Wednesday, August 5, 2009

Quotes/Revelations from Wessel Book

I was traveling all day yesterday, so I had a chance to read almost all of David Wessel's new book, In Fed We Trust. I think it's very good (and, just as importantly, accurate). Among the most interesting quotes/revelations from the book are:

  • Hank Paulson, to Geithner and Bernanke, on the possibility of bailing out Lehman: "I'm being called Mr. Bailout. I can't do it again."
  • Fed governor Kevin Warsh, on Lehman: "If there had been a buyer, the guys on the first floor [the Wall Street CEOs] would have filled the hole, and if they wouldn’t have, we would have."
  • Bernanke, on Lehman (emphasis mine): "Bernanke also made it clear that had Congress given the Fed and the Treasury more authority sooner — for example, had the Troubled Assets Relief Program (TARP) been enacted earlier — he would not have let Lehman fail. 'We could have saved it. We would have saved it,' he said in an interview in October 2008. 'Even then, it would have been politically tough because of the risks to the taxpayer that would have been involved. And, of course, if Lehman hadn't failed, the public would not have seen the resulting damage and the story line would have been that such extraordinary intervention was unnecessary.'" (This actually strikes me as very politically astute. Bernanke was right, of course: if they had asked Congress for the TARP any sooner than they did, they would have been laughed out of the room.)
  • Geithner, to Sheila Bair, who—amazingly—wanted to wipe out Wachovia bondholders: "It has to be this way. We just went to Congress for $700 billion. The policy of the U.S. government is that there will be no more WaMu's." [Emphasis mine]
  • Geithner, on his decision to bail out AIG after initially indicating that he probably wouldn't: "I just changed my mind, and I wasn't alone in changing my mind."
  • Harvard economist Martin Feldstein, in his capacity as an AIG board member, actually opposed accepting a Fed rescue. According to Wessel, Feldstein "said it wasn't the government's role to forcibly buy private companies." (Apparently Feldstein thought his duty was to his personal economic philosophy, rather than to the shareholders. What a clown.)
  • Bernanke, on why they bailed out AIG but not Lehman: "'The impact of AIG's failure would have been enormous,' Bernanke [said]. 'AIG was bigger than Lehman and was involved in an enormous range of both retail and wholesale markets. For example, they wrote hundreds of billions of dollars of credit protection to banks, and the company's failure would have led to the immediate write-downs of tens of billions of dollars by banks. It would have been a major shock to the banking system.' Even banks that weren't intertwined with AIG would have been hurt, he said. 'Since nobody really knew the exposures of specific banks to AIG, confidence in the entire banking system would have plummeted, putting the whole system at risk.'"
  • Sheila Bair sucks. Okay, this isn't really a new revelation, but still, Wessel's book drives home that Bair is truly an atrocious regulator. She sought to undermine Bernanke, Geithner, and Paulson's efforts to save the financial system whenever she got a chance. This is in addition to the colossal mistake she made in forcing WaMu's bondholders to take huge losses at the absolute height of the panic. No wonder the other regulators were so eager to avoid including her in any rescue policies. She has a grand total of 0 years of experience in banking, and is concerned with only one thing: her image. The sooner this walking train-wreck is out at the FDIC, the better.
  • Sen. Harry Reid, cautioning Bernanke and Paulson (as well as Pelosi, Boehner, and McConnell) that TARP may not sail through the Senate quickly: "This is not an easy thing to do. ... This needs hearings. I know the Senate. It takes two weeks to pass a bill to flush the toilet."
Good stuff from Wessel. Highly recommended.


Andy said...

You showed some disgust that Martin Feldstein held to his personal convictions with regards to an AIG bailout. Feldstein simply believed that the company should take responsibility for its actions.

I think it is refreshing that he held to his personal convictions even though it may have hurt him personally or financially.

Anonymous said...

So Feldstein opposed a bailout that would have benefited his firm (and perhaps him personally) on principle. That's what most people would call courage, integrity, and honesty.

