Monday, March 30, 2009

Does anybody really know what time it is? Does anybody really care?

First of all, I picked the art for this post for two reasons. One, it has my name in it. (Hey, it's my blog. I'm allowed a point of privilege. As we'll see again in a few moments.) But more important, the Italian road sign nicely captures the confusion that grips us as we face the nation's massive financial problems.

Secondly, the title is an allusion to an old hit by the jazz-rock group Chicago (listenable in today's Jazz Corner, at right). I thought it was equally appropriate under the circumstances.

So let's review, shall we?

Item. In September 2008, AIG needs $85 billion to stay afloat
this, by the way, is seven months after telling Wall Street that the company holds "excess capital" of $16-$19 billion (a part of the whole saga that receives very little coverage). Then the giant insurer comes back one month later needing another $38 billion. Eventually the AIG bailout, in all its facets, swells to an estimated $173 billion.

Item. Detroit takes $25 billion, then GM asks for additional billions...and now says it may have to file bankruptcy anyway. Private citizens who do things like that
i.e., max out their credit lines and then file bankruptcyface criminal prosecution for bank fraud.

I think everyone understands by now that our free-market economy has gone off the rails, and the old metrics, definitions and standards no longer apply. We've blown all previous scales of federal investment completely out of the water at an order of magnitude that would've been unthinkable to the average Joe or Jane Q. Public just one year ago. A billion dollars
a single billiondoesn't even sound like much anymore. A company records a 10-figure loss and we hardly flinch. Absent the sort of reptilian duplicity we saw with, say, Bernie Madoff, there's little stigma attached to mishandling fantastic amounts of money and being unable to meet your routine obligations as a result. Certainly we've come a long way from the time when we used to put even well-meaning debtors in prison. And I guess that's a good thing, on balance.

What concerns me here is what might be called an integrity gap in the solution phase. It seems clear that the folks at AIG lied about how bad things were in the first place* in order to get what they could while the getting was good (knowing that their predicament would evolve into a case of "in for a penny, in for a pound"). With GM, meanwhile, we have to ask ourselves: Was it really worth it to spend $25 billion to prop up a company that stood a good chance of going under anyway a few months later? Shouldn't someone have seen that coming? Why didn't the execs who flew in on those private jets admit, "Look, we don't really know if this is going to help us
it may be a case of throwing good money after badso save your $25 billion"? I don't understand what's happening here, and I worry greatly that no one else does, either. Nobody seems to know where the money is going, precisely what it's being used for, or whether any of this will work. All of that cash that was "infused" into the banking system to encourage liquidity, to restore the normal flow of consumer credit, doesn't seem to have done a damn thing towards that end. In fact, as we speak, banks have begun hitting consumers with a new round of charge-card fees, interest hikes, and slashed credit lines.

I want someone to tell me, authoritatively,** what we've gotten for our $1+ trillion investment so far except some fragile sense that "we're doing something about the problem." So again: Does anybody really know what time it is? Pardon my French
and I am taking a one-time liberty as administrator of this blogbut does anybody really know what the fuck is going on?

* and government auditors presumably were inept?
** say, in the same authoritative way that Obama yesterday told GM execs he doesn't think the company's electric-car and SUV strategies are viable and they should revise or scrap such plans forthwith. What a stunning moment in the history of corporate governance.


Chad Hogg said...

People running everywhere,
Don't know where to go.
Don't know where I am,
Can't see past the next step.
Don't have time to think past the last mile.
Have no time to look around.
Just run around, run around and think why?

Indeed. I think that's a pretty good description of the last decade of US government. Incidentally, there has never been another album quite like Chicago Transit Authority, though not for lack of trying by the re-named Chicago and others.

What bothers me is that there does not seem to be a specific goal in mind. If these companies are "too big to fail", then I would think priority number one would be stabilizing them for long enough to shrink them to a more manageable size by selling off business units, calling in loans and paying off others, etc. (And then making sure no other company can ever be so important that we need to do so again.) If the objective is to return these companies to profitability, then throwing money at the problem is not going to be sufficient. The money going to the automakers appears to be attached to some radical changes in business practices, but not so at the financial firms.

Anonymous said...

What have we gotten for our trillion dollars?

The powerful Ivy League politicians have saved the bacon of the powerful Ivy League corporate titans.

Outside of Sen Dodd - who was #1 on the AIG payroll (Obama was #2) - I can't find where any of the usual suspects didn't spend time in the Ivy League (Bush was Harvard, Yale; Geithner is Dartmouth; Paulson was Dartmouth, Harvard; Obama is Princeton, Harvard...) you get the idea.

It's like a big fraternity looting the country.

Another thing we have learned is that all the really bright Masters of the Universe types don't understand risk at all.

Lana said...

I care!

You might like this (simple and to the point):

Open Letter from One Non-Economist to Another

Anonymous said...

The short answer to your question, Steve, is no. No-one knows what they're doing--but we get fooled by the slick types who can put on a good show of 'knowing what they're doing'
Otherwise it's business as usual, the old boys look after each other and the man in the street picks up the tab.
Some French for you:

Plus ca change, plus ca meme chose.
(the more things change, the more they stay the same)

Stever Robbins said...

We absolutely knew that the money we gave GM would run out in just a couple of months. It was mentioned extensively at the time.

That was one of the mind-boggling ideas to some of us watching: the idea that a decabillion dollar bailout would buy us slightly more than a single quarter, in an industry where development of a new product can take a decade. It doesn't take a rocket scientist to ask how a three-to-six month extension of credit was supposed to make any material different to the future of the company. Or perhaps it does, since none of the so-called experts seem to get it.

Am I the only one who is starting to realize the the "expert" economists, the "expert" businesspeople, and the other "experts" seem to have no particular actual expertise, despite impressive resumes and/or fancy pedigrees?

Stever Robbins said...

Anon 2:40. Do I sense bitterness in your words? Forsooth! My bitterness trumps your bitterness. I actually went to those Ivy League institutions but somehow missed the connections and the gravy train. I concentrated on learning to do a good job instead of learning to position myself for Old Boy Allocations... Where's my refund??

Rational Thinking said...

"does anybody really know what the fuck is going on?"

I think not. Let's see what the G20 comes up with in the next couple of days. But I'm not holding my breath.

Anonymous said...

does anybody really know what the fuck is going on?

NOW you're talkin'! :)

Steve Salerno said...

Stever: I sort of meant those questions rhetorically, more in the sense of if we knew this was coming, then why did we do it? Hence, my remark about the "integrity gap."

RevRon's Rants said...

Stever - You might enjoy knowing how some of us corporate types used to define "expert": A retired drip under pressure.

This was marginally more flattering than our definition of "consultant": A guy who knows 100 ways to have sex, but doesn't know any women.

Judging by results of late, it seems that the experts and consultants have been at the helm for too long. Perhaps it'll take a few seasoned boatswain's mates to clean up the mess. :-)

Anonymous said...

'Judging by results of late, it seems that the experts and consultants have been at the helm for too long. Perhaps it'll take a few seasoned boatswain's mates to clean up the mess. :-)'

The bosun runs the ship, RevRon. The measure of a captain is how much notice he takes of this master mariner. ;-)

RevRon's Rants said...

Unfortunately, the boatswains *haven't* been running many ships of late (at least, not the ships of business). Look at how many "underlings" have given warnings in so many of the business failure cases, only to be ignored (or fired). In the medical profession, actual health-care practitioners' decisions are routinely overruled by accountants who have little (if any) medical knowledge.