There’s a piece on the financial mess by Michael Lewis and David Einhorn in the NYT. It started off as a recap of the folly of recent years. But then it went a little too far, stretching points that did not need stretching in this tale of greed and perfidy that is fascinating without exaggeration. For example, it criticized the government for using preferred stock in some of the bailouts, characterizing preferred stock as “essentially a loan,” which it is not. A little later the piece said this:

on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroup’s assets. The Treasury didn’t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.”…

There are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail. Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside. This is more plausible than it may sound.

When a proper history of this crisis is written, September 15, the day Lehman Brothers failed, will probably be seen as the nadir, a brief moment of folly that brought the global banking system to a screeching halt. November 24, on the other hand, with the second bailout of Citibank, represented a recovery from that folly. The reporters from CNBC — the morning team — stood on deathwatch the evening of Sunday the 23rd, with nothing much to do except to watch and wait for the patient to expire. The decision of Paulson and his associates to assist Citibank was the evidence that the government had finally (and appropriately) made the decision that “the systemically important institutions remain viable.”

Lewis’s suggestion that the correct course is to nationalize the TBTF banks is absurd. It would have created a catastrophic market incentive for the short sellers and others. The “vicious hedge funds — media — ratings agency circle” would have forced all the largest banks, one after another, into government ownership. The financial crisis has most likely passed its worst point thanks to the change in policy between September and November, nasty and expensive as it is. Lewis’s suggestion would have created far greater chaos for a far longer time than the current imperfect structure.

This entry was posted on Monday, January 5th, 2009 at 12:36 am and is filed under business, Democrats, General, MSM, Republicans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.