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Thursday, October 30, 2008

Can Bailouts Have Do-Overs? This One Might.

posted by on October 30 at 16:10 PM

A few weeks ago, I had intended to track key metrics in the credit markets as a sadistic means of removing all joy from the world. Then I came to my senses. Calculated Risk beat me to it anyways, with a daily tracker. According to those numbers, while many things have improved in the credit markets since the bailout went into effect—from all-time historical highs to merely untenable highs—we’re nowhere close to normal.

The bailout plan, first proposed by Treasury Secretary and former Goldman Sachs banker Henry Paulson, was intended to loosen up these markets, returning them closer to normal. Thus far, the bailout measures have added about a trillion dollars to the national debt and left the credit markets improved, but still non-functional. And, it appears as if most of those credit improvements were due to direct governmental intervention, rather than a true improvement in investor confidence.

The two models of the bailout can be exemplified by the bailouts of Bear Stearns and AIG.

For Bear Stearns, the government bought up their impossible-to-value toxic debt. No returns on that investment yet:

The Federal Reserve reduced the estimated value of the Bear Stearns Cos. assets it took on in June by $2.7 billion, or 9.2 percent, as the worsening credit crisis forced more markdowns on mortgage-backed debt.

And with AIG, the taxpayers took control of the company in return for desperately needed cash to keep the enterprise running. Initially, we provided $85 billion for a controlling share of AIG, followed by an additional $35 billion. How did that work out? The heads of AIG apparently lied about just how ugly the situation was and is. The $120 billion or so of taxpayer dollars we lent to them is already gone, with the company still teetering on failure. Take it away, NYT:

The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.

The revelations that things were worse at AIG than expected led to the collapse of several insurance company stocks today, with many losing a quarter to a half of their total value.

How bad are the credit markets? Well, investors in the world’s largest—and first—Money Market fund still cannot get their money back, over a month after it was frozen. The fund lost a tremendous amount of assets after Lehman Brothers collapsed. It gets worse. A second fund managed by the same company, that was supposed to only invest in government debt, also has been frozen—perhaps evidence the Reserve Fund company, in an attempt to hide their losses in their primary fund, took and lost money from investors in the government fund.

At least 400,000 people, and perhaps as many as a million, can’t get access to their savings, a problem that has quietly persisted in spite of widely publicized federal efforts to restore confidence in money-fund investments….

Initially, the company simply announced that it would delay redemptions from the Primary Fund for up to seven days, as allowed by law. Customers were somewhat reassured, but anyone trying to get additional information was met with busy phone lines and unanswered e-mail.

The news occasionally posted on the fund’s Web site got steadily worse. On Sept. 18, investors in a host of other Reserve money funds learned that their money would be tied up for as long as a week; that delay later became open-ended. On Sept. 19, the fund delayed redemptions from both the Primary Fund and the US Government Fund indefinitely.

Why would anyone entrust their money to a system where the lies and deceit are still being uncovered?

In the meantime, enter Fed Chairman Ben Bernanke—former economics professor and expert on the Great Depression.

His prescription: The government should spend money, even if it means running up even more debt. Spend on everything, including another round of checks. Enough with trying to save the financial system. If the credit markets are beyond short-term salvation, it’s time to try to save the citizens of the country. You know, the Democratic plan, costing a (now paltry-seeming) $300 billion.

And the man he endorsed to spend the money, as his choice for the next president? Obama.

To summarize, in the Golob-scale-of-economist-panic, after a brief bit of optimism in the shadow of the trillion dollar Hail Mary pass to save the financial markets, and its subsequent failure to help enough, we’re at six beakers by now:

You don’t have to take my word for it. Let the San Francisco Fed president Janet Yellen’s gloom be your confirmation.

And now some Muppets to make things feel better:

RSS icon Comments


Why can't the government just start lending directly to those who need to borrow and we can get on with our lives? Let the private credit market sort itself out, or not. Whatever. Do we even need them?

Posted by elenchos | October 30, 2008 4:18 PM


You've basically reiterated what Bernanke stated and did this week. He lent out about a half trillion dollars of Fed money directly into the short-term corporate debt market.

Expect more of the same.

Posted by Jonathan Golob | October 30, 2008 4:20 PM

Today they talked about bailing out people with credit card debt, who fell behind when the credit card companies tripled interest rates and tripled minimum payment amounts ....

Posted by Will in Seattle | October 30, 2008 4:27 PM

Paula Rosput Reynolds, the former CEO of Safeco just became the AIG Chief Restructuring Officer.

Posted by did you know that? | October 30, 2008 4:38 PM

That's really not what I'm saying. "The market" hasn't all of a sudden learned how not to collapse. I'm saying lend the money to borrowers, and bypass the market.

