In an interview with CNN at Berkshire Hathaway's annual meeting,
Munger, who is Warren Buffett's chief lieutenant, said he thinks the big
banks are still too complicated and dangerous for the economy. But he
doesn't think a recently proposed bill by Senators Sherrod Brown and David Vitter, which has gotten praise from others who want to rein in big banks, is the answer.
"I think if you increase the capital requirements and let them do
what they want, they will just get in trouble again," says Munger.
Munger's preferred prescription sounds like a stricter version of the Volcker Rule,
which was meant to limit risky trading at the banks and was included in
Dodd-Frank, but has yet to be implemented. He would force the banks to
get out of their business of underwriting and trading derivatives,
financial contracts that allow you to speculate, some say hedge, on
commodities, interest rates, and other things. About a year ago,
JPMorgan Chase (JPM) announced it had lost billions on a credit derivative hedge that had not worked out as expected.
As CNN reporter Stephen Gandel notes, Munger's words carry additional weight, because he's calling for action against banks like Wells Fargo and Bank of America, institutions in which Berkshire Hathaway has sizable investments.
Munger thinks that big banks should be more heavily regulated, and that more regulation will be just what the profit doctor ordered. "By getting out of risky businesses, banks may end up giving back much less of their bull market gains in the down years" He thinks that banks should stick to their knitting, lending. "The ideal bank is pretty boring." I agree.
Gandel thinks that if Munger actually believes that more regulation and smaller size lead to greater profits, then he has a fiduciary duty to Berkshire's shareholders to press banks like Bank of America to pare down their size and accept tighter regulation (instead of unleashing the lobbyists on Congress).Munger thinks that's the job of the regulators. I'd argue it's the role of Congress, but I'd also agree with Munger that Berkshire Hathaway isn't going to persuade Bank of America to accept being broken up or buried under an avalanche of more regulation.
Munger said he and Buffett make investment decisions based on the world
they are in, not what they wished it to be, which is fair.
Like Buffet, Munger has always pretty much said what he thinks. As he ages, he's not becoming any less candid. It makes for an interesting interview.
A regular reader sent me a link to a video of a recent interview of Sheila Bair by Bill Moyers. Bair plus Moyers equals big bank bashing, and you know going in what you're going to hear. For those who expect me to do my usual double-tap to Bair's forehead, I'm sorry to disappoint you. I didn't think she was that far off base.
Moyers tried to serve her some softballs that she could stroke into the far left-hand corner of the outfield, but to me, Sheila seemed, for the most part, to resist the temptation to play to Moyer's typical crowd (take a look at the comments box for a sampling). She let it be known that while she's no fan of the management of the largest banks, and she believes that the federal bank regulators have suffered "cognitive capture" by those banks, she also thinks that trying to modify Dodd-Frank to add more specific provisions regarding breaking up the big banks is a fool's errand. Not only is it impossible to effect in the current political environment, but the regulators already have the tools to accomplish what they need to accomplish regarding mitigating the risk of the "Too-Big-To-Fail" institutions. That's the theory, at any rate, and I don't find it to be an unreasonable one.
Of course, the regulators had all the tools they needed to prevent the latest financial disaster and didn't use them effectively. Yet, we can always have hope, can't we?
I do find her purported amazement at the fact that banks use their own internal models to assign risk weights to certain held-for-trading assets to be, itself, amazing. As Dealbreaker's Matt King observed not too long ago, the banks base their models on public information and that information is, to put it mildly, "opaque." I doubt that the regulators would have much more success in assigning across-the-board risk weights to such assets in the same manner that they can assign risk weights to single-family mortgage loans. Moreover, the regulators have not been clamoring to usurp the banks' internal models with spiffy new and improved models of their own, have they? Maybe they have and I've simply missed the clamor.
