Spero Consulting

Posts Tagged ‘failed bailout’

We chuck­led when we saw this head­line in The Wall Street Jour­nal today, Jan­u­ary 15: Fed Offi­cials Say Ail­ing Banks Require More U.S. Funds.

That’s not really news, and – by the way – it’s tau­to­log­i­cal or true by def­i­n­i­tion. (Uh, oth­er­wise, they wouldn’t be ail­ing now would they, precious.)

Any­way, our point is always the same – we’re con­sis­tent that way. Just because they need the money, doesn’t mean that they deserve the money nor does it mean that they’ll spend it wisely.

In that way, they’re not much dif­fer­ent the the home­less alco­holics who beg for drink­ing money on the Roberto Clemente bridge in the city of Pitts­burgh, and pre­sum­ably – this is just a wild hunch – in other cities around the coun­try, too.

Now, we know that some drug addicts get monthly Social Secu­rity checks from the fed­eral gov­ern­ment because their drug addic­tion tech­ni­cally – or, at least, bureau­crat­i­cally – dis­ables them, but we don’t think that usage is wise gov­ern­men­tal pol­icy, either. Maybe it’s just our nar­row way of think­ing, but such poli­cies not only sub­si­dize but also seem to con­done such unde­sir­able, anti-​social behav­ior, and we, as a soci­ety, end-​up with more of the dys­nfunc­tion­al­ity that we should be try­ing to eliminate.

The only com­pel­ing argu­ment that we’ve ever heard for such sub­si­diza­tion was pre­sented by the aptly named, Alfie Doolit­tle, Eliza’s father, in My Fair Lady. His was a strictly util­i­tar­ian argu­ment. Mr. Doolit­tle didn’t really deserve the £5 he was ask­ing for (her). In his own words, he was unde­serv­ing and planned to con­tinue to be unde­serv­ing, but he’d cer­tainly enjoy spend­ing it on a spree for he and his mis­sus; so, in that sense, the pay­ment would be used to max­i­mize soci­etal wel­fare and cre­ate jobs for those serv­ing him.

We don’t see the valid­ity of that argu­ment in the government’s response to the cur­rent finan­cial cri­sis, and it seems that many other mem­bers of the middle-​class feel the same way.

By the way, in an arti­cle yes­ter­day, U.S. Seeks Rest of Bailout Cash, the reporters Deb­o­rah Solomon and Damian Paletta wrote: “Con­gress rejected Trea­sury Sec­re­tary Henry Paulson’s ini­tial request, send­ing mar­kets tum­bling. A sec­ond ver­sion of the law passed sev­eral days later, allow­ing Trea­sury imme­di­ate access to $350 billion.”

Per­haps those two slept through the wealth destruc­tion that fol­lowed pas­sage of TARP, as they make no men­tion of that drop in equity val­ues. The DJIA was at 10,831 on Sep­tem­ber 30; so, talk about rewrit­ing his­tory! More pre­cisely, talk about an extremely weak argu­ment to waste more of our money!

Per­haps if the ail­ing banks and their reg­u­la­tors were a bit more straight­for­ward and bit more like Alfie Doolit­tle, we’d per­son­ally be a bit more sym­pa­thetic. Until then, we’ll point read­ers to our other posts, includ­ing the last few (What Is Cit­i­group Worth? and When Is Enough Enough?) and our entry from three months ago when we first called for the nation­al­iza­tion of the weak­est banks as a les­son to the remain­ing healthy ones: It’s Time!

So, we con­clude by ask­ing rhetor­i­cally: why sub­si­dize irre­spon­si­ble, anti-​social behav­ior, regard­less of the recip­i­ents’ hygiene, con­nec­tions, or cronies, espe­cially when – unlike Alfie – it and they are not the least bit amusing?

That’s a title we never thought that we would write, but before we chase away our reg­u­lar read­ers who share our polit­i­cal and eco­nomic world-​view, please let us explain: it’s not as bad as it looks.

In Kim­berly Strassel’s WSJ col­umn, Hillary of State, Ms. Strassel describes how the main­stream media have now returned to pro­vid­ing a favor­able opin­ion of Hillary Clinton’s for­eign affairs qual­i­fi­ca­tions (to be Sec­re­tary of State). 

We must admit that that this is the first time in our life that we viewed overly-​favorable cov­er­age of any Clin­ton to be a good thing, or even the pos­si­ble indi­ca­tion of a good thing.

But, again, we cau­tion reg­u­lar read­ers: it’s not as bad as it looks. 

