Heads they win, tails we lose

by Russ Roberts on November 25, 2009

Bebchuk, Cohen, and Spamann show that even the losers at Bear and Lehman made a killing. They were playing with our money, taxpayer money, lending it to each other, making huge short term profits and paying themselves enormous amounts along the way. The authors argue for changes in executive compensation. I want to get rid of government rescues. When they can’t play with my money, the Ponzi scheme falls apart.

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Seekingexports

Mr. Roberts, when you wrote "playing with our money" did you mean TARP funds or the funds from institutional investors such as government employee 401B funds (ie. U of V retirement)?

Even though I don't think that Lehman and Bear Stearns received rescue funds I think the ones who did, like B of A or Wells Fargo, may be making risky trades now with taxpayer money. They are too big to fail and they know it.

Thanks for making us more aware of the compensation issue for these fat cat financial engineers making giant sums while losing giant sums.

Economiser

Bear received a backstop from the Federal Reserve as part of its sale to JP Morgan. Without that guarantee, Bear probably would've had to file for bankruptcy. And while it's impossible to know the counterfactual, a Bear bankruptcy 6 months before Lehman failed might've scared the other financial firms enough to actually deal with the problems before the meltdown in September 2008.

Methinks1776

I think the other banks were too far gone by then. It's not so much the leverage that was bothersome, but the leverage in light of the assets they were long.

They were all essentially long the housing market. Once the bids disappeared, there was nobody willing to buy the trash they were selling at a price that would have saved the banks.

The only question remaining, I think, is what's more costly? The moral hazard that will result from mass bailouts and asset price manipulation by the Fed and SEC or allowing the whole fragile system to collapse in order to build a stronger one? I think moral hazard is more costly, personally. The strong banks could have been bolstered (I believe the FDIC has a mechanism for that) and the weak ones should have been allowed to go the way of Lehman Brothers.

Methinks1776

I like your suggestion, Russ.

That's not what's going to happen, of course. You will continue to be robbed to spare "us" from certain "disaster". The regulators will then create an environment to pump up asset prices and then.....Oh I can see it's going take forever to enumerate the disasters.

Let's put it this way, after they pull the pig out of the quicksand, you will then receive a huge bill for its recovery and the lipstick.

Methinks1776

Oh, and it is government who feeds the pig until it weighs a ton and then tells it to go play in the quicksand.

George J. Georganas

The paper cited shows clearly that the government rescue and "your money" did not find its way to "the losers at Bear and Lehman". It is the shareholders' money that went to the losers' pockets. While government was out of the way the "losers" did fine. Calling for government to continue staying out is endorsing the managers' stealing from shareholders.