Tony Petroski

Too Big to Fail vs. Too Political to Regulate

I'm in the cut down the Too-Big-to-Fail camp, also known as the Bull Moose party, because time and again, the Too-Political-to-Regulate path doesn't work. The regulated capture the regulators and it leads to corruption of the political process along with the very failures the regulators are supposed to prevent.

The author recalls Continental Illinois.

I recall Chrysler in the mid-70's. The same arguments were made in favor of a bailout for them at that time. I remember (and have to laugh) at the amounts involved. $600 million was given as the figure sought by Chrysler to save their business.

I argued at the time (when I was in knee pants) that 1) There is no constitutional provision for the federal government to tax one citizen in order to take his money to give it to another. 2) Giving $600 million to Chrysler prevented banks from lending that $600 million to businesses with more promising prospects. 3) Chrysler's failure wouldn't be the disaster it was portrayed: Ford and GM would be comparatively stronger and the two could purchase up whatever assets they could use along with employing a portion of the laid-off Chrysler workers and the overall business of making American cars would be stronger although the medicine would be bitter in the short-run.

We know what happened: The political pressure to bail out Chrysler was too much. Chrysler got their bailout. Lee Iacocca became famous (although he was never able to parlay his fame into political power) and the Chrysler bailout entered the lore as a great success.

Now we know the next chapter of the Chrysler story. A second bailout, this time along with GM, amounts that dwarf $600 million, the institution of Tsars for the first time outside of Russia, and a still-bloated auto system that will drag on the economy for many years to come. The same arguments apply to all businesses, not just banks that are TBTF.

Too-Big-to-Fail doesn't mean that we have to kill all the birds so as to catch the few with swine flu. It means we have to make sure the flocks don't get so large that they block out the sun, and the smaller flocks can still fly (hopefully not all of them to China and Brazil).

More AIG Controversy: Maiden Lane III

This is from Mr. Kwak:

"There are a couple of details I can’t quite reconcile (for example, the Fed balance sheet shows initial funding of $29.3 billion, but everyone says Maiden Lane III paid $29.6 billion for the CDOs), but essentially it went like this."

I was just about to nominate him for inspector general and then this

"The controversy is not over paying $29.3 (or $29.6) billion for the CDOs, since that was the market price. The controversy is over whether AIG should have agreed to settle the CDS at 100 cents on the dollar..."

Readers: Vote. AIG/Goldman or Mr. Kwak?

Bailout Alternatives

Mr. Harrison. You're on fire here. Keep going, and aim the sights once in a while.

From the article:

"...fix has not trickled down to common folk to better their lot."

I have to confess, I caught a little piece of the trickle down, and I alerted all my fellow common folk. They are awaiting your next article.

Freedom.

Geithner's Bad Judgment Leaves Taxpayers Holding the Bag

Mr. Papadimitriou. Good article.

"If Treasury Secretary Timothy Geithner doesn’t know how to get appropriately compensated for the loans / bailouts that he keeps approving on behalf of the United States Government then he shouldn’t be giving out these loans at all. His mismanagement of these negotiations is wasting our money."

Keep an eye on these guys. Geithner was late to the game and can't be blamed although he will be "appropriately compensated" when he resumes his career on Wall Street like Mr. Rubin did.

Keep going Mr. Papadimitriou. You have an interesting voyage ahead.

On Bailouts and Moral Hazard

Mr. McTeer is a sober analyst and makes a lot of sense, but what ever happened to the Federalist Society? Could we have a debate between the proponents of strong central government and a federal system in this age of We are all Keynesians Now?

The suckers at the table are the taxpayers who ponied up the money to pay off the city slickers from Wall Street.

If Another Stimulus Comes, It Needs to Be Different

Mr. Lindmark: You raise some interesting questions.

The title of the article: "If Another Stimulus Comes, It Needs to be Different."

Curious use of language, as if "stimulus" is a season like the summer.

The Keynesians shot themselves in the foot because the "stimulus" didn't stimulate. It was a gigantic pork bill that kept the purchasing power of the government-class going (perhaps averting a panic) but did nothing to get the jobs-creating private sector cranked up.

My suggestion: Go back to basics. Stop subsidizing and incentivizing and get out of the way. Need I mention stop the takeover of the health business. The U.S. economy will revive if we stop hoping and changing.

