Modern Bank Robbery

I agree with Simon Johnson that this line of thinking is atrocious and unacceptable:

One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives. We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

If the goal is to wrap up the crisis as quickly as possible, then let's stop talking about buying junk assets from banks and start talking nationalization. If the key to recovery is to avoid "prolonged deterioration", we can end the role of those junk assets in this mess just as quickly by estimating the lowest price we can pay for "the various toxic assets residing on financial institution balance sheets".

This Is Acceptable?

Robert Reich comments,

In other words, Geithner and Fed Chair Ben Bernanke continue to do pretty much what Hank Paulson and Bernanke did: They hide much of the true costs and risks to taxpayers of repairing the banking system. Those risks and costs should be put on the people who made risky bets on the banks in the first place - namely bank shareholders and creditors. Shareholders of the most troubled banks should be wiped out entirely. Bank creditors- except depositors - should take major hits. And top executives who were responsible should be canned. But Geithner and Bernanke don't want to take these steps for fear of spooking the Street. They think it's safer to put the costs and risks on taxpayers -- especially in ways they can't see.

Remind me again why "nationalization" is such an awful word? Not in the context of healthy organizations, or even those that are struggling to recover, but in the context of bankrupt financial institutions that seem to lack the will, desire, and ability to get themselves out of the mess they created? "It spooks the street" just isn't convincing enough for me.

The New Bailout - I Don't Get It...

Okay, I'm not an economist. Not even close. My calculus is so rusty, I probably couldn't struggle through the first exam in a Calculus 101 class. (Or is it 201? See, I can't even remember that much calculus.) So no, I'm no expert - don't pretend to be. So maybe this shouldn't be a surprise, but...

I just don't get it.

I appreciate that we've moved away from the "bad bank" model, something that seems primarily to be "bad for taxpayers". But I just don't see how providing capital for private investors to buy toxic assets is going to help clear up this mess. Let's say I'm an investor, and I'm not inclined to borrow money to invest in those assets at a present, near zero interest rate. That could be because I see them as too risky, as offering an inadequate rate of return, or because the seller doesn't want to admit their fair market price. Unless somebody gets subsidized how does federal money change that equation?

If I'm a bank that does not want to admit actual value for its assets because I'm bankrupt, having more potential buyers won't change that. Maybe that where Geithner's idea of auditing banks before giving them additional bailout funds comes in, assuming that plan has teeth. Their "97 cents on the dollar" entry is reduced to 38 cents, they qualify for federal aid (or a takeover), and the investor uses a federal loan to pick up the securities at their market value. But how is that superior to simply bailing out the bank and having it hold its own asset at its actual value?

Is the idea here that the money is only available to buy toxic securities, so that the private partners may decide, "Well, I wouldn't put my money on the line for a possible 0.1% rate of return, but I'll happily put free federal money on the line." What guarantees are we offering to the private partners? That we'll cover any losses if the securities drop in value - subsidizing the investors instead of the banks? How is that better than directly overpaying for junk securities through something like TARP - such a guarantee would seem to be yet another layer of lemon socialism, as with TARP the taxpayer would at least get the benefit of any increase in value. If we're not offering any guarantees, why should we expect investors to pick up the worst of the worst securities, the ones that are the biggest drags on the financial industry?

Granted, I'm working off of a public statement, pretty much devoid of details. I guess I'll wait to see what the experts have to say.... (Although the operative word so far seems to be BARF.)
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Update: What are Nobel Prize-winning economists for, if not to explain these things to us, and Paul Krugman has stepped in to help me understand the Geithner plan!

So what is the plan? I really don’t know, at least based on what we’ve seen today.

Wow.... I feel... so much better....

Justifications

With all of the reasons tossed out for why a stimulus bill needs to be conservative, at least in comparison to the amounts many said would be necessary for an effective stimulus, what's the future of the bank bailout? I may not be thrilled about taking a huge money gamble to fix an economic mess largely created by the idiots who run our nation's banks, but I'm even less thrilled by spending hundreds of billions more to help save their jobs and prop up their bankrupt companies.

