Bailout roulette: Why AIG was saved and Lehman wasn't

If you're puzzled by the government's "eenie, meenie, miney, moe" bailout policy, this one's for you. This is how blogger, economist, and "Bailout Nation" author Barry Ritholtz explains who gets bailed out and who doesn't:

• Lehman Brothers was like the little kid pulling the tail of a dog. You know the kid is going to get hurt eventually, and so no one is surprised when the dog turns around and bites the kid. But the kid only hurts himself, so no one really cares that much.

• Bear Stearns is the little pyro -- the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.

• AIG is the kid who accidentally stumbled into a bio-tech warfare lab . . . finds all these unlabeled vials, and heads out to the playground with a handful of them jammed into his pockets.

Thanks, Barry.

--Peter Viles

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Photo Credit: "Bailout Nation" cover, from Amazon.com

Comments

[annonyed]

Amusing.

But it still doesn't justify any bailouts.

[Amazing_Happens]

... And the United States Government and Federal Reserve are the rich but negligent parents who are only around when their crazy teenagers get in serious trouble, and bail them out of jail, send them to some expensive therapist, and useless rehab centers - again and again. They neglect to teach their spoiled kids anything about morals, ethics, or financial responsibility.

[The End Is Noir]

What does that make WaMu?

[Giacomo]

The more complicated the analogy, the more I am reminded.. analogies are always flawed... weak rhetorical devices that rarely explain much of anything.

Say, ever notice how blogs tend to get filled posts trying to outdo each other to be the latest, greatest, most clever analogy which restates the same old point? It gets a little tiring.

Nothing personal. Nice try.

[MyLessThanPrimeBeef]

And derivatives are like that sex-craved, AIDS infected young man who goes around sleeping with all the young women on Wall Street.

Being consenting adults, no one tried to stop them, not even bothered to ask if they were related, as long as they were consenting adults.

[MyLessThanPrimeBeef]

Giacomo, you sure you are not talking about Hollywood moives?

[Giacomo]

So...

Bear Stern's failure looked like it might hurt the markets generally, and possibly cause a panic, so it was bailed out.

Lehman's failure figured to mostly only affect that company and it's investors, so it wasn't bailed out.

AIG failure stood to disrupt institutions and clients worldwide, so it was bailed out.

There, was that so hard to understand?

[Valley Observer]

"... And the United States Government and Federal Reserve are the rich but negligent parents who are only around when their crazy teenagers get in serious trouble, and bail them out of jail, send them to some expensive therapist, and useless rehab centers - again and again. They neglect to teach their spoiled kids anything about morals, ethics, or financial responsibility."

That's right. The current administration, and the Republicans for the last couple of decades, have worked to reduce superivision/regulation, which ensures the US government is faced with these gigantic problems when the bubble bursts. They can intervene, or let everything fail, which might be more "fair" but makes everybody poor. (Ever heard of The Great Depression?) It's going to be unfailr, but IMHO we need help more than fairness. The Wall St folks have already taken their millions, and even if their stock options are now worthless they still have what they've taken. Let's not worry about getting back at them. Let's worry about issues like saving my retirement funds, which affects millions of ordinary folks like me who did not participate in the bubble.

[Amazing_Happens]

Analogies are nothing but models.

And models are important - and I don't mean the swimsuit kind. Models are one way in which we come to understand sophisticated processes. Yes, they are not the thing in and of itself, but they can make things simpler and clearer than the actual process.

Models are flawed, of course, because they aren't the the process, they only represent the process. But even a simple model can make a complicated process more understandable.

And in this case, Mr. Ritholz's humorous analogies help us understand a little bit about why one bank was bailed out, and why another was allowed to collapse.

Nothing personal. Nice try to disparage the use of analogies.

[Robert in Palm Springs]

All these bailouts are tantamount to robbery of the American people by our own Treasury. It is the greatest rip off in history being done right under our own noses and no one is saying anything to stop it.

All the bailouts will fail. The debt bubble is too large and will deflate no matter what the Fed, the Treasury and Congress do. Bush is such a coward he would not even have a press conference yesterday after getting updated on the situation. He is so stupid he probably didn’t know what to say anyway. This administration is largely responsible for what we are facing now by ignoring domestic issues in favor of a needless foreign war. Don’t forget that when you vote in November.

