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.

Time to Climb Off the Ledge?

You are well aware, Dear Readers, that much has been and is continuing to be made in the press of the terrifying, relentless, and cruel monster known as the Credit Crunch. This unappeasable beast has apparently moved on from snacking desultorily on the tattered remains of those few financial institutions still drawing labored breath to attacking pure and innocent victims in the non-financial sector, like General Electric and AT&T. Attentive readers of this space will also be aware that your Dedicated Correspondent has remained simultaneously less than alarmed and less than impressed by the supposed magnitude, terror, and destructive force of this purported monster, at least as far as it affects the non-financial economy. Some of you tender souls may be struggling with whom to believe.

Well, in an effort to wrap some more data around this scary bedtime story, the Financial Times reported yesterday that investors pulled $95 billion out of the commercial paper market for the week ended October 1st, and $200 billion over the last three weeks. Frightening, huh?

Of course, a little further reading in the piece (three sentences, in fact) would reward you with the information that—notwithstanding this catastrophic hemorrhaging of the day-to-day economy's lifeblood—total outstandings in the commercial paper market clocked in last Wednesday at an impressive $1.6 trillion. Which, frankly, sounds like a hell of a lot of money to me.

Furthermore, a little independent research visit to the Federal Reserve Board's official data release will lead you to grasp a slightly more nuanced picture than the one being peddled by the newspaper vendors in the mainstream media. It turns out, for instance, that of the $94.9 billion less invested in commercial paper last week, $64.9 billion was pulled out of financial companies, $29.1 billion less was invested in asset-backed commercial paper, and $0.8 billion was pulled out of non-financial CP. Of which, you will be relieved to hear, domestic non-financial CP outstanding declined by a stunning, seasonally-adjusted total of 0.0 dollars. That's right: zero. Zilch. Nada.

Now, to be fair, total non-financial CP outstanding of $199.1 billion only comprises 12.4% of the entire commercial paper market, so by belittling the non-existent collapse in non-financial CP I do not mean to suggest that all is well in finance- and asset-backed-land. In fact, conditions there are factually pretty bleak, and do not seem to be improving or even slowing their rate of decline at all.

Nevertheless, the non-financial CP market looks pretty damned healthy to me. At $199.1 billion, there was more non-financial CP outstanding as of October 1st than at any month end from March to September 2008, and substantially more than year-end outstandings of $167.1 billion and $162.7 billion in 2006 and 2007, respectively. Furthermore, looking back over a longer period, the graph below demonstrates to me that the non-financial commercial paper market looks like it has survived the recent storms racking the credit markets in remarkably good form, continuing a growth trend which started in 2004.



Now, the corporate credit markets in aggregate are huge, and I readily acknowledge that a $200 billion sub-sector is too slender a reed upon which to rest a robust argument that all is well in the commercial funding markets. But the data in this instance do not support the fashionable screed that the sky is falling, either.

Other reports of doom and gloom from around the fixed income markets leave me similarly underwhelmed. The leveraged loan market is mostly closed to new issuance, sure, but whom does that harm? A bunch of private equity buyers and the extensive outsourced ecosystem of bankers, lawyers, accountants, and other flunkies who used to support them, plus a few highly levered companies, that's whom. Corporate debt spreads to Treasuries have blown out to impressively wide levels, but casual commentators fail to notice that that is primarily because Treasury yields are in a rapid nose dive toward zero. Absolute borrowing levels for companies which can get access to the market remain at historically attractive levels. (Likewise, those fortunate individuals who can qualify for a mortgage nowadays have noted that mortgage rates remain remarkably reasonable.)

We have seen some eye-catching shucking and jiving by a few industrial companies to gain access to funds. Fabled economic bellwether General Electric just toddled off to Omaha to get raped over a barrel by everyone's favorite sugar daddy, Warren Buffett, in exchange for some onerous preferred equity finance. But again, most of the mainstream media seem to gloss over the fact that GE did so because its giant financial services division makes it look a helluva lot like a bank, and a dodgy bank at that. GE Financial Services accounted for more than half of GE's consolidated earnings, carried over half a trillion dollars of debt, and accounted for more than 82% of GE's balance sheet at the end of the last quarter. Given that GECS has no nice, stable retail deposits to fund its massive lending activities, it is little wonder that Jeffrey Immelt chose to strap on his kneepads and go visit Warren for an extremely lopsided vote of confidence.

Sure, sure, the sky is falling on friend and foe alike in the financial sector, and the damage is likely to spread from these shores to other jurisdictions. Non-financial companies cannot afford to be complacent, because the turmoil in the credit markets—and the banking and investment banking intermediaries in particular—can become dangerously disruptive to any company's ability to raise borrowed funds on demand. Furthermore, the credit crisis will further disrupt the real economy in ways that will harm the balance sheets and income statements of non-financial companies, as well.