And in terms of that bailout....

Summers suggested the bank rescue plan may offer incentives for private investors to buy mortgage-related assets that have lost value because of the collapsed U.S. housing market.

"It can't all be private capital," Summers said on "Fox News Sunday."

It only takes enough private capital for securities not already guaranteed by the government to establish their market price; then the government can buy the rest at market value? Yeah, right.

"But with the right kinds of government guarantees, with the right kinds of financing ... with the right strategic approaches, Secretary Geithner believes that we can bring in substantial private capital," Summers said.

Why do I suspect that with Summers' version of "the right kinds of government guarantees", whether it's public money or private that "buys" the security, the taxpayer bears all the risk.

At Least He's Honest

Caught up in what you would thing would be an obvious scam, a lawyer admits,

"I'm a capital 'D' Dumbass."

I don't say that to be hard on the man, but to emphasize this: When you're offered huge amounts of money for doing virtually nothing, odds are you're being scammed.

I don't want to review the entire history of international financial scams - it's long, and predates the Internet. Yes, those promises of wealth from foreign lotteries you haven't entered, deaths of foreign relatives you didn't know existed, or desperate millionaires who can only get their money out of a developing nation if you let them wire it to you? There was a time that they came by mail or fax. Now they come primarily by email, and although they evolve the central theme remains the same:

1. You are selected at random, for no apparent reason;

2. You are offered a great deal of money to do virtually no work; and

3. If you go along with the scam, you'll end up losing a great deal of money.

A relatively recent version of this scam is a "work at home" scam, where you supposedly process payments for a company, forwarding them their balance when the checks clear. You retain a percentage, say 10 - 20%, as your fee. Now it should be pretty obvious that there's something fishy here - why would a company direct its clients to send you their checks (more probably, money orders), and pay you to process them, when it would be cheaper and easier to receive the payments directly?

I received a phone call the other day, inspired by an article I wrote a few years ago on this type of money order fraud. It was a story I expect to hear repeated quite often in the current economic climate - a woman, facing financial hardship, answers an ad offering home-based employment. She signs up, starts receiving and processing money orders, and "clears" a couple of money orders through her bank before they are revealed to be fraudulent. She's already forwarded the money, less her "share", to an international address. Her bank wants its money back from her. The money orders in that case looked very real because they were real - all except for the dollar figures. The scammers had managed to steal some blank money orders.

But that woman is "small fry" compared to the lawyers who have been targeted. It's exactly the same deal, except the scam comes from somebody claiming to represent an international corporation trying to collect on an unpaid account - tens or hundreds of thousands of dollars. They offer the lawyer a sizable percentage of the money recovered. Ironically, this percentage vastly exceeds the 10 - 20% offered in the "work at home" version of the scam, because ordinary people would probably be incredulous that they could get 30 - 40% of the payment merely for processing a check. The lawyer-victims, not so much.... They sign up, call the debtor, are told, "No problem - I'll mail that right out," get a check within days, and it never occurs to them to wonder, "If the debtor was that eager to pay, why didn't the creditor simply call and ask for payment and why would they offer, let alone agree to, this fee?"

Here's my proposed solution - banks should prepare brochures outlining the most common version of this scam, and have them available at their counters. When a customer comes in to deposit a money order, their tellers should be instructed to ask, "Do you personally know the person who sent you that money order? Have you seen our brochure on money order fraud?" Even at the ATM machine, banks could give a general warning about money orders to customers making deposits - display the full warning one time, and offer a "press here to learn about money order scams" option for future deposits.

Because I suspect that 90% of the people suckered into this type of scam, once made aware of how the scam works, would figure out whether or not they should be depositing the money order. Banks lose money on these scams, as well. Wouldn't this simple step be less costly for everybody?

Somebody Knows What Those Assets Are Worth....

Following up on the obvious fact that there is a way to get an actual valuation for the toxic securities held by financial institutions, commenting on a New York Times article on some of the dubious assets, Rep. Brad Miller writes,

The financial institution [holding the bond] values the bond at 97 cents on the dollar. Standard & Poor’s values the bond at 87 cents at the current default rate, but estimates the bond’s value could go down to 53 cents if the default rate doubles. But someone actually bought one of the bonds recently. The purchase price was 38 cents.