Take that excla­ma­tion both ways: first, we’ve not changed, and sec­ond, we spec­u­late that the econ­omy isn’t as bad as the recent losses in the stock mar­ket sug­gest. Although, we have no doubt that cur­rent gov­ern­ment offi­cials could turn that neg­a­tive per­cep­tion into real­ity, and may have already done so with their extant actions.

So here’s our short argument:

1. Prior to the col­lapse of the stock mar­ket, losses were highly con­cen­trated among finan­cial intermediaries. 
2. Now, words can hurt…the econ­omy. The hyper­bole and/​or out­right pan­icky speech (or some com­bi­na­tion of both) by elected offi­cials and appointees, pri­mar­ily Messrs. Paul­son and Bernanke, helps cre­ate the recent collapse. 
3. Mis­guided actions can be dam­ag­ing, too. The government’s effort to stem the crises, which we believe that they still con­sider to be a sin­gu­lar cri­sis, has been very dam­ag­ing, too.
4. So, equity val­ues have decreased sub­stan­tially and the econ­omy is less sound than it was. There maybe be some­thing close to a depres­sion or not.
5. For­tu­nately, the media’s gen­eral high regard for Mr. Obama, and their desire to help him suc­ceed dur­ing the new administration’s hon­ey­moon period, may gen­er­ate suf­fi­cient good­will to pos­i­tively influ­ence the atti­tudes and per­cep­tions of con­sumers and investors to pre­vent the poten­tial dis­as­ter that we have been talked and erred into by said offi­cials. Ergo, in this instance, media bias may be a good thing if it influ­ences the zeit­geist towards opti­mism and away from eco­nomic devastation.

Now here’s the longer argument.

Con­cen­trated Losses

We very much enjoyed Peggy Noonan’s col­umn this week, Tur­bu­lence Ahead. Much of it deals with the lack of evi­dence for what she abbre­vi­ates as GDII, or Great Depres­sion II.

Despite the eco­nomic slow-​down this autumn and the stock mar­ket crash, we’ll take her obser­va­tions as evi­dence of a phe­nom­e­non that we have writ­ten about exten­sively: the high con­cen­tra­tion of losses in this mort­gage and finan­cial cri­sis com­pared to ear­lier ones. Please con­tinue to ignore the “domes­tic” auto man­u­fac­turer (as most of you have through the many years of buy­ing “for­eign” cars that were made in other coun­tries and in our coun­try). The out­sized pub­lic­ity that the indus­try receives about its prob­lems far over­state its value to the econ­omy. More­over, bank­ruptcy does not imply liq­ui­da­tion; so, there is no rea­son to think that at least two of the three will not survive.[1. Smart Japan­ese or Ger­man man­u­fac­tur­ers might wish to con­sider mov­ing their head­quar­ters to the U.S.A., and becom­ing a lead­ing domes­tic man­u­fac­turer. Think of the good­will such an act would engen­der, includ­ing the invalu­able free publicity.]

While not directly related to this post, Ms. Noo­nan spec­u­lates about the nature of GDII, and her com­ments are wise and con­sis­tent with our obser­va­tions liv­ing in a rel­a­tively depressed region of the coun­try: West­ern Penn­syl­va­nia, dur­ing and after the col­lapse of the steel indus­try. She talks about the grad­ual, almost imper­cep­ti­ble changes that may take years to real­ize. Those who spent their lives here were/​are much less sen­si­tive to the change, whereas hav­ing spent a decade away, we noticed the gen­eral unkempt shab­bi­ness imme­di­ately upon return; one can con­tinue to see it in the peel­ing paint and dirty facades of many small businesses.

Epic Gov­ern­men­tal Mismanagement

See most of what we wrote about the cri­sis since Sep­tem­ber although we might have crit­i­cized Mr. Paul­son before that. This morn­ing, in More Evi­dence of the Lack of Fore­thought that is TARP we sum­ma­rized our crit­i­cism of cer­tain aspects of the government’s response: the words and actions of elected and appointed offi­cials have been extremely dam­ag­ing and their efforts often coun­ter­pro­duc­tive at best.

As we wrote sev­eral months ago, no sin­gle firm could destroy our econ­omy. Such an out­come can only be achieved through gov­ern­ment action.

Like Ms. Noo­nan, we’ve really not seen any panic among con­sumer – whether they are fam­ily, friends, acquain­tances or strangers at the mall. How­ever, the government’s response to the cri­sis has the con­tin­ued poten­tial to (con­tinue to) harm the nation’s eco­nomic psy­che and make bad times worse.

