Politics

McCain on AIG…

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"The government was forced to commit $85 billion," McCain said in a statement. "These actions stem from failed regulation, reckless management and a casino culture on Wall Street that has crippled one of the most important companies in America," McCain said in a statement.

"The focus of any such action should be to protect the millions of Americans who hold insurance policies, retirement plans and other accounts with AIG," he said. "We must not bail out the management and speculators who created this mess. They had months of warnings following the Bear Stearns debacle, and they failed to act."

Although he is stepping up criticism of government regulators as he seeks the presidency, McCain has long favored a reduction in corporate regulation.

More here. Feh.

In last week's New York Times, Tyler Cowen hit these right notes:

The biggest financial deregulation in recent times has been an implicit one—namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated. To be sure, these institutions contributed to the severity of the Bear Stearns crisis and to the related global credit crisis. But it's not obvious that the less regulated financial sector performed any worse than the highly regulated housing and bank mortgage lending sectors, including, of course, the government-sponsored mortgage agencies.

In other words, the regulation that we have didn't work very well.

There are two ways to view this history. First, with the benefit of hindsight, one could argue that we needed only a stronger political will to regulate every corner of finance and avert a crisis.

Under the second view, which I prefer, regulators will never be in a position to accurately evaluate or second-guess many of the most important market transactions. In finance, trillions of dollars change hands, market players are very sophisticated, and much of the activity takes place outside the United States—or easily could.

More here.

reason readers know that the GOP and George W. Bush have been spendthrifts. And contrary to common perceptions, Bush has also been a regulatory nightmare.

NEXT: A Great Moment for Women

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  1. Tax rebates, low FED rate, deficit spending, bailouts, loans. All heroin to the economy.

  2. reason readers know that the GOP and George Ilyich W. Bush have been spendthrifts

    After AIG, can we add socialist to that? 🙂

  3. nobody has summed up the regulation arguments better than Radley. Do we really think that the feds, who run a half a trillion dollar deficit, will do a better job managing these institutions than the boards who have direct interest in them?

  4. The funny part is when, during what’s become a plethora of OPEN government manipulation of markets, people still try to deny they also secretly manipulate certain markets (coughGOLD&SILVERcough) whose results tend to strongly affect inflation measurements.

  5. I knew I should have shorted AIG! Shit!

  6. Naga,

    Could be worse. You could own shares in Washington Mutual.

  7. I have no confidence in the government’s ability to understand, let alone regulate derivates.

  8. Pro Lib,

    Actually I’m thinking of buying some shares. Low number though around a thousand. If I do its under the hope that WAMU gets bought up.

  9. Fannie and Freddie regulator

    http://www.ofheo.gov/about.aspx?Nav=55

    From mission statement:
    “OFHEO’s mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). OFHEO works to ensure the capital adequacy and financial safety and soundness of two housing government-sponsored enterprises (GSEs) — Fannie Mae and Freddie Mac. ”

    A whole agency for 2 companies that were completely insolvent and not one regulator said a thing.

    Regulation does not work.

  10. Naga,

    No problem with doing that. My problem was buying in as an employee in the high 30s. I’m dead under any scenario except for WM clawing its way back up someday, without getting acquired or declaring bankruptcy. Fortunately, I wasn’t crazy enough to sink a ton of money into the stock. I was wary of their hedging strategy back in ought-three.

  11. These actions stem from failed regulation

    No, they stem from SUCCESSFUL regulation. Their credit rating dropped and they had to come up with collateral.

    Bailing them out is the failed regulation part. IOW, “The fed’s actions are failed regulation.”

  12. “The biggest financial deregulation in recent times has been an implicit one-namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated. To be sure, these institutions contributed to the severity of the Bear Stearns crisis and to the related global credit crisis. But it’s not obvious that the less regulated financial sector performed any worse than the highly regulated housing and bank mortgage lending sectors, including, of course, the government-sponsored mortgage agencies.”

