Treasury not buying up troubled assets and the auto bailout

http://news.yahoo.com/s/bloomberg/20081113/pl_bloomberg/apwpjfpf6mgu_1

``This is a flip-flop, but on the other hand, when they first proposed the thing, they didn't really know what they were doing,'' said Bill Fleckenstein, president of Fleckenstein Capital Inc. in Seattle and author of the book ``Greenspan's Bubbles.'' [Treasury Secretary Henry] Paulson has pushed some ``cockamamie schemes,'' he said. ``So one has to ask, does he have any clue?'' -Bloomberg.com

In September, Bush and Paulson sold the rescue package to Congress and the public as such: taking the toxic mortgage-backed securities off Wall Street's books would help restore recently lost confidence and unclog the financial sector. Uncle Sam would hold onto these investments until the economy rebounds and they turn profitable, maybe even making a pretty penny for the taxpayers. After initial resistance, Congress signed on, and up to $700B was available for Paulson to buy up whatever he felt would help the economy.

Yet two months later, how many securities has the government purchased? Yep, a big fat zero. This is partly because of the credit crisis taking priority and stocks tanking. Lending dried up, the economy was grinding to a halt, and banks requested cash infusions and lowered interest rates to try to right the ship. Like in Europe and Asia, our government also wanted to buy up shares of troubled companies to stanch the bleeding. So what about the bundled mortgages? Washington hasn't moved on those toxic securities because even the experts have no friggin' clue what those assets are worth (if anything), and who really owns them. It's too darn difficult to research and ascertain the value of those securities to decide what to buy. So instead, they just take the easy approach: pump more money in the credit markets, keep interest rates low (will the Fed rate even fall to 0%?), and hope for the best.

Paulson generally received praise for his swift, decisive handling of the financial crisis this fall (but decisiveness is only commendable when you're making good decisions). Now he said that he won't apologize for changing his approach as the facts change. That is fair, and much better than clinging to an outdated, flawed strategy. But maybe he could have handled his PR a little more delicately. The Wall Street bailout was already very controversial in Congress and more so on struggling Main Street. Some Americans still feel very outraged, and anti-fat-cat backlash is the strongest its been in decades. The taxpayers have given unprecedented authority and a gargantuan loan to Bush/Paulson to fix the economy. If the custodians of our cash appear wavering, maybe people will start to feel jerked around. It also sends mixed signals and uncertainty to the markets, which responded as expected (Dow and Nikkei lost 4-5% on Wednesday). So they don't have to pick one plan and stick with it no matter what, but at least speak plainly with us (something Paulson is not known for). Is this bailout about restructuring mortgages, increasing lending, buying up stakes in troubled companies that are "too big to fail", or taking toxic paper off private sector books? I am sure we need to do all those things, so let's have a cohesive, comprehensive plan of attack already. It's been two months, and more people's lives are being shattered each day longer that Washington flounders.

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http://www.economist.com/opinion/displaystory.cfm?story_id=12601932

"Bailing out Detroit would be a bad use of public money." -The Economist

Also, what do you guys think about Obama/Pelosi pushing for an auto industry bailout? As J and I noted in September, the Big 3 already got $25B in "loans" from a rushed spending bill in Congress, to help them modernize and get more efficient (things they promised to do years ago, but kept making SUVs instead). Now Obama is calling for another $50B in a move that would resemble Chrysler's rescue in 1979. But America and Detroit were very different back then. Auto was and still is huge, but to give you a sense of scale, UPS has more employees than the Big 3 combined. Manufacturing was a much larger sector of our economy back then, Wall Street was relatively healthier, and Chrysler had the very effective and innovative Lee Iacocca at the helm (he axed many bad car concepts, rolled out the first American minivan, and laid the groundwork for the Jeep Cherokee). I don't think the current bozo CEOs would measure up. US auto sales are way down across the board (even for Toyota), and the Big 3 are hemorrhaging money to keep their expensive operations going while their lots are chock full of unsold vehicles. They have announced new rounds of layoffs, factory closures, and reduced hours/production. But this is nothing new - Detroit has been contracting for a decade or longer ("Roger and Me"). Maybe they would have failed earlier if not for all the lobbying in Washington for huge tax breaks and other government assistance.