But what all this sturm und drang really means for the average corporate Treasurer and CFO is that they are going to have to look a little earlier, and a little harder, for the money to keep their company running than they have had to do during the last several years. Corporate treasury departments have been enjoying an extended period of super liquidity in which all they had to do to raise beaucoup bucks was wink at a bank or two and show a little leg. Now, the environment is returning to a more normal one, in which money is donning its traditional guise as a scarce and expensive resource.

Treasurers may actually have to begin working for a living again, but I feel confident in predicting that the world will not come falling down about their ears for some time yet.

Now, if we could only get some levelheaded reporting from the financial press—instead of regurgitated talking points from their stooges in the banking industry—we might just prevent the widespread popular panic which could take the economy down for real.

* * *

UPDATE (6 October 2008) — Bloomberg News has now decided to climb on board the Panic Train this morning, too. Although, once again, a close reading of the article will show that non-financial companies do indeed seem to be able to raise money, through alternate means, if necessary.

Companies from Goodyear Tire & Rubber Co. and Duke Energy Corp. to Gannett Co. and Caterpillar Inc. are being forced to tap emergency credit lines or pay more to borrow as investors flee even firms with few links to the subprime-mortgage debacle.

Golly! Imagine the shame: having to tap emergency credit lines, or—Heaven forfend!—actually paying a little more for money. Oh, the humanity!

I really am beginning to lose patience with people, whether in business, government, or the media, whose primary panicked complaint nowadays seems to be that potential lenders are no longer willing to hand them enormous amounts of free money on a platter.

Grow a fucking pair, you pansies. You can bet that any Corporate Treasurer worth his pay grade already has.

© 2008 The Epicurean Dealmaker. All rights reserved.

A Letter to Bedford Falls

"No, but you're ... you're, you're thinking of this place all wrong. As if I had the money back in a safe. I ... the, the money's not here.

"Well, your money's in Joe's house ... that's right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and, and a hundred others. Why, you're lending them the money to build, and then they're going to pay it back to you as best they can. Now what are you going to do, foreclose on them?"

— George Bailey, It's a Wonderful Life

Dear Main Street —

Aunt Millie called me the other night to complain about the $700 billion financial rescue bill Hank Paulson and Ben Bernanke are trying to ram through Congress. She sounded pretty pissed off, ranting and raving about how she thinks the plan is just a big, fat bailout for the fat cats on Wall Street. She doesn't see why we need any bailout at all, since she still gets five credit card offers in the mail every week, and her local banker Joe continues to badger her to take out a loan to put that addition on the back of her house. Paulson, Bernanke, and the New York Times keep trying to persuade her that the entire US banking system is about to go kerflooey, but she just doesn't believe them.

I have to say, I sympathize with her.

One of the problems is that there seems to be a kind of exaggerated hysteria sweeping the mainstream media and commentocracy, as they desperately try to explain what the current credit crisis means to you and your fellow Americans and why it is so important to prevent a total meltdown of the financial system. Putting aside the fact that many of these reporters and pundits have no clue themselves of what credit is and why the banking system is important, most of them just have no idea how to relate to you or Aunt Millie, and, in a well-intentioned effort to explain it all to you, they end up sounding alarmist, condescending, or both. I don't know about you, but if you are anything like Aunt Millie, Joe Sixpack, or me, you probably get pretty ticked off when some Big City Fancypants tries to patronize you.

Among these, the alarmists—who try to tell you that you better meekly submit to the greater wisdom of Paulson et al. damn quick, or we will all be selling apples on street corners in six months—just end up sounding foolish or irresponsible, and are easily ignored. If, on top of everything else, they have a connection to Wall Street, their behavior just confirms to you and all of your neighbors that the fat cats are trying to put one over on you.

Sure, the commercial and investment bankers are squealing like Ned Beatty's character in Deliverance, but the rest of us look around at each other and don't see anybody else getting reamed in the butt. The wailing and gnashing of teeth from the financial sector just sounds like an exaggerated form of special pleading. You know what they say: if your neighbor loses his job, it's a recession, but if you lose your job, it's a Depression. They may have aggressive pneumonia in the canyons of Wall Street, but the rest of us just have the sniffles, if that. If you are like me, you are inclined to tell Wall Street to take some Tylenol and shut the hell up.