I also found amusing her contention that Congress could have been more "prescriptive" in Dodd-Frank, contrary to the wishes of the regulators, who wanted to retain more discretion to set the rules. Leaving aside her own position on this issue in the formulation of Dodd-Frank, that act was drafted so hastily and rammed down the throats of the opposition so quickly that the very idea that the folks who wrote it could have nailed down "prescriptions" in any coherent fashion is implausible. On the other hand, as we've found in many of the lawsuits that the FDIC has filed against former officers and directors of failed community banks, hindsight is amazingly clear-eyed and Sheila has the benefit of 20/20 hindsight.
All-in-all, however, Sheila is sounding almost reasonable these days. Or, perhaps, I'm merely mellowing.
I'm traveling for the next couple of days and will be off the air. Some interested readers have written to me and asked what I think about the OCC's memorandum in support of its motion for summary judgment, filed last Friday, in the ongoing lawsuit by United Western Bank to overturn the FDIC receivership into which it was placed over a year ago. A couple of people sent me copies of the memorandum, and I thank them for it. However, I was traveling over the weekend and will be again tomorrow, and given my schedule and typical commitments in the week before a holiday, I won't review all 87 pages of it until this weekend. I know it comes as a shock to those readers who expect me to shoot from the lip, but I'd like to take some time to parse this one and see how it responds to the plaintiff's motion and supporting memorandum. That shocking desire to be prudent in my analysis won't likely be repeated frequently.
However, I will respond in typical fashion to several requests for comment on the recent hedging loss by JPMorgan Chase. Jamie Dimon is still taking heat for it and rightly so. It was a public relations disaster and a black eye for banks of all sizes due to the fact that so much of the bank-hating public wants to occupy everything other than a library, and lumps community and regional banks in with the largest of the large on Wall Street. That said, the financial effect on the bank was not earth-shattering. It temporarily hurts profits, but does not imperil the bank. It's puzzling to me that a purported "hedging" position could suffer a $2 billion to $5 billion loss. That sounds like a speculative trade, to me, although it appears that Chase's public spin is that it was a horrendously executed epic fail of a botched hedge.
Whatever the intended transaction might have been, hedges aren't designed to "eliminate" risk, they're designed to "reduce" risk. If properly considered and executed, they should cap losses at predetermined limits assuming certain worst-case scenarios occur. If those scenarios do not occur, then in many cases the bank has paid for protection it didn't ultimately "need," just like insurance. On the other hand, some perfectly proper hedges can result in some gain for the hedger if circumstances turn out to be go the other way. It shouldn't be a huge profit (if the transaction is a true hedge of downside risk), but there can be gains realized. The only hedge that completely "eliminates risk" is "don't make any investments." You have to take some risk to make some return.
Someone should tell that to Barney Frank. He was interviewed by MarketWatch last Friday and displayed a woeful lack of knowledge.
Q: Another area some lawmakers are concerned about is the way the Federal Reserve and other regulators interpret the Volcker rule, which is designed to prohibit speculative trading by big banks. Some senators say the regulators’ proposal allowing for portfolio hedging is a large loophole for continued speculative trading.
A: A portfolio hedge is not a hedge; it is a speculative bet. A hedge is aimed at being neutral on a particular asset, aimed at neither losing or gaining. They are trying to make money. The hedge is to take the risk out. I agree that is a problem.
It is so much more complicated than that, Barney. However, a simple answer to your simple answer is to tell you that you wouldn't know a hedge from a hedgehog. In that respect, however, we'll have to give Barney the fact that he's no different than most members of Congress. That lack of knowledge never stops them from opining, though, does it?
Barney Frank got into what Housing Wire's Jessica Huseman describes as a "cat fight" today with CNBC's Brian Sullivan. Frank took umbrage at Sullivan interrupting Frank in the midst of an answer to a question, and Sullivan's repeated warning that he needed to interrupt because he was waiting for the president rang hollow, not only to Frank but to any disinterested listener, since, as Ms. Huseman points out, "this president has been at least a half hour late to just about every speech he’s ever given since the start of his presidency." On the other hand, Frank complaining about someone else treating him rudely is like Lindsay Lohan calling out anyone for abusing blow. "Pot, meet kettle!"
