Tuesday, January 22, 2008



In the midst of this mornings harrowing market action, cries for the government to “do something” from the free market tough guys on Wall Street reached unusually stentorian levels, even for this crowd. Apparently, 75 basis points from their boy Ben Bernanke were not enough to satisfy these free marketeers awaiting their turn on Mother Government’s lap.

One of the cries for the government to “do something” came from a predictable quarter, CNBC’s Jim Cramer, who apparently makes a living demanding that the government take immediate and decisive action to prevent his friends on the Street from having to suffer the ignominy of having to sell, say, the third yacht or the west coast fleet of Ferraris. In Jim’s defense, he is not one of the shameless hypocrites on Wall Street who demands government help for himself while counseling “letting the market work” for the working stiff who, say, loses his job in the wake of one of their client’s latest efforts to pad his bonus by relocating production overseas on order to save two or three percent on manufacturing costs. Cramer is no free marketeer, and does not pretend to be one. He is usually quite enthusiastic about government action and deliriously delighted with such action when it helps him or his cronies out of a jam into which they put themselves. So while Jim is quite shameless, he is not a hypocrite, or at least he is not as much of a hypocrite as his more Republican oriented Wall Street tough buy cronies. Jim is a believer in nothing but, as he once put it, what’s workin’ now. But I digress.

Cramer latest whopper was this morning’s proposal to have the federal government buy the bond insurance firms, the MBIAs, AMBACs, etc., of the world now that they got themselves into trouble by following the usual financial services path of “broadening their market” by entering a business about which they had not the slightest clue, in their case, insuring CDOs, CMOs, etc. Apparently not content with the healthy profits involved in insuring municipal bonds, or perhaps anticipating the entry into that business of rational types like Warren Buffett, the braintrusts at these businesses decided that they could “enhance shareholder value” by insuring financial Frankenstein Monsters that were not understood even by their creators. The results were predictable: It didn’t work. The instruments got into trouble, the investors want the insurance companies to pay up, the insurance companies are incapable of doing so and hence have lost their Aaa ratings (their sole raison d etre), and may be in danger of insolvency and/or bankruptcy.

So Cramer has come up with the perfect solution: have the government reward these miscreants by buying them. In the pantheon of idiotic ideas emanating from Wall Street in the wake of the “mortgage crisis,” this is clearly the most excerebrose. What Cramer is proposing is a taxpayer bailout of managements and shareholders of company who played with fire and got burned, badly and having the taxpayers guarantee the bastard stepchildren of the twenty and thirty somethings in whose hands Wall Street managements placed the fate of this nation’s most eminent financial institutions.

Some might argue that the shareholders and managements will not be bailed out at all. The shareholders will probably walk away with nothing and the managements will (horrors!) lose their jobs. Those who make this argument might be right regarding the shareholders; depending on the price Mr. Cramer proposes the government pay for these rats’ nests, the shareholders may get nothing. But maybe not. And the managements? If they do get fired, they will get Mozilo/Prince/O’Neal type “don’t call them severance” packages, at least some of which will be financed by the typical taxpayer.

Even if the shareholders are made to feel some pain, those who lent the bond insurers money, either banks or bondholders, and probably preferred shareholders, will be saved from punishment for their financial torpidity. Yes, they bought AAA paper, but bond guys, of whom I used to be one, are not paid the big money they make to merely look up Moody’s ratings. In fact, the credit game, as I and many of my old timer colleagues understand it, consists largely of second-guessing the rating agencies and thus finding value. Those who lent the agencies money are supposed to do actual credit research. At the expense of sounding trite, that is why they are paid the big bucks. Similarly, those who bought municipals relying on a bond insurers’ Aaa rating without looking into the credit of the insurer are guilty of the same lethargy and sense of entitlement but would also be able to dip into the taxpayers’ pockets under Cramer’s proposal.

Also being bailed out will be those who bought the financial Frankensteins called structured debt products without thoroughly understanding them and without demanding a sufficient spread to justify the risk involved in these securities (obviously) merely because they were insured by a AAA rated insurer. There is more to bond management than asking “Is it insured?” So Cramer is proposing that the average taxpayer reward the financial torpidity of millionaire Wall Street money managers who were too busy (doubtless attending “conferences” in sunny climes in the dead of winter) to do the job for which they were paid and save those investors who foolishly put their faith in these charlatans, doubtless because of a great commercial or a slick presentation featuring cool Power Point slides.

Even more troubling with Cramer’s proposal is its implications for federalism. Now, for people like Cramer, federalism is one of those quaint notions they learned in useless courses like history that have no chance of making them any money, so why bother? But think about it. The major business of the AMBACs, MBIAs, etc. of the world is insuring municipal bonds. Having the federal government buy these companies and assume this task would put the federal government in the business of insuring the debt of cities, states, mosquito abatement districts, etc. Proponents of a federal buyout might ask what difference it makes; taxpayers are taxpayers. But, according to that archaic document we call our Constitution, state (and local, in a sense) governments are not mere arms of the federal leviathan established to do its bidding and the tasks it feels are beneath it. State governments are separate governments who willingly cede some of their powers to the federal government when necessary. If such ideas are merely turgid claptrap to practical types like Cramer, think of it from a more conventional perspective: if the federal government insures municipal debt, taxpayers from more fiscally prudent states, states that derive their frugality from the diligence of their voters and/or flinty stubbornness of their taxpayers, will be forced to cover the profligacy of their free spending states made so by the indifference, or self-induced obtuseness, of their citizens. What incentive would remain for fiscal sanity on the part of state and local governments? Such coercion might make sense to Cramer or to anyone who considers our federal system a bothersome impediment to doing what is expedient , but wouldn’t make sense to the taxpayers of, say, Indiana or Idaho, or anyone who believes our Constitution is more than a prop in a Nicholas Cage movie.

So Jim Cramer’s proposal would force taxpayers to pick up the tab for lazy and insecure executives, long and wrong stock and bond investors, lackadaisical bond managers, and primped and pampered Wall Street tough guy dealmakers. It would also nail another coffin in our system of federalism. But it would provide succor to Wall Street tough guys who decry government until it is placed into their service.

What did you expect? Consider the source.

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