The bigger question is this: WHO WILL BAIL OUT THE USA? Our debt (government and private) is so large it is impossible to repay. So my thinking is the government will continue to bail out companies like AIG just to buy time. After all, the numbers have become meaningless.

Here are some basic facts that dictate why there will be no housing or economic recovery anytime soon.

1. Our society is consumer driven to an absurd degree (70-80%). Less than 10% of our economy is manufacturing based and is shrinking daily. We do not have the manufacturing means to support ourselves. We must import just to survive.
2. Unemployment is growing and is substantially higher than government figures show. The use of the birth/death model has completely understated unemployment to make the economy look better than it is and this was done by design by our government.
3. Incomes have not grown for the average American in real terms in decades. We are already getting poorer.
4. We have used up ALL our credit. Home equity loans, car loans, credit cards, etc. Nothing is paid for. We not only borrowed against current and future earnings but also equity that no longer exists.
5. We, as consumers, have saved nothing for years and therefore have no cushion to fall back on in hard times.
6. Pensions are either nonexistent or under-funded.
7. The economic boom in the USA from 1982 to 2006 was achieved through inorganic growth. That means through mergers and acquisitions and stock buybacks rather than product development and innovation, which is organic growth. Organic growth is self-sustaining while inorganic growth is not.
8. By displacing jobs overseas, our companies depleted our own economy of the consumers it desperately needs to sustain itself.
9. Our government is completely out of touch with reality and has failed the American people. Moreover, their excess spending crowds everyone else out of the credit market.
10. There is no accountability.

All of these issues must be addressed before a sustainable recovery can begin. Our system is fundamentally broken. The virtuous circle created by Republicans Greenspan and Reagan is now the vicious circle. As the famed Austrian economist Kurt Richebacher said a few years ago warning about this calamity to come, “Every market excess must be followed by a market correction of equal or greater magnitude.” The recent market excess was the biggest in history.

We know the credit crisis is far from over. Hang on to your cash, sell your stocks and get out of debt. No one knows how it will play out but these 3 precautions will help you survive.

[Numb]

Bob in PS - Clearly we are used to being robbed and we love it. We expect it. I actually don't think of it as being robbed but rather being willingly shtupped. I have been amazed for months now that no one seems to have been upset much by what's happened to our gas prices in the last 2 years. No protests. No picketing. No nothing. We love it. So why in the world would this stuff upset us?

It's just an...um..."adjustment."

[Giacomo]

Ah, I see now that Mr. Ritholtz was angling for an appearance on the Daily Show. That explains a lot.

So he gave his best shot at comedy writing, fine. But "[making] a complicated process more understandable" ?
Give me a break.

[mbob]

In his writings in the magazine & site "Tikkun," Spiritual Progressive essayist Rabbi Michael Lerner points out that in Washington, there may have existed a perception that Lehman was "Jewish" and "Liberal" and thus given a cold shoulder in the bailout department run by our more or less fundamentalist administration.

If that question has even a shred of truth to it, then we are in far worse trouble than anyone can imagine.

Rabbi Mike's about the only guy around outside of 12 step groups who's calling on people to conduct a fearless personal inventory -- in his case, of values and beliefs and how we can use them to bring about political change for the better.

[Ed]

mbob is as close to right as anyone. i can't believe that no one is discussing this pattern more broadly in the media: Lehman Bros is (was) known as the most liberal-leaning Wall Street investment bank. CEO Richard Fuld gave fairly equally to Republicans and Democrats (that's saying a lot: Wall Street CEOs are notoriously GOP supporters), and Richard is rumored to be an Obama supporter. Richard's wife Kathy is a FERVENT supporter of Democratic Party candidates and politics. When Lamont beat Lieberman in the US Senate primary in CT in '06, she was right over his shoulder at his acceptance speech.

What we have here is simple: the vindictive Bush Administration let Lehman Bros twist in the wind because their upper management and work force is far more left-leaning, and have donated BIG bucks to Dems. Everyone else has and will get bailed out before they go belly-up.