According to the article, financial industry critics “say that the banks’ accounting for those assets cannot be trusted because they have an incentive to use optimistic assumptions.”

“Optimistic”? Whoever paid 38 cents on the dollar for one of those bonds is a giddy optimist. The financial institution’s valuation of 97 cents on the dollar is pretty clearly fraudulent.

Absolutely.

Falling Down on the Job

Although nothing's set in stone yet, I'm not particularly impressed with the lack of progress on a stimulus bill, or with what looks like a pretty atrocious approach to bailing out the nation's financial institutions.

The "S" Word?

That's right, folks. When you run your business into the ground and the government rushes in to give you billions of dollars, allowing you to stay out of bankruptcy, keep the lights on, and pay your employees, anybody who criticizes the fact that you use government money to give oversized bonuses to the people who ran your company into the ground is... a socialist.

Well, better that type of "socialism" than lemon socialism, right?

It's Pity Party Time

Break out the violins for Wall Street.

While Wall Street investment banks and other financial firms make headlines for the millions paid out to certain executives, more modest bonuses go to workers from human resources representatives to secretaries as well as employees who actually made money for their companies last year.

There's an implied sneer in that, at "workers from human resources representatives to secretaries" as people who don't make money for their companies. But let's turn it around... Let's say, "Even in the financial industry it's okay to give bonuses to the employees who made money for their companies last year... but do we need more than one hand to count them?"

Jason Weisberg, vice president of the Wall Street brokerage Seaport Securities, said bank employees count on performance bonuses like salesmen count on commissions.

"What are you supposed to pay them?" Weisberg asked. "Or are you not supposed to pay them?

Salesmen count on commissions from their sales. If they don't make sales, believe it or not, they don't get commissions. Similarly, if we're going to refer to "performance bonuses", they perhaps should be somehow related to... performance?

And if you don't pay them, how do you expect that employee to stay employed at that company?"

Well, if they're not performing... do you really care? And with financial industry employer's shedding employees like leaves, odds are that only those employees who actually performed will be marketable - and their performance bonuses are defensible.

"The reality is good people will always be able to get a job someplace else if they are unhappy," Hall said. "So do you want to own stock in a company that is filled with people who can't get a job anywhere else?"

You mean, the "good people" who lost hundreds of billions of dollars, and caused the value of my stock to plummet to the point that the only reason it has any value is... not even the bailout money it has already received, as that hasn't fixed things, but the expectation that hundreds of billions in additional taxpayer dollars are on the way? No, I don't want stock in that company, but it's not because I'm concerned that the "good people" might leave.... Stock in the company that's doing well enough to poach them, on the other hand....

This is funny - a Wall Street veteran states the obvious:

"You could absolutely make an argument that we shouldn't be getting any bonuses this year," said the worker, who also requested anonymity because of his company's restrictions on talking to the media.

"If you are going to have a pay-for-performance system, you have to take the lows with the highs," he said. "This just happened to be a really low year."

It's only the guy who speaks out against bonuses, it seems, who "can't" use his name.

"Nobody Knows What These Assets Are Worth"

You've heard that one, right? That banks are sitting on trillions of dollars of securities, state on their books that those securities have a specific value, but that "nobody knows" what they're actually worth? Even though, not so long ago, those same securities were traded on the market and everybody "knew" what they were worth?

Let's be honest for a moment: It's easy to figure out what the securities are worth. Put them up for sale. The price somebody is willing to pay for them? That's what they're worth. The protest, "But once financial markets settle down and the economy becomes more normal, they could be worth a lot more"? Sure. But the person who is buying the securities in the current market is considering that when setting a price. Gasoline may be back up to $4/gallon next fall; but that doesn't mean I'm going to buy gas at a station that wants to charge me $4/gallon today. (If I believe gas is going to go up to $4/gallon, I might buy futures, but I'm not going to buy them at $4/gallon.)