The rescue might sound outrageously huge, but to be fair, the entire proposed auto bailout is just 42% of what one company already got from Paulson ($120B to AIG). Though AIG had its tentacles in most of the big players in global finance, so its failure would make Detroit's vast problems look like a piece of cake. Rescuing auto will add to the bad precedent of the Wall Street bailout: companies can screw up as much as they like, and Uncle Sam will clean up the mess (as long as they demonstrate that they are "vital to the economy"). But the Big 3 are not, at least not as much as banks/credit. For years, Detroit kept saying they are this close to finishing their restructuring for modern competitiveness, and just need one last push to get over the hump. Maybe this bailout is that last push, or maybe they are willing to say anything for a handout. Sure in a perfect world we would want to help Detroit. But lending and resources are very tight now. Imagine all the good that $50B could do for expanding green industries and critical infrastructure projects (things Obama promised during the campaign), which also creates jobs and commerce. Instead of a bailout, the Big 3 can file for Chapter 11 as the airlines successfully did after 9/11. If it wasn't for the spike in jet fuel, many of our airlines might be healthy and profitable now. Auto can continue to pay their workers and maintain some operations during the bankruptcy negotiations, and it won't cost taxpayers nearly as much. Then in a few years after this recession has abated, they can emerge as leaner, stronger companies ready to compete it the new hot markets (developing nations, not saturated Western countries).

Though of course the auto industry has sentimental and symbolic value to America, and its labor unions have much political influence. But does that mean we have to use our dime to keep those screw-ups on life support? In a market economy, companies are free to fail. Yes it's true that the ripple effects will be huge (losing the Big 3 would also kill thousands of dealerships, parts suppliers, mechanics, etc.). But they are not the only show in town; foreign auto makers also have dozens of huge plants in the US and employ almost as many Americans as the Big 3. We don't have to build or buy American cars if we can't do it well. Or will auto become another taxpayer-subsidized unprofitable industry like agriculture? Already our domestic electronics and textile sectors are all but gone due to globalization - why not let auto go if the costs of supporting them are too great? It will be painful, but auto is not the only industry in deep trouble. The gambling entertainment industry (which employs more Americans than the Big 3, and generates billions in tax revenues) is also on the rocks due to restricted leisure spending in this economic downturn (I guess it's not recession-proof after all). The major casino corporations have seen their stocks drop over 50% in the last 12 months. The airlines are desperate too: Delta-Northwest merged out of survival, and even though oil dropped from $140 to $55/barrel this year, the industry will still report billions in losses. The big carriers' stocks all lost over 20% yesterday on news that Americans would be predictably curbing their travel habits next year. Who deserves a bailout and who doesn't? Who is more vital to our economy?

And what about the housing sector? Isn't that the root of many of our problems? Millions of households are still at risk of foreclosure in the next year. What about their rescue? The mortgage and housing sectors employ many more people and are a much larger chunk of our GDP than auto.

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http://marketplace.publicradio.org/

Some interesting interviews on these issues:

First, though, Henry Paulson. We've told you over the past couple of weeks that there isn't any buying up of troubled assets going on. Today, Hank Paulson made it official.
Our Washington bureau chief John Dimsdale starts us off.


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Dimsdale: Secretary Paulson was unapologetic about the change in plans. He said the purchase of bad assets would have been too slow to help banks, while the new strategy of injecting government capital will shore up banks and attract private investments.

Tape of Henry Paulson: As the situation worsened, the facts change. The thing I'm grateful for is we were prescient enough, Congress was, that we got a wide array of authorities and tools under this legislation. And I will never apologize for changing an approach or strategy when the facts change.

Paulson said he might use some of what's left in the bailout to encourage broader lending to consumers, now that credit card, student and car loans are drying up. The Department is reportedly thinking of requiring that lenders match future government payments with money they raise on their own. And John Dearie at the Financial Services Forum says forcing lenders to come up with their own capital eases the perception that the government is choosing winners and losers with its money.

John Dearie: The extent to which you can minimize government involvement by trying to leverage the government's involvement by bringing in or encouraging private capital, I think that's wise on Secretary Paulson's part.

