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September 29, 2008

Are All The Animals Really Equal?

Friedrich von Blowhard:

Dear Blowhards,

Last week I noticed a sarcastic essay by Michael Lewis (author of "Liar’s Poker") on Blooomberg, headlined "America Must Rescue the Bonuses at Goldman Sachs." It reads in part:

The total collapse of the global financial system is one thing -- everyone at Davos in January saw that coming. But the shrinkage of the Goldman Sachs Group Inc. bonus pool is another. Whatever else the Treasury achieves it must know that if the employees of Goldman suffer any sort of pay cut, it will be judged to have failed. And our country may never recover….

To its credit the government has thus far done pretty much all it can to prevent any suffering inside the firm. Its extreme sensitivity to Goldman's pain is the only way to explain its actions thus far.

I thought this was funny here and there but a bit too exaggerated to be really wounding. Well, that is, until I read Gretchen Morgenson’s Behind Biggest Insurer’s Crisis, a Blind Eye to a Web of Risk in the New York Times. While the story is about how AIG’s credit default swap unit tanked the insurance empire’s holding company, a few paragraphs were focused on the peculiar role of Goldman Sachs in that imbroglio:

Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yeah, right. Mr. Blankfein of Goldman Sachs and only Mr. Blankfein gets to consult with the powers that be (including his immediate predecessor) on the proper policy for the government to take regarding a firm he’s doing business with. Don’t worry, you’ll get your invitation to consult personally with the Secretary of the Treasury over a matter of significant financial interest to you any day now. Ha, ha.

And, heck, that isn’t all. Now I get wind of this via Yves Smith of Naked Capitalism: on Sunday night the Treasury conducted a briefing on the bailout bill for financial sector players only.

Well, just remember, while all the animals are equal in this great democracy of ours, some of the animals are a little more equal than others.



P.S. I almost forgot. The National Journal, a political-insider publication, speculates that the reason Lehman Brothers was allowed to tank was because the firm had neglected to spend enough money lobbying Congress. Hat tip to Jesse Richman at the blog Trade & Taxes. The money quote from Mr. Richman’s post:

Although it isn't flattering for the government, it seems entirely possible that firms with better lobbying operations in DC would be better able to persuade the government that they were "too big to fail" or otherwise deserved help or a bailout. Lehman spent less money than any of the other big investment banks on lobbying. And when the time came for Lehman to plead for help, Washington wasn't listening.

posted by Friedrich at September 29, 2008



"Well, just remember, while all the animals are equal in this great democracy of ours, some of the animals are a little more equal than others."

Its not democracy foo' its capitalism.

ever been into a Tbill auction with a couple of hundered (thousands of)dollars in your pocket and asked for equal treatment with the broker delers there?

You'd think the right wing would be more clued in than everyone else on the capitalist system.

Posted by: ramesh on September 29, 2008 8:05 AM

BTW, I admire Michael lewis' semi non fiction books about the financial system. Hes almost as funny as I and is probably as smart as friedrich. He's right about the goldman sachs bonuses, and the main immediate impetus behind this push for the bailout being bonuses that would be lost if counterparties went under.

Thank goodness the markets have built in survival instincts!

or all the conspiracy theorists would be looking anxiously at the price of bread, instead of the dow jones, right about now.

Posted by: ramesh on September 29, 2008 8:19 AM

When AIG was taken over without a vote of its shareholders, that left GEICO, its biggest competitor, with a huge advantage. Guess who owns GEICO? Warren Buffet's Berkshire Hathaway. His wealth increased by 14% overnight. Indeed, some are far more equal than others in this imbroglio.

Posted by: Charlton Griffin on September 29, 2008 10:03 AM

This isn't capitalism in the sense of the free market, it's crony capitalism.

Posted by: Lester Hunt on September 29, 2008 10:37 AM

To paraprase, a sardar patel quote about keeping gandhi in poverty,

It takes a lot of crony capitalists to keep the markets free.

The only question is , whose cronies?

Posted by: ramesh on September 29, 2008 12:15 PM

Check it out -- the peoples' house slaps down the elites.

Posted by: MQ on September 29, 2008 2:01 PM

some one is making a shitload of money selling short..and buying back when they re table the bill

Posted by: ramesh on September 29, 2008 4:14 PM

[url=]Agriculture Vs the World[/url]

Posted by: ramesh on September 30, 2008 1:31 AM

Fools being separated from their money is free market capitalism. So when Lehman goes under, that's capitalism at work. When the government bails out AIG, that is not the free market.

For most of these bailouts, the shareholders have gotten annihilated. The management teams, however, have kept their salaries and bonuses from all of the years in which they were getting their companies into trouble. This raises the question, how did shareholders allow the incentives of management to get so far out of whack?

The moral hazard problem of bailouts protecting risky companies doesn't quite apply to the shareholders. They actually are getting crushed.

Posted by: Alex J. on October 1, 2008 12:45 PM

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