Part of a director's responsibility is to his company. However, director's are also citizens. Clearly, Feldstein put citizenship (as he saw it) first.

Shalom P. Hamou said...

In my Tract The Age of Turbulence: Plea for a New Economic Order, I explain the nature and causes of economic depressions.

In fluid dynamics, turbulence or turbulent flow is a fluid regime characterized by chaotic, stochastic property changes. This includes low momentum diffusion, high momentum convection, and rapid variation of pressure and velocity in space and time.

A Turbulence is a Chaotic, Discontinuous State of a Liquid. It Owns Most of the Proprieties of Keynes' Liquidity Trap.

It proves that after the inflation of the Mother of all Asset Price Bubbles the ominous fate of this economy is Keynes' Liquidity Trap.

Its consequences are a new, bigger Crash causing, this time, a Real Great Depression II.

That bipolarity of the Market is the problem: any irrationally exuberant person, as any psychiatrist would tell, is unable to understand that he is irrational and that he will necessarily fall in a deep depression. He just doesn't want to hear the warning no matter how many times he had the experience.

What do we do Before The Crash?

My Strategy: Preparing for the Crash, The Age of Turbulence. answers that question.

Using the yield curve as a predictor that strategy covers Treasuries, Corporate Bonds, Minerals (Oil, Precious Metals and Base Metals.) and Stocks.

Its aim is to profit from both the Asset Price Bubble and Irrational Exuberance and The Crash and Economic Depression that will necessarily ensue.

It tries, and for the time being very profitably, to accomplish Alan Greenspan Mission Impossible:

"That is mission impossible. Indeed, the international financial community has made numerous efforts in recent years to establish such oversight, but none prevented or ameliorated the crisis that began last summer.

Much as we might wish otherwise, policy makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances.

Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away."


The clear evidence of underpricing of risk did not prod private sector risk management to tighten the reins.

In retrospect, it appears that the most market-savvy managers, although conscious that they were taking extraordinary risks, succumbed to the concern that unless they continued to "get up and dance", as ex-Citigroup CEO Chuck Prince memorably put it, they would irretrievably lose market share.

Instead, they gambled that they could keep adding to their risky positions and still sell them out before the deluge. Most were wrong."

Alan Greenspan
The Age of Turbulence: Adventures in a New World [Economic Order?].

That Strategy Will not Any More be Available to the General Public as of September 1st, 2009. However the Members of My Networks Will Still Have Access to It & Will be Regularly Updated. Join My Networks Now!

The Yield Curve - Plea for a New Economic Order.


Shalom P. Hamou said...

But what do we do After The Crash?

I propose a plausible alternative solution to the Depression: I designed a System that will allow us, when The Crash will come, to get out of Credit Based Free Market Economy, Capitalism, and transfer to my Adjusted Credit Free, Free Market Economy and Abolish the FED:

To participate in our New Economic Order you need to Enter Your €5 in The Cra$h R€gi$t€r Before The Crash - It is Fr€€!..


"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.

But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.


A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register, facilitates such assemblies. It connects individuals who might never otherwise be known to one another, and gives every man of the trade a direction where to find every other man of it.


A regulation which enables those of the same trade to tax themselves in order to provide for their poor, their sick, their widows and orphans, by giving them a common interest to manage, renders such assemblies necessary."

Adam Smith
June 5th, 1723 – July 17tn, 1790
An Inquiry Into the Nature and Causes of the Wealth of Nations.
Inequalities Occasioned by the Policy of Europe.
March 9th, 1776

The Tract Will be Published on September 17tn, 2009. It Will be Withdrawn from the Internet on September 1st, 2009. Buy The Tract Now!

You will certainly enjoy my popular articles:

Ron Paul vs. Bernanke.

Ben "Systemic" Bernanke.


Anonymous said...