When Will We See the Bottom?

We had a con­ver­sa­tion with friend ear­lier in the week who was much con­cerned about the future (who’s not?). He won­dered if equity mar­kets had reached their nadir and had cited some anec­do­tal evi­dence sug­gest­ing that his acquain­tances were inter­nal­iz­ing their sub­stan­tial loss of wealth. They were not par­a­lyzed with fear but had sur­veyed the eco­nomic envi­ron­ment and their own weak­ened finan­cial con­di­tion and were get­ting on with life.

The Poten­tial Ben­e­fit of Media Bias

Clearly, words do mat­ter, and the media can frame and empha­size issues and perspectives. Directly and indi­rectly those words affect the behav­ior of cit­i­zens, con­sumers, investors, and entrepreneurs. 

If the mass-media’s desires to aid Mr. Obama pos­i­tively affect per­cep­tions and improves the gen­eral eco­nomic out­look of the nation (and there­fore the world), then the prob­a­bil­ity of escap­ing truly dev­as­tat­ing eco­nomic con­di­tions improves.

In that and many other respects, we cer­tainly hope the best for Mr. Obama.¹

So, start­ing today and con­tin­u­ing for a few months, we’re all for left-​wing media bias.

Of course, we ask Obama? BWAMA?

The Wall Street Jour­nal today, Novem­ber 28, reports Res­cue Plan Strained by Lack of Staff.

We’ve crit­i­cized the government’s response to both the domes­tic mort­gage cri­sis and the larger global con­fi­dence cri­sis since it – that which became TARP – was first pro­posed. (We use the sin­gu­lar “it” because we’ve not heard any gov­ern­ment offi­cial decou­ple the prob­lems either in their ini­tial panic or in the inter­ven­ing months.)

Since mid-​September, other than times when we were too busy to write, our crit­i­cism as been con­sis­tent, harsh, and steady: (1) ini­tially the gov­ern­ment offi­cials, led by Trea­sury Sec­re­tary Henry Paul­son, over­re­acted. That hys­te­ria – or maybe it was (indistinguishable) hyperbole – exac­er­bated the sit­u­a­tion and cre­ated real panic and extremely high volatil­ity, which remains. (2) Their solu­tion – which, as Trea­sury offi­cials now implic­itly admit did not meet the def­i­n­i­tion of a plan – was poorly con­structed and des­tined to fail. And (3) as we wrote nearly two months ago, in Even A Per­fect Bailout Will Fail, “What Hope of Suc­cess with Typ­i­cal Bureau­cratic Efficiency?”

The arti­cle cited above pro­vides evi­dence of that “Bureau­cratic Effi­ciency,” by which of course we meant inef­fi­ciency. (We should have included “inef­fec­tive­ness,” too, but it seemed like overkill at the time.) The key line in today’s arti­cle: “The cur­rent Trea­sury has so far strug­gled to keep up with the task of hir­ing enough peo­ple to han­dle the $700 bil­lion finan­cial res­cue package…”

Would any rea­son­able per­son expect any more (or less) from a mas­sive, cen­tral­ized bureau­cracy? In that regard, is the fed­eral government’s response to this dis­as­ter or cat­a­stro­phe any dif­fer­ent than its response to Hur­ri­canes Kat­rina and Ike? (Ike has escaped national atten­tion due to the more destruc­tive finan­cial cri­sis and the recent Pres­i­den­tial election.) 

Thus, our gov­ern­ment seems to be unable to deal with either large-​scale nat­ural or man-​made dis­as­ters. How­ever, while Michael Brown, the Direc­tor of FEMA at the time of Kat­rina, could never be blamed for caus­ing Kat­rina, can the same be said of Mr. Bush’s finan­cial appointees in the cur­rent crisis?

Update: Well this post is already obso­lete, but we stand by our crit­i­cism. We tax pay­ers should not sub­si­dize Cit­i­group shareholders.

Tonight (Novem­ber 23), The Wall Street Jour­nal reports in Bailout Talks Accel­er­ate for Ail­ing Cit­i­group that the gov­ern­ment is nego­ti­at­ing to be the resid­ual claimant of a sep­a­rate entity that would house Citigroup’s worst assets and deriv­a­tive bets.

Cit­i­group could lose up to $50,000,000,000, and then the gov­ern­ment would absorb the losses. It is kind of like buy­ing flood or hur­ri­cane insur­ance after the flood or hur­ri­cane. (Seems kind of silly and like a mas­sive sub­si­diza­tion of a lot of bad decisions.)