You can view the entire "cat fight" here. From my standpoint, it's impossible to pick a cat to root for. They both deserve to be bagged in burlap and flung from the middle of the Royal Gorge Bridge.
Jessica cuts to the chase, though.
Barney Frank, who was on-air originally to talk about the GOP’s efforts to water down Dodd-Frank regulations on derivatives, essentially said his self-titled legislation still doesn't go far enough. He said there should be complete transparency in the prices of derivatives — something that would change the entire nature of the derivatives market.
Derivatives rely on their ability to be kept under wraps. Transparency on the level Frank is advocating would shake the market and distort the ability of the buyer and seller to reach a price on their own. Pricing deals in secrecy is a cornerstone of the market, one that Dodd-Frank seeks to disassemble.
But did Sullivan touch on any of that? No. Why? Well, he was waiting on the president.
With fringe elements of Occupy Wall Street and The Tea Party currently spazing out so far into the ether of the opposite ends of the political spectrum that they are likely to join hands on the far side of the moon, I think it's safe to say that for vast segments of the American public, when Jamie Dimon talks, nobody listens, especially when what he's talking about is how the Volcker Rule "might" make the largest American banks less competitive with their foreign counterparts. He could be right, he could be wrong (he could have sworn he saw a light coming on*), but I guarantee you that most people reading that interview at this moment in time don't care. They may in a year or two, but today they simply can't work up an ounce of concern that JPMoragan Chase's trading profits were down $900 million for the quarter and that the Volcker Rule might exacerbate that problem.
Also lost in the overriding barrage of white noise emanating form the fringes of inner space is Dimon's very sound admonition about unintended consequences (a topic near and dear to our black and withered hearts).
“Maybe excessive risk was taken by some people,” Dimon said, but added that regulators and the government shouldn’t do things without understanding the full implications.
Sorry, Jamie, that train left the station a long time ago and has been in run-away mode for a while.
Strangely (or not-so-strangely, for those who consider Dimon a thoughtful man), he feels the pain of the people who think he and his ilk deserved to be shot down without being given a running head start.
When asked about the Occupy Wall Street protests that have grown from a few citizens to a global movement, Dimon said he could understand why everyday Americans are upset.
“You have to be looking at Washington and the big banks and asking what is going on,” he said, adding that job creation is key to getting the economy back on track.
It's not merely that "everyday Americans" are looking at Washington and the big banks and asking "what's going on?" It's that they're looking and asking "Where'd I put that cattle prod and my box of spare of RPGs?"
*obscure reference to Radiohead's "I Might Be Wrong"
The ether was wearing off. The acid was long gone. But the mescaline was running strong. Good mescaline comes on slow. The first hour is all waiting. Then about halfway through the second hour, you start cursing the creep who burned you because nothing's happening. And then - ZANG! ---Hunter S. Thompson, "Fear and Loathing in Las Vegas"
If you thought that the lobbying that occurred during the run-up to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act was hot and heavy, the Washington Post's Amanda Becker says that you ain't seen nothin' yet.
The Dodd-Frank Wall Street Reform Act has generated more work for lawyers and lobbyists since being signed into law than during even the frenzied days leading up to its passage in the House and Senate last summer.
That's because a host of federal regulatory agencies are now in the process of trying to write the rules that will turn the law into reality.
Work has begun on drafting 243 rules and on 67 separate studies by the likes of the Treasury Department, the Securities and Exchange Commission, the Commerce Department, the Commodities Futures Trading Commission and other regulatory agencies, according to one estimate by the law firm Davis Polk & Wardwell.
"In a way, during the run-up to the legislation, while it was very active, there was a limit to how much people could really influence the statute," said Covington & Burling's Mark E. Plotkin. "The implementation phase is really industry's opportunity to influence what the final product looks like."