Let's see:

1. Sheila Bair got a better offer for Wachovia from Wells, and drove a hard bargain with Citi beforehand.

2. She was willing to force bondholders to take losses at Wachovia and WaMu.

3. She has opposed Team Geithner/Paulson in their bailout efforts, including killing PPIP.

4. She has 0 years of banking experience.

I say God Bless Her, this is EXACTLY what we need from regulators. Willingness to make bondholders, rather than Americans, the bagholders. Willingness to regulate, rather than promote, the US banking industry. Spine.

I'm afraid you're the one who sucks, Mr. "structured finance lawyer." In law school someone should have taught you about risk.

David Harper said...

@Andy: Feldstein is a clown for saying that. His personal convictions are admirable and agreeable. But he needs to act in the role of Director with fiduciary; you don't want your Directors introduces other agendas, they are supposed to act on behalf of the shareholders. They are paid to do that job, handsomely, they are not paid to weigh in on public policy - David

Don said...

'We could have saved it. We would have saved it,' he said in an interview in October 2008.'

I've thought that Bernanke didn't want Lehman to fail, because he's a student of Irving Fisher, and understood that we were facing a Debt-Deflationary Spiral. That's why I'm a fan of Bernanke. He understood the importance of govt guarantees in Debt-Deflation and the importance of QE. He's just too timid in my book, and I don't find Fed Independence a real issue.

"(This actually strikes me as very politically astute. Bernanke was right, of course: if they had asked Congress for the TARP any sooner than they did, they would have been laughed out of the room.)"

Maybe, but we've had slow motion Debt-Deflation since Sept., during which, as Fisher predicted, we've had a Proactivity Run. In other words, as we've seen, as against other downturns, in this one job losses have been higher than Real GDP would have warranted. Employers have been shedding jobs proactively. Can you imagine where unemployment would be today if we'd had a Spiral? Try much worse. I don't think Congress would have been pleased with those numbers.

On Feldstein, his job was to look out for the interests of his employer. Other people will defend the govt's interests. In our system, each side gets to present its case. We want each side to be well defended. Don't we?

Finally, on Bair. WaMu was a mistake. The spreads after it was taken over show that. Without WaMu bondholders being screwed, it's likely that spreads wouldn't have widened so much, helping cause Debt-Deflation in the Flight to Safety. John Hempton has written a lot on this topic, most of which I agree with.

Of course, if you don't think that we're facing Debt-Deflation, most of what I just argued won't seem right. But if you agree, it's important to see that only the govt could stop a spiral by guaranteeing everything, because only the govt has the resources to calm the panic. It's not a great situation to be in, but that's where we were.

Don the libertarian Democrat

Anonymous said...

The government cannot stop debt deflation, it can only delay it. There is too much debt in the system. The bailouts and government guarantees have prevented a disorderly liquidation of this debt, but interest continues to compound at an exponential rate. The economy sheds jobs while the banks lie about their balance sheets. Corporations beat reduced earnings estimates only by mass cost cutting and layoffs. Make no mistake, these debts that are being backstopped will eventually be defaulted.

As defaults rise, testing the resolve of the government backstop, the Treasury will continue to saturate the bond market with new debt. Our politicians cannot be trusted with fiscal policy in a world where the USD is a reserve currency. Without meaningful constraint, they will abuse their power until the breaking point - and then face two choices: default on what has become an overwhelming sovereign debt burden, thus triggering a currency collapse, or allow asset prices to deflate. They will choose deflation. It will cause significant hardship but it is the only choice that leaves the economy intact.

Future taxpayers will then labor under an excessive tax burden, paying off the losses that should have been borne by private sector investors such as the Wachovia bondholders. The bailouts and backstops are theft, plain and simple. But look on the bright side - at least by propping up these institutions we have maintained the revenue stream to Economics of Contempt's law firm.

Don said...

I certainly don't agree about Debt-Deflation. Fisher showed how and why Reflation can work against Deflation, and, quite frankly, the QE we've had has worked.