If that’s the case, wouldn’t that guar­an­tee make tax pay­ers the resid­ual claimants of the entire entity?

Let’s rephrase our ques­tion in another way: in nego­ti­a­tions between (1) inter­ested and profit-​motivated Cit­i­group bankers and (2) less inter­ested gov­ern­ment appointees and fed­eral civil ser­vants with no claims on the assets, does the reader believe the expected losses – or, pos­si­bly the privately-​known, undocumented, extant losses– will be greater or less than $50,000,000,000?

So, shouldn’t the tax pay­ers own the entire entity?

Unfor­tu­nately, it’s not clear whether the gov­ern­ment will get any equity share of the “good” bank.

Now the reader might argue that it would be dif­fi­cult to lose $50,000,000,000 on $2,000,000,000,000 (that’s tril­lion) of assets; so, there’s really not much sub­si­dizin’ goin’ on.

First, if that were the case, then there really wouldn’t be any need for a sub­sidy would there?

Sec­ond, it turns out that the $2,000,000,000,000 is a bit on the low side. Cit­i­group has more than $3,000,000,000,000 of assets when its off-​balance sheet assets are included.

By the way, that increase of a $1,000,000,000,000? The arti­cle men­tions that $667,000,000 of it are in mortgage-​related secu­ri­ties. (They’re prob­a­bly of the high­est cal­iber because, you know, every­one tries to hide their most valu­able assets in off-​balance sheet accounts.)

We love the sen­tence: “Cit­i­group has tried repeat­edly to rid itself of its expo­sure to those assets.” Do ya think?

We start­ing a new con­ven­tion of writ­ing all the trail­ing zeroes. We think it com­mu­ni­cates the size of the stakes more clearly. Things like three-​digit “bil­lions” and one-​digit “tril­lions” are so abstract, but nine or twelve zeroes mean some­thing. We do wish that the bureau­crats within the gov­ern­ment and with firms would start­ing fol­low­ing suit.

As we wrote on Fri­day, if US tax pay­ers are sup­posed to cover the down­side, they should get the upside, too. This isn’t like deposit insur­ance, where there was a prior con­tract and exchange of pre­mi­ums for pro­tec­tion. This is the sub­si­diza­tion of mistakes.

Guar­an­tee­ing the bad bank is bad indus­trial pol­icy, and it would accel­er­ate mas­sive merg­ers (in attempts to become too big too fail) and exac­er­bate moral haz­ard as there would be no down­side to failure.

We say: Nation­al­ize Citi. Wipe out the own­er­ship inter­est of all exist­ing share­hold­ers, except non-​executive employ­ees with restricted stock, and let them retain the same own­er­ship inter­est in a new entity when it is privatized.

Do it as a les­son to other banks to find cre­ative ways to improve the cred­it­wor­thi­ness of their indi­vid­ual insti­tu­tions. That’s prefer­able to pledg­ing much of our nation’s cur­rent and future wealth to a small sub­set of its cit­i­zens, who hap­pened to own bank stocks in 2008.

With­out try­ing to be melo­dra­matic, we ask: who’s chil­dren and grand­chil­dren should pay for and sub­si­dize Citi’s errors?

Update (01−20−09): now that Mr. Paulson’s term as Trea­sury Sec­re­tary has ended, we must admit that the small bit of opti­mism we exhib­ited in this post was sadly and unfor­tu­nately mis­placed. It was out-​of-​character for us, but we’re a hope­ful pes­imist. He quickly reverted to his behav­ior of Sep­tem­ber and Octo­ber, and for that, the mar­kets, the nation, and the world have and will con­tinue to suffer.

We hope that his ear­lier actions haven’t caused irrepara­ble dam­age, but we’re doubtful.

This is a longish post that cov­ers sev­eral aspects of the ongo­ing finan­cial cri­sis and, for the con­ve­nience of new vis­i­tors, con­tains plenty of ref­er­ence links to ear­lier posts.

In our mind, until last week, the cur­rent Trea­sury Sec­re­tary had an incred­i­bly long and unbro­ken string of wrong deci­sions and actions. Start­ing in March if not ear­lier, and through early Novem­ber, in almost every impor­tant deci­sion, when Mr. Paul­son zigged we would have zagged, and vice versa.

