Strange Things Happening Every Day

Jesse Walker | September 15, 2008

After months of rescuing failing companies, Washington did the right thing this weekend and refused to bail out Lehman Brothers:

Hank Paulson, the treasury secretary, decided to draw a line and refuse such help. After the Fed had bailed out Bear Stearns in March and the Treasury had taken over Fannie Mae and Freddie Mac last weekend, expectations were high that they would do the same for Lehman. And that was precisely the problem: it would have confirmed that the federal government stood behind all risk-taking in the financial system, creating moral hazard that would take years to undo and expanding taxpayers' liability almost without limit.

The company filed for bankruptcy this morning. We'll see how long the new approach lasts.

Comments

The Extispicator|9.15.08 @ 9:42AM|#

Nothing to be excited about. Lehman is not "too big to fail." Let's see what happens when someone bigger goes down.

Elemenope|9.15.08 @ 9:48AM|#

Lehman is not "too big to fail." Let's see what happens when someone bigger goes down.

I heard a rumor here yesterday about Merrill Lynch and AIG...

They're bigger, right?

|9.15.08 @ 9:50AM|#

Well thank zog for this much anyway. Let's cross our fingers they hold the line on AIG.

|9.15.08 @ 9:51AM|#

Merill Lynch was in some trouble, but they're being purchased by Bank of America.

The rumors are about AIG, but I have a strong feeling they're gonna get that government bailout they're asking for.

anon|9.15.08 @ 9:53AM|#

Just a matter of time before someone applies partisan conspiracy theory to this.

|9.15.08 @ 9:53AM|#

They have a saying in the military "failure breeds supervision." I am so angry at these clowns for running their companies in the ground. I couldn't care less if they end up broke. I do care about the people who trusted them or are depending on pension funds that no doubt are taking a bath on this. Worse though is that it does nothing but give ammunition to the people who want to regulate everything. Thank you again you arrogant MBA bastards for running your company in the ground and leaving us with the mess.

|9.15.08 @ 9:53AM|#

LMNOP
Bank of America stepped up and picked up Merrill (for the low low must sell price of fifty gigabucks). The street is buzzing with rumors that the Feds twisted their arm. But how?

|9.15.08 @ 10:00AM|#

They have a saying in the military "failure breeds supervision."

True dat. It's unlikely AIG would be in the jam that it's in if provisions of the Glass-Steagall act hadn't been repealed in 1999, allowing insurance companies to get into securities and derivatives.

This is *not* going to be a great argument for deregulation, however you look at it.

Lefiti|9.15.08 @ 10:04AM|#

Ideology crisis! Ideology crisis! Get the blinkers! Shore up the dogmas! Avoid any evidence that doesn't strongly confirm bias! Hunker down! This will pass!

|9.15.08 @ 10:05AM|#

The company filed for bankruptcy this morning. We'll see how long the new approach lasts.

Until the Big 2.5 loan guaranteebailout bailout package makes it way through congress. If that.

|9.15.08 @ 10:11AM|#

It's unlikely AIG would be in the jam that it's in if provisions of the Glass-Steagall act hadn't been repealed in 1999, allowing insurance companies to get into securities and derivatives.

Financial regulation is like collecting the trash, not building a bridge. Banking is the area of the financial sector that has been subject to the greatest regulation for the past decade or so, because "innovative arrangements" created to allow the circumvention of the law are a constant in high finance, and even since the 1990s, the regulatory state wasn't keeping up with them.

So, who bought whom again?

libertarian democrat|9.15.08 @ 10:15AM|#

Is it just me, or is Lefiti by far the stupidest of trolls we get here.

Honestly, Ultimate-anonymity bot is more substantial.

|9.15.08 @ 10:17AM|#

This is *not* going to be a great argument for deregulation, however you look at it.

If I may indulge in some casual heresy, maybe that's because, in this particular area, deregulation was/is a bad idea?

|9.15.08 @ 10:23AM|#

If your goal is a strong economy that doesn't have financial crises, deregulation is a good idea.

If your goal is deregulation in and of itself, that fact that it leads to financial crises is irrelevant to the argument.

|9.15.08 @ 10:26AM|#

I will commit ideological heresy here and comment that maybe the people who thought it was a bad idea for insurance companies to get into securities and derivatives were not completely stupid after all. To put it in concrete terms, you have a people out there who dutifully paid their insurance premiums and now face their insurance company going belly up not because there has been a disaster and the company is over exposed but instead because a bunch of knuckleheads who should have known better thought the housing market would go up forever.

