Bailout Watch 59: George F. Will Votes Nay

by Robert Farago

September 22nd, 2008 8:40 AM

bailout watch 59 george f will votes nay

Well he would, wouldn’t he? As usual, George F. Will takes his sweet time getting to the meat of the matter: his final position on Uncle Sam’s $25b low-interest loans for The Big 2.8. And when he does, Will’s irony meter pegs out at 10. “Lemon socialism — the subsidization of the weak — is supposedly needed lest a U.S. automaker file for bankruptcy, causing the sort of civil disorder and social chaos that accompanied the disappearance of Studebaker, Packard, American Motors and others.” Will’s summation hedges his rhetorical bets, but the message couldn’t be any different from Washington Post stablemate and nominal car critic Warren Brown. “Detroit says, correctly, that some of its problems stem from fuel economy and other mandates imposed by the 535 automotive engineers on Capitol Hill. But that is beside the point, which is: No one thinks that the failure of an auto manufacturer would pose systemic risk to the economy. Americans would just buy a different mix of cars.” In fact, day after day, month after month, year after year, they already are. [thanks to loads o’ folks for the link]

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Pch101 on Sep 22, 2008
Instead, they need to be properly valued. They will eventually default in large enough numbers to create the problems that we are seeing today. This cannot be helped -- when borrowers have no skin in the game, large numbers of them will default. Traditionally, banks have demanded collateral precisely because they want a hammer to hold over the borrower's head. If the borrower has little or no money in it, the borrower has little incentive to keep it afloat. One can't possibly value that properly, the loss reserves required on the balance sheet would be extreme. When it comes to bailouts, my only concern is that the first guys to get a haircut are those who took the risks In theory, this should happen. In practice, it doesn't and can't, because their failure becomes our failure. When they pay, we pay. They have a gun to our heads, and they damn well know it. We aren't bailing them out for them; we're doing it for us. If the feds hadn't done this stuff, we could have had a depression -- that is no joke, we are that close to the edge. Their shareholders are getting killed and their top managers being forced out, so there is some justice here. But the bonuses that were earned in past years aren't coming back.

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on Sep 22, 2008

How the Democrats Created the Financial Crisis: Kevin Hassett "The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them. Turning Point Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened. It is easy to identify the historical turning point that marked the beginning of the end." http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSKSoiNbnQY0

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Landcrusher on Sep 22, 2008

On the values, it would seem to me that the proper valuations used to be there, and that has somehow changed. I don't know exactly how it's done now, but I suspect that somewhere the likelihood of a default is mixed into the formula. As you say, the likelihood of a subprime default is extremely high, and the more of them in a given area, the higher the risk of a domino effect. I would have put the value of a subprime california loan at pennies, while one in Aspen might be worth near face value. If the loss reserves would be extreme, then GOOD! That's where we went wrong, is it not? This should have never gotten this big because only private players should have been able to play in the markets due to the risks. If someone offers you a pig in a poke, you won't buy it. How come the SEC and others allowed companies to buy dozens of supersized 5,000 pig sized pokes and put them on their books as if they had just bought 5,000 prize pigs rather than a bunch of feral cats? If the officers of Jared Jewelry put a bag of paste on their books as gemstones, they would be prosecuted. It's FRAUD. If you run Lehman, how do you claim you didn't know? If you are that stupid, don't you have a fiduciary duty to resign? Let's be gracious. Leave them each 3 million, and take the rest. Bail out the company, but weed out the so called leaders. Sorry about the rant, but I am still pissed.

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Pch101 on Sep 22, 2008
As you say, the likelihood of a subprime default is extremely highd It isn't just subprime. There are plenty of loans in today's market that had little or no equity to begin with, and have since lost whatever they may have had and more. Even the prime borrowers are a great risk under these circumstances. They are less risky, but still too risky during times like these. If the loss reserves would be extreme, then GOOD! What I'm really telling you here is that it isn't realistic to expect anyone to book these inherently risky loans to the extent that we are talking about. There will be motivations to do otherwise, and do otherwise they shall. If you run Lehman, how do you claim you didn’t know? Because it is possible to use the data to say otherwise. Which is what they did. We need to separate theory from practice. If you allow bad practices, they will be used. We tried doing what you're suggesting -- assigning a value to them -- and it didn't work, because there is far too much room for interpretation to make that workable. This would be akin to dealing with rapists by making sure that they carry insurance policies that will pay out their victims in the event that they rape again. Clearly, that isn't a solution, because the goal needs to be prevention, more so than recompense.

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