How the AIG Bailout Scuttles the Chance for a Second Stimulus

Salmon, quoting Krugman: "try talking to the general public about stimulus, and it’s all confounded in their minds with the deeply unpopular bailouts."

This shouldn't prove a setback for elite Citizens of the World. Try another Keynesian bailout only let the media know that it's not a bailout but is instead, let's see...balm--yeah. Tell the establishment media that the next bailout is balm and the rubes will go along.

Are Obama's Policies Working?

"Obama’s economic policies are working effectively."

Hope and Change is not a policy. Basically Obama signed into law a gargantuan pork plan that had been crafted by others before he took office. On that score he gets a pass. But to give credit for "economic policies" that don't exist is on the order of awarding the man the Peace Prize because he...no wait, he did get the Peace Prize--never mind.

I can also see why this wasn't the "left-right thing at all." You had no right wingers. This is the face of things to come: Far lefties debate near-lefties over whether the Emperor has a beautiful set of clothes.

CDS Regulation: Just One Simple Rule

I must confess I'm one of those nutjobs who thinks naked short selling can affect the health of a company. I watched one or two financial companies singled out for a raid in the summer and fall of 2008 with losses on stock value of 30% or more in a day. The raid would continue for a week or two (while the other financial companies had moderate or no losses). Then another company would come into the crosshairs and get shorted into oblivion.

From my nutcase perspective, I assumed it went like this: Hedgefund Joe XYZ would purchase CDS contracts at leverage of 100/1 on Bank A. Hedgefund Joe XYZ had no insurable interest at all, i.e., no debt owned on Bank A. Then Joe XYZ, along with a group of other "sharks" (Joe XYZ would openly brag that he was a shark) would anounce that he's already shorting Bank A because Bank A is insolvent and will be taken over by the government over the weekend. Hedgefund Joe covers his short position when profitable enough, and then when Bank A is declared insolvent, Hedgefund Joe collects on the CDS if the government is willing to bail out AIG.

I realize that Hedgefund Joe and his camp followers can get badly burned if his short position turns against him--I'm not saying Hegefund Joe has no risk. Only that Hedgefund Joe can certainly affect both the stock he's raiding as well as the financial community as a whole if the panic is spread skillfully.

Kid Dynamite is right: There is a legitimate use for a CDS contract. Ban CDS contract purchase with no insurable interest, regulate the CDS sellers like the insurers they are to make certain they have the capital to pay off their contracts, and then ban naked short selling. No wait. Naked short selling has already been banned.

Government Stimulus Programs: Where They Stand

Mr. Newman is making sense here.

He's saying that despite the unprecedented involvement of the government in the comings and goings of U.S. citizens, a year after "the panic," we still exist as a society and a people.

From the article: "...and get the government more involved in the private sector than it has been in 70 years."

A curious number, that. 70 years. 1939?

Suffice it to say, the government is involved more than ever.

Good article Mr. Newman.

Is This the End of 'Too Big to Fail'?

Let's suppose this proposed change had been in place in 2008. Are we saying that the government would not rush in to bail out the too-big-to-fail institutions but would instead say: "Goldman, we're assessing you 2.5 billion as Lehman is now underwater"?

This proposal is even less likely to be implemented than the idea of letting the Lehmans of the world fail while doing nothing to shore up the remaining (now weakened) institutions. There's no substitute for breaking up these institutions ATT style to an asset size of less than 10 billion or another reasonable standard, whichever is less.

Goldman Bonuses Based on Socialist Policies, Not Capitalism

Mr. Golde: Keep the firebrand going!

David Einhorn: Break Up Too Big to Fail Institutions

From the article:

"As I see it, there are two basic problems in how we have designed our government."

Forgive me, but when did that pipsqueak design anything?

Charlie as a Too Big to Fail Bank

Charlie. Poor choice of names.

Geithner to Blame for Outrageous Goldman Bonuses

An enjoyable article. As the author pointed out, Goldman became a "bank," and therefore was able to tap into the federal treasure, but in what sense are they a bank, and in what sense do we need them? I'm not proposing a pitchfork-wielding spree on their assets, but explain again why they needed to be saved?