Paulson is also under pressure to use bailout money to help homeowners facing foreclosure. He praised Fannie and Freddie's plans to set voluntary standards for banks to ease mortgage terms, but stopped short of endorsing an FDIC-backed plan to buy distressed mortgages. He said that crosses the line into a government spending program.

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RYSSDAL: I wanted to pick up on a couple of themes that John Dimsdale just laid out for us. First of all, why? Why didn't the original plan to buy up those toxic assets work?

PETROU: Well, they've never tried it. But, in part, it didn't work because it was always going to be hard. And not anticipating how hard it was going to be, Treasury was sideswiped when it figured that out and then had to quickly construct Plan B.

RYSSDAL: Was it the thing that we heard about as that plan was being floated -- that you couldn't figure out how to price these assets? You didn't know what they were worth?

PETROU: Bingo. The assets are complicated. They're hard to price. They're held by thousands of investors around the world. This isn't e-Bay here. This is tricky.

RYSSDAL: All right. Well, then, why is bank recapitalization better?

PETROU: In the long run I'm not sure it is. It's just easier. I think in time in poses significant issues, most notably the question of combining troubled banks into huge, bigger troubled banks. Or handing problems that ought better to be resolved by the FDIC over to big banks that then get weaker. But it was easier. It was quicker to corral those nine big banks, put them in a room and force the capital on them than it turned out to be to run the asset disposition and purchase process.

RYSSDAL: Here we are, two months into this bailout program and still the secretary of the Treasury said this morning that he is worried about systemic failure in the economy. Did that catch your ear at all?

PETROU: Anytime he says that, it sure does. It's pretty scary out there still.

RYSSDAL: Why?

PETROU: I think it is because we've taken the financial markets from a liquidity problem, which was where we were starting in August of 2007, and a very delayed recognition by the federal regulators and Treasury about how serious that was. Then we moved into a rapid collapse of the housing market, particularly prices and the residential market freezing up. Now we're looking at a recessionary scenario -- one thing building on the next, with a sharp drop-off in retail sales and the unemployment issues. So, that's a lot of scary reality built on top of the liquidity and market-confidence issues. And that's the problem Treasury Secretary Paulson was referencing this morning.

RYSSDAL: Let me ask you sort of a strategic question. It seems now the government's attacking this problem two ways: One, sort of top-down with the Treasury and the bailout money, and also, especially, yesterday with some mortgage relief. How did that come to pass and is one better than the other?

PETROU: I think we need all of them. We need more mortgage relief. And the plan announced yesterday with Fannie Mae and Freddie Mac is a piece of the problem. As you all know, the FDIC is looking at another program that would involve guarantees. We're going to need still more in the mortgage sector. But we've got problems throughout the financial sector -- autos coming immediately to mind, commercial mortages. There are different tracks for each one of these asset sectors.

RYSSDAL: Where do the tracks all lead, then, Karen?

PETROU: Ah, to you and me and the rest of us as taxpayers! I hate to say it but that's where, right now, all the tracks are coming into each one of our houses.

RYSSDAL: Karen Shaw Petrou is a managing partner at Federal Financial Analytics in Washington. Karen, thanks a lot.

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Yeah, the problem with bailing out the Big 3 is tough. I'm sure the US Gov't will demand their requisite pound of flesh for bailing them out (equity, limitation on executive pay, etc). The problem this time comes from the high possibility that you create zombie firms; sure, this time they only ask for $25 billion, but what about when they keep losing money and have to come asking again? Are we going to say no then?

On the other side, there is the fact that if just GM went out of business, 100,000 people lose their jobs, with a multiplier effect of maybe up to 500,000 people losing their jobs (supplier companies, etc.). If all 3 went out of business, we'd be talking about well over 1 million people. In the middle of perhaps one of the worst recessions in the last 50 years. It's a pretty steep price for creative destruction; it would no doubt further sink the economy and prolong the recession.

So ideally you'd want a company to come in and buy up GM or Ford's productive assets (like the bank bailouts); lay some percentage of the people off, but basically keep the plants and whatnot running as going concerns. But who wants to buy these turds of a company now?

It's a really tough nut to crack. I guess I'd probably come down on the side of bailout, but hardly enthusiastic about it. I'd probably bail them out but only under the agreement that they work on parting themselves out as quickly as possible...

