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Too big to fail: the Fed, the root cause and the bailouts September 18, 2008

Posted by Who? in Business, Politics, Random.

Was reading about all the craziness with the financial markets and had an interesting question.  So a company finds itself in deep shit and realize that they aren’t going to be able to ride it out.  How does the dialogue start with the Feds?  Is there a Bailout Hotline?  How about a hotline for homeowners that are going to lose their home?  The more I think about it, I am dead set against bailouts.  At least in theory.  Reality is always in shades of gray.

I wonder what it would have cost for the federal government to bailout every single homeowner?  In other words, was the cost of the panic in the financial market greater than the cost if the Fed just paid to secure the underlying securities in the first place?  This is assuming that the deterioration in the MBS market was the root cause of the current panic.  This is probably an overly simplistic view but it seems rational that there is a root cause and that MBS’s were at, or very near, the core.  The market got greedy and ran leverage to unsustainable levels.  Then confidence in the stability of MBS’s got rocked and values plummeted.  And the downward spiral followed.

Here is another question- why can’t the SEC just shut the markets down and let this blow over?  In other words, what I’m saying is, I think that the panic itself is causing more decrease in valuation the underlying, strictly financial issues.  If that is “too unreasonable”, how about halting trading in “at risk” securities?  The reaction would be “No, no, no- the markets must be allowed to function!”.  Uhhh…I’m pretty sure the market is what got us to where we are at AND the market is what continues to push us deeper in the hole.  In theory, if you freeze the “at risk” securities and let the panic fade/give the economy time to recover you would be making an effort to limit the correction to the responsible parties.  In a bailout, the cost is immediately distributed to every taxpayer.  Why not give the taxpayer a free roll of the dice to have the cost limited to those responsible?  Too big to fail is bullshit; too big to fail means that Wall Street gets a free roll of the dice.  The taxpayer is now stuck with the cost and the particpants on Wall Street got the benefits.

I hope between now and the next panic, I will have two things in place: 1) cash and knowledge of how raise large amounts and 2) the network and knowledge of how to raise a distressed debt fund.  More on this later.



1. shubhamsingal - September 18, 2008

Too big to die means a domino effect meaning more companies will go bankrupt leading to more people losing jobs, leading to more losses on mortgages … leading to …….

But yes an interesting question is that what if all too big to die companies start behaving stupidly

2. theavidpenguin - September 18, 2008

“Read carefully or your children will go to public school.” Professor M

That isn’t really the question I was asking…at all.

You don’t want your kids to go to public school, do you?

3. unastronaut. - September 18, 2008

Would it be too much to ask to require that banks actually have the money they lend? Or that traders only sell shares they actually own?

“Publicly subsidized, privately profitable!” – Propagandhi

4. Edgar - September 25, 2008

“why can’t the SEC just shut the markets down and let this blow over?”

That’s the best damn question I’ve heard asked all week! The short answer is that all the brokers and traders that make their living off the minute ups and downs of the market spew forth all sorts of drivel to the media. “The markets must be allowed to be fluid, liquidity is the cornerstone of the market”, ad naseum … pure poppycock! The true investors are taking a beating at the expense of the guys that make a living trading our stock on Wall Street. See a posting on this blog for an example: http://tinyurl.com/3orsq5

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