Posted by elenchos | October 30, 2008 4:38 PM

@4: I did not know that. I cannot fathom the ghouls she'll uncover during that task. For all of our sakes, I wish her the best of luck.

elenchos: The banks can't or won't lend. So Bernanke started lending to non-financial institutions directly, in the corporate paper market. While he isn't lending fed dollars to individuals quite yet, this is getting close to a federal banking system that completely bypasses the failing banks.

This is a totally distinct act from Paulson's lending or equity injections into banks.

Posted by Jonathan Golob | October 30, 2008 4:42 PM

Where are the fucking indictments?

Posted by Westside forever | October 30, 2008 4:49 PM

AIG blows through $120 billion of taxpayer money in a matter of weeks, and I'm still waiting for my IRS stimulus check.

Posted by Emily | October 30, 2008 4:55 PM

I'll tell you why the government can't or shouldnt lend to people directly like you suggest. who is the government's backstop when their risk analysis fails to mete out risk properly? There is no backstop in that scenario. Do you want to get into discrimination of such lending?

and to go back to the initial bailout plan...I very well predicted that it would be an unmitigated disaster the way it was structured and laid out. It didn't resolve the underlying problems of credit markets or what sent credit markets into a tizzy: risk.

And now we have asshats thinking we need more money? Money doesn't solve problems in and of itself. It needs to be applied smartly. I can't fathom anyone telling me at this point that the AIG bailout was well worth it.

on the upside, oil will go below $60 in the near term making me some money.

Posted by Bellevue Ave | October 30, 2008 5:00 PM


Have you talked to them yet? They held up my check for completely bogus reasons, without telling me why until I called them. They might be doing the same to you.

Posted by keshmeshi | October 30, 2008 5:00 PM

and here's a thought, maybe you people that are looking for government to lend should look at investing in the governments around the nation. Buy municipal bonds, get a modest payoff and do some good for the nation tax free.

Posted by Bellevue Ave | October 30, 2008 5:04 PM

i'm just waiting for the graph where golob has a vertical asymptote of beakers to describe the panic.

Posted by Bellevue Ave | October 30, 2008 5:07 PM

I just don’t have the heart to tell people that the FDIC only has about $39 billion on tap when there’s some $5 TRILLION in bank and mutual fund money market accounts.

Even more to the point, if there truly is an economic collapse, it’ll immediately be followed by a wave of hyperinflation that’ll totally wipe out the value of our US dollars anyway.

Posted by Original Andrew | October 30, 2008 5:07 PM

hyperinflation is the best way to make your debt blues go away. and if it is commodity lead hyperinflation you have options to at least retain some value.

Posted by Bellevue Ave | October 30, 2008 5:11 PM

@ Bellevue Ave,

The Reserve Primary fund broke the buck largely because they had around $800 million in Lehman paper that was suddenly worthless when Lehman declared bankruptcy, which subsequently led to a run on money market funds.

AIG is a similar situation in that it will cause a cascade failure of many businesses and institutions if it goes under.

Posted by Original Andrew | October 30, 2008 5:13 PM

holy cow Jonathan I didn't even play the YooHoo b vid, because BEAKER is my new doppelganger Have a stuffed aniMal of him on the dresser If you get a chance there is a 3-D muoppetthing at the new? amusepark across from Walt's Dizzyland (see the The EX Dizzy Spells)
Not a great Vacation More excited for the Mr Poe anniversay in 2009 BALTIMORE The Raven LIVES Tell-Tale HEART

Posted by gry mklsk | October 30, 2008 5:14 PM

if u don't get Mii

herez an empee3

Posted by gry mklsk | October 30, 2008 5:22 PM

@ Bellevue Ave,

Re: Municipals

Sorry, no.

Just like private individuals and businesses, many guvmits took on astronomical debt loads and are closer to bankruptcy than most people realize.

Jefferson County, Alabama, for example, avoided bankruptcy just this week (for now).

Posted by Original Andrew | October 30, 2008 5:24 PM

You do realize that Beaker is playing the Ode to Joy, don't you? A more inappropriate piece I can't imagine.

Posted by Silverstar98121 | October 30, 2008 5:28 PM

orig andrew. money doesn't stop the bleeding cause we don't know how much blood aig has. how much can we throw at aig before it is plainly seen were pissing in the wind

Posted by Bellevue Ave | October 30, 2008 5:30 PM

Bellevue Ave,

No one knows, which is why everyone's hitting the panic button and Bernanke's running the printing presses full speed ahead.

They've started the process of identifying and spinning off the profitable divisions of AIG, but an orderly liquidation of the company will take at least two years.

Posted by Original Andrew | October 30, 2008 5:35 PM

nice Magical Adventures. i'll try and send a comment ur way in more appropriate lingo

Posted by gry mklsk | October 30, 2008 5:41 PM

for a bunch a people that seemingly support a larger government intervention, you're not doing any favors for it by claiming the risk of default on muni bonds are that great. You can't save the government without putting money in and there is always risk. its not risk free but holding on to cash isn't doing anyone any favors but yourself. and look where herd mentality has gotten us...