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Well, I agree that we shouldn't "punish" the Big 3 and ancillary employees for their industry's mismanagement. But let's not be alarmist - it's not like 100% of those jobs will be lost and they'll all go on welfare. And where do you draw the line then? How do you justify saving some and not others? We have seen how the markets responded to the ambiguity of saving Bear but not Lehman. We can't possibly save them all, unless we want our future economy to be semi-private. How many other troubled industries will come crying to Washington for rescue? Just today Citi announced over 50,000 layoffs - that is half of GM. Sure that company is still solvent, and probably the move is meant to downsize from their bloated status during the financial bubble. But why should Washington care more about auto workers than those workers, or the 1.2M+ Americans (according to CNN) who have lost their jobs in the last 12 months for a variety of reasons?

Plus, we're not talking about the Big 3 disappearing. Maybe Chrysler is beyond salvation, and will be carved up and sold on the open market no matter what. But the other two will be around, just maybe in diminished form or merged, even during Chapter 11. Unlike Chrysler's rescue in 1979, the Big 3's current problems have less to do with finances. They just have a screwed-up business model and produce the wrong products for the 21st Century. Ford and GM are successful in overseas developing markets (often because they enjoy near exclusive trade rights), but other makers are catching up. They have had almost a decade to reconfigure their facilities and change their production to match demand. But they haven't yet. I know it's a pain in the ass to negotiate with the UAW, shareholders, and change is like molasses for some companies. But what is it... like Japan needs 2 years to get a car from blackboard to showroom, yet Detroit needs 8? Will another $25B in loans be able to fix that? Their problems extend far beyond executive pay.

Whatever we do, it's going to be painful no doubt, and some lives will be ruined. But it boils down to choice. Will those billions be best spent by our government on an auto bailout, or maybe other public works and economic stimulation programs that could deliver more widespread impact? Let's be honest; Michigan, Ohio, and much of the Midwest rust belt are dying economies, even if the auto industry was more robust. And auto bailout just postpones the inevitable. And even if the Big 3 have to lay off 100,000's, I really doubt that the Obama administration would just cut them loose. Already there are plans for job retraining and other assistance programs, right? And a lot of those supply chain logistics jobs can translate into many other industries. We bailed out the banks because we didn't have a choice. I don't think that is the case with the Big 3. But as you say, there is quite a strong argument to still do it. Maybe the pros outweigh the cons. We just won't be happy about it.

The financial crisis and bailout

WHEN DOES A COMPANY QUALIFY FOR A BAILOUT?