We're caught between financial institutions that claim, "We don't know what these securities are worth" because they don't want to establish a market price that would render them insolvent, and a government hoping to rescue those same financial institutions from insolvency without creating a massive public uproar that they're paying tens or hundreds of billions of dollars over market for some extraordinarily risky securities. And we're supposed play along because the consequence of establishing a market price could make everything a lot worse.

Making the "Bad Bank" Not Quite As Bad

If we must have a 'bad bank'... Dean Baker proposes a provision that will keep taxpayers from being completely soaked when they buy up toxic securities from our nations bankrupt banks:

We can just attach a clawback provision, under which the bank will be forced to make up any money that the bad bank loses on their junk, plus a penalty. For example, if Citibank sells $100 billion in junk, and the bad bank ends up selling it for $70 billion, then Citibank has to cover this $30 billion loss, plus a 20 percent penalty ($6 billion). This structure will both ensure that Citibank doesn't run off with our money and also discourage banks from trying to mislead the bad bank about the true value of their junk. (Senator Dodd proposed a similar measure in the debate over the TARP.)

Under the Bush-Paulson plan, we gave away a ton of free cash, no strings attached, and we were rewarded with... Yeah. Enough of that.

Note, though, that an honest valuation won't make the banks solvent.

But It's Even Worse, Isn't It?

If you wait long enough, somebody's probably going to articulate what you are thinking, and probably say it better. Case in point: I haven't had much time to type out my thoughts on the nation's fear of "nationalization", but Robert Reich does a pretty good job of describing something that's been bothering me:

The federal government -- that is, you and I and every other taxpayer -- has taken ownership of giant home mortgagors Fannie and Freddie, which are by now basket cases. We've also put hundreds of millions into Wall Street banks, which are still flowing red ink and seem everyday to be in worse shape. We've bailed out the giant insurer AIG, which is failing. We've given GM and Chrysler the first installments of what are likely to turn into big bailouts. It's hard to find anyone who will place a big bet on the future of these two.

In terms of the companies lining up for bailouts,

If anyone has a good argument for why the shareholders of these losers should not be cleaned out first, and their creditors and executives and directors second -- before taxpayers get stuck with the astonishingly-large bill -- I would like to hear it.

I completely agree. But there's something Reich doesn't mention that concerns me: Our current bailouts aren't working. That is, it may cost us more to continue bailing out loser companies while declining to nationalize them than it would if we nationalized them, ate their bad debt and, as quickly as possible, restored them to private ownership. (Part of the reason, of course, is the appalling greed of incompetent managers.)

I can also tell you this, not far off from one of Reich's points - Chrysler is a black hole. If it weren't, Cerberus would be bailing it out itself. They shouldn't be invited back for more "loans" or bailout funds, save perhaps a bridge loan to help them seal a takeover deal with a viable company.
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Addendum: "Moral haz... whuttard?" David Ignatius flat-out calls for subsidy:

How will the managers of the Bad Bank coax the gremlins out of hiding? With money, of course -- buying up an estimated $1 trillion to $2 trillion in toxic paper. Will the government overpay? Of course it will, especially at first, as it discovers fair prices for securitized debt for which there isn't now a functioning market.

Anybody even casually conversant with this crisis knows that the government will overpay because to do otherwise won't help the banks. We can buy them for the pretend value the banks presently use, knowing we're paying probably two, three, four times their actual value, removing a huge liability from the banks' shoulders, then hope that with actual assets back in their coffers banks will return to "business as usual". Or we can try to come up with something approximating market value, force banks to report multi-billion dollar losses on those assets, and... then most of them have to admit insolvency.

At least people seem to be through arguing that if the taxpayer ends up owning these toxic assets, there's a chance of "turning a profit". Does Larry Kudlow blush when he reads crap like this, or does he shrug, smile at the corporate interests he serves and say, "It was worth a shot."

Hedge Fund Transparency?