Well, actu­ally, we wouldn’t have zagged or zigged as that requires effort. Instead, we hope our rhetor­i­cal flour­ish illus­trates our oppo­si­tion to many of Mr. Paulson’s deci­sions. We would have done what we have advised all along, and what Mr. Paul­son finally, finally seems to be doing: nothing.

As we advised in Sep­tem­ber, par­tic­u­larly in the posts Over­re­ac­tion and Moral Haz­ard: Now That Will Be a Cri­sis and Pub­lic Bailout? Why Rush or Do It at All? among others, we rec­om­mend Mr. Paul­son to vig­or­ously do noth­ing, and advice Mr. Obama and the next Trea­sury Sec­re­tary do the same: noth­ing or more pre­cisely, noth­ing much. 

We ital­i­cize the “much” because we con­tinue to (1) offer our pri­vate, non-​governmental solu­tion to the mort­gage cri­sis, which the gov­ern­ment has yet to address since TARP become law, and (2) offer advice on the best way to mit­i­gate the big­ger and more wor­ri­some liq­uid­ity cri­sis, and that will require a bit of aggres­sive gov­ern­ment action to moti­vate remain­ing bank man­agers to act or sell. See, we don’t think that the gov­ern­ment should act (much), but we do think that banks and share­hold­ers should.

In gen­eral, we’re strongly in favor of an eco­nomic ver­sion of the Hip­po­cratic Oath: do no harm. Thus, we advise: do very lit­tle for which there will be few unin­tended con­se­quences. (Although we do have two spe­cific rec­om­men­da­tions in mind that we’ll men­tion later.)

So lit­tle time, so many mis­takes: what’s the point?

The Treasury’s ear­lier insid­i­ous approach of get­ting the government’s many, spindly, lit­tle fin­gers on all of its Vishnu-​like arms into hun­dreds of firms will likely have no end, ever. (Our pre­dic­tion: they’ll rene­go­ti­ate rates when tax­pay­ers are sup­posed to reap the ben­e­fit of rate increases.) It was so very dis­ap­point­ing – not sur­pris­ing, but so very dis­ap­point­ing – to see our fed­eral offi­cials act in such rushed and expe­di­ent manners. 

Until last week there didn’t seem to be any thought – even an after­thought – of the havoc they were wreaking. Given shal­low­ness their depth of thought, we would have been con­vinced that Mssrs Paul­son and Bush were teenagers with Prog­e­ria had text-​messaged their inter­views and press releases.

What’s the point: when we taught decision-​making to MBAs we heav­ily empha­sized (1) know­ing the deci­sion cri­te­rion – the objec­tive func­tion – and (2) iden­ti­fy­ing rel­e­vant or incre­men­tal costs and ben­e­fits across alter­na­tive courses of action.

We saw no indi­ca­tion that our government’s lead­ers oper­ated under such a frame­work, par­tic­u­larly in Sep­tem­ber and Octo­ber of this year.

In other words, it should be very clear how to account for the fed­eral government’s deci­sions and actions. One would hope that offi­cials would have some met­ric by which they mea­sure the effect of their actions, but that seems to have been beyond them.

What were Mssrs. Bush, Paul­son, and Bernanke try­ing to accom­plish? What were (or are) the costs and ben­e­fits of their fea­si­ble alter­na­tives? Which cat­e­gories of costs and ben­e­fits seemed to have the most reli­able and firm esti­mates? What deci­sions were most sen­si­tive to under­ly­ing vari­ables and assump­tions? Which deci­sions seemed the most robust across poten­tial changes in the eco­nomic environment?

Dur­ing the both the orig­i­nal mort­gage cri­sis and the larger, ensu­ing and ongo­ing liq­uid­ity cri­sis, has the reader heard any gov­ern­ment offi­cial speak in those terms? Or, until last week, when Mr. Paul­son said, “Nyet,” were their state­ments more like: “Eek! We’ve got to do some­thing! We don’t have time to think?” Yeah, it was a rhetor­i­cal question.

As reg­u­lar read­ers know, we have very seri­ous doubts about the effec­tive­ness of var­i­ous aspects of the government’s plan – although “plan” seems to be too thought­ful and orga­nized a term to describe the government’s response to the cri­sis of 2008. Like­wise, we have even greater doubts about its effi­ciency, or the ratio of ben­e­fits to costs. (Is it not approach­ing zero?) We mean that there are at least two issues to con­sider: (1) will the government’s response ulti­mately be suc­cess­ful? Will it be effec­tive? And (2) If achieved, what will that “suc­cess” cost? Will it be efficient?

