JUST GIVE MY CHECK TO THE GUY OUT THERE STARING THROUGH THE WINDOW AT THE REMAINS OF THAT SUMPTUOUS MEAL I JUST FINISHED

10/26/11

Today’s Wall Street Journal reports that European banks are negotiating with “euro-zone officials” over the size of the hit those banks will have to take on their Greek debt. So we are confronted with a situation in which those who are being bailed out are arguing with those who will bail them out over the size of the largesse of the latter. The financial sophisticates who run these banks are essentially saying that they don’t want to take too large a hit as a consequence of their very poor investment decisions; instead, they want the taxpayers to take the hit for them. No talk about any of those bankers suffering any consequences for those decisions that will ultimately put shareholders, but more saliently taxpayers, at risk. No, sir. These guys are smart, even when they make bad decisions, like loading up on the debt of a country that has been nearly transparently bankrupt for years, if not decades, and therefore deserve not only their jaw dropping compensation packages but also to have the hoi-polloi European taxpayers clean up the messes these masters of the universe leave after uttering the word “Whoops.”

The strange thing is that this utterly nonsensical set of circumstances was arrived at following a series of utterly logical steps, at least steps taken since those banks loaded up on the toxic assets that are somehow necessitating a bailout. The bankers know that if they take too big a hit on Greek debt, they will become at least regulatorily, if that is a word, and maybe actually insolvent. If that happens, the danger to the world financial system, of which these institutions are a lynchpin, will be sufficiently immediate and large that European (and, who knows, perhaps American and Asian) taxpayers will have to bail them out. So the taxpayers have been put in a position in a “pay me now or pay me later,” in which the “pay me later” option will, presumably, be far more expensive than the “pay me now” option. The banks have the taxpayers by the short hairs, and the banks know it.

The average person looks at this situation, sees its utter insanity, and thinks something like “Gee, it must be nice to be put in a position from which you can whine to those who are giving you a handout that the handout isn’t big enough, and do so with the desired results.” Yet, given the current rules, or lack thereof, of the world financial system, this is the rabbit hole into which we have fallen.

Unless…

Couldn’t we go back to a receivership situation, following something like the template that prevailed when we on these shores had to rescue the depositors in the S&Ls whose all-wise, all knowing executives bet recklessly, in some cases criminally, on grossly inflated real estate and junk bonds of questionable, in some cases fraudulent, credit quality? The government simply took over the banks, paid off the depositors, and sold off what assets they could. The animal spirits took over and the damage was limited to the point of being forgotten in a few years.

Yes, we are talking about institutions of a vastly different magnitude here. And we are no longer dealing only with satisfying the claims of depositors but also those of a myriad of counterparties. But something like the S&L model has to be put in place in order to make sure, or at least make a little more probable, that those who put the world financial system in such a state, and the shareholders and bondholders that looked the other way while they did so, suffer some of the consequences. Depositors could be paid and some counterparties could be made whole while others would also have to pay the piper. The system would stay up and running, and perhaps people will be more wary of excessive risk in the future.

We have to do something to make sure that it is made absolutely clear that the current system of socialized risks and privatized rewards no longer prevails. If not, we will continue to be confronted with situations in which the overly compensated and overrated miscreants can, with a straight face, demand that those whom they, in most circumstance, deem unworthy even of existence, pay for the mistakes of those who are certain that they have everything figured out. Such a situation is not only unjust but also will surely break us financially if allowed to continue.