We Wrote Nearly A Year Ago Of Exactly What Happened Last Week With Paulson's Bailout Plan
A few timely comments before the post. I'm writing this as Senators interrogate Paulson and Bernanke. Paulson must have said root cause at least six or seven times. Housing prices are not the root cause. And, neither is debt. The questioning by Congress is some of the most brilliant I have ever witnessed. It actually makes me proud that our form of government still has the ability to rise to the occasion in time of crisis. It is substantially apparent this workout of intellectual discourse will be to the benefit of society as this is an ill-thought out plan. All Senators are on their "A" game. Quite frankly, Senator Bennett has made a point that I think could be twisted into another potential solution. This should be a reverse auction open to anyone that wants to bid. Not just the Federal Reserve but anyone interested in buying distressed debt. One bidder attempting to set market pricing for hundreds of billions of distressed assets and a handful of sellers does not leave me feeling warm and fuzzy that market pricing will be achieved. But, then this really isn't about achieving true transparency and market pricing. It's a ruse for a scheme meant to bail out banks without any concern for taxpayers built into the plan. Why can't I bid on some of this debt? I would most assuredly like to bid if I knew what I was bidding on. And open bidding to market buyers would reduce the taxpayer risk and would require transparency in advance of the auction. This would assist the sovereign to determine what they are buying. It shouldn't take too much time for financial institutions to prepare the appropriate documentation. Okay, on to the post.
This moment in time is an appropriate opportunity to re-post some remarks I made on here last January - I posted a game and then an outcome or answer to the game. That game described our banking and finance system at the time. Below is a re-post of the game and outcome. Last week we witnessed the exact outcomes to that game as I wrote it would happen at the time.
-The Lehman failure
-The Merrill failure (Their failure led to the merger with B of A.)
-The imminent failure of Goldman and Morgan Stanley
-The failure of AIG
-The hedge fund crisis associated with Lehman & AIG's failure
-And as a final culmination, the proposed Paulson bailout needed to stabilize the players in the game
It was inevitable we would get to the point where a bailout was necessary. I could have just as easily written that post ten years ago. The outcome would be the same. And, were Wall Street actually driven by market forces, we never would have gotten to this point. The market would have determined these outcomes well before this crisis unfolded. But, because Wall Street is a monopoly, this was let to build to levels of disaster. Incompetence becomes systemic in systems of monopoly. There is no doubt Wall Street is systemically incompetent. Now we face dire economic consequences regardless of what plan is approved. So much for free markets.
Remember, since my original post every major CEO on Wall Street told us the system would be fine. Hank Paulson told us everything was fine. Nearly every Federal Reserve governor told us everything was fine. And, at differing points between then and now a vast majority of Wall Street talking heads told us to get back into the stock market. And, all of these actions happened over and over and over again. It is important to remember the John Kenneth Galbraith quote I have put up on here many times - we assign values to people that are completely without merit.
Do you still assign the same values to these people? Do you really think any of these people understand the basis for this crisis or how to solve it? Do you really believe Wall Street executives making tens to hundreds of millions of dollars by handling your money really deserve that pay? You want to believe because most likely much of your belief system would be shattered not to believe it. Questioning your belief system is not a place many people feel comfortable going. But, if you take away your bias, do you really believe?
Here is the prior post of the game...............................
Question:
After watching this video, we can play a game. A quick game. A game involving the Socratic method and Socratic questioning. Here goes. What if an environment existed where there was significant leverage in many assets and very large bets across all assets. And, let's say some of those assets are more liquid than others. And, that some assets are actually quite illiquid. By that I mean there is not a clearinghouse or large auction market with substantial players to trade that asset. A piece of art may be an example of an illiquid asset. And, let's say any one of those bets turns against one of the players or many players. And, let's say one day players have to recognize that bad bet(s). In doing so, the players have to recover a stable financial position. In other words, they need to raise capital to remain liquid and stay in the game. Or, in a bank's case, remain solvent. And, let's say it has become impossible to raise that capital through the sale of semi-liquid or illiquid assets. And, in a worst case scenario, let's say the illiquid assets are the ones that have turned against those players. What are the players forced to do? And what are the consequences for the players and for the asset markets they've invested in? Both short term and long term?
