Why Bailing Out The Financial System Is Causing Outrage

Cobbling together several blog comments I have found, as I sometimes do, may help connect some dots.

The issue is not really bad or stupid lending, although that can be considered a factor.  Understanding the deeper causes also helps explain why pumpinmg the additional $700 billion into the system is likely to be just a stop-gap measure that may restore confidence and let the system run a bit longer, but …

The real culprit is leverage, enabled by deregulatiion, bought and paid or by lobbyists.

That’s who ultimately is being protected … lobbyists’ clients, who were allowed to make money out of thin air by making risk into a "product" and sellling it over and over again.

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"This is not caused by sub prime loans:

 
You add up the really bad loans and the not so iffy loans and even if they were 2 trillion, which they are not.

The collateral of the mortgages loans are still worth at least 70% or more of the loans.

The problem is they sold loans in slices and some were sold 30 times."

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I get what you’re saying, but …

artificially inflated housing prices, along with many years of stagnant wages and high unemployment put lots of people in a desperate situation. I have no sympathy for speculators or people who knowingly took out "liar loans", but let’s remember what made this all possible in the first place: extreme deregulation.

It does suck to have acted responsibly and to be left facing an enormous bill, but keep in mind that there are always people who’d like to borrow beyond their means.

This never was a problem until Wall Street lobbyists got everything they asked for."

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A True Nugget

(Hence saving these companies at all cost from bankruptcy, because actual bankruptcy would make real values public.)

They can mark (value)-to-market–safest.("This pile of silver ingots is worth…..")

They can mark-to-model–necessary. (Date: 1958: "So Hewlitt & Packard you say this thingamabob–oh, ‘integrated circuit’—is a different kind of transistor? Its gonna replace vacuum tubes huh? Hmmm")

Or they can mark-to-made up (the last several years. How well can you sell it?)

But the rules of the game are when you get better information (move toward mark-to-market) about the price/value of an asset your accounting has to reflect that.

And THIS is a big part of WHY the push for an immediate federal bailout. Other firms can look at an AIG being rescued (and AIG’s own accountants can say) "They/We’ve been bailed out….a rare, one-time event that cannot serve as a precedent (in accounting terms) for valuation."

If a firm is failing and sells itself to another firm (Merrill Lynch sells out to Barclays) how the buyer evaluates what they are getting is a PRIVATE matter between the firms.

But if a failing firm files chapter 13 then all the insides of the busted firm are made public—a matter of public record. And other firms holding similar assets (MBS, CDO, swaps, etc) now have open, available data (not quite market data but a fair approximation) to value their OWN assets. They can (perhaps MUST) put a value on that #107B "security" that is backed by the real, physical asset of a drivetrain of a 1987 Yugo.

That’s what they’re afraid of. That’s what binds them together–their mutual, interlocking fear of being found out. That’s what would pull them all under. (Darkly, it could indeed pull us all under—the Depression scenario.) Enron "worked the refs" (Arthur Anderson Accounting) the same way and Anderson went along with them and then went down with them.

Sobering to say the least, but also explains the urgency on Wall Street’s part to get this done yesterday.

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