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| Fri Mar. 6, 2009 8:43 AM PST

Atrios responds to the latest government plan to restart the credit markets via partnerships with hedge funds and private-equity firms:

They made bad bets when they at least theoretically thought they could incur losses. Now the cunning plan is to hope they make good bets even though...no chance of losses!

This is all going to end really badly.

I have some longer thoughts on this subject that I haven't quite had the nerve to write and post yet, but the short version is this: everyone in the financial industry made bad bets over the past seven years. So if you think the government shouldn't work with any of these guys, it means you think the government should refuse to work with the financial industry, full stop. That's just not practical, though. Even if you think they're all idiots, we have to work with someone, and the idiots are all we have.

Now, as it happens, I don't think they are all idiots. But that's the post I haven't written yet. Maybe later.

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Kevin Drum is a political blogger for Mother Jones. For more of his stories, click here.

Comments

I don't understand

Submitted by Obama loves the Steelers (not verified) on Fri Mar. 6, 2009 8:59 AM PST.

How is it that burning trillions of our dollars is better than just setting up a new bank with those trillions?

You have to work with them,

Submitted by reino on Fri Mar. 6, 2009 9:20 AM PST.

You have to work with them, but the question is how you should work with them. You certainly shouldn't insure their losses unless you strongly control their investments, or this certainly will turn out to be even worse than doing nothing. Atrios' post demonstrates a continuing frustration with Geithner, who is proving more and more each day that he is the wrong person for the job.

If you don't think they're

Submitted by Anonymous (not verified) on Fri Mar. 6, 2009 9:29 AM PST.

If you don't think they're idiots, you must think they're crooks. If you think they're neither, I await your post with piqued curiosity.

'xcuse me?

Submitted by SRW1 (not verified) on Fri Mar. 6, 2009 9:29 AM PST.

Kevin, aren't you purposefully misinterpreting what Atrios is saying? His point is that it might be a really dumb idea to give the same people who behaved recklessly when gambling with their own money (or at least the money of their own clients) a licence to gamble without the risk of loosing. You really think it is a good idea to tell the visitors of a casino "Gamble away, tonight everything is on the house. Whatever you win is yours, if you loose, the house is going to reimburse you!" I don't read Atrios as arguing for the exclusion of hedge funds and private equity firms, but rather aginst the latest proposal from Treasury. To me, Krugman has it right, Geithner & Co are just dressing up the same old idea in different clothes. I'm really looking forward to your post on this.

If you don't think they're

Submitted by Anonymous (not verified) on Fri Mar. 6, 2009 9:30 AM PST.

If you don't think they're idiots, you must think they're crooks. If you think they're neither, I await your post with piqued curiosity.

Can't disagree more

Submitted by g. powell II (not verified) on Fri Mar. 6, 2009 9:36 AM PST.

First, there is no reason to have a govt-subsidized asset buying program in partnership with these people. They are a lot of smart people out there who don't like the program. It is not necessary and a bad idea. Second, as former IMF official Simon Johnson has pointed out, these rescue plans don't work unless you get rid of the people who created the mess. Ultimately you are up against a self-serving corporate culture that has too much invested in conducting business as usual. I think this is Obama's greatest failure, he hasn't cleaned house. I think this error will gravely weaken him and the country. There are people who work in the mid-level of these financial institutions who function on a technical level. They make comparatively modest salaries. They are lawyers and accountants. They have the skills to get us out of this mess and probably should run the financial industry, hopefully in a more boring way.

what reino said. its easy to

Submitted by Anonymous (not verified) on Fri Mar. 6, 2009 9:40 AM PST.

what reino said. its easy to paint Atrios as all or nothing, but that's not the choice.

Kevin Drum: So if you think

Submitted by alex (not verified) on Fri Mar. 6, 2009 9:41 AM PST.