[M Saleem Chaudhry]

How long the tomfoolery of nincompoops go on who don't understand the objective realities and have no vision for,the impact and life of supercial and shorterm strategy for transient gains, without digging into the actual causes of economic down turn,to work out,realistic,long term and short term plans,corresponding to objective realities? This is the price of following an emotional upsurge,triggered by the obsessional thinking and psychotic response of the inflated ego of a nation,even a Super power,like America.Let's hope Americans go for a rational thinker in Nov.2008,instead a stooge of the current breed.

[M Saleem Chaudhry]

How long the tomfoolery of nincompoops go on who don't understand the objective realities and have no vision for,the impact and life of supercial and shorterm strategy for transient gains, without digging into the actual causes of economic down turn,to work out,realistic,long term and short term plans,corresponding to objective realities? This is the price of following an emotional upsurge,triggered by the obsessional thinking and psychotic response of the inflated ego of a nation,even a Super power,like America.Let's hope Americans go for a rational thinker in Nov.2008,instead a stooge of the current breed.

[Jack Warren]

Accountability is paramount.
Think about present and past legislators with their generous pensions and health benefits. Why aren't they being cut.
Without accountability we are doomed to suffer repeat episodes.

[Steve]

someone tell me these guys are kicked out of the finance business permenently.

[RICHARD SHADE]

IGA WAS BAILED OUT BECAUSE MOST OF OUR HOUSE, AND SENATE MEMBERS HAVE LARGE AMOUNT OF THEIR INVESTMENTS IS AGI STOCKS. WOULDN'T WANT THESE POOR LAWMAKERS TO LOSE ANY OF THEIR GREED MONEY WOULD YOU.

[Jamie]

Why dignify Rabbi Mike's absurb notion with a tentative analysis of what might be the case were there "even a shred of truth to it?"

Claims of racism or religious bias aren't needed to explain what is going on. There isn't one. Lehman Brothers was allowed to fail because, as we can all see, it didn't matter. Bear Stearns didn't matter either, but no one was sure of that at the time. Case closed.

[Vizio]

Say, ever notice how blog comments tend to always have one person who continually critiques and criticizes others, yet they offer nothing informative or enlightening themselves. It gets a little tiring.

Welcome to the complainer generation. Case study - Giacomo. Get a life loser.

[Vizio]

Say, ever notice how blog comments tend to always have one person who continually critiques and criticizes others, yet they offer nothing informative or enlightening themselves. It gets a little tiring.

Welcome to the complainer generation. Case study - Giacomo. Get a life loser.

[Dave]

Part of the reason why we are inthis mess is that we tinkered with the free markets. People who should have paid a higher interest rate (bad credit, little money, etc) on their mortages - but we stepped in and said it was racsism to make them pay more - they should all be able to have houses, etc.. If left untouched the market would not have allowed these people to get homes in the first place. If you can't afford it you shouldn't buy it , right ?

[syscom3]

Steve, these bailouts would be tolerable if the DOJ announces criminal probes on all of these managers, the golden parachutes are blocked and the institutions who remain standing, are told not to hire any of the clowns who destroyed the failed ones.

[Almost Angeleno]

And where is our so-called "MBA president" in all of this? Calming us and telling us what he's doing to fix his 8-year fiasco?

Nope, he's too busy fundraising for the Loot the U.S. Treasury Party -- Years 9-12.

Oh that's right, he was quoted in 2004 as saying that, "there are more important things than the economy..." I guess like continuing an unncessary war to enrich his oil pals along with The Carlysle Group and Halliburton shareholders. We didn't care that he previously [mis]managed 3 businesses that he was CEO of into the ground -- Arbusto, Spectrum 7 Energy Corp., and Harken Energy. Never mind that he managed to make millions before those same companies themselves tanked -- and that's the same screw job he's applying to the average American citizen now (that is, those that aren't in the millionaire bracket) by taking care of his Robber Baron cronies before leaving the White House.

Nope, he's a "Christian" president who was sure of his resolve and never second guesses himself. Even communicates with the Old Guy Upstairs -- especially when it came to starting wars.

"Mission Accomplished?"

I'll say.