Tuesday, September 23, 2008

Live and Let Die

La guerre! C’est une chose trop grave pour la confier à des militaires.

— Georges Clemenceau

Say what you will about the United States Congress, Dear Readers—and I know I am not alone in having said many things about it over the years which are unsuitable for publication in a family newspaper—but I must say that I am heartened by what is transpiring under the klieg lights at the Dirksen Senate Office Building this morning. The same authorities who tell us that secrecy begets tyranny are the ones who reassure us that sunlight is the best disinfectant. I am quite happy to endure some populist demagoguery and partisan grandstanding from the lunatic fringe of the Senate Banking Committee if it allows us to shine a light down the rabbit hole Ben Bernanke and Hank Paulson are desperately urging this nation to jump down into.

I am also delighted that Senator Dodd and Congressman Frank have taken the lead in negotiating with Messrs. Bernanke and Paulson over exactly what form the massive bailout they have requested will take. Clearly, the Treasury's first draft of the proposed bailout suffered from a number of minor deficiencies, including the relatively trivial one that its demand of immunity for itself—

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

—was egregiously unconstitutional on its face. (Nice try, Hank.) It is reassuring that a few of our brave elected representatives have chosen to smack the Hammer on the snout and try to come up with something more in keeping with truth, justice, and the non-fascist way.

[As an aside, I have to say that I hope the final proposal does include some provision for the Treasury to take an equity stake in any financial institution which elects to participate in the bailout by selling toxic assets to the fund. Given that we have what almost everyone acknowledges to be an intertemporal asset valuation problem—in which the current fair value of these assets and firms is opaque, widely believed to be artificially depressed, and just as widely expected to recover over time when taken out of the glare of current market pressures and mark-to-market accounting—it strikes me that the best solution is one where the bailer—that's you and me, Ladies and Gentlemen—and the bailee have neatly aligned incentives to participate in the market's eventual recovery. There is a nifty, time-proven financing method to accomplish such ends, which is called equity. Frankly, it was the height of stupidity, carelessness, and/or disingenuousness for the Treasury to have made their initial proposal without incorporating such a mechanism, especially since it has been done successfully before.]

* * *

But whatever final form this bailout proposal takes, and however it is implemented by this Administration and the one to come, I think it is absolutely critical to maintain a clear distinction between saving the American (and global) financial system from catastrophic lockup or breakdown—which should be the point of the whole exercise—and pulling any one (or more) particular financial institution's bacon out of the fire, which should not.

As an economy, and as a country, we will suffer losses. Sacrifices will have to be made. And, like in any war, it should be the soldiers on the front line who bear the brunt of the damage.

Let me be clear: financial ruin and calamity for some, if not many, market participants should be completely understood as a likely and perhaps even desirable outcome from this godforsaken mess. There is no reason on God's green earth why Goldman Sachs, Morgan Stanley, or even Citigroup cannot and should not be allowed to fail completely, utterly, and without a trace. (And to reassure you I am not being partisan, I would remain unmoved if outfits like Cerberus, PIMCO, and KKR went down the tubes as well. I just tend to think they are at far less risk that the traditional financial intermediaries currently on the firing line.)

These firms, and the people who run them and work for them, have been living by the sword for a long time. It would be no great American tragedy if some of them died by the sword today.

Would there be a great big smoking crater in our financial system from the impact of one or more of these failures? Yes. Would there be collateral damage to apparently innocent bystanders in the markets and the broader economy? Of course. Would the smoking rubble of the institutional assets and liabilities of such firms require a huge clean-up effort by regulators, lawmakers, and other market participants over a period of many years? Very much so.

Would tens of thousands of lives be ruined, just like the tens of thousands of lives which have already been ruined by the wholesale collapses and takeovers of Bear Stearns, Lehman Brothers, and other market casualties? Absolutely.

You know what I say to that? So the fuck what.

War is hell, mister.

Goldman Sachs is not more important than the national interest.

© 2008 The Epicurean Dealmaker. All rights reserved.