WALL STREET AND SOCIALISM….There are several obvious things happening in the financial markets right now. One is that there are enormous amounts of money flowing through non-bank institutions that are fairly lightly regulated. Another is that the people running these institutions can take enormous risks that provide them with enormous payouts, and they can do it with the knowledge that if those risks cause a collapse, they won’t have to give any of that money back. The feds and society at large will eat the loss.
What follows is an email I got from a regular reader that touches on both these subjects. It’s pretty clearly on the apocalyptic side, and I don’t necessarily agree with all of it. But it seemed like it was worth reprinting, if only to spur some reaction. I hope he’s all wet. I fear he probably isn’t.
One of the things that shocks me is that the liberal blogosphere has been deadly silent about the massive bailout of bankers that is taking place with taxpayer money, and fueling the collapse of the dollar. Where’s the outrage? What we’re seeing is a classic example of “Privatize the gains during the boom — e.g. hand out $30B+ in Wall Street bonuses each of the last several years — and socialize the losses during the bust.” But for this to be taking place in the context of a financial apocalypse among the American middle class (9m families currently have negative equity in their homes, and prices in all likelihood have much further to fall) strikes me as bordering on criminal. Why aren’t the Democrats demanding the re-regulation of Wall Street and the reining in of compensation in the finance industry as quid pro quo for these bailouts?
For most of this winter, I’ve myself basically been OK with what the Fed has been doing, figuring that a full-scale collapse of the financial system isn’t in anyone’s interests, but I’ve come to the dark suspicion that the threat of moral hazard is not merely some abstraction that we need to worry about over the long term.
Check out the linked article. The comment that jumped out at me is Fannie Mae’s Richard Syron saying his company “won’t raise capital unless it benefits shareholders.” This made me realize that a wide range of financial institutions — with the GSEs [Government Sponsored Entities, like Fannie Mae] at the head of the line — in an odd way may see an incentive in having the current turmoil problem get worse, insofar as doing so facilitates their getting a huge handout from the U.S. government.
One of the questions I’ve been toying with is who might be inclined to game the system during this moment of crisis. In looking for such potential perps, I’ve been inclined to sniff around Moscow or Tehran or sovereign wealth funds. In fact, the real perps may be hiding in plain sight, in boardrooms on Wall Street. It’s becoming quite apparent that a lot of Wall Street players are hoping they can orchestrate an endgame where they get a huge bailout from the taxpayer, while limiting the re-regulation of the system to the mortgage-issuer end of the business.
Let me put the case more baldly: if you’re a banker, an endgame that ends up creating (or giving the appearance of creating) system-level “moral hazard” is exactly what you want. One man’s moral hazard, after all, is another man’s way to have the government cover his ass while he retains huge personal profits.
I think you see that kind of political calculus pretty clearly at work in Syron’s comments. You gotta admire his chuztpah in saying that Fannie Mae expects “to thrive for the benefit of our shareholders — and for the country.” I mean, isn’t it clearly to the benefit of the country that Fannie Mae remain solvent, even if that means, shucks, that the taxpayer has to pick up a few tabs?
How could the bankers be gaming the system? Easy: by continuing to refuse to go back into the debt markets until the Fed gives them better terms. Now that the Fed has shown a willingness to take some of their bad debts off their hands (e.g. the 4 March intervention), why not allow the present turmoil to fester for a few more months, in the hopes that, by doing so, the election-year Fed will eventually be willing to take a whole lot more of their crappy assets off their hands?
The specific calculus is likely to be: can I make more money by going back into the market and snatching up my competitors’ undervalued assets, or by sitting tight and waiting for the Feds to come take my overvalued assets off my hands at a generous premium?