But even the clever, responsible commentators—like my pal over at Accrued Interest—who try to explain the importance of what is happening in plain English in a reasoned, informative way, often end up sounding as alarmist as the wingnuts, and hence lose some of their own credibility. AI, for instance, does a very creditable job of explaining the importance and centrality of banks and other financial institutions to the everyday functioning of the real economy, and the critical role that credit plays in the everyday lives of you and other citizens. But then, in an apparent effort to keep things simple (for the "simple folk?"), he stumbles into this:

So if banks and other lenders cannot get cash, they cannot lend it. So what? Isn't our society doing too much borrowing as it is? Maybe, but let's consider the consequences of a world with no lending.

First of all, there would be no housing market. Very few people can buy a house with cash. Housing prices would continue to fall for many years. The result would be that people would almost universally live in rented housing. Wealthy land lords would own all the housing in America, and would reap all the profits from rentals.

Second, there would be no secondary education. Like housing, the vast majority of people need loans to get a college education. Granted, colleges would probably pare back on the quality of the education offered in an attempt to lower their costs. Even so, it would likely be that only wealthy people could afford college. The income gap in our society would increase as a result.

It would also be extremely difficult for average people to start a new business. Most businesses require start-up capital, most of which is normally borrowed. In addition, many small businesses need working capital, which allows the business to make payroll while waiting for accounts receivable to come in. So here again, only the wealthy would be able to start new businesses.

Wait a minute. Who said anything about no lending? Is that really a realistic consequence of Main Street not supporting the current bill in front of Congress, or indeed any potential rescue plan designed to ease the credit crisis?

Of course not.

Not to mention, it would probably do us all a world of good if those economic sectors in which value for money has become completely unhinged from reality—like real estate, higher education, health care, and private school tuition in New York City (my personal bugbear)—faced a little demand recession of their own for a while. Housing prices, while falling, still have come nowhere near reaching historical levels of affordability compared to income, and the value of a Harvard education is swiftly evaporating as the sectors where it is a prerequisite—like investment banking, corporate and securities law, and national political office—are either imploding or rapidly losing whatever social cachet they may have enjoyed in the last few years.

Could the Great Depression recur? Sure it could. Could we all end up selling apples to each other on street corners (filmed in grainy black and white footage, natch) and jumping out of our hermetically sealed highrise windows as our life savings disappear? I suppose. Especially if the credit markets remain frozen for an extended period of time, the tremendous cash inflows from foreign investors which have been financing our nation for many years suddenly stop and remain stopped, and Congress, the Treasury, the Fed, and everyone else within the Beltway conspire to come up with a series of actions and decisions so stupid and ill-informed that they would make their recent behavior look positively Solomonic. It could happen.

It just isn't going to happen next week, or even the week after.

It is ludicrous on its face to imagine that that is what will happen if we do not pass the current rescue bill, and you, me, Aunt Millie, and Joe Sixpack know it. If that is what Paulson, Bernanke, and the punditocracy are selling, we're not buying. We've read The Boy Who Cried Wolf, too.

The wolf only comes for real the third time the boy rings the alarm.

* * *

So, how does this bank/credit business work? What does a bank do?

I give you Accrued Interest again:

First let's think about how modern lending works. Pick any type of loan: student loan, car loan, credit card, home mortgage, small business loan, etc. Any time a loan is made, whether its to pay for meal with your credit card or to pay for tuition, someone actually has to come up with the cash to lend to you.

Where do lenders come up with this cash? Primarily three places.

• Deposits.
• Borrowing from investors or from other banks.
• Securitization. This means that the loan isn't held by the lender, but sold to investors.

Lenders don't want to use deposits to make loans right now, because there is serious risk of depositors suddenly demanding their cash. Remember that banks don't ever actually have enough cash to give all their depositors their money on any given day. So when depositors are nervous, banks are nervous.

Simple, but not simple enough.

In their purest form, banks are simply conduits, which connect people with money to invest—savers—with people who need money to spend—borrowers.

Depositors are savers who want to put their savings in a bank to earn a little bit of interest until they need to withdraw it. They lend their money to the bank. Borrowing from investors or other banks is simply another form of the same thing, where the people with the money—the investors themselves, if directly, and the other bank's investors and depositors, if from another bank—put their money to work in the form of a loan to the first bank. Investors in securitizations simply buy a piece of paper which represents a piece of a loan to the institution selling the securitization, which is backed by whatever assets (usually other loans) the bank has stuffed in the securitization.

Having come up with a bunch of money from various sources, banks turn right around and lend it out (at higher interest rates, hopefully) to other borrowers, banks, or asset holders.

Banks match savers (lenders) with spenders (borrowers). As simple as that.