    Wait a minute, wait a minute. This doesn’t make sense to me. The “highly regulated” institutions were major players in the exotic derivative market. Especially Fannie and Freddie. I’m not a regulation fan but this argument doesn’t hold water to my ears.

  13. Ouch!!! Sorry my friend. I never even considered WAMU in the scheme of things. Their commercials always offended me. “FREE checking? For LIFE? You, sir, are crazy! Just crazy!”

  14. In other words, the regulation that we have didn’t work very well.

    Or maybe, just maybe, when your “regulators” are political hack appointees who don’t believe in and are loathe to enforce regulations and constantly choose to interpret them in the most toothless ways, the problem isn’t necessarily the regulations?

  15. Greedy, pinstripped, martini swilling, gucci wearing bastards cost us all more than anyone responsibly consuming cannabis. If only they were drug tested, this would have never happened.

  16. And contrary to common perceptions, Bush has also been a regulatory nightmare.

    I hear people whining about deregulation incessantly. I try not to laugh. Same as when people start braying about how this “meltdown” demonstrates the failure of George W Peron’s laissez faire adminstration.

  17. “Casino culture” Really?

    Does he know that casinos actually make money?

  18. Well, I worked there for over four years, and they had a 15% discount and over ten years of growth, growth, growth! I figured I could ride out any downturns, because, you know, they’re a bank and regulated and stuff.

  19. Pro Lib,

    You just reminded me of my worst decision ever. I think it was January or February 2001 and I had about 1,800 dollars saved up and Cisco Systems was down to 7 dollars. I was like “I’m not going to be a chump and buy that crap”. Same decision with Lucent Technologies when it went down to .78 cents. I’m still kicking myself for my early mistakes.

  20. Amen, P. Brooks.

    I teach Administrative Law, and the notion that we are living in a deregulated economy is a joke. Or would be, if so many people didn’t buy it as gospel.

    All of my students are shocked when they discover that most of the rubber-meets-the-road contacts between a business and government are with unelected, unaccountable bureaucrats enforcing regulations that were not authored by Congress, but by the agency itself.

  21. Or maybe, just maybe, when your “regulators” are political hack appointees who don’t believe in and are loathe to enforce regulations and constantly choose to interpret them in the most toothless ways, the problem isn’t necessarily the regulations?

    But that is a natural weakness of regulations. Regulations are always going to be interpreted and enforced to the benefit of those in power. What you are talking about isn’t some anomaly, it is how *ALL* regulations and regulatory bodies work.

    So yes, the regulatory system worked exactly like expected: While costing billions of dollars in enforcement and compliance, it did virtually nothing to prevent a meltdown.

    The difference between you and us is that you believe that you can vote for political Jesus, and political Jesus is absolutely selfless, interested in the good of all people, and will make the regulations work for all. Where as we believe that political Jesus doesn’t exist.

  22. When regulations fail, there will always be two schools of thought:

    1) See, regulations don’t work;

    2) See, we need more funding, more regulations, better people in the agencies, etc. — i.e. regulations work, but these just need a little more tinkering.

  23. What is puzzling me this time is the factually incorrect third reaction:

    3) Why weren’t there any regulations in place to stop this?

  24. Quis custodiet ipsos custodes?

  25. Part of the problem here is that we live in an age of instant online trading and instant stock charts. That’s causing this influx of roulette speculators in the market that we didn’t have in the past, which is leading to repeated bubbles.

    Over time, this behavior ought to get punished.

    What seems absurd to me is that right now the political commentators are acting like the stupid behavior of speculators is equivalent to “ordinary hard-working Americans” getting taken in by scheming capitalists. Oh those poor babies in the investment banks, buying up those worthless mortgages, whatever shall we do?

    It true that “ordinary Americans” may be adversely impacted by the credit environment. But, not counting people who took out morgages they couldn’t afford, this impact is temporary and not substantive. Eventually the credit market will return to normal.

