Systemic Risk

It's obvious that Americans do not understand what is meant by systemic risk. Worse, I suspect that most of the members of the various House and Senate oversight committees do not understand it either.

Paulson, Geitner, Bernanke: they all understand it. But the knowledge is so complete, so innate, they simply do not realize that other people do NOT understand what they mean, how it is assessed, what the risks are. Or, perhaps, they know their Congressional overseers do not understand, but they haven't figured out how to explain it without showing that the emperor has no clothes (that a lot of those in Congress have not a clue.)

Worse, the ignorance related to this issue goes further. On Monday, Mar. 17, 2009, Pulitzer Prize-winning journalist Gretchen Morgenson said two truly idiotic things on Terry Gross's Fresh Air.

First, she couldn't understand why U.S. taxpayers should pay off foreign counterparties of AIG. Apparently the NYT's crackerjack financial reporter doesn't realize that our financial system does not stop at the country's border. We live in a worldwide financial market. Americans invest abroad. Foreigners invest here. The banks are actually rather tightly connected. Nor does it occur to her, apparently, that obligations (treaty, legal, etc.) also do not stop at the Atlantic and Pacific Oceans. Further, if there were no legal or self-interest reason for doing this (because massive bank failures in Europe would, and to some extent have, effect us), there would still be a moral obligation.

The worldwide financial crisis (not the recession which probably would have happened anyways) began in the U.S. with our sub-prime mortgages, our inadequate or non-existent, or lax regulatory systems, and our glorious "quants" who invented all these instruments that have come close to destroying not just our financial system but the world's. This mess was made in the U.S. and we have an obligation to help our partners while we help ourselves.

Second, she couldn't understand why the President couldn't just break the employment contracts at AIG because they're no different than the bankruptcy cramdown (allowing judges to force a write-down of first home mortgages in bankrupt proceedings).

Hmmmmm. The President can't do either. He hasn't the legal authority. As a matter of fact there has been enormous resistance in the Congress to the proposed bankruptcy cramdown bill (passed in the House but not, at this date, in the Senate) precisely because "contracts must be respected". Nobody in the Executive branch, including the President, has the authority to abrogate, willy nilly, any kind of contract between willing parties.

Barney Frank, to his credit, admits it is not a good idea for the Federal Government to get in the business of, through statutes, canceling contracts. And I, quite frankly, do not like the idea of using the IRS to punish people we think ought to be punished. No matter how such a law is written, I figure some innocents will be caught. And, again, if the Congress can do that in this case, where there is lots of public support, what if it did it for less universally approved reasons?

Frank thinks it makes more sense to exercise our rights as owners of AIG. I will note, however, that Liddy's lawyers told him that if they broke the contracts, the employees could sue, would probably win and it would end up costing even more. I'm not a lawyer. I have no idea if this is true. But the retention bonuses do seem to be issued on a "pay for performance" basis rather than a just "you're here" basis which makes them more rational than otherwise might be thought.

P.S. As I have said before, I am not an accountant, a lawyer, an auditor or a finanacial analyst. I do not work in the financial services industry. My opinions are based on a lot of reading and hundreds of hours of watching C-SPAN and my own commonsense.

GM Bankruptcy - Chap. 11 vs. Chap. 7 - Media Malfeasance

I don't know why I still expect anybody in the national media to do their jobs. Maybe I had just decided that "politics" was different. That I shouldn't expect fair or responsible coverage. But they could still deal with facts in other cases.

Not so. The Detroit 3 are asking for money. The response from the media, and from much of the Congress, is that they should just file for bankruptcy. "Chapter 11 is the solution".

Now, I am not a bankruptcy expert, or even a semi-expert. Hell, I'm an aboslute novice. But there appears to be a major difference between Chapter 11 (reorganization) and Chapter 7 (liquidation)and it is not at all clear that GM could reorganize under Chapter 11. Some people have mentioned a "pre-packaged" Chapter 11 or the Government (!) ensuring warranties, but as far as I can tell none of the talking heads who throw "Chapter 11" around know any more about bankruptcy law than I do.

It seems to me that the consequences of liquidation vs. reorganization are significant, not only for the companies but for the country. Millions could lose their jobs, their health care and, quite possibly, their homes.

I will admit that the executives of the Detroit 3 didn't do their cases any good by their inability to answer simply some basic questions (like how much cash they needed each month) or to explain to the committee members who advocated Chapter 11 the difference between the two types of bankruptcies. But isn't there a business reporter somewhere in the media (print, internet or TV) who could spend a little time researching the issue?

Personally, I'd rather waste 29 million trying to keep those 3 million jobs than just throw the dice and assume that everything will work out. (A couple of CNBC's guest stars on The Big Deal really threw me with their cool assessment that the 3 million would get unemployment benefits!)

A lot of this talk about "let them fail", "let the market clear out all the riff-raff" isn't new. It was last heard en masse in 1929. I'd like to think we learned something, but it appears that Conservative Economists are convinced that the Government caused the Great Depression and want to do it "their" way this time. Oddly enough, only CNBC's Jim Cramer seems to understand that in the current economic situation, ideology is not a good counselor. As he points out: we can punish all these corporate idiots later. It's more than a bit masochistic to send the world into a Depression just to prove that capitalism penalizes failures.