The Madoff Whiners

TW: Completely agree with this Nocera piece. If it were up to me, Madoff would be drawn and quartered in Central Park. But, the whining from his investors is pathetic. Should some of the investors be pissed at their advisors who took a fee while doing lame diligence? Yes. Were they smug thinking they were in a "special" fund? Frequently. Many people have had their asses kicked in this market. Most of all they should be pissed at themselves. Nut up and move on.

From Joe Nocera at NYT:
"...Let’s dispense first with the idea that the S.E.C. should be reimbursing Madoff victims. Why? Government agencies make mistakes, treat people unfairly, and do all sorts of things we all wish they wouldn’t. But by law, the federal government cannot be sued when it carries out an unjust prosecution or, for that matter, when it fails to uncover a giant fraud. Government negligence led pretty directly to the recent financial crisis. Does that mean the feds should be reimbursing us for our stock market losses? Of course not. Because it’s not really the S.E.C. that would be paying out the money — it would be the taxpayers. Why should my tax dollars go to helping Madoff victims? This is not 9/11.

Besides, as I’ve argued before, the S.E.C.’s negligence notwithstanding, shouldn’t the Madoff victims have to bear at least some responsibility for their own gullibility? Mr. Madoff’s supposed results — those steady, positive returns quarter after blessed quarter — is a classic example of the old saw, “when something looks too good to be true, it probably is.” What’s more, most of the people investing with Mr. Madoff thought they had gotten in on something really special; there was a certain smugness that came with thinking they had a special, secret deal not available to everyone else. Of course, it turned they were right — they did have a special deal. It just wasn’t what they expected.

Outside the courthouse today, television reporters interviewed victims, all eager to tell their tales of woe. And their stories, in many cases, truly are heart-wrenching. Hopes and dreams have evaporated. Homes have been lost. Retirees are having to take minimum-wage jobs. Their anger at Mr. Madoff is understandable, to say the least. But to see them lash out at Irving Picard, the bankruptcy trustee, made me realize that too many of them still seem to think that someone should have to make them whole. The whole point about Ponzi schemes is that there is not enough money to make anybody whole — they were robbed, pure and simple, and the government is not in the business of reimbursing for robberies. Not even when the cops stumble across the robbers and then mistakenly let them go."
http://executivesuite.blogs.nytimes.com/2009/06/29/madoff-victims-get-over-it/

AIG the Metaphor For the Blackhole Known As Our Financial System

TW: Today we announced another eleven figure bailout for AIG. As Nocera frames, the situation is very frustrating but ultimately unavoidable. AIG is many ways is the poster child for the financial irresponsibility and incompetence that has led us into this morass. AIG is a complex business (with many that are still profitable) but the easiest way to think about it's problematical piece is to think of an out of control insurance company.

Except in this AIG unit's case, it issued massive insurance (multi-trillion $) policies covering financial instruments. AIG collected the premiums which was a great business as long as few attempted to collect on the insurance. But when the financial system imploded, all of those holding those insurance policies tried to collect but AIG not surprisingly in retrospect did not have the trillion $ or so it would have needed to pay off on those policies.

The U.S. government is faced with a dilemma, help AIG unwind those policies or create a whole new wave of falling dominoes. As the folks who bought those insurance policies include international governments, our already troubled banks and other financial institutions. Everyone kept the party going by buying these insurance policies and issuing even more debt ("we can always collect insurance if they default") but the punch bowl in empty now. Or rather U.S. taxpayers are re-filling it as fast as they can lest the world's financial system truly implode (i.e. remember I think u still want your ATM to work, we are not bailing out the "financial" system, we are bailing ourselves out).

From Nocera at NYT:
"...Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.

If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.

I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.

“They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert. Mr. Vickrey of Gradient Analytics said, “It was extreme hubris, fueled by greed.” Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet — and this is the part that should make your blood boil — the company is being kept alive precisely because it behaved so badly."

http://www.nytimes.com/2009/02/28/business/28nocera.html?_r=1&pagewanted=all

Framing the Issue: We Do And We Don't

TW: I love these kind of polls. Essentially the same question asked different ways gets strikingly different results. And you wonder how biased media/politicians/pundits etc. are able to righteously run around in circles claiming intellectual superiority. It is occasions like these when intellectual honesty is sorely needed. But if there is one thing I have learned in life it is that intellectual honesty is a scarce commodity.

I am very tired of hearing pundits on the "bank bailout" worrying the Geithner plan might do this or that (understand the same ones whined about the Paulson plan) whilst concurrently they demand the government "do something".

As I have said before I do not know what is the answer but I strongly suspect the balance sheets are fried which is the problem, a big problem. If so, ideology one way or the other is not the issue, practical solutions must rule. If we are hesitating over semantics then we are fools.

From Joe Nocera at NYT (TW: good article if u r interested in more background on the bank situation):

"...As for the fact that the stock market fell Tuesday after his speech, I can't think of a less reliable barometer of whether Geithner's set of ideas will work. The instantaneous judgment of the market is as meaningless as a thing can be. "A few hundred points up or down in the market today or next week isn't material to what's at stake here," said Daniel Arbess, who manages the Xerion hedge fund for Perella Weinberg Partners. "What is important is that the government get this right, because another false start risks triggering years of economic malaise."
Arbess added: "You've got a situation here that has been in the making for decades. Everybody knows it is complex. It's not going to be resolved in two weeks." Point well taken.

Second of all, we need to face the reality that nobody can say with any certainty what will work and what won't. Nobody knows - not Geithner, not Lawrence Summers, not Paul Volcker, not anyone in or out of the administration. It is difficult even to evaluate what has already taken place. Was the original $350 billion in bailout money wasted because bad assets were left on the books to deteriorate further while the taxpayers' money was used to recapitalize the banks instead? Or did the recapitalization stave off disaster, keeping the system from collapsing and buying time? I've heard both arguments.

The truth is, solving a financial crisis amounts to a kind of sophisticated, high-stakes guessing game. Every proposed solution also has the potential to backfire.

..."When I talk to experts, after about two minutes they say, 'We should just nationalize,"' said Simon Johnson, a banking expert at the Sloan School of Business at the Massachusetts Institute of Technology. "That tells me that the consensus is moving in this direction, and we are all just afraid to say it."

Nationalization. I just said it. The roof didn't cave in."

http://www.iht.com/articles/2009/02/13/business/wbjoe14.php