Kevin Drum: So if you think the government shouldn't work with any of these guys, it means you think the government should refuse to work with the financial industry, full stop. No. The point is that the current plan privatizes the (potential) profit and socializes the risk. It involves making below market rate loans to hedge funds and private equity firms, and accepting the supposedly AAA stuff as collateral on no recourse loans. In other words, if the stuff is worth more than claimed, the private parties make a profit. If it's worth less, then all the government can do is take the collateral (no recourse means they can't take anything else). It's nothing more than Paulson's original laughable TARP idea in a different guise. Krugman in today's NYT explains it well.

Too Big to Fail should be illegal

Submitted by alan (not verified) on Fri Mar. 6, 2009 9:47 AM PST.

If a company is oversized to the point where it could argue it's 'too big to fail' no matter how disastrous it is, it should never have been allowed to get that big in the first place. There should be international law outlining explicit limits on company size and, er, tentacularity, limits that get increasingly strict as it gets larger.

I thought we had this thing

Submitted by Anonymous (not verified) on Fri Mar. 6, 2009 9:57 AM PST.

I thought we had this thing called "anti-trust legislation". Hmm, maybe I just dreamt that up. In any case, the size of the company (e.g. AIG) is probably irrelevant since the most important thing is the combination of leveraging and interdependence. It doesn't matter if AIG is one company or a dozen if they all have the same balance sheets and all made the same bad bets.

We are so screwed.

Submitted by Anonymous (not verified) on Fri Mar. 6, 2009 9:54 AM PST.

We are so screwed.

Not all Crooks or Idiots

Submitted by Brian O (not verified) on Fri Mar. 6, 2009 10:06 AM PST.

I think the complexity of the situation is that there are plenty of good, smart people employed by the banks and financial firms. It is not as if every working group in each department were all making huge leveraged gambles -- this was focused in a few, albeit large, departments such as mortgage origination, RMBS, CMBS and CDS. Even within these groups there are plenty of people who did their job well, hence the consternation at the decimation of the efficient and effective CMBS market (which hasn't seen defaults or delinquencies anywhere near levels required for rates to be what they are). I agree that management, who are in charge of distribution of risk across the entire firm, are to blame. Ideally, the good people in the companies would rise up against the problems and remove them, but in this environment of random job losses who wants to stick their neck out? Especially when compensation requirements are limiting the amount of work they can do to receive any marginal pay? I don't see how state management (as reasonable as it is given the huge equity the gov't now "owns") would remedy these problems. I don't really know how to remedy these problems at all short of a realistic public accounting and fire sale of the firms' assets, including human capital. It's going to take a few years for this all to sort out and the outcome will likely be something we can't envision right now, with new names for the holding companies, new regulations and new risk management strategies.

Brian O: I don't see how

Submitted by alex (not verified) on Fri Mar. 6, 2009 10:33 AM PST.

Brian O: I don't see how state management (as reasonable as it is given the huge equity the gov't now "owns") would remedy these problems. No matter how good the management many financial institutions can't be rescued except possibly with enormous gifts from the taxpayers. The real purpose of receivership then is to wipe out the shareholders, give the bond holders as much of a haircut as needed to return it to solvency, and allow toxic assets to be transferred to a bad bank (which only makes sense if the government owns the original bank and the bad bank). Right now the government is throwing enormous amounts of our money into a hole in a futile attempt to rescue them without nationalization. It didn't work in Japan, and historically it's almost never worked elsewhere. So let's get an approach that will work and stop throwing away taxpayer money.

choices lead to obvious conclusion

Submitted by Anonymous (not verified) on Fri Mar. 6, 2009 11:16 AM PST.

The best responses to Mr. Drum’s post dispute the definition of ‘them’. Yes, all of the big American companies seem to have made bad bets. But that does not mean that everyone in those companies thought it was a good idea. These seem to be the main solutions under discussion: 1) let them fail 2) take them over 3) give them money For the time being (1) and (2) seem to be out of consideration by the decision makers. That leaves (3). I read atrios’ comment this way, if we’re going to give ‘them’ money under these absurd terms—the companies get the profits and we cover any loses—should it really be to the same ‘them’ that ran these companies into the ground? Or shouldn’t we insist on a new ‘them’ to manage the companies? We can’t do that without taking control of the companies and finding new managers. This leads to (2), take them over, which is what he (and I) think we should be doing.