It is true that Inflation can be a problem going forward, but we have lots of experience fighting Inflation.

Rule Number One in fighting a battle: Move it to more familiar terrain.

Don the libertarian Democrat

Andrew Bissell said...

Basically, you criticize Sheila Bair for being the only regulator who had the balls to force some bank bondholders to eat the losses they helped create, and for showing reticence about shoving barrel after barrel of taxpayer dough to the banks.

But hey, we good Keynesians have to throw money around in a panic, right? _Anything_ but liquidation and actually realizing the losses that are staring us in the face!

Really brilliant commentary.

Andrew Bissell said...

I certainly don't agree about Debt-Deflation. Fisher showed how and why Reflation can work against Deflation, and, quite frankly, the QE we've had has worked.

It is true that Inflation can be a problem going forward, but we have lots of experience fighting Inflation.

It is way way way way WAY too early to call reflation a 'fait accompli'

Don said...


Agreed. Deflation is still a threat. But the QE has helped.

Take care,


Anonymous said...

Maybe today is a good day to ponder this issue. I say that because it should be easy for all of us to remember the state of the world exactly one year ago.

Exactly one year ago, there was some talk of the subprime issue in the media. The collapse of Bear Stearns had moved the issue closer to the front page, if not to the front page. But the "official" diagnosis was that it was "contained." The economy was "okay."

The presidential campaign was heating up. When one candidate expressed concern about the economy, the other candidate told him not to "underestimate the American worker." Even though the concern was that the American worker would *suffer* from a downturn in the economy - not *cause* a downturn in the economy.

This time last year - most Americans were hearing that things were okay with the economy.

Then - BOOM, "We gotta have $700 billion. And we gotta have it RIGHT NOW."

Water is a good and essential thing to drink. But not from a fire hose operating at full throttle.

I try to imagine the psyche of the "average" American (who is not intimately tied into the daily twists and turns of markets and the economy - as most of us here seem to be) in dealing with this alternative scenario.

So the typical school teacher or welder or ER nurse goes from hearing "The economy is 'okay.' Yes, we know about the subprime issue - but it is contained" ... to hearing ... "The economy is in serious trouble, due to events in the financial sector."

"Due to our conviction to absolute free market principles, if the troubled institutions cannot solve there own problems - we will have to allow these institutions to perish as they will cease to be able to operate as ongoing concerns. This 'disorderly liquidation' will be painful - but we will not, and should not, waver from our absolute convictions. Because these convictions are always the best. Regardless of the ultimate outcome."

Needless to say, all forms of media would, within a day, put out a short list of firms likely to fail within the next 2 to 4 months. And the ramifications.

"The firms likely to fail are:


Bank of America

The Chrysler Corporation


Fannie Mae

Freddie Mac

General Motors

Lehman Brothers

Merrill Lynch

Washington Mutual


In case the blank needs to be filled in here, this would not be 'calming news' to the masses.

In hindsight, particularly after seeing the effect that the singular Lehman episode had on the system, it is stunning to see that some people feel that some sort of "disorderly liquidation" involving at least 10 other major firms over a 3 month period (and at least 20 to 30 times the market capitalization relative to Lehman) would be "preferable" to govt. intervention.

I don't think the 'teacher' and the 'welder' and the 'ER nurse' would calmly fold their arms and simply sigh ... "it is necessary" ... as their world collapses around them.

Yes, GM and Chrysler ultimately did go bankrupt. When it finally happened, the public was in a state of being better informed about the overall situation. I personally think that it also helped that these two firms that had been struggling for a long time - well before the Fall of 2008. They did not have the perception of 'sudden and catastrophic failure' - when compared to the AIG episode.


Anonymous said...

Anyone revealed Diablo 3 Gold many repugnance of which Martin Feldstein held in order to their individual beliefs regarding the AIG bailout. Feldstein just considered that the business really should GW2 Gold kaufen take responsibility because of its actions.

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