The fact is that no amount of education, intelligence or regulation can prevent people from being greedy and stupid. But what things like Glass Steagall did do is build firewalls to prevent the stupidity in one sector from damaging all sectors.

|9.15.08 @ 10:34AM|#

Now that we have let stupidity run amuck, fuck them all. Let them all go broke. Liquidate all their assets and let asset prices fall where they may. It will just purge the rottenness out of the system. The longer we wait to do that, the worse it will get.

shrike|9.15.08 @ 10:38AM|#

Of course a modest degree of rule-setting is required when public money is at risk! Commercial banks have compliance rules so that the FDIC is not needed every week somewhere.

Hell - it turns out Bush gave the finger to regulatory oversight to the mortgage industry in 2005 -- http://www.salon.com/tech/htww/2008/09/10/greenspan_bush_fannie_freddie/index.html?source=rss&aim=/tech/htww

This bill would have saved taxpayers a trillion bucks NPV.

This is akin to the idiot right-wingers who bark about school vouchers. When US madrassas start teaching the Koran eight hours a day they will claim "no one could have seen that coming".

Does being a Republican always have to mean that your head is parked inside your ass?

|9.15.08 @ 11:24AM|#

Shrike,

I don't about being a Republican but you certainly are evidence that being a Democrat means having your head up your ass. Cram a crowbar up there and see if you can get enough of your head out to look at who was running FANNIE and FREDDIE and who was lying about the assets in order to collect bonuses. You will find that they were all former Clinton grandees and that they bribed and bullied Congress into forgoing oversight.

|9.15.08 @ 11:29AM|#

Fannie Mae and Freddie Mac were created by Presidents Franklin D. Roosevelt and Lyndon B. Johnson to make homes more affordable for Americans. They accomplish this by buying, repackaging and then selling home loans that other institutions make, thus freeing institutions to offer more loans. Contrary to what some defenders of big government assert, Fannie and Freddie were also key players in the subprime mortgage market. In 2004 alone, they bought 44% of all subprime securities. Every dollar that Fannie and Freddie gave to companies like Countrywide Financial for bundled subprime mortgages was another dollar Countrywide gave out in new subprime mortgages.

When President Bill Clinton took office, Fannie and Freddie were viewed as "key" to Clinton's plans to expand home ownership. The Washington Post reports: "The result was a period of unrestrained growth for the companies. … The companies increasingly were seen as the engine of the housing boom." As the companies grew, conservatives repeatedly warned that their size posed a systemic risk to the financial system. As Sarah Palin put it, thanks to the implicit federal guarantee of their debt, Fannie and Freddie had become too big and too expensive to the taxpayers.

But Fannie and Freddie pushed back hard, turning to friends on the left for protection. Former Walter Mondale and Barack Obama campaign adviser James Johnson led a fierce lobbying campaign to fight reform of Freddie and Fannie. Clinton administration OMB director Franklin Raines told investors when he was Fannie Mae CEO in 1999: "We manage our political risk with the same intensity that we manage our credit and interest rate risks." Fannie and Freddie's lobbying power over the left continues to be strong to this day. According to the Center for Responsive Politics, the top three recipients of campaign donations from Freddie and Fannie's PACs and employees are all Democrats. From 1989 through today, Sen. Chris Dodd received $165,400, Barack Obama $126,349, and John Kerry $111,000. The Washington Post concludes: "Blessed with the advantages of a government agency and a private company at the same time, Fannie Mae and Freddie Mac used their windfall profits to co-opt the politicians who were supposed to control them."

Nobody wants to see anybody lose their home. The current Wall Street turbulence will not settle until home prices do. But before we move to some new massive government spending effort to prop up home prices at some artificial level, we should also remember what the historical record teaches us about the unintended consequences of well-meaning market interventions.

http://blog.heritage.org/2008/09/15/morning-bell-a-viscious-cycle-of-their-own-making/

|9.15.08 @ 11:49AM|#

This is akin to the idiot right-wingers who bark about school vouchers. When US madrassas start teaching the Koran eight hours a day they will claim "no one could have seen that coming".


I love it. you simultaneously dog out "idiot right-wingers" and then appeal to the Muslim "boogeyman" like a typical right-wing shill.

Stupefying, really.

How dare any "right-wingers" (and since when did advocacy for choice become a righty attribute, anyway) want to bust up the failed public school monopoly? Mein Gott, they're teh fascist!.