http://www.newsweek.com/id/158615
Wall Street is consumed with the subject of bailouts. As analysts chewed over the implications of the government's decision to assume the debt of ailing mortgage giants Fannie Mae and Freddie Mac, traders (and their real-estate brokers) wondered whether erstwhile titans Lehman Brothers and Washington Mutual would be next in line for government assistance. Meanwhile, lobbyists for the big three automakers were refining their pitches for $25 billion in loan guarantees. It is sure to be another long weekend for Treasury Secretary Henry Paulson.
Bailouts—the government's stepping in and providing financial assistance or credit guarantees to private-sector companies—are a highly confusing subject. As policymakers hasten to save some companies from the ravages of creative destruction, they leave others to fail. Some 5,644 businesses went bankrupt in July, up 80 percent from July 2007. So are there some objective criteria we can use to determine whether the government will toss a lifeline to a particular company?
It's a truism that the bigger you are, and the more you owe, the more forbearance you're likely to get. In 1984, when Continential Illinois, whose reckless lending practices had catapulted it into the ranks of the nation's 10 largest banks, ran into trouble, the government bought some of its loans and provided extraordinary compensation to depositors. "We have a new kind of bank," complained Fernand St. Germain, a congressman from Rhode Island, "It is called too big to fail." (St. Germain, who shepherded the bill that deregulated the savings-and-loan industry, would be blamed in part for the record-setting bailout of S&Ls later that decade).
But these days, size alone doesn't matter. Earlier this decade, Enron, WorldCom, and Global Crossing, three gargantuan companies, went bust while the government looked the other way. Of course, when the aforementioned companies filed for Chapter 11, nobody lost electricity or was unable to make a phone call. "But if the government envisions that a failure will have a serious adverse consequence on the economy, it's going to step in," said Benton Gup, a professor of banking at the University of Alabama and editor of the collection Too Big To Fail: Policies and Practices in Government Bailouts.
For that reason, certain types of financial institutions are much more likely to be helped than others. A bank that lends to people with dodgy credit in California doesn't pose much of a threat to the Davos crowd. But financial intermediaries like Bear Stearns and the FM twins function like the heart of the global financial system. If they go into cardiac arrest, the whole body is in danger. Since Bear Stearns was a counterparty to (and guarantor of) trades and financial arrangements with the world's major financial players, its failure would have triggered a cascade of losses. In the same vein, huge quantities of the $5.4 trillion in debt issued and insured by Fannie Mae and Freddie Mac sit on the balance sheets of central banks and financial institutions around the globe. For the U.S. government simply to let this debt—which it had been implicitly backing for decades—go bad would have meant inflicting severe damage on America's most significant diplomatic and trading partners. Fannie Mae wasn't too big to fail, one Wall Street wag told me this week. It was too Chinese to fail.
To be eligible for a bailout, firms must also demonstrate a particular genius for screwing up. Before it went bust, Bear Stearns had a monstrous $33 of debt for every dollar of capital, and hedge funds it owned destroyed hundreds of millions of dollars of clients' cash. It got a bailout. Lehman Brothers, which has taken painful measures to reduce its risk, is perversely less likely to get direct government help. "The worst Lehman can do is destroy the firm," said Barry Ritholtz, CEO of Wall Street research firm FusionIQ and author of the forthcoming Bailout Nation. "Bear Stearns, on the other hand, set up the firm so that if they screwed up, they could threaten the entire financial system." That may explain why Treasury Secretary Paulson has thus far resisted providing federal succor to Lehman.
Finally, companies seeking the tender mercies of the taxpayer must have good timing. Nearly all the great corporate bailouts of modern times have come in election years. Congress enacted loan guarantees for Chrysler in January 1980, ensuring that a company that employed about 130,000 people, many of them in the swing state of Michigan, would not go bust on the eve of primary season. So, if your company is in trouble, what should you do? Double down. Establish links to other firms. Export your products with abandon. And hustle. There are only seven more weeks until the election.
PERSONAL NARRATIVES AND EMOTIONS IN ELECTION PSYCHOLOGY

http://www.newsweek.com/id/158749

Narratives have been used to attract voters at least since Lincoln's campaign managers cast him as the rugged rail-splitter from the country's frontier, not the prosperous railroad lawyer and sophisticated writer he was, notes historian Michael Beschloss: voters are drawn to someone they can relate to, and the way to make that happen is by offering them stories. (The human brain is wired so that we can follow a chain of events that have people doing things in chronological order more easily than we can follow abstractions.) But the power of the narrative has grown as party identification has weakened—putting more voters in play—and as the culture has changed. Television has made voters expect to, and think they can, "see into people's souls to take their measure," says Beschloss. To do that, "they need clues," and there are few clues so potent as the challenges a person has faced and how he or she has met them. "The feeling that we need to know who these people are has become so enormous that a good part of Sarah Palin's appeal is her life history, the choices she made, things that let voters form a bond with her," says Beschloss.
The outsized power of the personal narrative today compared with even a generation ago (in 1980, Ronald Reagan ran not on personal narrative, but on hope and the promise of change) reflects something that has become almost a cliché in political analysis—namely, that emotions, more than a dispassionate and rational analysis of candidates' records and positions, determine many voters' choice on election day. The emotion can be hope or fear, pride or disgust. And don't be too quick to pat yourself on the back for thinking you cast your vote based on a logical parsing of a candidate's positions. For all but the most wonkish wonks, what matters is how the prospect of pulling out of Iraq or expanding oil drilling or any other policy makes you feel, and not a pro-and-con analysis of its pluses and minuses, which few people can figure out.
All of this has been true for decades. What's new is that the circumstances of this election have conspired to push people away from the reason- and knowledge-based system of decision-making and more down the competing emotion-based one. The latter is more ancient and has, throughout the course of human evolution, "assured our survival and brought us to where we are," says neuroscientist Antonio Damasio of the University of Southern California, a pioneer in the study of human emotions and decision-making. ...One of the most salient circumstances of this campaign is the sheer amount of information voters are bombarded with, says Damasio. You can barely pass a screen (TV or computer) or overhear a radio without being pummeled with the latest brouhaha over lipstick-wearing pigs or which candidate was cozier with lobbyists for the failed mortgage giants. When FDR was making radio addresses, "people had the time needed for reflection, to mix emotion with facts and reason," says Damasio. "But now, with 24-hour cable news and the Web, you have a climate in which you don't have time to reflect. The amount and speed of information, combined with less time to analyze every new development, pushes us toward the emotion-based decision pathway." And not even emotions such as hope. Voters are being driven "by pure like and dislike, comfort or discomfort with a personality," says Damasio. "And voters judge that by a candidate's narrative."