    What really interesting is that in the big picture, what ACTUALLY happened is not that ordinary Joe-shmoe got taken in and lost his money, but that the banks got taken in by Joe-shmoes with no collateral and took THEIR money. Effectively, it was a big transfer of wealth from stupid investment bankers to poor homeowners who were given credit terms they could never have dreamed of otherwisem and who are now being assisted by the government to keep those homes on even better terms.

    It’s like the market accidentally created a massive housing subsidy program and the left-wing reaction is to blame the capitalists for not being tight-fisted enough with their money.

  26. and iBankers make sick money

    I used to assume it was because they were so smart they were worth it…

  27. The difference between you and us is that you believe that you can vote for political Jesus, and political Jesus is absolutely selfless, interested in the good of all people, and will make the regulations work for all. Where as we believe that political Jesus doesn’t exist.

    I’m not looking for a political Jesus — just someone who isn’t a complete crony capitalist — and a media that holds politicians accountable when the people in power that have absolutely no place being there. It doesn’t take a political Jesus — just someone who isn’t completely corrupt.

    You don’t put people don’t believe in regulations in charge of regulating things. And you don’t put lobbyists for industry in charge of regulating that industry. And when you do, there should be a fucking shitstorm by watchdogs and media alike.

    Atrios also sums up the “free-marketeers” nicely:

    People who prattle on about “the free market” are usually too stupid to have a clue how complicated and pervasive the “rules” had to be to to get a well-functioning modern market system: sophisticated concepts of contracts and enforcement, property rights, legal entities, proper accounting, bankruptcy, limited liability, etc… etc…, did not descend from the heavens but were, in fact, created.

  28. We’d better come up with a way to avoid these kinds of crises, otherwise there will more bailouts and more regulations. That’s the real world. I say that we should try and develop some decent and minimal regulations. But,hey,if the world changes, that’s fine with me.

  29. So what did Lehman do that got them passed over for a bailout?

  30. If you do the math… this AIG bailout is equivalent to twice the size of the entire FDIC fund to cover depositor losses when banks, and equivalent to roughly 6 months of war spending.

    Similarly the Fannie/Freddie debacle was equivalent to years of war spending, and in the long run may cost as much as all of the war spending since September 11, 2001.

    Despicable.

  31. Crony capitalism or crony socialism?

  32. That should have, of course, read “depositor losses when banks fail.”

  33. Happy Constitution Day, everyone! This is my favorite holiday, when George Washington delivers little bags of freedom to all of the good boys and girls.

    Strangely telling that no one really celebrates this day, since it honors the idea of limited government. Such a primitive and pass? concept. Shouldn’t our presidential candidates be doing special speeches celebrating this day?

  34. The calls for regulation will win the political debate, because the argument was lost before it even began.

    Fed policy and Bush fiscal policy created an asset price bubble.

    The problem with asset price bubbles is that during them economic behavior that would otherwise be irrational appears rational, due to distortions of the decision-making data being used.

    Basically, state action created an environment in which risky real estate bets were paying off. By now braying about the need for regulation, the statists are essentially saying, “We need to regulate you to stop you from behaving rationally when we fuck up the macroeconomic situation. We want to be able to reap the political benefits of a loose money policy, but we want you to ignore the existence of that policy.”

  35. Pro Libertate | September 17, 2008, 2:41pm | #
    Crony capitalism or crony socialism?

    Definitely crony socialism. Capitalism gets an undeserved bad rap for these sorts of things, and those that fall victim to the twisted logic of anti-capitalist head games play right into the hands of those that are sucking this nation dry like so many leeches.

  36. So what did Lehman do that got them passed over for a bailout?

    Not big enough and not important enough counter-parties to take down with them.

  37. If you do the math… this AIG bailout is equivalent to twice the size of the entire FDIC fund to cover depositor losses when banks, and equivalent to roughly 6 months of war spending.

    I am curious to know what’s gonna happen when the FDIC fails

  38. FDIC won’t be allowed to fail, of course, but any solution to that problem will add more inflationary pressure to the economy.

