Ten Things

At Bloomberg Barry Ritholtz lists ten misconceptions about the financial crisis of 2008:

  1. Lehman’s collapse caused the crisis
  2. If not for X, we would have been OK
  3. Repeal of Glass-Steagall
  4. Bailouts were the only option
  5. Taxpayers were repaid in full and even made a profit
  6. No one went to jail because stupidity isn’t a crime
  7. Borrowers were as blameworthy as lenders
  8. Poor people caused the crisis
  9. The Fed made a mistake by stepping in when Congress refused
  10. Lehman could have been saved

I agree in particular with his remarks about #4

There were many other options, but they would have been very painful and required considerable foresight. I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts. I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest. It would have been more difficult in the short term, but the economy would have rebounded much sooner.

and I said so at the time. Why didn’t we take that course of action? I think the only genuinely viable explanation is regulatory capture.

There will be a next time. The way we dealt with the last time practically insured there will be a next time. And we will deal with it the same way for the same reasons.

3 comments… add one
  • Gray Shambler Link

    Not mentioned was Arthur Anderson. Which rated the bundled mortgages and received the death penalty. They risked 150 years of reputation for profit. Why were they not spared? Why were they not bailed out?

  • Andersen surrendered its accounting license in 2002 in the aftermath of the Enron scandal, unrelated to the financial crisis of 2008.

    I believe you’re thinking of the credit-ratings organizations. S&P paid a $1.5 billion fine but the reality is that was a slap on the wrist. The entire credit-ratings industry (basically three companies: Moody’s, Fitch’s, Standard & Poors) should have been given the death penalty. It exists primarily because federal regulations require that they rate the bonds of publicly-traded companies. We are now assured that their ratings are worthless and, consequently, the requirement should be abolished. Caveat emptor.

  • steve Link

    A key part of what Rtiholtz notes is the need for considerable foresight. These were large banks with international holdings and complex domestic holdings. By my readings, no one actually knew how to simultaneously go the DIP route with so many institutions. One of the goals in Dodd-Frank was to force every institutionally important and have a plan in place in case they needed to go through bankruptcy. The banks and Congress have pretty much gutted that now. We have a banking system characterized by complexity, opacity, incredible wealth, influence and little accountability.

    “The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”

    Lord Acton


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