Be afraid! Be very afraid

 A long time ago, I worked on financial systems. And so, back in 1998, I was called to give some comments to a gathering in Mexico City’s historic district. (I still have the suit I wore, a very sturdy Christian Dior; it isn’t the one in the below photo from December 2014.) I kept my discussion short, since I was well-aware of my ignorance, having just lost a potential job at Columbia University due to overly sweeping claims of knowledge.* 

So, still chastised from the New York fiasco, I made only one claim to the gathered dignitaries from the Financial Ministry, the U.S. State Department, the IMF, and the big Mexican banks: shareholders must lose in a bailout. Give away money, write checks, defend depositors, make good guarantees on subordinated debt, throw bags of money at the banks’ creditors. But shareholders must be wiped out. 

And so, I am terrified to read today that a federal judge held that the U.S. government was too harsh when it bailed out AIG. The bailout, you see, wiped out the shareholders and ultimately made money for the Treasury while preventing a much worse financial collapse. But wiping out the shareholders, according to the judge, was too harsh. Better to have let the shareholders be ... uh ... wiped out with no public benefit.

Wait, what?

It gets even weirder than that. The AIG investors received nothing in damages ... the judge recognized that without the bailout they would have lost everything. But he still held that the government overstepped its bounds. I cannot parse the logic.

Which means one of two things the next time a financial crisis rolls around. One, no direct bailouts. Fun! Why have a second Great Recession when you can go full on to a second Great Depression? Two, bailouts (or bailouts in disguise) that enrich the already prosperous, who will face no consequences for their bad investments. Heck, let’s see just how unequal a modern automated economy can get! 

I don’t even have to mention the words “moral hazard” to make this look scary. But since I am on the topic: Moral hazard! Boo!

And so, I give you Judge Thomas Wheeler, a George W. Bush appointee still making the world a worse place. I guess it deserves some sort of prize.

I really need to respond to the comments in the Crazy Base World post, no?

* How different my life would have been! I would have bought a place in Manhattan or the northwest Bronx and settled into being a historian back in my home town, with prestige but not a whole lot of money. I suspect that I would have spent a lot more time on active duty. A very different life. 

Comments

[NYCMT]

Watch the decision get appealed instanter. It's totally wackballs.

[Bernard Guerrero]

Alternate take: The courts are here to interpret and enforce the law, rather than to create policy outcomes (even necessary ones.) The government and the Fed clearly did go out of their way to gain control over a non-bank in a way that they really weren't authorized to do by statute. If we feel that shareholders in "systemically important" entities need to get wiped out in case of a similar circumstance, then the answer is not to pretend that the law is otherwise, but to change it.

[Noel Maurer]

Not really. Courts have long held that governments, state and federal, are not limited by their enumerated powers as long as no rights have been violated or statutory limits overstepped. This judge somehow concluded that rights were violated although no harm was done, something which really makes no sense.

There is also a practical issue regarding Congress, but I agree with you that granting more power to the executive is a second-best result. Although it's the one we have and likely the only way to save the Republic from itself.

I say that in the full knowledge that Scott Walker has a significant chance of being the next President of the United States.