Mike's alerting me to a huge expansion of the federal bail-out into hedge funds - yes, hedge funds - made me think (for some reason) of Sebastian Mallaby. Although he wrote this a couple of weeks ago, I think it deserves a bit of attention:

Madoff illustrates a problem with investment outfits that claim to have some special sauce that is too valuable to discuss. People who entrusted their money to Madoff thought he had a clever options trading strategy; they were wrong. Worse, people who entrusted their money to respected banks and investment advisers had no idea that their savings were being passed out the back door to Madoff. On Monday, I happened to be visiting one of the most famous traders in Manhattan. He had invested with a hedge fund that had in turn invested with Madoff, hot-potato style.

The good news is that Madoff's fraud was so brazen that any future imitators may be spotted. A newly chastened wealth management industry will be warier of people who hire bucket-shop auditors; the "fund of funds" industry, which gets paid to do due diligence on hedge funds, will feel appropriate pressure to redouble its efforts. Even though hedge fund managers may legitimately refuse to disclose their trading strategies, there are some things they can be open about. Do they trade through a respected external broker? (Madoff apparently didn't.) If their returns clock in at 1 percent per month with eerie consistency, can they explain why? (Madoff could not have.)

I can think of three reasons why hedge fund managers might refuse to disclose their trading strategies:

1. They're "secret sauce" isn't anything special - it would be easily replicated by their competitors;
2. They're engaged in trading strategies that skirt the boundaries of the law, and people would be appalled that their actions are legal (or might conclude, even under present law, that they're not); or
3. Like Madoff, they're criminals and disclosure would reveal their crimes.

Now sure, some hedge fund managers may truly have developed secret trading methods and sophisticated models of predicting markets, that would lose their power if their competitors had even a hint of how they worked. But why am I thinking that the principal reason for the secrecy lies behind door #2, and that the net result is that the industry demands a freedom from regulation and oversight that protects those who, like Madoff, lurk behind door #3?

Although Mallaby is not skeptical of hedge funds - quite the opposite - he is concerned about door #3: As a result of the way the system is structure, he tells us, "the bad news is that less-brazen fraudsters may be impossible to detect" and "this Achilles' heel could eventually kill hedge funds". Nonetheless, "Responding to this scandal with more regulation would be like thrusting more pills on a patient who refuses medication." (Why do I suspect that Mallaby has no problem drowning hedge funds in taxpayer money, even to the likely benefit of hedge fund managers who are continuing to perpetrate their hard-to-detect frauds?) Wouldn't Madoff's fraud have been discovered even with a modestly thorough audit? "No.... Regulation bad...."

This is curious:

Perhaps half of all funds use strategies about which there is no great secret, so disclosure is possible...

If that's truly the case, how do we justify the astronomical compensation taken by hedge fund managers? How can anyone defend taxing their income at the capital gains rate, instead of as... income?

Moving to more current news:

Last month, five hedge-fund managers who each made more than $1 billion a year were called before Congress to discuss the industry's role in the crisis and the case for regulation. Four of the five said they thought that hedge funds could pose a systemic risk to the economy. "Any institution that has a pool of capital at its availability and uses reckless leverage indeed poses a potential systemic risk to the marketplace," said Philip A. Falcone, manager of Harbinger Capital Partners.

When pressed, the hedge-fund gurus agreed that they could probably live with some form of disclosure to a federal banking regulator, as long as the data are not shared with the public.

How... special.

Well Go Figure

Don't tell Thomas Friedman, but here's a little footnote from history.

Though [Isaac Newton] never managed to turn base metal into gold in an experiment, later in life he became Warden of the Mint - the man in charge of making the country’s money. Here, he oversaw the production of gold and silver coins, and ensured that they were made more exactly than they had ever been made before. He also went after counterfeiters, several of whom were hanged.

That's the best and the brightest for you. Always trying to make a mint in banking.

Because That's What They Would Be Doing?

Thomas Friedman sings a tired old refrain,

To top it off, we’ve fallen into a trend of diverting and rewarding the best of our collective I.Q. to people doing financial engineering rather than real engineering. These rocket scientists and engineers were designing complex financial instruments to make money out of money - rather than designing cars, phones, computers, teaching tools, Internet programs and medical equipment that could improve the lives and productivity of millions.

