Disorganized Musings on the Financial Crisis

By Steve Poftak
September 24th, 2008

I don’t have a comprehensive response, if I did, I’d be out pedaling my wares. Instead, here is an aggregation of thoughts (apologies in advance for the lack of links):

1) From practical experience (with both federal and state matters), anytime you are told that a crisis requires you to put aside your reservations and proceed with a maximalist solution IMMMEDIATELY OR TERRIBLE THINGS WILL HAPPEN, you should stop. Then slowly and deliberately examine every last detail of what is being thrust upon you.

2) The Frankenstein Monster – The power vested in the Treasury Secretary under TARP is breath-taking. Certain folks seem to be comfortable with this notion, when presented by the current Secretary. Has anyone pondered the possibilities of the upcoming election and who might be the Treasury Secretary in late January? It’s a nation of laws, not men, the credibility of one man (which I’m not bought into) is not enough.

3) Pricing – The markets are not ‘working’ right now, implying that they will work at some point in the future and a bailout vehicle will sell these assets at that time. So, who has the acumen to properly price these assets now? (I’d note that the brightest financial minds in the public and private sector looked at AIG’s portfolio right before it was nationalized and could not figure out its liability) If you have an answer, ask yourself, where they smart enough to foresee this crisis? If they couldn’t grasp the current dynamic of this market, how can they price these securities in such a way that the level of taxpayer subsidy is not too high?

4) Dealbreakers – I keep hearing that equity positions or executive compensation caps are dealbreakers. So, these institutions need capital to survive but will kill themselves rather than accept these terms? Baloney. That just proves that they don’t actually need the money (not a bad outcome, in my view).

5) Ratings Agencies – In order for a market to police itself, it relies on the flow of information. Ratings were intended to communicate information to the broader market about the quality of various securities. It is clear that they did nothing of the sort. I am deeply curious about the future of these institutions.

6) GSEs – Before certain folks lay the entire blame for this on Alan Greenspan, it is instructive to recall his campaign against government sponsored enterprises from the mid-90s.

7) Keeping vulture money on the sidelines – The prospect of a government bailout will keep everyone on the sidelines until the extent of government participation is clear.

I’ll end with a caveat — I cannot grasp the potential catastrophe that this current lack of liquidity poses, so perhaps I’m being cavalier. I invite your comment.