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The bailout article is interesting, but to me that's mostly because it shows how shamelessly the media is fanning the flames here. The article implies a substantial moral hazard in finance - that management/employees are rewarded (get money) for doing the wrong thing (blowing up the economy). There's certainly some of that, primarily in compensation paid during the boom and liquidated (i.e. not kept in company stock). That's very hard to resolve post-facto (it would be illegal for the g't to take back money already paid, though they can regulate for future booms). But it's not nearly as bad as the article implies.

The bailouts we've seen this year have not been soft landings for the companies involved. They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value. In the year preceding Fannie Mae's "bailout", the stock lost ~90% of its value (from mid-60's to ~6), and since the g't stepped in it's lost another ~95% (to 0.43); that blows up a lot of the moral hazard, particularly given how much company stock was owned by employees and management. Management was fired (and it's not like people are going to be lining up to hire those folks). AIG's stock took a similar path (from mid-60's a year ago to 2.3 today), management was fired, and the money the g't is loaning them is at 850 basis points over the LIBOR (which is to say, borderline usury). Nobody is intentionally going to drive their firm into the rocks in order to lose 99% of its value and get fired.

In terms of the value of the company and assets, the difference between bankruptcy and bailout seems semantic - I mean, that's roughly what happened to Lehman. The article suggests that companies would somehow *want* to set up their company to be so big and entangled that they would get a bailout. The results when they fail seem pretty similar, though. And the big difference is that Lehman had a much better chance of surviving, exactly because they worked to get untangled. Merrill took a similar approach, and managed to get bought, albeit at firesale prices - not an ideal situation, certainly, but better than either bankruptcy or bailout.

The other bit that seems totally over the top is the assertion that the GSE's were bailed out to help Chinese investors. In calendar year 2008, Fannie Mae and Freddie Mac financed 80% of new mortgage issues. If those two companies suddenly evaporated, it would be dramatically harder for people to get new mortgages ... which means fewer home sales, increased mortgage rates, lower housing prices, and generally a steel-toed kick in the balls for the whole housing market. China benefits as well, but the main beneficiary was the American homeowner. Again, I'm not thrilled about it - it's essentially a generational transfer of wealth, as our parents' generation gets bailed out and mails the bill to you and me 20 years from now, in the form of debt.

I mean, I'm not suggesting things are working well. I think the government should have gone further in fully nationalizing the GSE's and then made clear they were going to be completely dismantled and sold for parts. I think the government should also be more transparent in making these determinations. And I think Wall Street compensation should have a large component of long-term results so some of those financial profits could be pulled out of those folks' pockets as we discover years later just how they earned their money (being leveraged 33 times over, for example). At the same time, Paulson and Bernanke have an incredibly hard job which would be challenging to do even if they could see the future.

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Well, I don't think the article was suggesting that these companies deliberately screwed up huge in order to "merit" a bailout. I think the author was being facetious to say that ironically, the biggest greedy morons get more help than those who admitted fault and really tried to help themselves. Like the Prodigal's Son story.

I'm not quite sure what you mean by: They haven't been quite as "Old Testament" as I'd have liked, but they have done a pretty good job of wiping out management, employee and shareholder value.