Answer:
There are many outcomes. One is forced selling. Even many deeper angles on the selling. One of them is that players are left with continually deteriorating BAD bets while they sell their good bets to remain in the game. That has a self-reinforcing or recursive effect of selling more and more good bets while more and more bad bets draw down their capital positions over time and thus continually erode their capital positions until either bankruptcy, capital injection or bad bets stabilize. Selling of good bets are not just paper assets or traded assets but could be other parts of the company, people, their trading businesses, etc. And, what might that mean for hedge funds that rely on them to stay in business? And, what does that imply for intrinsic value of these players? That said, there are still so many other angles.. .....But, we'll all watch as it unfolds.
And many are saying banks are a buy. Is that a joke? I'm sure it seemed bizarre when I wrote that Wall Street was peaking but they still don't understand what is happening. But, do they ever? And, for that, we all pay.
This moment in time is an appropriate opportunity to re-post some remarks I made on here last January - I posted a game and then an outcome or answer to the game. That game described our banking and finance system at the time. Below is a re-post of the game and outcome. Last week we witnessed the exact outcomes to that game as I wrote it would happen at the time.
-The Lehman failure
-The Merrill failure (Their failure led to the merger with B of A.)
-The imminent failure of Goldman and Morgan Stanley
-The failure of AIG
-The hedge fund crisis associated with Lehman & AIG's failure
-And as a final culmination, the proposed Paulson bailout needed to stabilize the players in the game
It was inevitable we would get to the point where a bailout was necessary. I could have just as easily written that post ten years ago. The outcome would be the same. And, were Wall Street actually driven by market forces, we never would have gotten to this point. The market would have determined these outcomes well before this crisis unfolded. But, because Wall Street is a monopoly, this was let to build to levels of disaster. Incompetence becomes systemic in systems of monopoly. There is no doubt Wall Street is systemically incompetent. Now we face dire economic consequences regardless of what plan is approved. So much for free markets.
Remember, since my original post every major CEO on Wall Street told us the system would be fine. Hank Paulson told us everything was fine. Nearly every Federal Reserve governor told us everything was fine. And, at differing points between then and now a vast majority of Wall Street talking heads told us to get back into the stock market. And, all of these actions happened over and over and over again. It is important to remember the John Kenneth Galbraith quote I have put up on here many times - we assign values to people that are completely without merit.
Do you still assign the same values to these people? Do you really think any of these people understand the basis for this crisis or how to solve it? Do you really believe Wall Street executives making tens to hundreds of millions of dollars by handling your money really deserve that pay? You want to believe because most likely much of your belief system would be shattered not to believe it. Questioning your belief system is not a place many people feel comfortable going. But, if you take away your bias, do you really believe?
Here is the prior post of the game...............................
Question:
After watching this video, we can play a game. A quick game. A game involving the Socratic method and Socratic questioning. Here goes. What if an environment existed where there was significant leverage in many assets and very large bets across all assets. And, let's say some of those assets are more liquid than others. And, that some assets are actually quite illiquid. By that I mean there is not a clearinghouse or large auction market with substantial players to trade that asset. A piece of art may be an example of an illiquid asset. And, let's say any one of those bets turns against one of the players or many players. And, let's say one day players have to recognize that bad bet(s). In doing so, the players have to recover a stable financial position. In other words, they need to raise capital to remain liquid and stay in the game. Or, in a bank's case, remain solvent. And, let's say it has become impossible to raise that capital through the sale of semi-liquid or illiquid assets. And, in a worst case scenario, let's say the illiquid assets are the ones that have turned against those players. What are the players forced to do? And what are the consequences for the players and for the asset markets they've invested in? Both short term and long term?
Answer:
There are many outcomes. One is forced selling. Even many deeper angles on the selling. One of them is that players are left with continually deteriorating BAD bets while they sell their good bets to remain in the game. That has a self-reinforcing or recursive effect of selling more and more good bets while more and more bad bets draw down their capital positions over time and thus continually erode their capital positions until either bankruptcy, capital injection or bad bets stabilize. Selling of good bets are not just paper assets or traded assets but could be other parts of the company, people, their trading businesses, etc. And, what might that mean for hedge funds that rely on them to stay in business? And, what does that imply for intrinsic value of these players? That said, there are still so many other angles.. .....But, we'll all watch as it unfolds.
And many are saying banks are a buy. Is that a joke? I'm sure it seemed bizarre when I wrote that Wall Street was peaking but they still don't understand what is happening. But, do they ever? And, for that, we all pay.
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