasing support through GSEs for low-income and minority loans.

What the hell is wrong with renting, anyway. Bush just wanted to show how much minority home ownership increased under his administration and allowed Andrew Cuomo as HUD Secretary to mess up the FREE functioning of these mortgage markets.

Free markets work every time they are tried, and government's true role should be to ensure transparency and keep the big guys from beating up on the small guys and taking their things. Unfortunately, the big guys have figured out they can enlist government in keeping the small guys out of markets. Small guys are then allowed to fail while big guys continuously find their way back to the government teat.

2008 Sep 12 08:17 AM

[Insiderman:]

Update... I meant FNMA was an offshoot of the Great Depression.

2008 Sep 12 08:19 AM

[Contrarian ...:]

It´s all so clear now. We need a Tempur-Pedic financial system that allows shenanigans, high jinks and back-alley dealing to happen without bothering anyone else. With increased government intervention, that´s exactly where things are headed.

2008 Sep 12 02:24 PM

[Kinabalu:]

The wine / mattress analogy, it actually makes sense. But do you think the politicians will understand ...or even care? Paulson and Bernanke will get it but McCain and Obama in an election year? I don't think so.

2008 Sep 12 03:10 PM

[Mondo Steve:]

I like your analogy. The "Financials" are so integral to the economy, and the consequences of thier fate so dynamic, we should support bailing them out.

This is empirical evidence that the "Theory of Shareholder Wealth Maximisation" no longer applies. When Shiznit hits the fan, suddenly we all realize there are many stakeholders. Too bad that all these other stakeholders (accross many mattresses) didn't factor into the "Financial's" decision making process. Nope, they concerned themselves with maximising shareholder wealth at any cost.

Now it seems, the "Financials" can no longer serve its singular master. It is all too clear that they serve many stakeholders - because it is to them they turn for help in such times.

This is a good arguement for Stakeholder Management Theory if there ever was one. The moral hazard of all this shareholder wealth maximisation has raised its ugly head.

The same can be said of the size and affect on markets that hedge funds have had in the last two years. The larger they became the more volitility they generated i.e. commodities. If everyone is seeking alpha it gets harder to find, thus the huge swings everywhere.

The greater the impact on a market of an organisation or a class of organisations, the greater responsibility it [they] have for the consequences of its [their] decisions. It seems lately that a few have had great impact on the many. Osprae, Amaranth, BS, Lehman, Fannie whatever........

The time is now for real change in corporate governance.

2008 Sep 12 09:59 PM