Definitely upper management played a large role in the crisis, and they should be punished accordingly. Maybe they lost a lot of their assets when the stock's value tanked, but they have plenty of diversified savings left and will recover from this mess, much better than their underlings at least. They will also get hired again, despite this black mark on their CV (maybe not as officers, but definitely into powerful positions). There is plenty of historical precedent for that. But for the ordinary workers, this is a killer, like the telecom and energy trading meltdowns before. Especially because it wasn't really their fault, unless they could have "blown the whistle" to alert others to the unwise business practices taking place, but no one was listening anyway during the housing boom when people were blind with greed. As you said, their savings in company stock has evaporated, and it will be hard to get re-hired quickly, because competing companies are in similar messes, and suddenly thousands of desperate, qualified workers have just entered the job pool. 100,000 financial sector jobs have been lost (maybe only 5-10% of that is management?), so that's 1/6 of total US new unemployment in 2008. So yeah, it wasn't any leader's intent to destroy his or her company, but their decisions contributed to the crisis so they should be held accountable. I don't think companies structure their business plans to make them more desirable for bailout (I hope not at least). But like in law enforcement, it's more efficient and socially preferrable if we can discourage bad behavior before we have to punish it after the damage was done. I don't know how DC can do that effectively though, without major political-economic backlash and accusations of interference in the free market.

How do we mitigate problems so they don't have to reach the bankruptcy/bailout stage? In America, people and companies are free to succeed or fail. Companies can, do, and must fail at times. Even dominant companies like Standard Oil, AOL, and PanAm were destroyed, either by the government, world/economic events, or their own mistakes. So when is a company "too important" to fail? I agree with you that Fannie & Freddie qualify - without them the housing sector grinds to a halt. The American Dream was made possible to millions over the years because of the 30-year-fixed, which no other nation can provide to the masses (so then why the hell did so many people take variable-rate loans instead!?!). However, maybe America doesn't have to have a mortgage-based home ownership system. Other modern nations like South Korea don't give home loans. People pay for apartments and homes with cash. It's a huge upfront cost, but then it's your asset 100% and no more hassles. But America is a borrow & spend culture, so probably we could never accept a change.

Maybe it's in the government's interests to prevent companies in critical sectors from qualifying to be too big to fail. It's horrible precedent to bail out companies with tax dollars, or force rivals to "take one for the team" and absorb another company's debt. Freddie was only created to give Fannie some competition. So maybe more competition/customer choice will keep these companies more honest and risk conservative? There are 5 major i-banks (well, 2 now). Is that too many or too few? Who knows, but I'm leaning towards too few. Other industries like wireless, oil, and airlines are heading down that path with merger-mania.

Regarding the China comments, of course Washington doesn't base its bail-out decisions chiefly on foreign considerations. But at the same time, economic turmoil abroad hurts us at home in this globalized commercial system. It would be bad for everyone if our mortage/financial crisis spread to other continents, and it already has (Asian markets down 5% this week, Europe 3%). The housing bubble also burst in Spain and the UK. European banks have folded or needed rescue too (UK's biggest mortgage bank was just bailed out this week), since they bought up so many American SIVs too. Foreigners must be pissed at us because through no fault of their own, their savings have shrunk because too many dumb Yanks and dumb banks engaged in bad loans.

So a large, troubled American company with significant foreign investment is probably more qualifying of assistance than one without. I think it makes sense. Countrywide wasn't bailed out (unless BofA was "persuaded" to do so by the Feds), and neither were smaller, more regional mortgage banks like IndyMac.

Yeah I agree with you that Paulson, Bernanke, and president 44 will have a hell of a time cleaning up this mess. You really need balls of steel for those jobs, and as you said, even a crystal ball may not save you. That's why it's so idiotic and repugnant for the presidential candidates to claim that they "understand" the economy and know how to "fix" it.

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I guess the problem, is, though, how do you legislate that? Being incompetent isn't (generally) a crime - it's only clear that they were incompetent post-facto (as in, after they were awarded their bonuses, which is an incentive problem I wrote at earlier), so by what mechanism do you decide to take their money away? And how can you make it so that they can't get a well-paying job again? By throwing them in jail?

I think the government did about the best it could, in wiping out nearly 90-95% of many of these company executives' personal wealth, without getting into punishments that would deviate from due-process and legal-based actions. I think it's a generalized problem of American life where well-connected people "fail-upward," as President Bush did, but no amount of legislating, unfortunately, is ever going to stop that problem (short of a total makeover of how society works). It's the same reason that all these political retreads get cushy jobs as political commentators spouting stuff that any idiot on the internet could come up with.

