Wednesday, April 28, 2010

Damned if You Do and Damned if You Don't

In the recent past, we were shown the spectacle of CEO's of failed and almost failed financial institutions (i.e. Fuld (Lehman) and Prince (Citibank)) raked over the coals in the Senate. Their crime was to buy, and promote to their customers, what the Government (Fannie and Freddie) was selling and not being smart enough or insightful enough to foresee the coming housing collapse and therefore not able to position their institution to weather the financial storm. They were forced to act contrite (even as they assert that "everyone was doing it" and "nobody was smart enough to foresee the collapse"). It was not pretty, but understandable; big losers often get pilloried.

Now, however, we have the spectacle of a CEO of a successful financial institution (Goldman) that did foresee the collapse (or at least recognized the significant risk and took steps to manage that risk) being raked over the same coals in the Senate. Their crime was in participating in the marketplace, buying and selling instruments that regulators permitted to circulate there, and to do so in such a way as to avoid losing (and even worse, perhaps making) money during the financial meltdown.

So, there we have it. The crime is not being stupid (failing the trust put in them by others), the crime is just being a financial institution in bad times.

The Government (including the Fed) serves up a dangerous cocktail of easy credit and legislatively mandated reduction of credit standards, and a major increase in the availability of Government guarantees for dubious credits. Private institution take these components and play a furious game of musical chairs for profit. The music stops. Some are winners and some are losers. And the guys who created the environment sit in judgment of the players and declare that winners and losers are both at fault.

Judge not lest ye be judged. Election time is coming. The public is not as gullible as populist demagogues think.

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