Now, I'm not saying that people who become MBA's or lawyers couldn't have productive lives as engineers and computer programmers. But how many of them do you suppose wanted to enter those professions? Friedman also seems to believe that pretty much all of the "best and the brightest" want nothing more than to chase the almighty dollar. Not everybody chooses to work for Wall Street or BigLaw.

I suspected long before I reached that point, but my second semester of organic chemistry sent home the message that I wasn't going to be spending my career in a chemistry lab. Please, don't judge chemistry by organic chemistry alone - a tedious bore of a subject that is best "mastered" through rote memorization - but for goodness sake, not everybody who is good at crunching numbers on Wall Street would be particularly useful in scientific or engineering fields. Maybe they would be accountants or lawyers, or economists, or politicians.

For that matter, who says the people who crashed and burned the world financial system are "the best and brightest" at all? Friedman seems to be falling for a pretty typical American conceit that anybody who makes a lot of money is among the "best and brightest", even if they can't change a light bulb unassisted. What makes the people who crashed Bear Stearns, Lehman Brothers and WaMu any better than the people who crashed Chrysler and General Motors? If it's such a big deal that GM is gushing red ink to the tune of $74 billion over four years "yet you can count on one hand the number of executives who have been reassigned or lost their job", what's the body count over at Citigroup? It's the auto companies that are "giant wealth-destruction machines"?

When we look at the decline of the nation's newspapers, including the New York Times, can we turn a mirror on Friedman? Friedman likes to look down on GM, but what about his own employer? At what point do we declare that newspapers have "become giant wealth-destruction machines", and insist that it's ridiculous to pay people six figure salaries to write syndicated columns when they could be out inventing something?

I know, I know.... "That's different."

Strings, Strings and More Strings

As far as I'm concerned, if a bank wants another handout, it's time to tie it up in strings. My suggestions:

Accountability for Any Prior Handounts - If the bank has received a prior infusion of bailout funds, it must provide a full accounting of the use of the funds;



An Honest Balance Sheet - Any banks who want handouts must present an honest assessment of any troubled / toxic holdings they possess, with bailout money being directed based on need. If a bank wants to pretend that its toxic holdings are worth 80 - 90 cents on the dollar (or more), we are equally entitled to pretend that they're telling the truth and that the don't need our money;

A Business Plan - Require a clear statement from the bank of how it got into this mess, and precisely how the cash it requested will help it get out.

An Insolvency Plan - In case it gets the funds and still can't get its act together, a plan for how it will enter Chapter 11 proceedings, or how it will otherwise facilitate the FDIC in arranging its takeover by another bank.

Henry Paulson doesn't appear to have the cajones to stand up to even a tiny bank, and seems happy to have bailout money wasted on huge salaries and bonuses, corporate jets, shareholder dividends, or whatever secret uses a bank may find for our money, so this will have to come from Congress.

Or, perhaps better, Congress can hang on to the remaining bailout funds for a month, until Pauson is just another historic participant in the Bush Administration's sordid legacy of failure.

What A Pathetic Display

The Washington Post, observing that the only proposal to save the auto industry is failing in the Senate - due to, of all things, a Republican demand for what amount to wage caps on auto workers - "What's Plan B?" It astonishes me that a Republican President can't convince enough of his own party's senators of the urgency of action, that they drop their filibuster threat. In what seems like "business as usual", a scheduled vacation appears more important to the Democrats than actually forcing the Republicans to break out their encyclopedias and, if they truly wish to block the bill, actually filibuster.

The short answer to the question, "What's Plan B", appears to be to use TARP money for the bail-out, which could mean that none of the restrictions, compromises, or demands placed upon the Big Three by the bailout bill will be implemented. The Republican Party may be giddy with the idea of harming or breaking the UAW and benefitting the foreign auto manufacturers who are located in "red states", but G.W. is worried about the tattered remnants of his legacy.

"Because Congress failed to act, we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry," Treasury spokeswoman Brookly McLaughlin said.