But I think that we do need to come up with, as Obama put it, a way to help out people on Main Street as well as Wall Street. A package that extends unemployment benefits, increases availability of food stamps, extends COBRA programs for those who recently lost their jobs, etc. Krugman and other economists have made the point that average citizens generally aren't as susceptible to the moral hazard problem - after all, most people only buy a few houses in their lifetime and bailing them out once isn't going to radically change their behavior, as it might with banks.

So I hope that the new rescue plan put forward is sufficiently draconian on companies and their executives; some people are actually speculating that the government might make money off of all of this (because no one has the money to buy these assets, many of them have fallen well below their long-term price. So the government, with a good source of capital, can now snatch them up). Hopefully they can use that money to repay the costs of helping out those on Mainstreet...

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Thanks for the comments A, and I agree it's a sticky situation for the government to decide how much to intervene on these economic matters. As you said, it's difficult and controversial for a government to punish business incompetence after the fact, and probably a company's own board is better equipped to punish poorly performing executives instead (unless the executives appointed the board). What do you mean by the government took away 90-95% of the executives' wealth? Because they lost their bonuses and the value of the company stock tanked? Can the government revoke private sector pay for poor performance?

In terms of helping out Main Street, it's clear that economic stimulus checks aren't the long-term answer. Bush's recent effort had only a minor impact for about 2 months at best; a drop in the bucket at the cost of billions borrowed. Unemployment assistance is a good step, but I think Senate Republicans and Bush, while he's around, may try to block it at every turn (they said it was excessive spending, yet they spend 100s of billions on Wall Street "welfare"?). Finally the Dems had to attach unemployment assistance to a war supplemental for Bush to accept it. But maybe now the situation has gotten more dire, and with the election approaching, the GOP should try to shed the stereotype that they don't care about the troubles of the Average Joe (unless it's true).

http://seattletimes.nwsource.com/html/politics/2004469503_apjoblessbenefits.html
http://www.military.com/news/article/bush-threatens-veto-over-gi-bill-adds.html

Unemployment insurance, COBRA, etc. can keep some people afloat for a few more months, but I don't know how we can go about creating over 1M new jobs in the next 12 months (what would be needed to bring unemployment back down to 5%). And minimum-wage service jobs with scant benefits won't cut it. The new jobs from the "green economy" won't materialize as long as this recession persists, lending is tight, and government spending is curtailed by the wars and tax cuts. Gas and food will not get significantly cheaper, even if there is a global economic slowdown (which causes other problems too). GM and some airlines are so deep in the red they might ask for bailouts too (but won't get them). The dollar's gains in int'l money markets may mean that exports slow somewhat. Even China is showing signs of economic cool-off. I don't know how we can get people back to work quickly. It seems like companies are laying low, besides the financial sector snatching up bargains of course, as you said of government takeovers too (that raises another interesting question - what will the Feds do with these companies once they start becoming profitable again?). Everyone is waiting for peak foreclosures to pass and home prices to adjust to rock-bottom (for this cycle at least), so the growth curve can re-commence with restored lending fluidity and market confidence. But who knows when that will be? 6, 12, 24 months or longer?

I agree that citizens are not exposed to the moral hazard like company officers, but nevertheless they can and do make decisions to hurt themselves. In many cases, predatory lenders didn't even need to persuade customers to enter into suicidal mortgages. And some of the same people who didn't learn their lesson after the dot-bomb made the same greedy mistakes in the housing bubble. And they will F up again during the next boom/bust. It's endemic in this greedy society to a certain extent. Some people are just predisposed to gambling, ignoring warnings, and screwing themselves. What do we do about them? I know we can enact some laws to protect citizens from themselves, but how do we do that without adding a new layer of bureaucracy to the already unjust and convoluted lending industry? And it's not like Washington has had a good track record of regulating anything intelligently. What completely sucks is that some speculators obviously got away with it if their timing was right. And the people who played it safe and played by the rules still get screwed by the reckless to some degree, yet they are the ones who get the least reward/assistance for their good behavior, because their situations may not be as dire as the gamblers. Well, I guess "being good" is its own reward, and I doubt they would want to trade places with the desperate.