Inside the meeting that saved the world

By Andrew Coyne - Tuesday, October 13, 2009 at 1:45 PM - 30 Comments

The meeting was not going well.

On Friday, Oct. 10, 2008, finance ministers and central bankers from the Group of Seven leading industrial economies had gathered in Washington for their regular fall meeting. The circumstances, of course, were anything but routine. Four weeks after the collapse of Lehman Brothers, the 158-year-old Wall Street institution, the financial world was in a state of escalating panic. With banks toppling one after the other, stock markets in a death spiral, credit markets all but disabled, the meeting had taken on crucial significance.

Around the world, investors were looking to governments for salvation—only they could provide the kind of rock-solid assurances that might put a floor under the markets. A strong, united statement from the G7, and there was some hope of restoring sanity to the situation. A weak statement, or worse, a failure to agree, and the entire world financial system might well tip over the edge. Continue…

It's going to get worse

By Steve Maich - Thursday, October 2, 2008 at 12:00 AM - 0 Comments

It may have been the oddest coalition of dissenters you’ll ever see: hard-core southern conservatives allied with ultra-liberal members of the Congressional Black Caucus, blue-collar Republicans from the Rust Belt, and a couple of dozen conservative Democrats known as the “Blue Dogs.” As a group they likely never agreed on anything before in their lives, and may never again. But they agreed on this—Treasury Secretary Henry Paulson’s US$700-billion plan to rescue Wall Street from a rising tide of toxic debts was a no go. And on Monday afternoon, 228 of them rejected the biggest private sector bailout in history and triggered the sharpest one-day plunge in world stock markets since the 1987 Black Monday crash.

Some said it was morally indefensible that ordinary taxpayers, many of them worried for their jobs, should have to foot the bill to support rich bankers whose idea of hardship is having to sell one of their vacation homes. Others complained the plan failed to address the root of the problem: millions of ordinary people declaring bankruptcy and facing foreclosure. With public opinion firmly against the deal, many simply opted to side with the voters and let the chips fall where they may. On his way out of the House of Representatives after the fateful vote, Rep. Steve Kagen, a Democrat from Wisconsin in the midst of a tough re-election fight, curtly explained his vote against the deal: “The bill does nothing for my constituents.”

The deal itself is not quite dead. Congressional leaders are meeting this week in hopes of reviving Paulson’s rescue plan, and many insist that some kind of bailout will get done, somehow. But with each passing day a more sobering reality is settling in: Washington’s intervention, whenever and however it might come, is already too late. Early Monday morning, Wachovia, the sixth-largest U.S. bank by assets, wilting under the strain of an estimated US$42 billion in bad loans, agreed to an emergency takeover by Citigroup. It is the sixth major American financial institution to crumple under its debt load in two weeks, and this week officials in Britain, Ireland, Iceland, France and Belgium all stepped in to shore up their own crumbling lenders.

Bailout or no bailout, America’s financial system is bucking under stresses that have been building for years, if not decades. The world’s biggest and most dynamic economy has been erected on a mountain of debt from the national government on down to the millions of ordinary families with hefty mortgages and wallets full of maxed-out plastic. America bought its vaunted standard of living on credit, and trading partners around the world profited wildly from its free-spending culture. Now the bill is coming due. Central banks around the world, led by the U.S. Federal Reserve, are pumping hundreds of billions into the system in hopes of keeping it moving. But that, even if it were combined with Paulson’s massive transfer of tax dollars to Wall Street, only buys a temporary deferral, not a solution.

“Everybody keeps saying if we do nothing, there’s going to be a severe recession. Yes. There is. There’s no way around it,” says Peter Schiff, president of Euro Pacific Capital in Connecticut. “We have to take our lumps. We’ve got to pay the price for all our reckless borrowing and spending.”