No choice

Submitted by g. powell II (not verified) on Fri Mar. 6, 2009 11:28 AM PST.

To anonymous above. You list three choices. But they are not choices, they are all necessary conditions to solving the crisis. There is no other choice. 1. Institutions fail. Shareholders are wiped out. Management and boards resign. 2. Govt takes over assets and liabilities. 3. Taxpayer money is used to create viable instituitons that can be reprivatized. That's it. There is no other way. The quicker we do it, the better.

fail, takeover, bailout

Submitted by MarkH on Fri Mar. 6, 2009 11:54 AM PST.

If we let them fail there will be more financial failure and panic and disaster and everyone will say Dems didn't do anything to help. Yeah, the hypocrites who call for doing nothing will turn and blame it on Dems. Besides, Dems don't want to do nothing. If we take them over it doesn't change their balance sheet AND we're stuck with the toxic assets as well as the burden of running the firms. This is double ungood. If we bail them out we have to put up a lot of money and we might not get much back. Which is least bad? I think it's the latter and that's the general course being used. Fundamental to all this is where the core problem is and how it's to be solved. I think it's the bad mortgages and (now) the effects of the housing bubble burst putting people's mortgages under water. Taking over firms doesn't change that. I proposed confiscating the toxic assets to let government take the worst of the worst and try to fix it, while letting firms get on with normal operations and absorbing some losses. Now we just have to fix mortgages, including letting bankruptcy judges handle the worst; perhaps there could be some incentive offered to help more people buy vacant houses while the prices are at (or neat) their lowest. This would help stabilize housing prices. Would you believe I actually heard a Republican House member calling for regulation of financial markets. It was amazing. I guess there's bound to be some kinds of regulation and Repubs want to have their hand in it. I hope that moves along quickly before some of these crazy problems bite us again.

asset inflation is not wealth creation

Submitted by tpx on Fri Mar. 6, 2009 12:11 PM PST.

The finance industry is not staffed with idiots. However, the finance industry adds little value to the goods and services sold for the economic surpluses that creates wealth. Finance industry staff are considered idiots because their strategy creating wealth by inflating the value of already existing assets failed. They should be considered villains because they have used the influence of cash through lobbying efforts to convince the political class asset inflation is wealth creation. The manipulation of the rules of the political economy institutionalizing the accumulation of wealth through asset inflation has caused the failure of the markets, and the responsibility belongs to the leaders of American finance and the political leadership who have hitched their economic well-being to this erroneous economic theory. Both should not be allowed to escape responsibility for their malfeasance due to ignorance. They should be severely punished and stripped of their ill-gotten wealth, which should be redistributed to workers who add value to goods and services with their labor. Unfortunately, the new executive administration still considers asset inflation as a legitimate wealth creation engine, meaning more economic hardship for value added workers.

MarkH: If we take them over

Submitted by alex (not verified) on Fri Mar. 6, 2009 12:23 PM PST.

MarkH: If we take them over it doesn't change their balance sheet Yes it does. In addition to wiping out the shareholders, you can give the bondholders a haircut. This is more akin to bankruptcy than it is to buying a solvent business. It's standard procedure - reduce the banks liabilities until it's solvent. Bondholders don't like it? Tough. There's risk in a capitalist system, and not all that risk should be borne by people losing their jobs. The government can not only do this, by law it's actually required to do this with insolvent banks. The FDIC is taking smaller banks into receivership at a rate of two a week. Why should Citi and other politically influential banks be any different?

fine them until they have to go on food stamps

Submitted by tpx on Fri Mar. 6, 2009 1:37 PM PST.