    Boy, will I be glad when this mess is over. Hopefully, with some sort of legitimate boom. Can we cure death or something big like that? I look to technology to solve this economic crisis. Flying cars powered by fusion? What do we need here?

  39. I look to technology to solve this economic crisis. Flying cars powered by fusion? What do we need here?

    We need competent minds fueled by logic, reason, and a sense of duty… not irrationality, ambition, and greed.

  40. Surely you jest. We only need a law that says that we’ll have fusion power next year. Voil?!

    In reference to my Constitution Day remarks above, how come Hit & Run isn’t commemorating this day of days? Well?

  41. In reference to my Constitution Day remarks above, how come Hit & Run isn’t commemorating this day of days? Well?

    Well, the constitution was signed Sept 17, 1787.

    But it was not ratified until NH became the 9th state to ratify Jun 21, 1788.

    And if NY or VA didn’t wind up ratifying it, (10th & 11th) it would have been a dead letter.

    And the bill of rights, which imo is more important to create “limited government with little bags of freedom” didn’t go into effect until into December 15, 1791

  42. Still, I agree that today has more of claim of being America’s B-day than July 4.

  43. Hopefully, with some sort of legitimate boom. Can we cure death or something big like that? I look to technology to solve this economic crisis. Flying cars powered by fusion? What do we need here?

    “Germany Russia Invades Poland!!”

    They tell me it worked before.

  44. Under the second view, which I prefer, regulators will never be in a position to accurately evaluate or second-guess many of the most important market transactions.

    And let’s just ignore people like Barney Frank, who have been telling us this would happen, and how it would happen, for years.

  45. “Germany Russia Invades Poland!!”

    They tell me it worked before.

    Not until

    “Jap PRC Planes Bomb Hawaii!!”

  46. Pedantic Nitpicker,

    It’s tough to pick a specific date, but this is the “official” one.

  47. Neither Obama nor McCain has the training nor the intellectual wherewithal to issue snap judgments on immensely complicated economic issues. Nobody does. I’ve been watching the MSM treatment of this latest “crisis” and not a single pundit has raised this objection. Do we Americans really expect the candidate to our highest office to be an expert on everything? Problem is, the candidate who honestly says, “I don’t know” will be crucified by the very press who have anointed themselves: “Protectors of the Truth.” Truly sickening. Not that we don’t deserve it.

  48. Neither Obama nor McCain has the training nor the intellectual wherewithal to issue snap judgments on immensely complicated economic issues.

    Which means the advantage goes to the candidate who has been talking about the problem, predicting the crisis, and proposing solutions to it for a long time.

  49. This post is too uninformed to be convincing. The biggest problems with the current market seizure absolutely could have been avoided with sufficient oversight. ‘No-doc’, ‘low-doc’ and negative amortization loans should not be legal. They are just bad structures, and they should never have been allowed to be marketed to consumers.
    Similarly, there is no excuse for not regulating credit default swaps. Swaps are insurance products. Insurance is highly regulated, and for very good reason. For instance, no reasonable person would argue that insurance laws preventing someone who does not own a property to insure against its destruction. These laws prevent fraud, and they also prevent a loss of 10 dollars from becoming a loss of 100 dollars through the multiplying effect of non-owner insurance. Similarly, insurers must be regulated so that insurance buyers can be confident that sufficient capital exists to compensate for losses and that the insured assets are actually worth the amount of the insurance. Libertarian arguments against regulation hold no water when applied to swaps and abusive consumer loans. Period.

  50. McCain? I think you’re giving him too much credit, joe.

  51. And let’s just ignore people like Barney Frank, who have been telling us this would happen, and how it would happen, for years.

    Mmm hm.

    So five years ago, there was one of those rare moments in Washington when the branches and personalities of government-in this case, the Bush administration-are less interested in protecting or expanding their turf than in fixing a looming catastrophe. What was Frank’s response to the proposal?