Rhywun|9.15.08 @ 11:50AM|#

conservatives repeatedly warned that their size posed a systemic risk to the financial system

Leave it to the Heritage Foundation to tell it like it is. I.e. to put all the blame on Democrats and make Republicans smell sweet.

Invisible Finger|9.15.08 @ 11:50AM|#

The rumors are about AIG, but I have a strong feeling they're gonna get that government bailout they're asking for.

This is the back-door route to national health care - bailing out insurance companies.

|9.15.08 @ 12:03PM|#

Rywyn,

No doubt there are plenty of Republicans who are to blame as well. But, the fact remains that the worst offenders seem to be Democrats.

Mike Laursen|9.15.08 @ 12:05PM|#

Lehman is not "too big to fail."

And some prominent Lehman executives have endorsed Obama.

Jerry|9.15.08 @ 12:50PM|#

Of course it was bad for insurance companies to get into the investing business. Insurance can only be based on mutuality, that is, they can only insure their clients based on what these clients are willing to pay in premiums (and any money left over at the end of the insurable period should be returned to said clients). Any other construction will lead either to involuntary redistribution or catastrophe in the market place. --Gets another bag of popcorn to watch the market spectacle.--

Rhywun|9.15.08 @ 1:06PM|#

and any money left over at the end of the insurable period should be returned to said clients

You do know how insurance works, right? Returning unused premiums would quickly ruin the industry.

Lefiti|9.15.08 @ 1:19PM|#

Hail Market,
Full of grace,
Prosperity is with thee.
Blessed art thou among systems,
and blessed is the fruit
of thy womb, Capital.
Holy Market,
Mother of Goods,
pray for us consumers now,
and at the hour of our bankruptcy.
Amen.

Jerry|9.15.08 @ 1:24PM|#

Rhywun, not at all, it would move them back to their core business, which is mitigating a certain class of uncertainties.

Rhywun|9.15.08 @ 2:24PM|#

it would move them back to their core business, which is mitigating a certain class of uncertainties

Maybe I'm not understanding what you mean by "any money left over at the end of the insurable period should be returned". When you pay a premium, there is no "money left over". You don't get insurance for "free".

Mike Laursen|9.15.08 @ 3:00PM|#

OK, leftiti, I can play, too:

I pledge allegiance to Centralized Authority
And to the Crony Capitalism for which it stands
One Jiggered Economy under Massive Debt
With Pandering and Fear for the Sheeple

|9.15.08 @ 3:06PM|#

A lack of standards at Freddie and Fannie turned out to be just as disasterous as a lack of standards at private firms.

Sounds like the problem is a lack of standards. If it makes you feel better to say that Clintonites were complicit in leaving the store unminded, have at it.

Kolohe|9.15.08 @ 3:16PM|#

I think AIG is working to swap some of their debt aroung in the new Fed vehicle that was created around the same time (or as part of, I can't remember) as the Bear Stearns bailout.

Jerry|9.15.08 @ 3:19PM|#

Rhywun,
The money left over after the insurance company pays out compensation for claims and its operational costs.

Lefiti|9.15.08 @ 3:37PM|#

Not very good, Mike. Try again. Maybe something about the Libertopia of your dreams set to the music of some Anglican hymn.

Mike Laursen|9.15.08 @ 3:46PM|#

Maybe something about the Libertopia of your dreams set to the music of some Anglican hymn.

You're looking at the wrong libertarian if you want libertopian dreams. I'm not too entralled with any other type of utopia, either.

Rhywun|9.15.08 @ 4:58PM|#

The money left over after the insurance company pays out compensation for claims and its operational costs.

Oh--profit. Nope, you don't get that money. (Yes, I work for an insurance company :))

Lefiti|9.15.08 @ 6:59PM|#

C'com, Mike, never having to defend an actual implementation of policy is where it's at for libertarians. Get with the plan. If only the market were truly free, all would be well.

Mike Laursen|9.16.08 @ 12:20AM|#

C'com, Mike, never having to defend an actual implementation of policy is where it's at for libertarians.

Is that a "Drink!" Where are the rules again?

Jesse Walker|9.16.08 @ 12:41AM|#

Where are the rules again?

Whenever Edward/Lefiti starts doing his schtick, you get to finish the bottle.

|9.16.08 @ 5:28PM|#

Insurance companies have ALWAYS invested their excess capital, rather than have it lay fallow. They were just restricted in areas of the economy they could invest in. (I'm ex-insurance myself)

For instance, we used to offer annuities as well as insurance. The payout was based on the S&P index. Now, how do you suppose we were able to grow the clients capital sufficiently to make the payout, and still make a profit on the contract?