The government should take over insolvent banks, wipe out the shareholders' and bondholders' assets, fire the managers, go over the books with a fine tooth comb, prosecute all officers from the banks who did anything remotely unlawful and fine them until they have to go on food stamps and live in their cars, like the rest of the losers in the economy they are responsible for creating. The sooner this is done, the sooner the recovery can begin. Bailouts prolong the misery by delaying the inevitable. The S & L's were not bailed out, and the banks should not be either.

Alex: I Agree...

Submitted by Brian O (not verified) on Fri Mar. 6, 2009 2:34 PM PST.

I agree that some sort of transfer of the toxic assets to the government (some sort of "bad bank") will be necessary, but that does not necessarily involve the government nationalizing the banks and managing them. The closest it would come to nationalization would be a weekend takeover with a quick spin-off of the valuable assets. That's what I meant about the core management problem not being solved in the short run. As far as wiping out the shareholders and giving the bondholders a haircut -- I agree this will happen; in fact it already is as seen in the current stock price of most of the firms and the margins of re-trading debt or issuing new debt. Here, however, there is incentive to offer a higher price for the troubled assets (a longer haircut, so to speak). The major holders of the debt are: 1. institutional investors such as state pension funds, and 2. sovereign wealth funds and other pseudo-governmental international investors. I'm not saying it's right, but there is a realistic political concern in low-balling the state of California's pensioners or the Chinese government. Plus, the bond prices (and underlying obligations) are almost certainly underpriced on the market right now (hence the trouble of mark-to-market and reserve requirements). In the medium run, they should mostly mature to value. Whew, it makes my head spin.

"if you think the government

Submitted by Gary Sugar (not verified) on Fri Mar. 6, 2009 5:55 PM PST.

"if you think the government shouldn't work with any of these guys," Oh come on Kevin. Atrios said we shouldn't give these guys an incentive to make things worse. Do you really believe that is the same as saying we shouldn't deal with these guys at all? Kevin wants a solution. He doesn't believe the best solution is politically feasible. So he's trying to believe that the really bad, corrupt idea that is politically feasible is, not the best possible solution, but the best achievable solution. Atrios is nevertheless right. This is all going to end really badly.

What has happened since

Submitted by michael7843853 on Fri Mar. 6, 2009 6:16 PM PST.

What has happened since 1980, a handy mile marker, is the greatest fraud in human history. Sure, many of those not on the winning side of this class warfare disregarded their correct reservations, if they had any, and went along proudly, but we don't put the lion's share of the blame for a scam on the pathetic dupes. America had a choice after the oil scares of the 70s, adjust or deny. Adjustment is something conservatives are not real big on, especially if their bailiwicks are threatened. The dangers, known to most everyone since the depression, in letting businessmen, whose interests are only truly their own(like all of us), run free were about to be exposed once again, and the Cold War could still be lost. A new(old) capitalistic myth had been rejuvenated by Milton Friedman, and led by a likable, photogenic father figure, America was off on a crusade to set businessmen everywhere free. People were basically greedy, we were told, so we should trust our fate to a new(old) master race, entrepreneurs, who with stern guidance from a new(old) god, the invisible hand of the marketplace, would lead us to the best conceivable outcome. We forgot that businessmen are just people; people who believe in greed, a one time vice. We ignored the fact that the guidance of the blessed hand was just a theoretical concept that worked best in an idealized world. Feebly, yet successfully, we hid the failures of our new vision. Inflation was redefined, GNP became GDP, debt became irrelevant, and catsup became a vegetable. The stock market became the voice of the new god and it looked at what had been wrought and it was pleased. New technologies, defense spending, speculation, bubbles, and a media that was bought off, intimidated, or enamored, hid or justified the failures of the new system, or just blamed the government. And all the while the classes separated and most just shrugged. The new god was just doing his work and his wisdom could not be questioned. Even as this new(old) system collapses, many cling to the self deceptions that made its rise possible. If there is anything slower than the beneficial reflexes of the blessed hand, it is humanity's ability to accept an unpleasant reality.