Wednesday, October 15, 2008

Candide, or Optimism

Il est démontré, disait-il, que les choses ne peuvent être autrement: car, tout étant fait pour une fin, tout est nécessairement pour la meilleure fin. Remarquez bien que les nez ont été faits pour porter des lunettes, aussi avons-nous des lunettes. Les jambes sont visiblement instituées pour être chaussées, et nous avons des chausses. Les pierres ont été formées pour être taillées, et pour en faire des châteaux, aussi monseigneur a un très beau château; le plus grand baron de la province doit être le mieux logé; et, les cochons étant faits pour être mangés, nous mangeons du porc toute l’année: par conséquent, ceux qui ont avancé que tout est bien ont dit une sottise; il fallait dire que tout est au mieux.

"It is demonstrated," said he, "that things cannot be otherwise: because, everything having been made for some end, everything is necessarily for the best end. Note well that noses were made for wearing spectacles, consequently we have spectacles. Legs are clearly created to be shod, and we have stockings. Stones were formed to be carved, and to build castles of, consequently My Lord has a very beautiful castle—the greatest baron of the province ought to be the best lodged—also, pigs were made to be eaten, and we eat pork all year long: therefore, those who suggest that everything is good have said a foolishness; they should say that everything is for the best."

— Voltaire, Candide, ou l'Optimisme

Evan Newmark continues to surprise me with hidden talents. Today, he is a philosopher, out-Panglossing Pangloss by putting forth the modest proposal that we anoint Treasury Secretary Henry Paulson a national hero for his role in the current credit crisis. Yes, you read that correctly.

Never mind the public waffling, the rapid reversals of direction and tactics, the confidence-destroying uncertainty and confusion the Treasury and Fed have been spoon-feeding into global financial markets for months. Never mind also the ham-handed arrogance of the initial three page draft of the TARP proposal, or the mawkish and callow play-acting of dropping to his knee in front of Nancy Pelosi (and a few hundred cameras). No,

... today, we have the U.S. government taking preferred equity stakes in our nine largest banks on terms that are acceptable to both Wall Street and Washington.

Come again?

This is admirable. It's almost as if Mr. Newmark surveyed the Lisbon earthquake, tsunami, and fire of 1755 and said that not only was the city's fate for the best in this best of all possible worlds, but also we should give the Mayor of Lisbon a baronetcy and a public commendation for saving three chickens and an outhouse from the destruction.

The Treasury's and Fed's efforts to fix the credit crisis long ago left the realm of rationality, economy, and forethought to wallow in the cesspool of panicked overreaction and political expediency. It is not really worth getting your knickers in a twist, however, because the current plan is what it is, and we are all going to have to live with its (currently imperfectly understood) consequences for many years to come.

That being said, I share the feelings of many who express puzzlement or underwhelmed disappointment over the Plan in its current form.

It looks like Hank Paulson has been dragged kicking and screaming by the global marketplace into reluctantly embracing the concept that you cannot begin to encourage banks to start lending again until you have stabilized their balance sheets, and, furthermore, that the government is the only entity remaining with the standing and wherewithal to pull it off. He certainly fought such a solution tooth and nail almost from the beginning.

Now we have what appears to be a half-measure: forced, non-voting preferred equity injections into leading lending institutions with virtually no formal oversight or controls over these banks' behavior other than moral suasion. For proof of how acceptable the current plan's terms may be to Wall Street, I give you the photograph above, taken at the conclusion of the all-hands meeting Mr. Paulson convened to stuff the plan down the throats of nine of the largest US financial intermediaries. It doesn't look like Messrs. Mack and Pandit are suffering from too much indigestion there.

I think Felix Salmon put it best: Treasury's plan "looks very much like Warren Buffett's investment in Goldman Sachs, or MUFG's investment in Morgan Stanley, only without the profit motive." And, lest we forget, it is our potential profit, as US taxpayers and lenders/investors of last resort, which Mr. Paulson has so handsomely foregone. At what price ideological purity?

Now what? The stock price charts for both Morgan Stanley and Goldman Sachs still look like they're on the glide path to dissolution. The markets are waking up from their pleasant wet dream on Monday to survey a weakening global economy with deteriorating fundamentals which Mr. Paulson's vaunted plan will do nothing to ameliorate. And we American taxpayers are saddled with non-voting preferred shares in a bunch of institutions which have proven conclusively that they would have trouble finding their own assholes in a thunderstorm. I, for one, do not feel reassured.

So pardon me, Mr. Newmark, if I decline to second your nomination of Henry Paulson to the pantheon of national heroes.

Frankly, it's a little fucking early to be handing out medals.

Hat tip for the photo and caption to Dealbreaker.

© 2008 The Epicurean Dealmaker. All rights reserved.