Unfor­tu­nately, so far, we’ve not heard a def­i­n­i­tion of success.

However, seven weeks after the approval of TARP, the results don’t look good. In fact, unless “suc­cess” has been defined down­ward, the results look more like fail­ure. The NASDAQ Index sits at roughly half of its twelve-​month high, and has lost as much value since the pas­sage of TARP – about 700 points – as it did in the period from its high last Decem­ber to the end of Sep­tem­ber. Like­wise, the S&P 500 has gone from about 1,524 last Decem­ber to 806 today, with 366 points of that 718 point drop occur­ing since Sep­tem­ber 30. Ditto for the DJIA: down from 13,991 last Decem­ber to today’s close three points below 8,000. It stood at 10,831 on Sep­tem­ber 30. Tril­lions and tril­lions of dol­lars of value destruc­tion – both before and after TARP.

Thus, “suc­cess” how­ever defined, seems doubt­ful. More­over, any claim of suc­cess must be tem­pered by the very heavy cost bourne by tax­pay­ers and investors. So, given those results, we’re very encour­aged by Mr. Paulson’s new­found hes­ti­tancy to act. But is the too lit­tle arriv­ing too late?

Don’t just do something. Stand there.

Given its sim­i­lar­ity to our position, we very much enjoyed the recent opin­ion essay by our for­mer Wash­ing­ton Uni­vesity col­league, Rus­sell Roberts in The Wall Street Jour­nal. It was enti­tled, “Don’t Just Do Something. Stand There.” A month after our post, Out of Their Ele­ments, and weeks after related posts like Well, This Is a Fine Mess You’ve Got­ten Us into…., Mr. Roberts makes sim­i­lar points, and he draws sim­i­lar, dis­cour­ag­ing, and almost depress­ing con­clu­sions about the future. Unfor­tu­nately, that doesn’t give us even a quan­tum of solace.

For­tu­nately, how­ever, it does seem that Mr. Paul­son may have read Mr. Roberts’ col­umn dur­ing the sec­ond week­end of November, internalized it, and vowed swift inac­tion in the tur­bu­lent finan­cial markets.

Finally: doing noth­ing! But why did it take so long?

We write that because last Tues­day, Novem­ber 11, Mr. Paul­son rebuked the automak­ers and their advo­cates seek­ing TARP funds, and news reports both last week and this week note that the Trea­sury have no plans to buy trou­bled assets or imple­ment new schemes. (Last Wednes­day, in response to the news, we wrote Tak­ing the TA out of TARP, and ungra­ciously gloated over the fact that we had cor­rectly pre­dicted the law’s inef­fec­tive­ness and poten­tial harm nearly six weeks earlier.)

Last Mon­day, the day before Mr. Paul­son denied TARP funds to the auto indus­try, we wrote Patience Please! They Just Need More Time!, which noted that the car man­u­fac­tur­ers had 35 years – that’s THIRTY-​FIVE YEARS – since the first oil cri­sis to change their ways. It seems that through the entire time – almost the life expetancy of a Russ­ian male – man­age­ment, the unions, and the deal­er­ships have been locked in an inter­minable game of “chicken” with each wait­ing for the other swerve to avoid col­li­sion and death to reap the pride­ful spoils of victory. 

While in some ways, Chicken seems like an apt metaphor, it ignores the fact that over the past 35 years, with each myopic deci­sion the spoils have become smaller and smaller – and are now almost noth­ing. In that sense, the auto indus­try seems more like a black hole where a mas­sive expanse (of warm sun­shine and fren­zied activity) has shrunken to a cold, shriv­eled, and nearly non-​existent state. Yet, its mass – or more pre­cisely, the mass of its lia­bil­i­ties – seems to warp and dis­tort nearby space as it smoth­ers and destroys every­thing within reach.

Unfor­tu­nately, the self-​destruction of a once-​vital and proud indus­try is not a game or a black­hole mil­lions of ligh years away. It col­lapse is tragic and close and the col­lat­eral dam­age of the col­lec­tive, short-​sighted self­ish­ness – mea­sured in the hun­dreds of bil­lions if not tril­lions of dol­lars and in terms of lives ruined – has been all too real. More­over, the siu­ta­tion is not interminable, but it finite, and the end is near.[1. We admit to being a bit overly harsh as it seems the ill-​advised CAFE stan­dards wouldn’t per­mit the Big Three to lever their com­pete­tive advan­tages with large cars and trucks. At one time, they did make the best large cars in the world (and we still love our Suburban.)]