The gravy train appears to be engineered by those law firms with big D.C. offices and ex-government lawyers who know somebody who knows somebody who knows somebody who will "take a meeting."
Some of the attorneys making the most frequent appearances come from the District offices of Alston & Bird; Gibson, Dunn & Crutcher; Patton Boggs; and Skadden, Arps, Slate, Meagher & Flom. Winston & Strawn's Peter Y. Malyshev, who has attended dozens of commission meetings, said the "unprecedented" scope of the rules that must be drafted over the next year has prompted the CFTC to "reach out very actively to both the business community and the legal community to explain the rules' likely impact and what the unintended consequences might be."
Delta Strategy Group's Scott Parsons was one lobbyist who met frequently with CFTC staff. Parsons says Delta's specialty in commodities and derivatives gives the firm a leg up in helping clients through the implementation of Dodd-Frank.
"We were doing derivatives before derivatives were cool," Parsons added.
Imagine a land where "derivatives are cool." Then, imagine that land layered with lobbyists and lawyers. Now, imagine an ICBM carrying a B83 thermonuclear warhead plowing straight into that land.
Yeah, I know. As the Chevy Hemi guy would cry: "Sweet!"
Well, dream on, dear banker, because reality bites, and in the real world of D.C., the fun has only just begun.
Both lobbyists and lawyers say Dodd-Frank work is unlikely to dry up anytime soon. Plotkin reports he recently requested three additional associates to keep up with client demand. Most attorneys estimate the rules will be hammered out over a period that will span not months but years.
Years of billable hours and fat retainers. So it was in the beginning. So it shall always be.
I assume that no Blue State readers ever watch Fox Business News, and, therefore, as a public service to them, I'm posting an embedded video of a recent interview of Sheila Bair on that cable channel in which she makes some sense about why tearing derivatives trading desks out of banks would be a bad idea. Among other cogent points, she makes the following:
Derivatives aren't all evil.
Banks need them to hedge interest rate risk, for themselves and other financial institutions.
Legislators who say stupid things like "AIG shouldn't be able to use insured deposits" should sit down, shut up, and let the adults talk.
She finishes up by confusing the poor interviewer on the issue of "dressing up the balance sheet" at the end of each calendar quarter. That didn't appear to be an extremely difficult task for her to accomplish, since I assume he was probably day-dreaming about either Angelina Jolie or an ice-cold Bud Light (or both) rather than the calculation of risk-based capital ratios based on average assets.
Back at the start of last year, when discussing the Cuomo v. Clearing House Corporation case (I expected the OCC to win, which was a bad call that surprised more than merely me), I had a feeling that those of us who had spent our careers thinking that inexorable march of national bank preemption would never be halted until the entire world was under the thumb of the OCC would soon see a countervailing move by Congress, a move that had a good chance of eventually succeeding. As I said at the time:
Even should the OCC prevail as expected, there exists the risk that a ruling to uphold the Second Circuit might be the high tide of SCOTUS
preemption rulings for national banks. With a new sheriff in the White
House, with the Democrats in control of the House and Senate (although control in the Senate is not filibuster-proof), and with preemption-hating Democratic leadership in Congress influencing the public debate, I can clearly see a scenario where Barney and the Boyz lead a charge for federal legislation that shortens the reach of national preemption as it applies to certain types of state laws such as those that are the subject of this action. I see much conflation in the public mind of predatory lending, subprime lending, discriminatory lending, unregulated and regulated lenders, banks and non-banks, into one big mess of "kill them all and let God sort the guilty from the innocent." When Joe and Jane Sixpack (and their elected representatives) are looking for scapegoats, national banks will do just fine.
As I said in October 2005, I think the states will continue to lose on these issues "unless Congress changes the law." At this point, it's merely a gut
feeling and nothing more, but if there ever is a time that might be ripe for such a change, this year (or next, perhaps) might be that time. Regulatory reform legislation is coming to the banking industry, and the clipping of the wings of federal preemption might be part of that package.
