[thechat] people who work weekends: a rant

Matt Warden mwarden at gmail.com
Mon Nov 3 20:18:08 CST 2008


On Mon, Nov 3, 2008 at 8:49 PM, Erika <ekm at seastorm.com> wrote:
> CEO's may not generally be dumb but they may be negligent (what happened
> to our banks again?)

I don't think you can really say the bank CEO's were negligent. They
engaged in loaning to risky borrowers (either due to interpretations
of regulations like the CRA or some other reason) because it was high
profit and low risk. Low risk? Yes. Either they held the risk for just
long enough to sell it to the government (GSE's) or if the worst
happened they would be bailed out by the government. (There is also
the fraud issue, but that is separate and the government already has
full power to prosecute that.)

The market always believed that the GSE's were backed fully by the
government, even though the law said they were not. Turns out the
market was right and the letter of the law was bullshit. And now we
have confirmed that we will bail out large corporations with taxpayer
money if they get into serious trouble. We have now forced CEOs to
continue taking such risks, because not to would result in competitive
advantages for their competitors.

BofA's CEO took a big risk by getting *out* of the credit default
swaps market when all its competitors were knee deep in it. If CDS's
never went belly-up, BofA would be at a competitive disadvantage and
the CEO probably would have been ousted. In hindsight, seeing how the
government has bailed out everyone but Lehman, one could make the
argument that -- if BofA knew the government would bail out a CDS
market failure -- BofA was stupid for leaving the market.

I know I'm being a crazy Internet libertarian again, but this is just
another example of unintended consequences building up bigger and
bigger issues. Both McCain and Obama suspended their campaigns and
rushed back to Washington to vote for a bailout they didn't understand
(also, if you're bored, go back and look at how long it took for
either of them to acknowledge the economic situation after things
began to collapse -- deer in f'ing headlights). Now we have serious
manipulation of risk and the balance of risk and reward in these
investments are all off kilter. The message is out now that the
government will save your ass if your risky investments end up in the
crapper (which obviously makes such investments less risky), and we're
left with trying to stop such investments with more market
intervention and regulation... which of course will have its own share
of unintended consequences and special interest influence.

Watching the house oversight committee hearings on c-span is very
enlightening; especially the one with Greenspan, Cox, and Snow. They
all have their own perspective on how regulation failed, and you leave
the session with the idea that either regulation is not the answer
(Greenspan), or it should be regulated but the market will always find
the holes in the regulation, which is necessarily imperfect (Cox,
Snow).


-- 
Matt Warden
Cincinnati, OH, USA
http://mattwarden.com


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