Between them and the pitchforks

Reportedly, the president of the United States told a group of assembled financial services sector CEOs gathered at the White House a week ago last Friday that his administration was the only thing standing between them and the pitchforks. I don't doubt the accuracy of the report, though it may capture the substance of his message rather than the words he actually used.

I don't know how I feel about that. I would hope that there was a continuum on which to build policy, and not merely a stark choice between simplistic and retributive populist anger bringing down the house and a corrupt and entrenched financial elite a bit overdue for its day of judgment. I do suspect that the political classes in Washington has lost confidence in the financial elite to mend its own affairs, and is struggling with that. If Obama delivered a message like that reported, doing so would tend to confirm my suspicion.

Unfortunately, given the limited political acuity of the bubble boys who are financial services CEOS, I also suspect that the message is lost of them. What they heard was that Obama was like a Chicago cop on horseback doing crowd control in Grant Park. He's wearing the city's livery, taking his orders, and doing his best to keep order in the mob.

But if this continues on its present course, Obama will presently realize that this isn't a matter of crowd control and that the fire department and its high pressure hoses aren't backing him up--they've stood down to see who comes out on top. At that point, he'll understand that his People want to see the back of his head and the asshole of his horse as he leads their charge, not a handsome cop on a handsome horse sidling along the flanks of their protest, keeping them on the approved march route.

If it comes to that, we will have reached an interesting moment.

Bad News for (Financial) Pain Suffers

I just read my first CNN article on the silver lining to the the recent financial cloudburst--relating the good fortune of a family that purchased, for $200,000 a house that had previously sold for a half million dollars. The gist of the story was that one man's misfortune is another's opportunity. Happy overweight dad and two his two daughters smiling at the camera. The losing former homeowner was nowhere to be seen.

I am afraid that the bad news of home price declines, with the theme of American dream turned into nightmare, has been mined for about all its worth. It is so 2008. A bit like the fall in the stock market. The new media event will be focused on life ever after, after the housing bubble popped, after the stock market meltdown, after debt fueled consumer spending shuttered into lower gear, in the new economy with its ongoing elimination of legacy sinecures being sequentially rooted out wherever they may be found in the old economy.

Don't get me wrong There will continue to be bad news. That last story--the death of the sinecure gig--will meane rising unemployment, and the next year may feature a dollar crisis of some sort. The auto companies have just begun their turn in the barrel, and don't count the financial services sector out--they'll be back this summer with some major institutional failures and outright government takeovers, then later, again, with a wave of indictments. I'm telling ya, that Wall Street story has legs. If there are any newspapers left to print it.

But the bandwidth devoted to innocent victimhood, of decent folks just minding their own business when, bam, they got blindsided, is about to contract. Look for uplifting tales of hardworking retirees returning to the workforce, making a new contribution and finding the good life in a new venue. With a little luck, maybe we'll have a morality play about universal health care coverage, and develop an approach to paying for universal medical coverage as good as the health care generally delivered to employed people in this country. That wouldn't just be a story, that would be social progress.

Remember, when we hit bottom, we start to look up, even if the recovery is the most gradual of hells.

Changing Perspective on the Bailout

A shift in perspective is underway, and the public perception of the AIG bailout illustrates it.

Until very recently, the mantra weirdly reflected the 'good bank/bad bank' idea. There were good banks--like Goldman Sachs or JP Morgan, and there were bad banks--like Citi or WAMU. Also, of course, there were lousy banks will agility--Merrill or Wachovia. The government was busily bailing out the bad and the lousy so that the competently managed institutions would not be swamped by the splatter from the failing ones. This was the dread 'systemic risk.'

However, in the last week or so, I've begun reading descriptions of the AIG bailout that conceptually are dismissing AIG as a mere conduit for federal assistance that is, in substance, being received by the AIG counterparties. In other words, the ultimate bailout recipient is perceived as Goldman, not AIG, because Goldman was the counterparty receiving large sums initally channelled through AIG. This perception is being fanned by some lying done by Goldman and its spokesmen when The New Yorks Times attempted reporting the story last fall.

The minute you stop treating counterparties as innocent victims who, in the interest of addressing systemic risk, should be made whole, and start thinking of them as bailout recipients, you have taken a gigantic step towards a paradigm shift. We seem to be realizing that the so-called competently managed institutions were merely more adept at gaming a fundamentally flawed system. They were gamblers in the casino like the others, just a bit luckier or better at the odds.

Meanwhile, the Banks are . . .

still insolvent.

Kid glove treatment they may get, while the auto manufacturers are slapped around. But the financial services sector remains insolvent, floating along in a sea of liquidity courtesy of the Fed and Treasury.

Personally, I'd like to see the TARP recipients treated like Chrysler and General Motors. But that's at least six months off. Of course, the more public money gets poured into them, and the more blatently imprudent their accounting becomes, the greater the baying for blood at the end of the day.

I also think that at least, with respect to Chrysler and General Motors, the federal government has a point of view, that is developing into a program, that will probably work. It will work because the resources are available to make it work. It will work because with a new capital structure the enterprises are viable because at a new price point their products are attractive.

The mechanics of a out-of-court cramdown are elusive. But a prepackaged federally backed reorganization with judicial blessing, out of which something that looks a great deal more like a German car company is the most likely result, at this point. That's assuming that the equity is wiped out, the debt takes a huge haircut, and all the pension liabilities are somewhow assumed by the federal government.

Meanwhile, the damage continues to grow on Wall Street.