How painful will that bruising be? Worse than anything we’ve faced in our lifetimes, he says. He describes a depression that would forge a new world economic order, with sharply higher interest rates, a weaker American dollar, surging prices and shortages of consumer basics. These are the strains that can pull a society apart, and while not everyone believes it needs to get that bad, such warnings are fast gaining currency all over the world. There is no easy way out of the economic vice tightening around America, and all the many countries, like Canada, which rely on it for their own prosperity. Last week, with major banks failing, home foreclosures running at a rate of 10,000 a day and unemployment climbing steadily higher, it was clear that something big was happening. Something that is going to change the way we live for decades to come.

For a US$700-billion behemoth, there was a certain elegance to Henry Paulson’s financial rescue plan. A new federal agency called the Office of Financial Stability would buy hundreds of billions in distressed assets (mostly toxic mortgages) from ailing banks and hedge funds in hopes of defusing the spread of panic around the world. In return, taxpayers would receive an ownership stake in the bailed-out companies, along with provisions to discourage excessive executive pay at rescued firms and a promise that, if the program was still losing money after five years, the president would take steps to recover losses through new fees and taxes.

Paulson's power grab

By Steve Maich - Monday, September 22, 2008 at 2:11 PM - 14 Comments

My favourite line from the proposed US$700 billion lifeline to Wall Street:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Hands up if you think suspension of the rule of law is a good idea…anyone?…anyone?

FOR MORE: Paulson’s folly

Paulson's folly

By Steve Maich - Monday, September 22, 2008 at 11:30 AM - 17 Comments

I’ll be writing a lot more about this in the upcoming issue, but at the risk of getting ahead of myself, I have to express my sadness at the goings on south of the border right now. The U.S. government is in the process of negotiating a bailout plan which will likely come in at close to double the cost of the Iraq war so far. We are told that this is regrettable but necessary in order to prevent worldwide financial Armageddon.

I’m not buying it. I think we have all been traumatized by ghost stories about financial calamities, and we are so frightened by them, that we will accept just about any lunatic policy proposal that promises to keep the boogey man at bay. Congress is debating a US$700 billion proposal to buy virtually worthless assets from hundreds of financial institutions that made out like bandits while the market was rising. The package will almost surely exceed a trillion dollars before it’s all settled. Nobody is even bothering to try to argue that this is right. Only that it is unavoidable. But is it? Continue…

AIG – A question for our readers

By Steve Maich - Wednesday, September 17, 2008 at 11:58 AM - 17 Comments

Last night’s shocking bail out of AIG hasn’t done much to calm the fears roiling through the markets this morning. It has, however, got me to thinking.

Clearly Paulson felt he was in a no-win situation, and made a decision based on the cold calculus of pragmatism. He ahd to decide which was the lesss terrible of two terrible options:

Continue…

AIG – Holy Moly

By Steve Maich - Tuesday, September 16, 2008 at 9:44 PM - 18 Comments

I am stunned, STUNNED at the news that the U.S. Federal Reserve and U.S. Treasury have kicked in US$85 billion to bail out AIG.

Just 48 hours after insisting that a bail out of Lehman Bros. was an absolute non-starter, Henry Paulson pulls a COMPLETE 180, and coughs up the cash to save AIG. The reason, apparentlly is pure pragmatism. Lehgman was allowed to fail because it could be allowed to fail. they made a calculated decision that Lehman was not big enough, or important enough to actually spark a market crash, and sure enough, this week’s modest sell off on the Dow proved them right. but they decided that AI with its $1 trillion in assets, and almost $30 billion in counterparty risk, would have brought worldwide trade in derivatives to a standstill and triggered a real, live old-fashioned freak out. And so, Uncle Sam bails the kids out of the drunk tank again.

Amazing. Absolutely amazing.  I never thought I’d see the day when the U.S. government essentially nationalized a major private company for the sake of minimizing fallout int he capital markets. I guess the Republicans just really really didn’t want a Black Monday in the middle of an election campaign.

That said – I can understand the dilemma Paulson is in. to fail to save AIG may well have triggered a huge market sell off, possibly global in nature, and it may well have brought lending to a halt and driven rates through the roof. Bad mojo all around.  But the precedent is just incredibly, staggeringly bad for the separation of government finances from private enterprise.

Mr. Paulson, GM and Ford are on the line, they have an urgent favour to ask.