Posted by Bellevue Ave | October 30, 2008 5:50 PM

and really andrew, you're advocating a policy where the only thing that can save us is the government, but don't provide scenarios in which the government has enough money or the ability to raise capital to save anyone. one way is to lend the government your money via bond. The riskier the muni the higher the yield, the better return for you lending the money to do something that ultimately you think needs doing. Do you think we live in a political climate where higher taxes across the board will pass? I don't.

on the other hand, you could just pull your money and let the spectre of hyperinflation fuck you over, like you think it will.

Posted by Bellevue Ave | October 30, 2008 6:06 PM

@7 for the goddamned win.

Posted by Will in Seattle | October 30, 2008 6:09 PM

Beaker is a fucking moron--believe me, I once shared the same dressing room with him. Please post more videos with Animal in them.

Posted by Cookie W. Monster | October 30, 2008 6:14 PM

Cookie W. Monster:


Posted by Jonathan Golob | October 30, 2008 6:20 PM

Since nobody else has made this point: EEEEE! Muppets!

Posted by Jessica | October 30, 2008 6:22 PM

@ Bellevue Ave,

My long-term investments aren't in cash; not sure where you got that idea. And feel free to check out the returns on muni-bond funds if you'd like to have a good long Halloween scream.

You're correct in that there is strong public resistance to tax hikes. I seriously doubt anyone could get elected by telling Americans how much their guvmit actually costs or demanding that the super-rich pay their fair share, which is why we have a $10 trillion+ national debt (and growing!). It's almost humorous watching the campaigns dicking around over who gets which tax cuts while we tailspin towards Bushville, but sadly the epidemic stupidity of wingtard Americans is beyond my control.

Posted by Original Andrew | October 30, 2008 6:49 PM

whats the default rate on muni's even in recessions? (they are less than 1%) what is the yield? (everything i'm looking at in initial offerings goes from a yield of 3 to 5%.)

look at it this way.

If you're seriously suggesting that people go long equities now, you're giving a tough sell because nobody knows where bottom is and which companies have the wherewithal to suffer through a 3-5 year recession. I personally wouldn't advocate throwing money into a fire with equities at the moment for this reason. If it's a matter of principle that government stays stable and has the ability to meet it's obligations, lend them the money yourself. If you're more concerned with how you'll make out in the end go for the big returns...

This gets to the heart of the problem though. People chasing their own best interest led to this entire debacle up and down the line. If a few of the outraged people here put their money behind their belief and support the government while meekly benefiting themselves. some people here already think investing at all is a betrayal of what is right.

as for the fair share of taxes the rich pay, thats entirely subjective matter. I'd say that the baseline at 250k is 45% and that capital gains should have it's own brackets that are independent of normal income. but thats only my opinion.

Posted by Bellevue Ave | October 30, 2008 7:11 PM

@25 no one cares. give it up, and STFU.

Posted by you're a douche | October 30, 2008 7:27 PM

Freude, schöner Götterfunken

Europe has been my hope for the world for some time now, but our economy is so damn big that we're dragging them down too.

Posted by Amelia | October 30, 2008 7:28 PM

that does it! we are DEFINITELY having muppet karaoke at the next SLOG happy. Abby and I are going to the be the two pink muppets, and Hernandez will be animal. with paul constant as kermit, and bellevue avenue and fnarf as statler and waldorf. mahna mahna!

Posted by scary tyler moore | October 30, 2008 8:03 PM

that does it! we are DEFINITELY having muppet karaoke at the next SLOG happy. Abby and I are going to the be the two pink muppets, and Hernandez will be animal. with paul constant as kermit, and bellevue avenue and fnarf as statler and waldorf. mahna mahna!

Posted by scary tyler moore | October 30, 2008 8:03 PM


Posted by NapoleonXIV | October 30, 2008 8:25 PM

I love statler and waldorf. favorite muppets ever.

Posted by Bellevue Ave | October 30, 2008 9:18 PM

Wow! Somebody here really doesn't like Will in Seattle.

Posted by Gigi | October 31, 2008 1:39 AM

Bush boondogle. Good money after bad. No white collar criminals? I guess not.

Posted by Vince | October 31, 2008 6:22 AM

Blah, blah, blah, blah, blah, MUPPETS! Whew, I almost skipped right over this delightful post about muppet nostalgia!

Posted by Christy O | October 31, 2008 6:30 AM

scary, are you trying to entrap me?

Posted by Cookie W. Monster | October 31, 2008 8:36 AM

I fucking knew it. I knew they'd take the cash, pad their capitalization figures, and sit on the money.

Screw it. These guys are only important to day to day because they're part of the money markets. Let's begin directly buying and selling commercial paper at lower than current, but higher than pre-crisis rates and let these assholes burn.

Posted by Gitai | October 31, 2008 2:56 PM

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