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This greed was beyond irresponsible
September 17, 2008
My regular column in the FT is on, guess what, the credit crisis:
I have a fine seat in the FT’s New York office looking down the canyon of Sixth Avenue towards the banks of Midtown. From my perch, I have watched the flabbergasting events of the past week.
My initial reaction was excitement – what a time to be observing Wall Street for a living! This steadily gave way to bafflement, fear and finally, after the US government’s $85bn (£48bn, €60bn) bail-out of AIG, anger.
I was pleased that Hank Paulson, the Treasury secretary, heeded my advice (OK, that of others too) and refused to rescue Lehman Brothers. Guess what? The world did not end on Monday, even if the stock market dropped, and on Tuesday, the Federal Reserve was also defiant.
Its unanimous decision not to bow to market fears and cut interest rates was greeted with boos on the New York Stock Exchange floor. But the stock market took the medicine and went on to rally again.
Then came Mr Paulson’s retreat, executed with gritted teeth, as the government and the Fed reluctantly decided that the risks of letting AIG founder in the same way as Lehman were too great.
That frightened me.
You can read the rest here and comment below.
Correct link:
Posted by: Alecco | September 17th, 2008 at 10:09 pm | Report this commenthttp://www.ft.com/cms/s/0/9c0e75cc-84e1-11dd-b148-0000779fd18c.html
John,
I have not yet read your column, but I already have something to say about two words in the title:
‘greed’ — did not Adam Smith teach us that greed can be beneficial to society at large? Modern economists would say it all boils down to a question of ‘mechanism design’: how does one form the right institutional infrastructure, one which engenders the right set of incentives? Which leads to the other word –
‘responsibility’ — who’s responsibility is it? Are we to rely on the players in the capitalistic game to constrain their own movements, when everybody else is playing to win? Is it their responsibility to do so? Or is it the game designers’ responsibility to set the right rules and oversee their implementation ?
Posted by: RCS | September 17th, 2008 at 10:13 pm | Report this commentI do not think their is any case here of moral hazard. The previous owners gave up 80% of their equity for a LOAN. I think Hank Paulson is deftly steering this crisis, in fact would probably make a better president than either of the two major party candidates. Hank is pragmatic. He has not drawn any lines in the sand because to do so would be foolish. Every case needs to be analysed on its own — dogma breeds certainty and certainty breeds moral hazard.
Posted by: RCS | September 17th, 2008 at 10:37 pm | Report this commentThank you for this great article.
@RCS: I beg to differ. I think Paulson is fixing the problem today by betting the future of the whole world economy. If US defaults or gets into an inflationary spiral, things will get uglier than this. Significantly.
Posted by: Alecco | September 17th, 2008 at 11:03 pm | Report this commentHello Mr. Gapper,
I do not think the situation as bad as some have claimed. Letting AIG officially fail would have spurred the assorted financial companies to act speedily to resolve the crisis.
With the Government now avidly participating, the mess will require years and much regulation and legislation to settle, not weeks and months.
The Government is very free with the public purse, especially during elections. Yet, the financial firms had months to do something and have obviously achieved very little. Truly shameful!
Regards,
Posted by: Gary Marshall | September 18th, 2008 at 5:09 am | Report this commentGary Marshall
Alecco:
You are quite right - it is the job of bankers to be greedy, which is one of their obligations to their shareholders. On the other hand, their other obligation is to safeguard the assets in their care.
John Gapper is clearly outraged at the AIG bailout. However, it is not that it is outrageous, it is that such an act is so foolish that should be the concern.
Parts of the US and OECD economies are in a catastrophic state. When government picks up the liabilities from this crisis, they are spreading the crisis into government financing, and indirectly will hurt the still healthy businesses in the future through higher taxation.
It is all very, very foolish, and will just spread the pain across the economy.
http://cynicuseconomicus.blogspot.com/2008/09/banking-crisis-is-as-much-symptom-as.html
Posted by: Cynicus Economicus | September 18th, 2008 at 8:30 am | Report this commentI think we are experiencing a raid on the government’s coffers throught Bagehot’s Lender Of Last Resort mechanism.
The raiders are the elite of Western finance. When the raid is over, we will have a new system and maybe less Socialism (Lender Of Last Resort is Socialism for the benefit of the financial industry) or maybe more socialism, especially if this whole thing develops into a war (like 1929).
Posted by: Frank Gerlach | September 18th, 2008 at 10:52 am | Report this commentI am especially worried about Italy, Germany, Spain, China and Russia. These countries do have a lot of technology, but a weak or nonexistent democratic tradition. Drop in a deep financial crisis and you get World War III.
Excellent article which can be summed up in just a few words “They should have stuck to their knitting”.
Unfortunately, far too many institutions (perhaps with the notable exception of Lloyds TSB)have ignored this basic home truth and have come seriously unstuck as a result!
Posted by: Alan Peachey | September 18th, 2008 at 11:02 am | Report this commentDo we want to play again the financial crisis of 1929 ? If we read again what “old economists” wrote (see John Kenneth Galbraith’s book : The Great Crash) we know that collapse of big retail institutions should be avoided (no matter what price) to avoid a big collapse of the economy.
Posted by: Patrick Goux | September 18th, 2008 at 11:23 am | Report this commentYou argue also that Paulson is doing a favour to European banks and governments. Interesting argument, but which regulatory bodies have failed to prevent the subprime crisis and AIG’s current situation ?
In Europe, we tend to believe that we have to assume when risks are big for the economy and when our regulatory bodies have failed to do their job (see UK government with Northern Rock, German Government with IKB and all German landesbanks).
That was well said and written.