And, White House spokeswoman Dana Perino said it is considering using the Wall Street rescue fund to prevent the USA's strapped carmakers from failing.

I like that - it's "because Congress failed to act", rather than, "Because the President couldn't convince his own party to back a bill he supports." Perino elaborated that "it would be 'irresponsible' to further erode the economy by allowing failure in Detroit", but how about some honesty here about just who it is that the President is describing as irresponsible.

The Washington Post repeats some common, yet silly, complaints about the auto industry,

Furthermore, if the Detroit carmakers are going to survive, they will have to completely overhaul the way they do business - and start building cars that people will buy.

Lets look back a whole year:

General Motors announced today that it sold 9,369,524 vehicles worldwide in 2007, which puts it in a dead heat with Toyota for the title of world's best-selling automaker.

Now the Big Three deserve criticism for disregarding the end of cheap oil, but really... but for the spike in gas prices this summer and the current financial crises, at current gas prices those highly profitable gas guzzling vehicles "that no one wants" would be flying off of car lots across the nation. (If auto makers booked their profits when those vehicles sold, as opposed to when they were shipped to dealerships, they would be looking a lot healthier right now - because sales appear to be picking up.)

For that, they are going to need new leadership, a rational assessment of their long record of failure and, yes, a much larger infusion of government cash.

We're back to that "new leadership" thing.... Something the Post isn't demanding of the finance industry, despite a perhaps unparalleled record of failure and incompetence by its leaders. Heck, the Post doesn't even appear upset by the astronomical wages, bonuses, and even stock dividends that bailed-out financial companies are paying with taxpayer money.

Perhaps we need a financial industry czar - somebody who saw that derivatives were, let's say, a "time bomb" or as "financial weapons of mass destruction"... Oh, but let's be realistic. Nobody could have seen the financial industry's problems coming. We need to find a Warren Buffett for the intelligence community, and apparently we need a Warren Buffett for the auto industry. It's truly a shame we can't find a Warren Buffett for the financial industry.

I've already commented, but it bears repeating - where exactly does the Post imagine that the Big Three will find "magic men" to lead them in a new direction? Ford got its CEO from Boeing; Chrysler's CEO used to head, of all things, Home Depot. How far outside the industry is far enough to satisfy this ridiculous demand - and what's wrong with looking for people within the industry who actually know about cars and may even have a track record of developing vehicles that are suited to the future?

Nobody - including the carmakers - fully understands the depth of Detroit’s problems or how much money it will take to dig them out. Mark Zandi, chief economist at Moody’s Economy.com, told Congress last week that rescuing the companies would cost taxpayers $75 billion to $125 billion over the next two years. And that’s probably optimistic.

Now that's a fair criticism. Chrysler, for example, is pretending that the bailout will result in a quick return to profitability. Does it believe that, or is it spinning a fairy tale? If the former, there's good cause to question the competence of its leadership. If the latter, it appears to be part of a mendacious plan by Cerberus Capital Management to get a taxpayer subsidy that allows it to avoid taking a loss on a bad investment. As you already know, I think it's the latter.

If the Big Three are glossing over a future that, realistically, will require a taxpayer bailout exceeding $100 billion, we should be sending them back to revise their plans to reflect that reality - and to demonstrate how they could recover with a smaller infusion of taxpayer money.

Beyond the Post's dream that the Big Three will find "magic men" to take over for their present leadership, it whines,

And the bill doesn’t set any conditions to ensure automakers invest in fuel-efficient vehicles. Any long-term plan must make sure the automakers don’t simply keep making gas-guzzling trucks and sport-utility vehicles, whose popularity - unfortunately - has recovered as gas prices have declined.

There's not even a slight effort to achieve internal consistency. If the idea is to force auto manufacturers to build cars that consumers want, it appears that they are doing so - as long as gas prices are low. If the idea is to force them to give up their gas guzzlers in favor of fuel-sipping vehicles, that's something quite apart from getting them to build the vehicles people want to buy. Let's be blunt - if you could build a car the size of a small house, have it get 25 MPG, do 0-60 in less than ten seconds, and sell it in various forms for $20-$30K, it would be the most popular car in America. (The auto manufacturers are about as likely to be able to create such a car as they are to find the Post's "magic man" leaders, so don't accuse me of being unrealistic.)