    “These two entities-Fannie Mae and Freddie Mac-are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

    As Frank mentions in his press release today, two years after it was first proposed, the House finally voted on a bill reforming the mortgage giants. Alas, the legislation was watered down to the point of being meaningless-that’s why it passed the House with such wide margins (122 Democrats and 209 Republicans). But even then, and despite his high regard for bipartisanship now, Barney Frank wasn’t among the yeas.

    Which means the advantage goes to the candidate who has been talking about the problem, predicting the crisis, and proposing solutions to it for a long time.

    So, advantage John McCain?

  52. @max:

    AIG is a holding company and only the insurance company subs are regulated by the insurance commision of ny. AIGFP (financial products) is a non-regulated sub of the holding company which wrote the swaps. It should be noted that of 57B in swaps with subprime/alt-a/heloc exposure, AIG had only paid out $103M and none of the underlying collateral has failed to pay its interest and principal.

    So we have an enormous failure without any realized losses. Good stuff.

  53. The biggest problems with the current market seizure absolutely could have been avoided with sufficient oversight. ‘No-doc’, ‘low-doc’ and negative amortization loans should not be legal. They are just bad structures, and they should never have been allowed to be marketed to consumers.

    You think the OCC and OTS were unaware of such loans? They were, and they only started trying to regulate them toward the end of last year. Likewise, the FHLBs could have haircut collateral values for lenders that focused on these products. Oversight was sufficient in terms of scope and funding, it just wasn’t competent.

    So we have an enormous failure without any realized losses.

    You can survive for years on realized losses (Ford), but you can’t survive one day without liquidity (Bear Stearns). AIG most definitely would have gone bankrupt without the Fed’s contingent loan, and the Fed’s goal seems to be to provide AIG two years to “orderly” sell off performing assets and operations, because AIG absolutely can’t emerge intact borrowing at 3M LIBOR +850 bps. That’s about 11.6% right now, and swap forwards don’t imply much of a decline over the loan’s two-year tenor.

  54. Pro Libertate,

    You mean this McCain: But so, in this whole new derivative stuff, and SIBs and all of this kind of new ways of packaging mortgages together and all that is something that frankly I don’t know a lot about. […]

    But I don’t know of hardly anybody, with the exception of a handful, that said ‘wait a minute, this thing is getting completely out of hand and is overheating.’

    So, I’d like to tell you that I did anticipate it, but I have to give you straight talk, I did not. – Dec. 2007.

    Nope, that is not the candidate who has been talking and warning about this problem for a long time.

    The people pretending this crisis STARTED with Freddie and Fannie’s books don’t know what they’re talking about. They’re just trying to cover McCain’s ass.

  55. Both candidates are economic idiots, in my book. However, I predicted back when I was at Washington Mutual, helping it self-destruct, that this monkey business at the GSEs would end up in a government bailout.

    How about the Rays? I wonder if they’ll end up holding on and winning the division?

  56. Bailing them out is the failed regulation part. IOW, “The fed’s actions are failed regulation.”

    I’ll add that my opinion is this particular Fed action is much more defensible than the prior moves.

  57. The people pretending this crisis STARTED with Freddie and Fannie’s books don’t know what they’re talking about.

    So where DID the crisis start then?

  58. I’m not looking for a political Jesus — just someone who isn’t a complete crony capitalist.

    Everyone is a crony capitalist. People have a natural tendency to help their friends and harm their enemies. People are self interested. And not only that, people who are more self-interested than others will do better in politics than those who ignore self-interest, as a matter of natural selection.

    So yes, you want Political Jesus. If your solution to our problems is “better leaders”, then you have no solution besides Political Jesus.

  59. I think the Times of India had the best headline for the AIG bailout, “USA becomes USSR: $85 bn bailout for AIG”.

  60. While regulation cannot adequately replace norms, morays & customs in areas of human life, it is imposed when the latter is perverse, corrupted or ineffectual on keeping the level playing field.

    btw…does Reason critiqe NFL football, the most heavily self-regulated sport? I’m a baseball fan, and like the inherent ambiguity of the regs to allow a midget to bat.

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