So, in our mind, ignor­ing GM, Ford, and Chrysler seems to be both the effi­cient and just thing do, and we admire Mr. Paul­son for admit­ting – even if only implic­itly – that his ear­lier actions were mis­takes. Clearly, we wish that he could have been a faster learner. It might have saved all of us hun­dreds of bil­lions of dol­lars of cash and tril­lions of dol­lars of equity value.

It’s our view that The Gov­ern­ment Will Save Us! Not!. Instead, we’d pre­fer that it get out of the way and pro­vide incen­tives to pri­vate enter­prise to act autonomously. In that spirit, we still pro­pose A Bet­ter Solu­tion (than a gov­ern­ment takeover), which involves tax incen­tives for buy­ers of trou­bled assets. Those incen­tives could be imple­mented as invest­ment tax cred­its or as extremely accel­er­ated depre­ci­a­tion, and would pro­vide large (30%-40%) and imme­di­ate tax sav­ings that would cush­ion the down­side risk of uncer­tain val­u­a­tions. (The things are hard to value.)

Make an example: nationalize the worst one(s).

We’re gen­er­ally almost lib­er­tar­ian in our free mar­ket approach to eco­nom­ics, but don’t get us wrong, we con­tinue to urge the gov­ern­ment to nation­al­ize the worst cap­i­tal­ized banks: the very few, not the many. We’d much pre­fer the out­right expro­pri­a­tion of the worst offend­ers both out of a sense of jus­tice and as a warn­ing to other firms to act quickly to save them­selves rather than to wait for gov­ern­ment handouts. 

Just as importantly, with com­plete own­er­ship of a few firms, it is much more likely that there would be many calls from many par­ties, espe­cially com­peti­tors and poten­tial investors, to re-​privatize the nation­al­ized insti­tu­tions ASAP. That polit­i­cal pres­sure would prove to be very ben­e­fi­cial to reduc­ing the government’s influ­ence in finan­cial intermediation.

Imag­ine if the gov­ern­ment would have nation­al­ized AIG, would the out­come have been any worse than what we’ve seen in the past two month? Would it have been any more expen­sive than it has already been? We’d argue – and have argued – that issues with col­lat­eral, includ­ing those related to AIG’s dimin­ished credit rat­ing, would have been mit­i­gated through gov­ern­ment own­er­ship and creditworthiness.

More­over, other than non-​executive employ­ees hold­ing shares, we’d argue that none – not 10% nor 20% – of the old own­er­ship struc­ture should remain. That might induce share­hold­ers in other firms to become a bit more activist and demand stronger and more knowl­edge­able rep­re­sen­ta­tion on their boards of direc­tors. (See our recent: The Fail­ure of Boards to Direct.)

We’d pre­fer the fren­zied, moti­vated efforts of bankers seek­ing cre­ative solu­tions to their most vex­ing prob­lem over the cur­rent sce­nario where hoard­ing of funds and wait­ing seem to be the pre­ferred tac­tics. In that sense we as an econ­omy, a nation, and a soci­ety are in no bet­ter posi­tion today than we were six or seven weeks ago.

We wrote about what has and con­tin­ues to occur in Even A Per­fect Bailout Will Fail and Finan­cial Pro­jec­tion in a Cri­sis among other posts.

Unfor­tu­nately, the biggest dif­fer­ence between now and the end of Sep­tem­ber is that our col­lec­tive equity hold­ings have lost about one third of their value, and new asset classes like CMBS are likely to depre­ci­ate like MBS already has. How­ever, on the upside, it seems that Mr. Paul­son is mov­ing (or more accu­rately not mov­ing) in the right direction.

In all seri­ous­ness, we do pray that our senior gov­ern­ment offi­cials take the right, rea­soned, and thought­ful actions. We hope you’ll join us. Per­haps it’s working.

(This a long post; so, there are prob­a­bly a num­ber of typos, which we’ll cor­rect dur­ing the com­ing days.)

Jeez, our post from two weeks ago, which noted the sim­i­lar­i­ties between TARP and GARP, makes us seem almost prescient.

Like T.S. Garp, it seems that Mr. Paul­son is jet­ti­son­ing let­ters as he con­tin­ues lonely and aim­less pur­suit. In fact, we’d pre­fer that he take up Mr. Garp’s hobby as it is less dam­ag­ing to the econ­omy and our well-​being than many of Mr. Paulson’s extant actions.

We base our state­ments on today’s announce­ment that the Trea­sury Depart­ment will not pur­chase any Trou­bled Assets: Trea­sury Not Plan­ning to Buy Bad Loans, Assets.