Last week, in the American Banker (paid subscription required), reporter Cheyenne Hopkins alleged that the largest banks (all national) were leaving the OCC all by its lonesome to fight the preemption battle in the Dodd bill in the Senate. The largest banks have bigger fish to fry, like trying to save their right to engage in blatant conflicts of interest proprietary trading and to combat any meaningful unduly restrictive regulation of derivatives (games in which community banks have no skin). That makes supporters of expansive OCC preemption powers concerned that something wicked is coming their way.
The Senate bill would reestablish the so-called "Barnett" Supreme Court standard that allowed the OCC to preempt state laws on a
case-by-case basis but also forced the agency to show that a federal law
exists to regulate the activity addressed by the state law.
"When people say that we are simply adopting the Barnett standard,
that is simply not correct," said Robert
Cook, a partner in the Hudson Cook
law firm. "They are adopting the Barnett standard and a couple hurdles
you need to leap. … I would be thrilled if we ended up with simply the
Barnett standard. I'm afraid we are going to get much worse."
While some supporters in the Senate are crafting amendments to the Dodd bill to address the concerns of the OCC, no one thinks this is going to be an easy fight.
Cook said getting any change in the bill would be an uphill battle and that banks must choose their fights carefully. "The banks don't have a
lot of time left now to make changes in the financial institution
regulatory bill, and they have to pick their battles, and it's not clear
to me they can fight all three or four issues," he said.
"Unfortunately, large banks don't have a lot of capital to fight with
right now. I am not optimistic that banks large or small are going to
have much impact on this bill."
Looking for an optimistic angle in this sea of sorrow, American Bankers Association CEO Ed Yingling correctly called the ultimate winners on this issue, regardless of how much of a beating preemption takes in the Senate (and in the reconciliation process with the House bill already passed): trial lawyers.
Any new language in the reform bill would effectively nullify decades of preemption decisions by the courts, sparking more court cases. "It will take years and years of litigation to figure out what the new law means, creating uncertainty," Yingling said.
State regulatory officials agreed. "This isn't going to be resolved in the Senate," said Ryan. "Whatever comes out of the Senate is going to create ambiguity and a role for courts."
In a country with more than one lawyer for every 300 citizens, and with new litters of barristers and solicitors being birthed by the nation's law schools every six months or so, the mantra regarding this legislation is: "THIS is the change we've been waiting for! Sue, Baby, Sue!"
According to Stacy Kaper, reporting in today's American Banker (paid subscription required), Barney Frank worked out a compromise late yesterday with moderate Democrats that appears to roll back the attempt by more liberal Democrats to restrict the OCC's power to preempt state law. Under Frank's original bill, "the OCC would have only been able to preempt state consumer laws on a
case by case basis when it interfered with the business of banking. The
standard was meant to repeal the agency's sweeping 2004 preemption
rules, returning it to the so-called 'Barnett standard' established by
the 1996 Supreme Court case of Barnett V. Nelson." According to Ms. Kaper, Frank agreed to amend his bill to effectively preserve the OCC's current power to preempt state law.
Under the deal reached between House Financial Services Committee Chairman Barney Frank and [Illinois Rep. Melissa] Bean, the OCC could preempt a state consumer protection law by simply writing a letter or issuing a ruling. It would reaffirm the deference given to the OCC’s rulings by the courts.
It would also allow the agency to preempt all equivalent state
standards at once. For example, if the OCC were to preempt an Indiana
credit card disclosure law, it could apply the same standard to other
credit card disclosure laws with similar language.
The bill would also lower the threshold required for the OCC to
preempt state standards by saying that it can override any law that
"prevents, significantly interferes with, or materially interferes" the
business of banking.
That's certainly a set-back for consumer advocates and state regulators, who had high hopes that the juggernaut of OCC world domination would be somehow forced to grind to a halt. In the messy world of legislation-making, the sausage that results sometimes is not very appealing to those with refined tastes.
