F.D.R.’s Safety Net Gets a Big Stretch

This pundit thinks that Oracle Greenspan is fallible.

"Alan Greenspan a former chairman of the Federal Reserve, said the system had transferred risk from banks — which he called “highly leveraged institutions” — to “stable American and international institutions.”

It turned out he was wrong. Much of the risk had remained with commercial banks, but packaged in such a way that they were required to put aside fewer reserves to protect against losses. Much of the rest of the risk ended up with financial institutions that relied on their ability to borrow at low rates whenever they needed it."

"“A sizable fraction of long-term assets — assets with exposure to different forms of credit risk—ended up in vehicles financed with very short-term liabilities,” Timothy F. Geithner, the president of the Federal Reserve Bank of New York, said last week in a speech. “As is often the case during periods of rapid change, more significant concentrations of risk were present than was apparent at the time.”

That risk has come to the fore in the last several months, as several mortgage companies and smaller financial institutions have failed. This week Carlyle Capital, a highly leveraged lender formed by the Carlyle Group, a private equity fund, collapsed. It had borrowed more than $30 for every dollar of capital, and it could not meet demands from lenders that it put up more cash even after it got a $150 million loan from the Carlyle Group."

32 times, I'd read. I wonder why the Carlyle Group wasn't required to save Carlyle Capital. And the latter one was Mitt Romney's company, the one he touted in his claim he was a savvy business manager. Yeah, right.

"By coincidence, the demands on Bear Stearns came on the 75th anniversary of the day when American banks reopened after the holiday declared by President Roosevelt when he took office. He assured Americans that only safe banks were being allowed to reopen, although there was no way he could really be sure."

Creepy coincidence, even if not factually meaningful. Psychologically, it carries an impact.

"The rescue of Bear is not permanent — the loans are for only a month — and there is an expectation that authorities will seek to arrange for Bear to be acquired, perhaps at a low price, or that it will be broken up and sold to more than one buyer. Such an outcome could avoid systemic risk while leaving Bear’s top executives without jobs and perhaps deflecting criticism that they had not had to face the results of their mistakes. Bear stock fell 47 percent on Friday; all of the decline came after the rescue was announced."

Unemployment wouldn't be too harsh a punishment for those bozos. They'll get by; if they have cash flow problems, they can always collect unemployment insurance payments.

"“This is a credit problem, not a liquidity problem,” said William L. Silber, a finance professor at New York University who has written about the 1933 crisis. “The root question is,” he said, “Will mortgage borrowers be able to repay their debts? That risk and that uncertainty is still there, and that has brought into question all sorts of credit exposure.” He argues that because that question cannot be resolved soon, in the end the Treasury will have to do as it did in 1933, and issue broad guarantees."

Can anyone smell a government bailout? This is what galls me: when times are good, corporate America yells at the shackles of regulation, and demands to be left alone to do business unencumbered by government's heavy hand; when they fall into their own mess, they cry for help.