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

[Zingaro]

I'll second what Rob't in Palm Springs said. That's a pretty fair statement of the situation.

Part of what worries me more than anything are the so-called bailout actions by the government.

In AIG's case, I'm not sure that the public spin has more than a few grains of truth to it. First, why, exactly, did the Fed and its supporters insist on a 79.9% stake in AIG-which effectively nationalizes the company? What is the US going to do with that 79.9% stake? And why were the (then) majority shareholders of AIG NOT consulted when the buyout decision was made at the Fed?

And how about that $85-billion figure we keep hearing about? How did Bernanke arrive at that figure? From what I had seen prior to the bailout, AIG could have stabilized for far, far less in a set of bridge loans. Also, the Fed hasn't actually loaned that much, but simply made $85-billion "available". What does the Fed plan to do with that earmarked money?

There are more and more unanswered questions here - and I'm not at all sure that we are going to get straight answers. We certainly won't from the Bush administration. He and they are clueless and they think we are, too.

[werdy]

M Saleem Chaudhry -

You pose an interesting problem. Sadly there isn't a "rational thinker" on the ballot in November...

[jon]

AIG constantly pumped subprime deals to borrowers without thinking about the consequence. THAT is called a poor choice. The C-levels should have known better. Oh that’s right, it’s about the bottom line even if that sticks everyone in the ass. Many contend it’s about regulation and tighten up reform. Again, that fixes corporate policies. You can fix, tape, glue, staple, sew, stick, Velcro, all damn day long and you can’t eliminate the human element. Just because AIG launched aggressive campaigns dealing subprime, doesn’t mean they were violating regulations. They were violating the moral compass. That’s a flat out human condition!. If the human heart wants to cheat, steal and destroy it will. And it will evade every regulation you put up. I’m not saying we don’t have checks and balances-duhh…obviously you have to have those. But what brought down AIG wasn’t regulatory, it was GREED! The savings and loans scandals, insider trading scandals, accounting scandals and now mortgage scandals all were rooted in human condition.

[Michael Snyder]

While we're watching Wall Street bailouts and bankruptcies moving at the pace of an NBA game has anybody noticed where the free market / non governmental solutions are coming from? The talking heads on CNBC & CNN are all talking about "deposit based assets". That would be the balance in your checking account folks.

Once again the burden of bailing out the fat-cats comes back to Joe Sixpack. This is as close as we've ever gotten to Wall Street capitulating to the consumer. Sure, the bankers are making the deals, but it's our nickles and dimes that built the obscene fortunes on Wall St. at the long term expense of our children's educations and our retirements.

This is a real opportunity in disguise. I have two words that can bring the likes of WaMu and BoA to their knees and force executive compensation back to realistic levels.

Ready?

Credit Union

O.K. You think I'm crazy. If you've been following this blog for any time you already have no doubt, but please hear me out.

Wall Street's vaunted financial sector has brought itself to its' knees after building a bubble that makes So. Cal. real estate look conservative. The compensation packages for top executives has been instrumental in this; (note the 9.5 billion Lehman paid out 9 months ago) and what's galling me is it's their mess! Now these same people with a little help from their "friends" at the Fed are either "unwinding their positions" at the expense of the taxpayer or like BoA & Merrill seeking haven in "deposit based reserves".

Credit unions are non-profit and carry all of the benefits of any major bank without the overhead. As a member/account holder in a credit union you become a "shareholder" at a dollar a share which you can "trade" at any time. Sounds simplistic; but a massive move away from the major banks would send the only kind of signal Wall St. and Washington get. What's more it will protect you in these troubled times while giving you access to one of the largest ATM networks on earth.

[mucker]

Vizio:

Looked in a mirror lately? To paraphrase Mom, if you can't say something constructive don't say anything.

PS if you don't get it this is constructive advice.

[Elroma]

We put so much trust in others to manage our money. We're told at work that if you put in to the 401k or pension plan you are "guaranteed" a certain amount of money but, in the real world there are no guarantees. Its sort of like when you pay people to do the things you don't do well or would rather not do...well, most people don't want to be financially literate so they rely on the government and financial firms to do it for them...well, now you see the result of that. Greedy idiots take the unsuspecting for a ride and now we are arriving at our final destination...get ready for the next great depression...it happens about every 100 years anyway!

[Giacomo]

Wow, my little comments on excessive analogizing seem to have hit a nerve and caused a few (Ritholtz fans?) to twist off into personal attacks. Why such low tolerance for a little dissent?

For the record, I'm not complaining, generally. I find this whole subject very intriguing, and personally... well, I've come through this bubble in the best possible way, and am enjoying the show.

Thanks Peter.

[Giacomo]

Wow, my little comments on excessive analogizing seem to have hit a nerve and caused a few (Ritholtz fans?) to twist off into personal attacks. Why such low tolerance for a little dissent?

For the record, I'm not complaining, generally. I find this whole subject very intriguing, and personally... well, I've come through this bubble in the best possible way, and am enjoying the show.

Thanks Peter.

[Ron]

this is kind of random, but in today's opinion piece in the NY Times it notes that the head of Lehman Brothers, Richard Fuld, was paid $17,000 an hour last year [1]. and a second story in the WSJ from a few days ago, written before Lehman's had been booted from the NYSE to the pink sheets (LEHMQ.PK) where it is now trading for pennies a share, and when Lehman's stock was still trading at $4 a share, the 24,000 Lehman's employees had lost around $10 billion [2]. I didn't know how to do a reverse evaluation per se so I just took the latest news on Lehman's bankruptcy filing and used that number: $613 billion. employing info in the WSJ article, that "roughly 25%" of Lehman's is/was owned by employees, I estimate $153 billion "or more in paper wealth" was lost in the past couple of weeks.

that's about $6,375,000 per employee. I know the stock and/or wealth wasn't equally distributed, but over 6 MILLION DOLLARS LOST PER EMPLOYEE. if that is not an insane number then I do not know what is.

[1] http://www.nytimes.com/2008/09/18/opinion/18kristof.html?ref=opinion

[2] http://online.wsj.com/article/SB122117966831526067.html

[skubiszm]

"He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood."

But when the whole neighborhood is filled with crack houses and meth labs, maybe it is time to let it burn and start from scratch.

[Dougmc]

Jon,

Your basic point may have some merit, but you need to get your facts straight and pick the right target.

AIG did not MAKE mortgage loans to borrowers, so your hyper-ventilating about its greed at the expense of borrowers is misplaced. First, AIG BOUGHT mortgages that turned out to be worth way less than it paid for them, so it might even be viewed as a victim of fraud practiced by other players in the mortgage game. I don't think AIG was a victim, because it's supposed to know enough to be able to protect itself, but it certainly wasn't a perpetrator. Second, through credit swaps, AIG in effect INSURED the holders of mortgages that they wouldn't suffer losses or suffer losses in excess of a certain amount. This turned out to be a huge wrong bet, and the amount of money AIG owed as a result was immense. It was the credit swaps that sunk the company.

Your should blame the Countrywides and New Financial Corp.s of the world and the Wall Street firms that sold the mortgages these originating lenders made.