Posted by: fabian hug | September 18th, 2008 at 2:04 pm | Report this commentIt`s business as ussual.Capitalists privatizes the profits and socializes the losses.This means
Posted by: Alex Marquand | September 18th, 2008 at 5:48 pm | Report this commentthey got the money and become millionaires with the State guarantee.Easy living for the elite.
We, to have for our expenses,have to work hard, in a daily basis.
Excellent column. Mr. Marshall, surprise, I agree with your comments here.
Posted by: Wendell Murray | September 18th, 2008 at 7:41 pm | Report this commentAIG was the creator and along with Citi Group was the movement toward derivatives and all these other exotic instruments. I agree with you they are above and beyond irresponsible and what happens to them they deserve. I feel for all the young people just starting out and those who are poor and got screwed by these billionaires and their government lackies.
Posted by: AJ Widget | September 18th, 2008 at 11:29 pm | Report this commentWhat is the constitutional basis for the United States government entering into a part-ownership agreement with a private firm, as with AIG? And if there is such a basis, why wouldn’t it apply to healthy companies too? For example, could the United States take an 80% share in Coca Cola, say, or Procter & Gamble? The U.S. Treasury re-cast as the world’s largest sovereign wealth fund…
Posted by: John West | September 19th, 2008 at 4:14 am | Report this commentWhy angry - instead of Lehman applying for Chapter 11 it would have been Goldman what would the Treasurer have decided ?
Posted by: Joe Sussmann | September 19th, 2008 at 9:52 am | Report this commentDiluation of risks at AIG was in line with same at all the issuers & distributors of subprime mortgages and resulting derivatives - banking may not be gambling and vice verso - Meir Rotschild suggested the last shilling be left for others : dont be greedy. Section IX of the Sinai
X series advises not to bear false witness. Offenses must be paid - but by whom ? Atlas is not shrugging but shaking.
What ever gave anyone the idea that businessmen would be more moral than the general population? Given a chance to steal with little danger of being punished, almost everyone will do it. For many people, this economy has already collapsed. Would they be worse off if these financial institutions were just allowed to fail? I don’t know, and neither does anyone else. But I marvel at the thinking that goes on at the Fed, the Treasury, and the Congress. We have heard over and over that the nation cannot afford its commitments to funding social programs, but in a flash, the nation can come up will trillions to fight wars and bail out crooked businesses while, in truth, the country is bankrupt. What kind of nation has the U.S. become? A nation of liars, thieves, and dummies? I believe so.
Posted by: John Kozy | September 19th, 2008 at 5:16 pm | Report this commentMasters No More? or, What Would Karl Make of It?
By Phil Linehan
Of the Universe each one was a Master
and scorned the few who hinted at approaching disaster.
The market they considered their very own toy
dismissive of what happened to Sherman McCoy.
So we watched as Wall Street went right on sinking
and wondered just what George W. was thinking.
It was he who led the call for multi-millionaires to pay less tax
and for regulators to get off their backs.
Then to the forefront came ambivalent John McCain
whose twists and turns would shame any Windy City weather vane.
When he said the economy was fine he was put on the spot
so he quickly reversed himself and said it was not.
He then demanded “those responsible” be given the push
especially the ones who are pals of Bush.
Meanwhile, Pistol Packin’ Mama Sarah continues to proclaim
that tax-cuts for the very wealthy must stay the same.
When asked how he would the mess arrange
Obama said needed was immediate change.
Would it not have been just terrific,
if he had come up with something a bit more specific?
John finds time to tell us ad infinitum about being a war hero
but not to say why he chose a running mate whose I.Q. is zero.
He should be wary that she does not cook his goose
by absent-mindedly mistaking him for a moose.
She wants to emulate Cheney, the guy she hopes to follow,
who shot his orange-coated friend as he lay in a hollow.
So John, do be mindful of your every “p” and your every “q”
or you might find yourself being blasted out of view.
As Palin continued to spew forth more and more inanities
the bonfire was consuming the Masters’ vanities.
The flames could not be extinguished with fire-fighting foam
while McCain was bewilderedly warbling “Show Me the Way to Go Home”.
Those who caused the meltdown were not asked to sell their shirts,
but some were forced to get rid of, or at least to cover, their shorts.
When they counted their assets, liquid and otherwise,
their consternation they could not disguise.
What was to become of them, was their anguished cry,
on what or on whom could they rely?
Not to worry, they were told, the taxpayers would pick up the bill
so they could go back to their watering hole and their favourite swill.
The champions of free markets, and also laissez-faire,
assured them they could keep right on without a care.
Those who had always warned about the evils of rationalizing,
had suddenly discovered the virtues of nationalizing.
As investment banks vanished from sight,
McCain agreed that putting the screw on taxpayers was obviously right.
If anyone should ever demand that John make amends
a good beginning would be for him to stop calling us all “my friends”.
The Decider said into the economy he would pump 700 billion,
terrified to utter the dreaded word trillion.
As the problem is a severe lack of cash
can it be possible he has ready access to a Saudi stash?
Perhaps he has learned to use a conjuring trick,
or maybe he will borrow it from his Svengali Dick?
After all, he is the one who is about to end his political career
as the world’s most infamous war profiteer.
Meanwhile the ex-C.E.Os including Prince, O’Neal and Cane,
Posted by: Phil Linehan | September 21st, 2008 at 5:46 pm | Report this commentwho left with golden handshakes had no cause to complain.
May one ask whether, as at the bar sipping Dom Perignon they stood,
they were still chanting their sacred mantra “Greed is Good”?
Simple question: will regulation have prevented this crisis?
I think not. In John’s article, he states a very clear point; AIG thought the move into risky derivatives was well understood. What are the chances that some regulator would have understood it any better?
Posted by: Nana Mbaeliachi | October 11th, 2008 at 10:26 am | Report this comment