Frank also agreed to a legislative maneuver that makes the preemption power provision almost bullet proof.
Bean succeeded in convincing Frank to adopt the bulk of her proposal to broaden preemption and roll it into the Massachusetts Democrat’s
manager’s amendment. By incorporating it as part of the base text
without requiring a separate vote solely on that provision, the move
virtually guarantees that her preemption language will stick.
Ms. Kaper also reported that there were further signs of compromise by Frank and the managers of this legislation with moderates, which may mean that a piece of legislation might be worked out with which banks could actually live.
During the negotiations, moderate Democrats also succeeded in convincing House leaders to consider other amendments during debate, including a measure by Rep. Walt Minnick, D-Idaho, that would substitute the creation of a new consumer agency with a proposal that would let a council of existing federal regulators jointly write new safety and soundness standards and consumer protections.
We'll have to see what amendments are actually adopted (as opposed to merely debated) and what eventually passes both houses of Congress, but if that change is as good as it sounds and makes its way into the final bill, it might address the concerns of commercial bankers who were "fixin' to open up a can of All-American whoop-ass" on Frank's bill over the single issue of the new "Consumer Financial Protection Czar." I think bankers might be able to live with a council of existing regulators who write protections. At least, you wouldn't have a newly created federal potentate with an axe to grind, and each type of bank's primary federal regulator would be able to have input as to its "constituents'" concerns. It would be nice if the new council also includes representatives of state regulators, so all interested parties have a seat at the table. Again, we'll need to see the final language before we get too excited.
The House will also consider an amendment by a group of moderates that would alter the definition of a major swap participant in derivatives legislation to better protect end-users.
The new manager’s amendment from Frank will also take steps to
address another big concern of bankers and modify a provision from
Reps. Brad Miller, D-N.C. andDennis Moore,
D-Kans., that would have required secured creditors to take a 20%
haircut in resolutions of firms that pose a risk to the economy.
Under revised language to be included in Frank's manager's
amendment, the haircut would be reduced to 10% and apply only to
short-term lending of 30 days or less. It would also explicitly exempt
any debt secured by government entities including the Federal Home Loan banks, the government-sponsored enterprises, the Federal Housing Administration and Treasury securities.
The 20% haircut is an idea that was launched by Sheila Bair and roundly criticized by experienced expert observers. Bair recently claimed that the 20% haircut "would rarely be used" and that it was designed to target "short-term secured funding." Critics, including long-time bank consultant Bert Ely, publicly warned that the original legislative language would also apply to long-term secured lending and would, in effect, make it nearly impossible for even small financial firms to get long-term secured funding. It sounds like the latest compromises will address the critics' concerns.
If this spirit of constructive compromise keeps up, there's no telling what might happen. Something might actually get passed that will satisfy no one but harm few. That's about the best you can hope for when Congress is in full action mode.
It is not the critic who counts; not the man who
points out how the strong man stumbles, or where the doer of deeds
could have done them better. The credit belongs to the man who is
actually in the arena, whose face is marred by dust and sweat and
blood; who strives valiantly; who errs, who comes short again and
again, because there is no effort without error and shortcoming; but
who does actually strive to do the deeds; who knows great enthusiasms,
the great devotions; who spends himself in a worthy cause; who at
the best knows in the end the triumph of high achievement, and who
at the worst, if he fails, at least fails while daring greatly, so
that his place shall never be with those cold and timid souls who
neither know victory nor defeat. ---Teddy Roosevelt
A post today by John Carney at Clusterstock, and some of the comments to that post, reminded me of my preference to apply "Occam's Razor" to most of life's problems. Simply put (because I'm not bright enough to put it more complexly), Occam's Razor is a principle that states "when you have two competing theories that make exactly the same predictions, the simpler one is the better."