And for this valuable service, banks get to charge fees. After all, hooking all those savers up with all those borrowers requires a lot of work, especially nowadays, when connecting someone who has money with someone who needs money can involve thirty-seven different entities, a passel of offshore vehicles domiciled in the Cayman Islands, and an army of propeller heads with PhDs, lawyers, accountants, tax advisors, and investment bankers to structure, market, and paper over the monstrosity. You wouldn't deny these hard-working folks their livelihood, would you?

After all, even George Bailey from the Bailey Building and Loan needed to make a living, didn't he? He matched up the people in the community who wanted to earn some interest on their savings with the people who wanted to borrow to build new homes, or start a business, or whatever. For his efforts, he charged just enough fees, in the form of net interest margin—the excess of what he earned from loans to his borrowers minus the interest he paid to his depositors—to support himself, his staff, and operate the bank's day to day business. It's pretty simple, when you think about it.

If you really want to understand this stuff, Main Street, I can recommend nothing better than breaking out that old Christmas chestnut, It's a Wonderful Life, a little early this year and watching it. About fifty minutes in, you get the scene quoted above, where George tries to talk his depositors out of a run on the Building and Loan, which has been triggered by the start of the Great Depression. You can have no clearer explanation of what a bank is and does than what George says. Cut through the crap of thousands of pages of documentation, regulation, and obfuscation in today's credit market, and what he says in that movie is as true today as it was then.

Watching that scene, you can see at once three important things. First, a bank only functions on the faith and credit it inspires in its depositors (and the people who lend it money), and it profits on the creditworthiness of its borrowers and their reliability in repaying their borrowings. Credit, or confidence, is the sine qua non of banking. The word "credit," after all, comes from the Latin verb credere, "to believe." Without belief, or faith, or forbearance, there is no credit.

Second, because a bank acts as a conduit between savers and borrowers in a community, its proper functioning is critical to avoid disruption and breakdowns in the general economy. If the financial plumbing system freezes up, all of a sudden it becomes much more difficult for nonfinancial businesses to invest, borrow, operate, and build. Payrolls can't be met, factories can't be built, people lose their jobs, and everything slows down. Lending does not normally stop, but it does become more difficult and more expensive, and that cost is spread throughout the economy in multifarious ways.

Third—and more hopefully—you can see that unless there is some extraordinary additional disruption, a run on a bank or a freeze in the credit system should be self-correcting. After all, as long as savers still have money to invest, they are going to want to lend it out. Sure, they may charge more, and they may be more reluctant to do so, but show an investor a solid credit willing to pay a juicy interest rate, and eventually they will make the loan. Any particular bank or banks may be toast, but credit and lending will find a way.

One factor which worsened the Great Depression, as I understand it, was that legions of savers actually lost their money when banks failed. The borrowers went bankrupt, but so did the lenders, and there was not enough savings or credit in the system to get things started again. Now, with FDIC deposit insurance, we have the US government standing behind the curtain to guarantee the safety of at least some of those savings, so widespread bank failures should not necessarily lead to a permanent freeze on lending.

Furthermore, we have literally tons of greenbacks or their foreign equivalents burning holes in the pockets of the governments and countries we have been buying stuff from for decades, and they have few good alternatives for their money to investing in this country. As long as the rest of the world does not lose complete faith in the USA—a scenario which, I grant you, is no longer as far-fetched as any of us would like—we should muddle out of this mess with a few bruises and a nasty recession, but otherwise intact.

So, color me skeptical about the urgency of this bailout. I think temporarily raising the limit on FDIC depositor insurance from $100,000 to $250,000 is a great and relatively inexpensive idea. The rest of it, frankly, strikes me as little more than a shot in the dark. Let hundreds of banks fail. Let tens of thousands of financial workers lose their jobs and their personal wealth. Let the entire country suffer through the recession which is surely coming no matter what the Fed and the Treasury do. The financial sector has had a really, really good run for a lot of years. It is time for it to pay the piper, and I, for one, have little interest in using my taxpayer dollars to cushion the blow. After all, I am just another heartless Wall Street bastard myself.

Well, that's it for now. I've got another letter to send you soon about who is to blame for this whole mess, but now it's time for me to walk the dog.

Say hi to Madge and the young-uns for me.

Your pal,

— TED

© 2008 The Epicurean Dealmaker. All rights reserved.

It's a Great Time to Invest!

It's the end of the world as we know it.
It's the end of the world as we know it.
It's the end of the world as we know it, and I feel fine.

— R.E.M., It's the End of the World as We Know It (And I Feel Fine)

Hat tip: Mrs. Dealmaker

© 2008 The Epicurean Dealmaker. All rights reserved.

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.