On my mind this morning is how to intelligently explain the following thought. I caution that I don't think I'm there yet. Let's try it anyway.
I understand that the financial system must survive, but I don't think that's true of every financial institution currently within it. In fact, it seems like with a little effort, the government could figure out which financial institutions have committed such egregious violations of common sense and best practices in borrowing and lending that they should be excluded from any bailout plan and allowed to fail.
Even if it is just a subset of such institutions, the government gets to send a message that this conduct is not rewarded in its worst forms. And it does so in a fundamental way, not with window dressing on managerial compensation for banks that will ultimately make it. The government can use the resources that would have flowed to these institutions under a bailout to provide help to other institutions that might be compromised by their failure.
I liken this to condemning the crack house and making grants to the neighbors to fix up the neighborhood.
While I'm working on this, here's some good Sunday morning reading:
- Reports on the bailout deal in The New York Times and Speaker Pelosi's office (via CalculatedRisk)
- A Memo Found in the Street, by Barry Ritholz
- The Opposite of Moral Hazard, posted by Mark Thoma
- Time Not for a Bailout, but a Nationalization, by Brad DeLong
Enjoy!
Well...
Isn't that what's happening now? The owners of Bear Stearns lost about 90%. AIG shareholders could be in the same boat. Lehman's bankrupt. WAMU's executives are probably out of work and the shareholders probably get zip.
Yes, it is happening now
You are right. Wall Street as we knew it is gone. Kaput. None of this $700 billion (or whatever it ends up to be) is going to Wall Street banks (even though the popular press calls it a "Wall Street bailout" to rile the uneducated masses and get eyeballs). As a friend (who worked on WS for many years) said today, "there aren't any WS banks left. Merrill was bought out by BOA, Morgan Stanley by China, Lehman is dead, and Goldman got a $5 billion (and can be up to $10 billion with his options) infusion from Warren Buffet."
He said banks can also get bought out by Middle East or Asian sovereigns in the future (and some will no doubt become very attractive investments), and of course that means the bill isn't paid by US taxpayers.
Most of this taxpayer money will go to propping up middle America so we don't head into GD II. The intent is to unfreeze credit markets so that we don't lose millions of jobs (the bottom line outcome of frozen credit markets).
Fortis going down today.
Wachovia shareholders will probably take a hit if they make a deal to be bought out by Citigroup.
And I'm not convinced that this plan, as written today, will work.