This is one case where we hate to be cor­rect, but it is exactly what we wrote about in Sep­tem­ber and early Octo­ber, when we wrote exhaus­tively that the government’s government-​run “bailout” could not be imple­mented quickly and would fail. (Search, bailout, for exam­ple, for our many posts on the topic.)

We’d also note that it is not too late to attempt a pri­vate solu­tion to the prob­lem. As we men­tioned repeat­edly – includ­ing in ear­lier posts today–the prob­lem is that no one has con­fi­dence in their own val­u­a­tion meth­ods, and that lack of con­fi­dence is jus­ti­fied thus the mort­gage mar­ket is par­a­lyzed. (The broader credit cri­sis also involves a paral­y­sis, but that lack of move­ment relates to dis­trust­ing each other rather than one’s self. Although there is a self-​referential aspect to it that we wrote about in Finan­cial Pro­jec­tion in a Cri­sis.)

How­ever, as we pro­posed in Sep­tem­ber in A Bet­ter Solu­tion (than a gov­ern­ment takeover), pri­vate buy­ers could be induced to pur­chase the trou­bled assets with the proper (and sim­ple) tax incentives. 

Either per­mit buy­ers to imme­di­ately expense their pur­chase price (and then pay low rates on future sales or cash flow realizations) or pro­vide an equiv­a­lent mortgage, investment tax credit.

Such tax incen­tives would pro­vide a cush­ion or mar­gin of error of 30% — 40% of the pur­chase price and would likely be large enough to stim­u­late a sub­stan­tial demand for the mort­gages and the mortgage-​related prod­ucts thereby pro­vid­ing liq­uid­ity with­out the heavy hand of Uncle Sam splash­ing around. (We sus­pect that many traders, struc­tur­ers, and mod­el­ers know that they were/​are wrong, but doubt that it is by an addi­tional, say, 35%.)

Now that our offi­cials seem less in the full-​panic mode than six weeks ago, per­haps they’ll take the time to pon­der or think or con­sider about rea­son­able, sim­ple, and rel­a­tively cheap alter­na­tives to their now dis­carded scheme. We know it is a stretch for many of them, but what else can they do? Garp. Garp. (Or is it rp, rp.)

Has Pres­i­dent Bush, Sec­re­tary Paul­son, Chair­man Bernanke, or Speaker Pelosi taken a sin­gle action or spo­ken a sin­gle phrase dur­ing the past month to inspire con­fi­dence in their abil­ity – not to solve the prob­lem – but to sim­ply com­pre­hend it and char­ac­ter­ize it?

By “it,” of course, we mean the cur­rent liq­uid­ity cri­sis fac­ing cer­tain insti­tu­tions that seem to have lax boards and man­age­ments that encour­aged exces­sive risking-​taking behav­ior that led to over-​concentrations of hold­ings in cer­tain (nearly worth­less) asset classes.

Per­haps, that ques­tion is too harsh; so, we shall ask a dif­fer­ent one. Has Pres­i­dent Bush, Sec­re­tary Paul­son, Chair­man Bernanke, or Speaker Pelosi taken a sin­gle action or spo­ken a sin­gle phrase that has mit­i­gated, rather than exac­er­bated, the cur­rent crisis?

As reg­u­lar read­ers know, we often urge those with decision-​making author­ity to take a short­ened ver­sion of the Hip­po­cratic Oath and pledge to “do no harm.” Today we go beyond that and rec­om­mend: just shut up!

Of the most rec­og­niz­able national politi­cians – sorry most House mem­bers – the most intel­li­gent quote that we heard was from John McCain in an Obama, anti-​McCain ad. It’s the one with the bad cover of Sam Cooke’s “Won­der­ful World” with the lyrics “don’t know much about…”

In the quote, McCain admits to not know­ing much about eco­nom­ics. If he and the other national politi­cians could remain that hum­ble and thought­ful dur­ing the cri­sis, there is much less chance that they would exac­er­bate it and cre­ate a real panic. (Clearly, a for­mer “community-​organizer” would have a bet­ter grasp of sub­tle eco­nomic issues and con­cepts and thus be able to pro­vide such insights as – and we para­phrase–we’ll solve the prob­lem with com­mon sense solu­tions and, as a bonus for the envi­ous and spite­ful, we’ll screw the rich while we’re at it. (Reg­u­lar read­ers will recall our use of ital­ics to denote sarcarm.))