Carney's post discusses statements by the Federal Reserve Bank of New York's general counsel that when the Treasury Department stepped in last year to bail out AIG, the ability of negotiators to make counterparties of AIG (like Goldman Sachs, for instance) on credit default swaps take a "haircut" on what they were owed by AIG went the way of the Dodo bird. A Washington Post article elaborates.
New York Fed officials explained that
the main reason creditors were willing for a time to accept less than
full reimbursement was their fear of an AIG bankruptcy. The
government's rescue of the company removed that threat and left the
company with virtually no way to wrestle concessions from the banks.
"In its negotiations with its
counterparties, AIG just didn't have the same bargaining power that it
did with the Federal Reserve standing in the background," said Thomas
C. Baxter, New York Fed's general counsel. "The only sensible outcome
was to give them what they were legally entitled to."
Moreover, AIG's foreign creditors told
the Fed that they were barred by their governments from accepting
partial reimbursement unless AIG faced bankruptcy, because doing so
would amount to giving a gift to a U.S. company, according to officials
at the New York Fed. Because the law prohibits the central bank from
favoring some banks over others, New York Fed officials said they had
determined that all of the creditors, foreign and domestic, had to be
paid in full. They also decided it would be improper for the Fed to use
its power as the banks' regulator to pressure them into taking less
money.
Baxter said that the New York Fed
"engaged a couple of institutions as to whether they would contemplate
a discussion of taking a couple of points less than what they were
entitled to." But he said officials were also racing to prevent AIG's
collapse and did not have time to get involved in protracted
negotiations with each creditor.
Carney alleges that the Fed's bailout of AIG, rather than allowing AIG to go bankrupt, had the "unintended consequence" of giving the counterparties enough spine that they would settle for nothing less than 100 cents on the dollar, which AIG paid. This, according to Carney, will cost the US taxpayers much more than they would have from the AIG bailout if the US government had simply stepped out of the way and allowed AIG to file bankruptcy or, at the very least, not taken any action to bail out AIG until the crisis reached its eleventh hour, fifty-ninth minute and the screws were put to the counterparties to take less than par.
Some commenters disagree strongly with the underlying contention, arguing that the government bailouts of GM and Chrysler resulted in the government strong-arming secured and senior unsecured creditors to take much less than they'd have been entitled to under bankruptcy, and that the government could have chosen to do so in the case of AIG but chose not to do so for some undisclosed reason. Others argue a more nefarious plot, one in which Hank Paulson and Tim Geithner rewarded their Wall Street cronies with plenty of taxpayer dollars because that's what good old boys do for one another. Another commenter alleges that its premature to raise the issue because AIG might pay back its loans from the Treasury and no taxpayer will suffer a loss on AIG.
I'm not a big believer in the probability that the Treasury Department will get back its full investment in AIG, although I agree that it's too early to tell. On the other hand, I don't buy the theories about the deliberate diversion of taxpayer money into the hands of Wall Street "cronies" of Hank Paulson and Tim Geithner solely because the Wall Street firms are part of some nefarious cabal that involves government and financial "oligarchs." That smacks of a poorly written Robert Ludlum knockoff novel. Human beings simply aren't that smart.
When I look for explanations, I usually look for the simplest one available that still passes the smell test. In this case, it's that the Treasury Department decided that it had to save AIG come hell or high water and the rest of the consequences were "details." Carney's correct to cite the law of unintended consequences. I think these folks were running around like Chicken Little, convinced that the sky was falling and that they were the only ones with the money and the power to prevent it. Having been in the midst of such situations, I suspect that paying off counterparties at par was a "detail" that someone thought about for a minimal period of time, looked at what he or she thought was the "big picture" and overriding goal, and simply said "screw it; pay 'em all at par and let's get this thing done." That was about the depth of the thinking that went into that particular issue at the time.
Of course, that's just my opinion. I could be wrong. Not that being wrong would ever keep me from continuing to lob shells from the peanut gallery.
