Tuesday, February 2, 2010

You're Never Too Big To Screw Up

I have been reading TOO BIG TO FAIL for the last few days now, and while I could easily use my vocabulary of four-letter words to describe the people and events that I have been reading about, it is not really necessary. I wish every member of Congress would take the time to read this book, but I know that is too much to ask for. Sorkin is telling a tale of how some very smart and talented people made some very stupid mistakes.

But, for me, the real bad guys in this whole story are those that think the field of money and banking, investment banking and securities trading do not need rules and regulations. Greed motivated a lot of the bad moves the players made, but in a climate where the wiser and older officials were married to an ideology that could not stand up to reason, made the eventual downfall all but guaranteed.

Alan Greenspan and Phil Gramm, and a few others, would be put on trial under my Alice in Wonderland World for economic and financial treason to the State. Whether they were just plain stupid or doing someone else's bidding, the final results were just the same. As the Queen said, "off with their heads!" No, I guess that is a bit of an over reaction. Let us make sure they are comfortable in their old age. Why should they be out anything because they were responsible for so many to be out the little they had?

You see, the game is not that complicated. In fact, when you strip away the fancy words like leverage and balance sheet, you begin to see how simple this game really is. A bag of shit is a bag of shit whether it is in a brown paper bag or a bag made out of silk and gold trim. Assets on the balance sheet that can not be sold, such as marketable securities, become crap. When the balance sheet fills up with crap, and that crap can not be converted into cash, the corporation is up shit's creek. It is that simple.

Once upon a time, cash was trash, but in a heart beat, cash can become king. If I have lost you at this point, don't worry about it. Pitchers and catchers report for spring training in a few days.

Stay tuned.


Julie Schuler said...

I was watching some of the hearings today. Geithner seems so level-headed. But how do you trust people- the whole lot of them- who are expressing correct opinions, but were just last year carrying wheelbarrows of money away? Tough for me to figure out. All I know is I want my wheelbarrow filled with money.

moneythoughts said...

Julie, I got a chuckle from your comment. Yes, Geithner is good at answering questions, and that will help the Obama administration.

The so-called bailout of the big banks was very necessary, but one of the big unanswered questions remains: should the Federal Government let AIG pay everyone that had bought credit default swaps with AIG, receive 100 cents on the dollar? With 20-20 hindsight, it appears that something less than 100 cents on the dollar would have worked just as well and left some of these big shots a little more humble in their behavior. (We should be so lucky that they would reform their behavior.)

Going forward, the government needs to push smaller community banks to lend more where appropriate.

Kathryn Brimblecombe-Fox said...

Hi Fred,

Many thanks for the link http://jerusalemhillsdailyphoto.blogspot.com/2010/01/tu-bishvat-symbolism.html. I visited the site and really enjoyed that post and the BLOG. I made a comment on it too. I plan to put the link in my next BLOG post.
I get a lot of spam comments and had a few in a row when yours arrived and I deleted it by mistake! Could have kicked myself when I realised! So, please send me any others you think I will be interested in.
Cheers Kathryn

LceeL said...

So THAt'S why AIG needed to be bailed out. I didn't understand that, before. I had thought they, like everyone else, were loaded with toxic assets. But no. When everyone bet against the derivatives in the marketplace, AIG was taking the bets. And lost.

Too big to fail my aching ass.

moneythoughts said...

Yes Lou, you got it now. Goldman bought CDS on the mortgage-backed bonds they themselves underwrote and sold around the world. They bet against these same bonds by purchasing CDS from AIG's London office, which some genius had their financial products division selling. When the mortgage bonds had a meltdown, became worthless, AIG was on the hook to make good on the insurance against default. AIG did not have the reserves to cover the bets they sold.