It should go without saying, but it doesn't - so here we go again. If the goal is to create a competitive domestic auto industry, you can't do that by hamstringing auto makers and forcing them to build under fuel efficiency standards that don't apply to their competitors. If you want more fuel efficient cars on the road, build an even playing field by instituting new, meaningful CAFE standards that apply to everyone.

If the Post is correct, that it's going to take $75 - $125 billion to turn around the domestic auto industry, then perhaps its time to think about something far different from a bailout that tries to keep the three auto makers in business. There are a number of options, short of and including bankruptcy, that should be considered in the new year. Assuming GM and Chrysler aren't already in bankruptcy by then.

But how about at least passing a contingency plan - an authorization of aid to parts suppliers to keep them out of bankruptcy in the event that Chrysler and/or GM file Chapter 11. If we're going to risk that they fail, let's at least try to keep them from dragging Ford down with them.

Vanity Fair on Henry Paulson

This seems like a pretty accurate capsule summary:

The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding—and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

I would add, Paulson's refusal to hold a steady course, and his willingness to throw "no strings attached" billions at banks based upon criteria only he appears to know (assuming he actually has criteria) could not possibly have created confidence in the banking system, as it's been entirely unpredictable.

More On The Financial Mess

The AP covers how, in 2005, the Bush Administration's contemptuousness of regulation and deference to lobbyists led to its rejecting regulations that could have helped diminish the bad lending practices that contributed to the housing bubble.

The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.

"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.

Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.

Also, CJR covers a Wall Street Journal article observing that, while the financial industry is presently being given a free pass for the incompetence of its management, it has a lot more in common with the auto industry than Congress has so far acknowledged:

For their part, banks have found lots of causes for their predicament aside from their own failings. The crisis, they have argued, is down to an impossible-to-predict perfect storm, predatory hedge funds, panicked investors, unrealistic accounting rules and economic changes that emerged so quickly there was no way to be prepared for them.

If only. The reality is the crisis is due to bad lending and investment decisions. And those, after all, form the core of the banking business. In auto terms, it’s as if banks designed cars that suffer from catastrophic mechanical failures, or can’t be driven during snow storms.

CJR concludes that the author is "right to point out there’s more urgency with fixing the banking system, and right to point out that doesn’t mean they should come out looking the same."Bush

Heads Should Be Rolling

Thomas Friedman, following up on this New York Times article, makes the case that the leaders of the financial industry, now reaping the benefits of the gargantuan, taxpayer-funded bailout, are incompetent or worse:

Why? Because in searing detail it exposed - using Citigroup as Exhibit A - how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.

With due respect to Friedman's acknowledgement that responsibility spreads well beyond those financial institutions, and duly acknowledging his focus on the leaders of finance and that he's not defending Paulson's decision to treat them with kid gloves, how can you argue but that those at the top of the financial industry who were either too stupid or too greedy to put on the brakes should be keeping their jobs, even as they get tens to hundreds of billions of dollars of taxpayer money and guarantees for their junk securities?

Also check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Portfolio.com. Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge — including Meredith Whitney, a little known banking analyst who declared, over a year ago, that “Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,” wrote Lewis.

“This woman wasn’t saying that Wall Street bankers were corrupt,” he added. “She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.”

Corrupt? Stupid? Or is it that they are so used to being lionized by a nation captivated by wealth, despite their limited knowledge and skills, and so immersed in a culture where almost anything goes in the name of profits, that they weren't aware that they should even try to look past their greed?

A few months ago, with this crisis looming, Friedman wrote,

Come August, though, I predict both men will be looking for a financial wizard as their running mates to help them steer America out of what could become a serious economic tailspin.

I wish he had "named names", as I am curious as to whether the reputations of the "financial wizards" he had in mind would have survived the past five months.